No doubt that title is troubling. As it should be…
Especially if you don’t know how to protect yourself from the coming storm.
But that’s why we’re here. We had a few goals in mind when creating this report.
- Lay out the current fragile state of the global economy
- Describe the factors that will contribute to the forthcoming crisis
- Explain how to not only protect your hard-earned money, but also how to profit from the carnage
[drizzle]The problem with most investors is that they’re stuck with their heads down, picking up pennies in front of a steamroller.
Too many have a myopic focus on things like earnings releases while completely missing the bigger picture. Sure they can tell you Google’s next year projections, but do they know about China’s struggles managing the yuan?
And that’s because they think these things don’t matter. But when the bough breaks half a world away, I can guarantee you that it absolutely will matter as every company’s earnings across the board are crushed as their stock prices collapse.
This is why our focus at Macro Ops is global macro. We spend countless hours scanning the world’s markets and analyzing global events to find the biggest factors that have an outsized impact on your investment portfolio. We don’t bother with the miniscule, because it’s mostly noise. The larger macro forces are what actually move markets. Everything else is a result of these macro moves.
Our macro research has lead us to believe that we’re now on the cusp of one of the worst global crises ever recorded. Never has the world been more interconnected, and never have we had higher global debt levels. These factors combine to create an environment primed and ready for a massive deleveraging that will wreck security markets and leave us with depression-like economic conditions over the next decade.
The following pages will describe how we believe this deleveraging will play out and what you can do to protect yourself and profit. The four main factors contributing to this crisis, or the Four Horsemen as we like to call them, are the:
- Long-Term Debt Cycle
- Bond Market Bubble
- Yuan Devaluation
Now the first step to understanding how we got into this situation is to learn about the economic machine and the long-term debt cycle. Let’s jump right in…
First Horseman: A Neutrino Debt Bomb
Debt… Debt… Debt… Debt… Debt………Debt. It’s been discussed so much over the years that it feels like kicking a debt horse at this point (ehem, sorry).
Here’s the thing though… we have to talk about it. Debt is the most important (and misunderstood) dynamic of the economic machine. Debt is the cause of all our current economic ills.
Do you want to understand why there’s slow growth in the developed world? Well, it’s because of debt.
Want to know why inflation has been so elusive? I can tell you… debt.
Are you curious as to why commodities are crashing and emerging markets are grinding to a halt? You guessed it… DEBT!
What about growing income inequality? Is it Piketty’s return on capital versus growth (r > g) B.S.? Noooo! It’s just debt. And it goes on and on...
Of the Four Horseman, debt is the one that drives all the others. And if you can understand the dynamics of debt cycles, then you can take much of the guessing game out of macroeconomics. The macro events above, and much more, become not only unsurprising, but absolutely expected.
My aim in writing this report is to not only inform you about the messy debt situation we now find ourselves in, but to also teach you how to properly view the world (as we see it).
And then of course I’m going to show you practical and actionable steps on how to protect yourself. If you really pay attention, I’ll even show you how to make a killing.
I also feel a slight obligation to publicly rebuke the misinformed and asinine commentary by economic talking heads sitting on both sides of the ideological aisle. These are the Keynesians and Austrians.
The Keynesians are the clueless policy makers who run the world. The arrogant ivory tower economists and central bankers whose only answer to slow growth has been more debt spending.
The Austrians are the doomsdayers, the gold bugs, and the establishment haters who’ve been worse than a broken clock in their calls for a market crash.
Both camps don’t understand a lick of how the real world works (though admittedly, I do have a soft spot for Austrians as their logic isn’t terrible). And both are bad for a trader’s P/L.
Being the dedicated market operators that we are at Macro Ops, we don’t care much for trading along conventional thinking or rigid ideological lines. Instead, we search out first principles and universal truths. The validity of our thinking is tested every day in the markets.
Conventional economic “wisdom” fails to understand the long-term secular effects of debt. If it did, then Keynesians would realize that just more spending is not the answer. And Austrians would realize that it’s way too late to call for just a rate hike.
Both parties fail to grasp the larger secular forces at work — deflationary debt dynamics. These dynamics are the logical sequences that comprise debt cycles. They have happened in a similar fashion since the advent of lending and credit.
Now when I say cycles, don’t roll your eyes and think I’m some tinfoil hat wearing conspiracy theorist. I don’t believe in Elliot Waves or Fibonacci or Pi or that some other hidden universal force has set us on a predetermined path of repetition — though I admit, I do look good in tinfoil.
A debt cycle is just the logical progression of large economic sequences that follow a certain order. These sequences arise due to predictable human nature and the inherent structure of our monetary system.
Understanding these cycles won’t give you the ability to predict the future. But it will give you the ability to better understand the present and enable you to assign significant probabilities to what’s around the corner.
Our view of the world and the dynamics of debt were born out of the work done by Ray Dalio and Bridgewater (the most successful hedge fund of all time). If you’re not familiar with their work on “How The Economic Machine Works”, I suggest you check out this site.
Here’s a quick overview of how the economic machine and debt cycles work:
The economic machine starts with money, or more specifically, what we think of as money; which is cash + credit.
Mainstream economics tends to focus solely on physical hard cash. But it’s credit that makes up the majority of transactions in the world. In the US, the supply of physical cash amounts to roughly $3 trillion. But total credit is near $60 trillion. Most buying (demand) is through credit, not cash.
It’s important to know this because though many people mistakenly think of credit as cash, the two actually work very differently. And it’s this difference that has compounding second and third order large scale effects.
You see, when you buy something with cash, you exchange that cash for a service or good. The transaction is closed. Complete. There is no further obligation between the two parties.
When you buy something with credit, you exchange credit (a promise to pay in the future)