It’s funny how things change when the world takes a turn for the worst.
Frackers that initially looked like the next revolution in energy and U.S. oil independence suddenly look bankrupt and uncompetitive when oil prices fall from $115 to $44.
In 2008, junk bond yields spiked from 7.5% to 23.5% as solvent bonds suddenly look more likely to default. Leveraged traders are getting killed with margin calls as stocks and commodities plunge. They go from heroes to zeros overnight.
Leading IPOs and tech leaders see their stocks plunge after making new records across the board.
Countries like Japan that led the 1980s boom suddenly crash the hardest and lose stature on the world stage for a long time, if not forever. And China is likely to face a similar fate, at least for the next decade, as they work off the greatest debt and overbuilding bubble in modern history.
That’s why it’s so important to see major turning points… and when the next great downturn does come, don’t you think that having 23 aircraft carriers, more than all of the rest of the world combined, would make you a safe haven?
We can only guess intelligently at minor turning points like most good forecasters.
I can’t tell you when a tsunami is going to strike Japan, or when the Fed is going to announce the next quantitative easing (QE) cycle, or when Putin is going to invade Crimea… although we do have longer and intermediate-term cycles that predict when such events are more or less likely.
Long-term trends are different… they’re much more fundamental and more predictable. Hence, our calls for major turning points are rarely wrong — just a bit too early or late at times due to such shorter term factors that are hard to predict.
These are the trend changes that are most important to get right for longer term profits in companies and investments. Once these trends change, there are strong negative feedback cycles, just as there are positive ones on the way up in a major boom.
Even though the rising demographics of the baby boom generation were the most important leading indicator of the last great boom from 1983 through 2007, much as the previous generation’s was from 1942 through 1968 — success builds on itself.
The longer the economy booms, the more confidence businesses and investors have and that increases buying and investing in the future. Borrowing goes up, mostly due to the demographic cycle of building durable goods between the late ‘20s and late ‘40s, but also due to increased confidence in the future.
New technologies move into the mainstream with the new generation’s spending power after their innovation cycle gave birth to them in the last downturn. But the productivity from such technologies amplifies profits and wages, and tends to bring interest rates down.
The lower interest rates, the greater the borrowing and speculation.
It’s when people start borrowing more to speculate than to increase their real assets and productive capacity that the economy starts to get vulnerable… and that happens naturally in the latter stages of any long-term boom.
And especially in the fall bubble boom season, which sees both the highest productivity and the greatest falls in interest rates.
That’s the positive feedback cycle in a boom period driven by more predictable fundamental trends in demographics, innovation and inflation cycles.
But then come the negative feedback cycles. When such trends finally reverse, the high debt and confidence also reverses. Interest rates spike up on the riskiest bonds and debt and it spreads wider as the downturn gets deeper.
When the economy drops and more stocks fall, consumers cut back on their spending and businesses minimize investment and lay-offs increase. The situation becomes dire when businesses begin to fail in large numbers and unemployment rises triggering loans to fail and banks get in trouble.
The more foreclosures, the more home prices drop and home loans fail.
In such a downward spiral and crisis, we learn who really has the goods and who doesn’t, especially in a survival of the fittest winter season of deflation. The U.S. dollar has grown through more debt and trade than any other currency, so when the great deflation comes, more of our dollars will be destroyed than other currencies.
That means fewer dollars that are paradoxically worth more. I’ve made this argument in my books and all of our newsletters so I won’t go into that here.
Globally, that is when the strongest countries hold up. In the developed world, the U.S. is still the largest and most innovative country — although we are slowly losing those leads. We have stronger demographics than Europe and Japan ahead. We’re the best house in a bad neighborhood as they say.
We’re printing and stimulating less than China and Japan currently, and now the ECB is printing euros at $70 billion per month to join the party again as a desperate and last response to their weakening economy and competitiveness.
Although we’re no longer the undisputed military power… we are still dominant.
At the Money Show in Orlando last year, Dennis Gartman was speaking ahead of me and he stated that we have more aircraft carriers than all other nations combined. We now have 11 super Nimitz flat-tops (they can carry 60 or more jets and are twice the size of most carriers) and eight of the more normal-sized. That is 19 total. But by 2020, we’ll have 14 Nimitz and nine normal, or 23 in total.
A few countries have two or three, and only a few plan on a Nimitz. Most countries like the French only have one… the infamous S.S. Croissant (just kidding).
This sort of military strength is worth more in bad times than it is in good times — like in our last winter season through the Great Depression and World War II where we first emerged as the sole military power in the world.
That continued into the 1990s, especially after the fall of the Soviet Union. But we’ll not see that again, likely ever.
We have been and will continue to bet on the U.S. dollar for the worst years of the deflation crisis into late 2016 or early 2017 and perhaps early 2020 as deflation favors the reserve currency and there is no one to replace us or our military power, despite squandering it since the early 1990s in wars beyond our reach.
After 2016 or so, the dollar may see its best days as we’ll see the faster rise of the emerging countries and especially the large ones like India in the next global boom.
We will reconsider our view of the dollar then, but for now it’s still the safe haven.
The Swiss franc is also looking better now that they have stopped trying to fight the fall of the euro by printing their own currency in order to keep their exports competitive.
They’re opting for a higher currency rather than higher short-term exports — kudos to them!
Other than that, watch out for all major currencies in the next two-plus years, especially the yen and the euro which have already been crashing… and as for China’s yuan — it’s next.