Global situation


(vaibhav) #1

Since FII fund flows largely drives Indian markets, it will be useful to track the situation globally

  • US markets are arguably very expensive at the moment. 3 matrices I tracked were shiller PE ratio, market cap to GDP and the dividend yield.

  • The public debt has been growing from 2009. Over 100% of GDP now at 19 trillion dollar plus.

  • this has been largely due to the QEs : QE1, QE2 and QE3. QEs have caused a bubble like situation in US markets. Its my assessment that w/o a QE4 and interest rates not being near zero, it will be impossible to sustain current levels in Dow Jones, s&P and Nasdaq.

  • another QE will mean more public debt which is already at unpayable levels. I.e. I don’t think the US Govt. ever wishes to pay the debt.

  • note that till 1971, currencies used to be backed by gold. Since then, it was decided to give powers to central banks to print potentially unlimited amounts and remove the gold backing.

  • In this situation, China has been selling dollar assets like the treasury bonds and buying gold. This is natural. Think from China PoV. It has massive trade surplus over the US. All US does is print more dollars and increase debt that I believe it never intends to pay back in full.

  • the alliance of China, Russia and Iran could end the petrodollar. Trump’s comments abt Muslims. How are Saudis gonna move on petrodollar if trump becomes president.

  • the worsening demographics and low fertility rates

In short, the global situation is very serious and we may easily be in for a change in world order. (Reserve currency, petrodollar to petrogold etc )


(Gaurav Agarwal) #2

I have few questions on your statements. All questions are in right spirit trying to understand your viewpoint and dig deep into the situation -

  1. What according to you should be reasonable market Cap to GDP for US and what it is now? Do you have any data source which you can point us to?

  2. What do you mean by Public debt of US? Does it mean federal, state and local debt? Does it include the consumer credit? Does it include debt on the books of Federal Reserve? Is there any threshold were any more debt will lead to depression/failure/default?

  3. How did you conclude that without QE4 & interest rates not being near Zero, it is impossible to sustain present level in the market?

  4. Till 1971, currencies used to be backed by gold? Do you mean all currencies of the World?

  5. Are you trying to say that since US is printing money therefore China is selling dollar assets like treasury? Do you have data how much Gold Chinese government has bought in 2015?

  6. Have China, Russia & Iran formed any alliance to end petrodollar?

  7. Have Saudis expressed any reservation about Donald Trump comments?


(vaibhav) #3

Market cap to GDP -
http://4.bp.blogspot.com/-MrwVlfH08gk/Va65dqzOgtI/AAAAAAAAIt0/aB4lGi5dJ40/s1600/fig1.gif

Shiller PE -

I am referring to Govt. debt (federal debt). Total debt (private+public) is over 350%. The net result of money printing(bond buying) since 2009 has been increasing Govt. Debt to GDP ratio with marginal GDP growth while the dow had moved from 6000 to 18000.

Slowly people will see effects of threat of interest rate hike , QE tapering and withdrawal on the real economy . the economy which was growing at 2% with help of QEs + zero interest rate may go into recession. The illusion of growth is getting exposed.

China sold dollar assets worth $500bn -

Many experts believe China’s actual gold reserves are many times the declared amounts. And it won’t surprise them if China has more gold than the US (8000Mt).


(vaibhav) #4

Pls be sure that the fight in middle East is abt oil and the petrodollar. Not abt Assad or anything else.

The point on Trump was not one of my most important points but should share the following-


(vaibhav) #5

I strongly urge everyone to watch Mike Maloney’s videos on YouTube . following is a good one -

While gold may or may not be the future , he makes very very credible case for the collapse of dollar which is a fiat currency.


(Nirav8) #6

I am sure you are reading lot of zero hedge…:slight_smile:


(Gaurav Agarwal) #7

Do you think that QE.x money printing has increased the Federal Debt of US Govt.? Do you think that debt on the books of Federal Reserve is same as debt on the books on US Federal Govt.?


Because China sold $500m worth of dollar assets and actual Gold reserves are many times declared amounts therefore should we conclude that China is selling dollar assets and buying Gold?


