Global Restructuring

Recently I posted links to a video that CNBC did during the Strategy Session last week. It featured an interview with Hedge Fund Manager Kyle Bass who talked about the need for a global restucturing of the global financial system and our economic thought process. He cited many great examples to our debt structure and argued in favor of many points I myself have suggested regarding that fact that borrowing and spending won’t do help us, but rather dig a deeper ditch. He said that he thinks that this will be the end of Keynesian economics, that people will realise that the global economy needs to be completely stripped down to the foundation. His portfolio seems to reflect that as about 90% of it is long US debt, and is not focused on equities. While I agree that at some point there won’t be any avoiding it and eventully this will all happen, I think that we’ve got at the very least another 5 to 10 years before that’s even the case.

There will be a lot of inflation and a lot of borrowing in the near future. Japan was the primary example he used in his point about restructuring. Just last week Japanese politicians became angry that their currency was rising in value to the dollar so they are now on a mission to debase. Sure the EU managed to take austerity, but all they’ve done is lessen inflation, they haven’t ripped the building down to start from scratch. Meanwhile, mainstream economists are using Greece’s recent high unemployment numbers as a target for ripping on austrian economics. They say that by choosing to balance the budget they’ve ruined their economy. This isn’t true, they’ve simply decided to deal with their problems now, instead of make them worse later.

The next important thing to consider when discussing the possibility of a makeover in economics is that Japan is our 2nd largest creditor and our 4th largest trading partner. They are also the most leveraged country in the world. Canada, is our largest trading partner and the 3rd most leveraged country in the world. Suppose that tomorrow, these countries decide to listen to the likes of Kyle Bass and they agree that the only way to restructure is to immediately begin deleveraging and possibly even defaulting on some loans. Allowing this would mean accepting that unemployment is going to most likely hit record levels and that their respective imports are going to significantly decline. Then, with demand for imports in America remaining constant due to our inability to produce goods, those prices would skyrocket. 70% of GDP in America is consumer spending, we are totally dependent on imports from other countries. The Fed and the White House wouldn’t dare let our economy deflate so they would be forced to print money for Main st. in order to meet the demand for imports, resulting in runaway inflation. So even if there was a misguided rush to US treasuries, those people would get slaughtered when the government decides to print the money to make up for demand. Precious metals would see record demand and the global economy would definitely then restructure, but it wouldn’t be the way that some are saying.

I think that it’s obvious that Japan nor Canada would like this to happen so my prediction is that they will both attempt to debase just as much as anyone else and I don’t see world government all of a sudden deciding to embrace fiscal austerity. Taking all of this into account, I’ve concluded that it’s much easier for politicians to blame the previous administration, and it’s much easier for them to kick the can down the road than it is to bite the speeding bullet.

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About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

4 Responses to Global Restructuring

  1. Jason Burack says:

    Aaron,
    Bass is obviously a short term trader and NOT an investor. I don’t know any investor in US Treasuries. Only traders are.

  2. aaronbasile says:

    I think he’s more than smart enough to know what he’s doing, I just think that for some people who may have watched those videos it may have been confusing because he has written letters to his clients in the past promoting precious metals however now it seems that he has suggested that he’s all in on treasuries, and I wanted to be able to clear up any confusion regarding that.

  3. The Destructionist says:

    This morning, I watched the Dow Jones climb into positive territory for about an hour before it slid back down into the negative, even after reports of billions of dollars in merger acquisitions were made public. Such good news should have bolstered the markets, right? Well, it didn’t work out that way and I seriously doubt it will work out that way any time soon. There seems to be no traction at all in the markets these days: with rising unemployment, home foreclosures at an all-time high, and consumer confidence going down the toilet; even seasoned investors, used to the fickle nature of business, seem to be abandoning ship.

    This economic slide into no-man’s land has been going on for quite some time now, yet brokerage houses, hawkish economists, and media outlets refuse to tell the truth: that America is in trouble. (And by trouble, I’m not talking about a “double-dip recession” or “depression”, but an ever-increasing and continued downward spiral into a dark economic abyss from which there is no return…)

    Using an analogy, I’d say that our global economy is more akin to the Titanic right after hitting that iceberg: those in charge either refuse to believe what is happening, or have decided not to share it with the rest of us for fear of a panic. Naturally, there aren’t enough lifeboats to go around, so seating is limited: corporations get first dibs (bailout), followed by government officials and people of importance and then, finally, people like you and me (that is, if there are any more seats left).

    And yes, just like in that ill-fated tale, wherein the band is told to continue to play to mollify passengers as that great ship sinks into the cold, dark oblivion, our media outlets will continue their vigil as well: soothing our anxiety-ridden nerves by serving up filth and fodder – both the glib and the non-sensicle – all in an effort to divert our attentions from the inevitable horrors yet to come. And when the need arises to actually explain to the masses what is happening with the economy, the talking heads will be instructed to say, “Don’t worry everyone. It’s just a small financial leak (er, dip)… Nothing to really worry about….”

  4. aaronbasile says:

    Great post and you’re exactly right. It was the same during the subprime mortgage breakdown. “Oh it’s all fine, it’s just subprime”. Then a few months later the whole thing comes crashing down and we’re on the verge of another depression. I’m not bullish on anything right now except for hard assets because I really can’t trust politicians and central bankers to all of a sudden stop playing the cherade.

    That was a really good point that you made about the M&A. I was talking to someone earlier about it and he was saying that the reason that M&A isn’t driving the market up was because that some of that cash that’s on the sidelines is being spent on mergers instead of the companies expanding projects themselves with their own innovation which hurts the job market because they’re not creating opportunities for new workers.

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