How I see the World (or Winter is Coming)

One of my side-obsessions is investing. I actively manage an IRA and investment account with my personal money in it, so I’m always trying to look into the future and figure out where we’re headed. Good investing is akin to be a good fortune teller (and has about the same level of accuracy). So I’m writing up my thoughts to increase my personal discipline when it comes to thinking through investments. This is just a start and the big picture view:

Right now the world is awash in debt. Over the past few decades we’ve seen an enormous increase in global money supply and in debt. At the same time, we’ve developed this faith in central banks to remove any negatives from the business cycle and constantly fix any problem that pops up. The world is not okay. I see three big problems all starting to collide in 2015 and I’m still reconciling where the fallout lies.

PROBLEM 1: DEMOGRAPHICS

My marketing work lies in demographic analysis, so this is close to my experience. People drive the economy. This is very visible in the US, but look at Japan as the prototypical example of this issue. When your population stops growing (e.g. people aren’t reproducing above the 2.1 kids necessary to grow the population), then the population ages. As people, we spend money in very similar patterns over our life. Young people buy much more stuff than old people, generally speaking. Young people create inflation, old people create deflation. There’s a lot more behind this assertion, but at a high level it is true (mainly because young people take on debt, old people pay it off). Japan has had to print money like a counterfeiter at Rio’s Carnival to keep their economy afloat. In normal times, this would have resulted in massive inflation. Because of their demographics, it hasn’t. But that leads us to the second problem (which Japan has) …

PROBLEM 2: SOVEREIGN DEBT

The latest numbers I’ve seen show the world debt levels (not just sovereign) at around $200 trillion dollars. Way, way above just 10 years ago. In the U.S., we admit to around $18 trillion dollars in debt (the last two presidents have both doubled the debt while in office), but that’s ignoring our implied commitments (social security, etc) that are likely two times this. Across the world, debt levels are out of control. I don’t have an economics background (which seems to be an advantage), but I’m not sure how countries can continue piling up debt with no remote plans to slow down or start paying it off. Japan is interesting to watch as they, seemingly without any concern, print money as fast as they possibly can. When does Japan become the next Greece? And how long will people continue believing that sovereign debt is risk free? There’s a Lehman moment coming and that concerns me. Also, I believe that the first two problems lead to the bigger issue, which is problem number three.

PROBLEM 3: SLOWING WORLDWIDE DEMAND

Debt slows an economy when it hits a certain GDP level, which I believe we have achieved in the US. In addition, too few young people reduce the need for things. Combined they result in a slowing demand for goods and services that has a rolling impact on the economy. I believe the disaster in commodities is the first place you are seeing this lowering of worldwide demand. This issue is tightly tied into the two problems above and leads to deflation. That’s where I think we’re going: deflation. Because of China’s massive building spree, we have too much production capacity across the world and not enough demand for products. The hope was that China would convert to a consumption economy and pick up the slack from slowing US growth. Clearly that hasn’t happened and I still believe China is essentially hitting a hard, hard landing. There is no country (I see) that has the growth to potentially pick up the baton. And I think the US is borderline recession at this point.

CONCLUSION: DEFLATION

In the end, I think we’re headed for tough times worldwide. This is a global debt hangover that makes our 2008 mortgage disaster look like a mild cold. In terms of investing, I’m long on the dollar (safe haven), short the Chinese market, short the Yen and actually short gold and silver (deflation pull is stronger than their safe haven pull). I also expect the S&P, NASDAQ and Dow to have significant corrections this year, so I’m waiting for a good chance to short those markets (only corporate buybacks are holding them up at this point).

So this is a summary of where my head is at this point. For the past two months I’ve done extremely well with my investments and I think the short-term outlook is good. Long-term I’m still trying to figure it out. But I’m worried. I can’t help but think: Winter is Coming.

Other random predictions:

  • Oil will be below $30 in 2016. Might hit $30 by the end of this year.  And won’t hit $100 a barrel for at least two years.
  • Telsa, Amazon, Twitter and other companies that have huge valuations but virtually no profit (social media) are great short opportunities. But so far I haven’t jumped in.
  • Europe is in worse shape than it appears. I think the Euro falls below parity with the dollar in early 2016.
  • Bonds are a disaster. I think we’re already seeing a move to quality investments and junk bonds are going down fast. I keep thinking I should short Spanish and Italian sovereign bonds, but I haven’t done it yet.

I’m curious as to your thoughts. Feel free to comment below.