(devansh_god) #8

China definitely has more Gold than the US. US, I think possesses very less gold at Fort Knox. This was evident when the Germans, who had loaned US the Gold wanted to just check their deposits and the US Govt. wont let them anywhere near the deposit. So, they demanded all of their Gold back, to which, the U.S. Govt. responded by saying that it would be returned to you over a period of time. I, mean, if they have Gold in their vaults, why the hesitation?
See it here:

While Maloney’s, Peter Schiff’s, Bill Holter’s and other “doomsayers” videos are quite informative, pls be mindful of the fact that they all are gold dealers, who earn by selling gold. And Gold sales are directly proportional to the level of fear in the system. That’s exactly why Gold moves are nearly always inversely proportional to the equity markets.
Proposing a case that the Equity markets will crash and burn and shutdown due to an economic cataclysmic event or WW3, greatly helps their sales.
Even the worst case scenario, like a WW3 or a Dollar Collapse or a US bond default or the rise of a NWO can not negate the fact that people still need products and services and the companies which profit producing them, are traded on the stock market and will always hold value.


(devansh_god) #9

Yes dear, all currencies were then and still are backed by/ pegged to the USD. Till 1971, before the Vietnam war, the USD had to be backed by Gold in the US Govt. vault according to US law. This was undone by president Nixon in 1971, resulting in a full autonomous grant of power to the US fed to print money as and when they like.
Today, I’m afraid, fiat currency is prevalent in ALL countries of the world, bar none. No currency in circulation today is backed by Gold. Gold, which used to a monetary metal for 1000s of years has been reduced to a commodity.

Yes. Look at the current events unfolding in and around Syria. The coalitions, as I see them are:

  1. US, Israel, Saudi Arabia, NATO
    V/S
  2. Russia, Iran, Syria, China
    No prizes for guessing what is at stake here. The US expansion of influence ( after the invasion of Afghanistan, Iraq and Libya). And the dominance and reinforcement of the petrodollar.

Also,

BRICS have entered into forming a bank on the lines of the IMF. Now, the question arises, why do you want another bank, if you have the (US controlled) IMF?
See it here:

Look at how much recovery did the govt. buy by doing QE1, QE2 and QE3? You’d find it to be a diminishing number.


(Gaurav Agarwal) #10

All currencies were never pegged to USD. For example - former USSR was not part of Bretton Woods system. Do you think today our INR is pegged to USD?

The Bretton Woods system of monetary management established the rules for commercial and financial relations among the United States, Canada, Western Europe, Australia and Japan in the mid-20th century

Historically in addition to gold several other commodities have been used as currency you can read Wiki here.

Examples of commodities that have been used as mediums of exchange include gold, silver, copper, salt, peppercorns, tea, large stones (such as Rai stones), decorated belts, shells, alcohol, cigarettes, cannabis, candy, cocoa beans, cowries and barley.

Also The Ascent of money is a good read.


Why do you see the coalitions the way you see them? Is it based on belief or facts?

  • What role China is playing in the Syrian conflict?

  • I could not find any news/evidence of any help to US from Israel either?

  • My understanding is Saudi being the biggest producer of Oil has declined to cut production and therefore excess supply over demand and therefore lower oil prices. Where does petrodollar dominance comes in here?


I could not understand what do you want me do here? If you explain a little, I will try to work on that.


(vaibhav) #11

From 2008, Govt. Debt has increased by $9 trillion -

The FED has printed $3.5 trillion. So FED holds a lot of it, individuals and foreign countries hold a lot of it as well.

(When China sold some of the bonds during last year, interestingly, an unaccounted for entity called the ‘exchange rate stabilisation fund’ bought those bonds. Basically it’s all a massive fraud)


(devansh_god) #12

I just googled what pegged means!! I was wrong to use the word since it means that the exchange rate is fixed. What I meant to say is the heavy dependance of the world’s major currencies on the USD. Being the World Reserve Currency, all exchanges, (even between currencies themselves!!) take place in USD.

