Artificial, Bloated, and Overdue
After possibly the steepest monetary tightening by the US Federal Reserve, the danger of a credit crisis is growing. In our 2020 report, we summarized the state of the financial markets and the global economy as “artificial, bloated, and overdue”. Now, roughly two and a half years later, our outlook and concerns have materialized with surprising accuracy and force.
“Artificial, Bloated, and Overdue” is an excerpt from the introduction of our May 2023 Special Report, Deeper Into the New Era – Navigating the Shifts & Turning Points Ahead. You can download and read the entire report by visiting the following link:
,https://www.bficapital.com/specialreport2023. If you would like us to send you a physical copy, feel free to send your request to us at ,firstname.lastname@example.org along with your mailing details.
For over forty years, and even more so over the past 15 years, financial markets have been accustomed to an environment of receding interest rates – an era of “cheap liquidity”. That time is over! We are now amid a fundamental transition, looking ahead to a future of elevated inflation and interest rates. The questions on investors’ minds are: How does one need to invest in that kind of context? And how does your strategy need to change when the tide turns like this?
One thing seems clear: the “Goldilocks Economy” is over! The economy is a complex system. Its health is influenced by many factors. Until about 5 years ago, these factors still seemed to align in a manner that afforded relatively good visibility and confidence.
A monetarily driven global economy existed, in which financial markets were largely focused on the speeches and actions of central bankers. It was a time of major tailwinds for the economy and financial markets. But a few years back, things started to shift away from the Goldilocks economy.
In 2020, we published a special report titled “On the Brink of a New Era – Are You Prepared?”. The analysis back then was straight-forward: After a 40-year period of “Easy Money”, excessive money creation had resulted in huge misallocations of capital and excessive debt levels across the globe. Finally, during the COVID-19 pandemic, central banks and governments opened their money spigots in a most spectacular and unprecedented way.
The ugly aftermath is now materializing before our eyes – at times slowly, and then in rapid bursts and shifts. This, unfortunately, will probably remain the nature of the beast in the coming years. So, we need to buckle up and prepare for a somewhat bumpy ride.
Key Factors to Consider Today
The developments of the past few years have rapidly produced additional complexity to big picture dynamics. Until recently, the number one factor to watch was monetary policy. Now, several moving parts and driving forces have been added to the mix.
We are witnessing a rare confluence of sea changes across multiple dimensions – from technological innovation and globalization to the international currency system and negative demographics, from the growing wealth gap to extreme political polarization. We will try to touch on most of the relevant items in this report. However, we want to concentrate primarily on three factors that have crystallized as the new dominant forces to reckon with:
Geopolitics in the Limelight
The Ukraine war was a wake-up call, and the opening bell to what is now widely seen as “Cold War II”. It has quickly put the geopolitical landscape into sharp focus. However, the Ukraine war is only a symptom of a bigger issue that at times is referred to as the “Thucydides Trap”. It describes the tendency towards conflict and war when an emerging power threatens to dethrone an entrenched hegemon. The term comes from the ancient Greek historian and military general Thucydides. He posited that the Peloponnesian War between Athens and Sparta had been inevitable because the Spartans feared the growing power of Athens.
This type of constellation has recurred many times since. Today, China is America’s challenger. As it rises to more power, the danger of strife grows. The tectonic shift away from a system of US dominance and toward a bi-polar, or multi-polar world will not happen quietly or uneventfully. And military conflict may once again be inevitable.
Western Societies in Disarray
The second force is found in a lack of unified values, the decay of our traditional and spiritual roots, and extreme polarization of societies in the West, with America at the epicenter of a growing conflict of societal visions. In the West, we like to point fingers at the lack of freedom, rule of law, and separation of powers in autocratic regimes like China and Russia. However, the West needs to take a close, hard look in the mirror.
Our formerly free nations, built on democratic principles and the rights and freedoms of sovereign individuals, in truth, are increasingly hard to distinguish from those regimes. The increasingly centralist censorship, propaganda, corruption, dirigiste politics, and financial repression, all advancing incrementally and unnoticed by most, present a considerable risk to Western, and global, prosperity and peace. It all reminds us eerily of George Orwell’s “Animal Farm”. The pigs are at it again!
A World Drowning in Debt
The third, and in our view most consequential factor, is excessive debt, born out of the lack of governmental limitations and monetary constraints. It is ultimately the result of a flawed global financial and currency system, based on a flawed fractional reserve banking system, governed by deeply flawed institutions and leaders.
During the current banking crisis, the cracks in the system became plain for all to see. The financial market represents the psychology and behavior of people. The stability of the financial system is built primarily on the trust of those people. When the trust in that “fiat” system starts crumbling – a system built on nothing but the promises and regulations of deeply indebted governments – we are well advised to take note.
Confidence in the financial system and its institutions is built over decades and yet can be destroyed in days. Like dominoes, as one bank falls, the next weakest bank begins to wobble. Trust has been compromised, if not irrevocably damaged. Earning it back will take time and will be difficult.
Artificial, Bloated, and Overdue
After possibly the steepest monetary tightening by the US Federal Reserve, as portrayed in Figure 1, the danger of a credit crisis is growing. In our 2020 report, we summarized the state of the financial markets and the global economy as “artificial, bloated, and overdue”. Now, roughly two and a half years later, our outlook and concerns have materialized with surprising accuracy and force.
Today, we are no longer just “on the brink” of a New Era, but find ourselves heading deeper into it, and more rapidly than even we had expected. We have entered a transition period that will see arguably the greatest bubble ever being deflated, with either a hiss, a sequence of pops, or a gigantic bang.