Things Are Not Right in the Economy…

In this article I will be discussing some thoughts I’ve collected over the past few days and weeks from my research listening to and reading many different sources and opinions about the coming economic crisis. I hope to also use various charts I’ve collected from around the internet too, so please bare with me because there are a lot of charts. I’ve already discussed my thoughts about the stock market and how it is beginning to rollover so I will refrain from talking about that here. And last before I dive in, I do want to mention that I am fully convinced our economy is about to experience something for the history books. So please hear me out and maybe you’ll be encouraged to do your own further research.

The first graph I would like to share helps see the magnitude of our problem. The economy is saturated in debt, debt, and more debt. To begin to see this, examine the graph below. The blue line is the total amount of debt in the economy while the red one is the GDP of the United States.

debt and gdp

It is not too hard to see that the amount of debt outstanding is much larger than our GDP. In fact, since around the late 1970s our total debt has grown faster than our GDP. This has amounted to an increasing ratio between debt and GDP (Debt/GDP) as shown below:

debt to gdp ratio

Something happened in the 1970s that was tremendously helpful towards this age of debt. On August 15, 1971 President Nixon removed the United States from the gold standard. This meant that the US dollar could no longer be traded in for gold. We moved into an age of fiat money where there is nothing backing our currency except the United States government’s reputation and people’s wiliness to use this paper to trade for things. As a result of this change, credit expansion began in full force. Because of this, our GDP growth became dependent on having more and more debt. Our economy is like a drug addict looking for more drugs. Without an increase in debt we won’t do much growing. Many of the experts I listen to each have a similar thesis. They believe the age of debt is reaching its end. You’ll notice that since the crisis of 2008 the debt to GDP ratio has indeed come down some. But let’s not kid ourselves. We have way too much debt nonetheless. Thus, the driving worry for this coming crisis is that much of this debt must be deleveraged. If the Fed hadn’t intervened in 2008 it is very possible this could have happened then. Instead, the pain was suppressed temporarily. There might come a point in time in the future where we look back and say 2008 was just the precursor event to what is to come. This time around, the Fed has used their rounds of quantitative easing and zero interest rates to prop things up artificially as long as they can. But nature always will prevail, and many of the experts I have come to respect believe that time is coming soon. It is clear that the Fed’s quantitative easing program has failed to produce more credit in our economy and instead inflated asset prices. Also, the interest rates set by the Fed are already at zero. If things start to get bad now, our central bank and a vast majority of central banks around the world are out of bullets. In fact, in acts of desperation our central bank will probably attempt their failed quantitative easing program again and will likely flirt with negative interest rates. But don’t be fooled. These are acts of desperation nonetheless. The ship is about to sink. Whether that happens this year or next. It is coming.

In the next chart I would like to show a graph depicting the growing number of negative yielding debts around the world. Think about what this means. People are paying for the right to loan their money. They will receive less money back in the future than what they lent out because the yields are negative. What kind of person would do that? This madness goes to show the potential apex moment we may be witnessing right now.

The next two charts are two data points suggesting we may be in the beginning of the next economic downturn (maybe the beginning of the end of our debt binge). The first is the Industrial Production Index which helps us see how much economic activity is going on in manufacturing, mining, electricity, and gas production. These are core industries to the operation of our economy and so it is often not a good thing when this index begins to flatten or decline. You’ll notice that over the past year or so the index has moved sideways. More recently, the index has begun to descend. This might be a telling sign.

industrial production index

The next chart depicts the Baltic Dry Index on a log scale. This index measures the price of shipping many sorts of raw materials by sea by taking 23 shipping routes into account. It is widely used as a proxy variable to determine the magnitude of shipping activity going on because a lower price would indicate fewer people are shipping things while a higher price would indicate greater demand. Therefore, this index tends to be a leading indicator in economic activity. Recently, the BDI has plunged to levels never before seen in the history of the index. This would imply that shipping across the seas has ground almost to a halt.

bdi log scale

Now that I’ve established that we have a debt problem and have shared two potential alarming economic indicators I would next like to share just a few more potentially startling charts. We’ll start first with the Federal Reserve’s deflation probability calculation. Remember, deflation is when there is a general drop in prices in the economy. Deflation is also the exact right scenario for debt deleveraging to take place because it makes it harder for debtors to pay off their debts.

deflation prob

You’ll notice that the probability has almost always been nearly zero except for 2008-2010 and more recently here in 2015 and 2016. It is likely much of this increased likelihood is related to the crash in oil prices over the past few years. But it is also the exact scenario the Fed has tried to make magically disappear. The government has a great incentive to keep deflation from occurring because they are the biggest debtors in our country. This is another reason why if things get out of control the Fed may be forced to act in desperation to try negative interest rates or quantitative easing again.

Next up is a chart depicting the level of retail money funds in our country. In other words, this is a measure of the amount of money individual people have placed into money market accounts. This is notable because money market accounts are thought to be low-risk assets because they hold short term government debt, corporate debt, and CDs. If we see an unexpected spike up this may indicate a large number of individuals are all of sudden nervous for some reason. And as a matter of fact, that is exactly what occurred at the beginning of this year:

retail money funds

For my final few charts I will show something amazing that has been happening on the COMEX exchange for gold. This is the exchange where people come together to buy and sell futures to dictate the price of gold. At the member depositories of the exchange sits the physical gold that people have offered up by marking their gold as “registered”. If someone holding a gold future would like to exercise their right to take ownership of a portion of this “registered” gold they may do so at any time. However, at any given time there is not enough physical gold on hand for every single person owning a futures contract to actually take ownership of this gold. That is because there are far more open futures contracts than physical gold available. This is similar to how banks operate. If everyone having a deposit at a bank demanded their money back all at once there wouldn’t be enough cash to go around. However, the ratio of open futures contracts to physical gold on hand hit an astonishing record high at the end of January. The amount of registered gold collapsed by 201,000 ounces to an all time low of just 74,000 ounces in one day! This is significant because it means there are now fewer ounces of physical gold on hand than ever before. To see this, look at the chart below from Zero Hedge:

This new low is further concerning when you find out that there are about 40 million ounces worth of futures contracts open right now. This means that there are 542 claims to every single ounce of physical gold on hand! Imagine if everyone wanted their gold at the same time. Such a problem at the commodities exchange is unprecedented. This means there are many, many people out there invested in gold futures contracts that believe they could go claim the physical product at any time but are terribly, terribly mistaken. Below is the chart depicting the ratio of the number of claims to physical ounces of gold on hand. It is unbelievable!

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