Sure, other commodities have been used as money, but none as long and as widespread as gold/silver/copper. Gold is quintessentially the most important monetary metal IMHO.

Its my belief based on my limited knowledge of world events.
China, while may not playing an active part at the moment can be safely assumed to side with Russia instead of US in case the situation heats up further.
Same is the case with Israel-US.
Yeah, Saudi overproduction is one of the causes of a lower oil price, as you mentioned, But the strengthening of the USD has also played a vital role IMHO.

I meant that, by QE, in layman terms, the govt. is pumping money in the markets to make the markets rise. In other words, it can also be said, that the govt is “buying” the recovery by supplying money to the markets. My point is, that the ratio of QE to the index gain has been falling. Which means, that the market needs more than cheap money (printed out of thin air with no backing) to sustain and to grow.
Pls refer below for starters:


(TT) #13

Making the statement that the central bank prints money to help the “markets rise” is an unbelievably naive view of economics. The central bank is in the business of supporting the economy, not the equity markets. The availability of cheap finance, of course, has a booster effect on the equity markets, but to assert that the objective of quantitative easing is to make the “markets rise” is frankly laughable.


(vaibhav) #14

That is the consequence, not the intention. QEs hardly brought growth in US economy and on the contrary, the public debt has risen to levels that the US will have credibility problem and w/o QE4 and then QE5 and so on( and more debt), u r staring at recession.


(devansh_god) #15

Glad I could be of use. :grin:


(Gaurav Agarwal) #16

QE was done by Federal Reserve System popularly called FED. Fed was created by act of US Congress and Fed does not report to US executive i.e White House. Fed has two tasks mandated by US Congress

  1. To have maximum employment, which they consider at 5% unemployment. Unemployment rate was around 10% at time of crisis on 2010 latest print is 4.9%

  2. To keep inflation at 2%. Now inflation is still below 2% therefore they are watching the situation keenly when to increase the rate.

So Fed was never after GDP growth. It is not the task of Fed to ensure that US GDP growth at certain stated number.

US GDP growth YoY is also at 1.8%, which far away from a recession. Keep in mind US economy is 17T. 2% in actual numbers is .34T whereas we are 2T economy our growth of 7% in actual number is 0.14T


(vaibhav) #17
  • Employment, inflation and GDP growth are linked as u would know. Recession will usually be accompanied by deflation and unemployment. We are on the verge of recession and deflation in the US. Employment figures are due to low paying,temporary, non-manufacturing jobs which are gonna struggle as well with recession but with some lag effect, so give it some time and it may get worse.

  • US govt. Debt is $19tn, annual expenditure is $3.x trillion. This ratio of debt to expenditure is the highest in History barring 2 occasions. And one of which was world war II. So present Govt debt is very very unusually high unless we are on the verge of world war III.


(Samir P H) #18

Check out http://www.usdebtclock.org/.

The total US debt is 64 Trillion$ and expected to sprint to 80 Trillion$ by 2020. With a high probability of a Republican Prez, one can think of how this problem could actually alleviate:stuck_out_tongue_closed_eyes:

Over the last decade, the growth for all major developed nations (including China) seems to have come from credit growth. Now you see the consequences. With problems in Russia, Middle East … analysts consider India as the only oasis in the whole desert. But we are bound to be affected by the global turmoil and the only way to reduce the risk is continue investing in high quality business in a SIP mode.


(vaibhav) #19

February 2016 US Markit services PMI flash 49.8 vs 53.5 exp -
http://www.nasdaq.com/article/february-2016-us-markit-services-pmi-flash-498-vs-535-exp-cm584044


(Chintan) #20

The best explanation of the reason behind the global situation, and why deleveraging is inevitable, I ever came across was by Ray Dalio, arguably the best hedge fund manager:

If I were in China’s situation, I would certainly want to put my hard earned 3 trillion dollars to some use before calling US’ bluff. No wonder Hong Kong is importing gold in record quantities

For the most current issues, one can read the book Connectivity Wars, which also includes a chapter by Jim Rickards.