The main driver of markets today is the continual loss of confidence in government debt, argues Martin Armstrong. If we understand the big picture and how this is driving global capital, everything else follows and makes sense.
Here's what he had to say in a recent interview on FS Insider (see Famous Forecaster Martin Armstrong Says Multi-Year Food and Commodity Price Inflation Underway for audio).
The 30,000 Foot Macro View
Armstrong argues that one of the biggest drivers of global markets is government debt: its continual growth in size, the interest cost (or yield paid to investors) to maintain it, and, most importantly, all the ways governments are attempting to perpetuate their efforts.
If interest rates rise too high, then the cost of financing their large debt burdens will also grow too large and they will be forced to default. In order to prevent this from happening, interest rates are kept low and inflation is allowed to run hot in order to reduce the outstanding value of those debts over time. However, this comes with a heavy cost—not just from inflation, of course, but also for those institutions that rely on a steady yield to pay out pensions and other distributions each and every year.
So what happens if global investors stop buying government debt? Theoretically, bond yields would go up and the prices of bonds would go down but global central banks have stepped in to prevent this from happening.
For example, several governments in Europe, particularly through the European Central Bank, lowered interest rates into negative territory in 2014.
However, for many years, European governments mandated that pension funds must hold government bonds to be conservative. But now that the interest rate on these bonds is practically nothing, or negative, virtually all the pension funds in Europe are on the brink of insolvency since they require around an 8% return to break even, Armstrong said.
Capital Moving From Public to Private
Because of this dynamic, where government bonds aren't yielding enough for global investors' return requirements, this is continuing to push money away from government bonds (public debt) and into the private sector via corporate debt, equities, real estate, and other areas.
Historically speaking, there are times when the private sector is the problem, Armstrong noted, and we see a "flight to quality" into government bonds and cash. Right now, however, it is the reverse.
The question everyone is asking themselves, Armstrong said, is whether it's wise to buy government bonds when yields are at all-time record lows (meaning bond prices are at all-time record highs) in Europe and in the United States?
Thus, when people point to the stock market and say it is in a bubble, Armstrong directs them to the government bond market and says that's where the true bubble lies.
“The amount of capital in the debt markets versus equities is about 10-to-1,” he said. “So it doesn't really require a tremendous amount of money to leave the bond market to come to equities. If it all did, the Dow would probably be over 100,000. We're not looking at that sort of thing. Even our model was suggesting the high longer-term is probably in the 65,000 to 68,000 area, but you have to understand what this is about. This is about the shift in capital from the government sector to the private sector. … When governments default, you get absolutely nothing. If the private sector defaults or goes into bankruptcy, you at least maybe get 50 cents back on the dollar.”
2022 'Panic Cycle' in Politics
The inflationary trend is set to continue into 2024, Armstrong stated, adding that his historical models were predicting shortages before the pandemic. The supply issues and manufacturing disruptions we’ve seen since Covid hit are just compounding the problem.
Virtually everywhere we look, Armstrong said, there is a shortage. This correlates with his model’s prediction that the commodity cycle will continue to rise into 2024 and he expects conditions to be inflationary into that period.
Shortages blamed on Covid and lockdowns are largely secondary, he stated, which has indeed disrupted the supply chain on a global scale. However, most of these disruptions are primarily caused by political ineptitude and mismanagement, Armstrong said.
His model predicts that we should expect to see major political disruptions, potentially on a global scale. His model has flagged what he calls a 'Panic Cycle' in politics next year in 2022. He isn’t certain where it will emerge, but he expects that the highest chances for unrest are likely to be seen in Europe. Specifically, in those regions of the globe where we'll see the greatest backlash to government policies.
“There are shortages of everything,” Armstrong said. “There is nothing that I can find that’s not in shortage. You're looking at really some insane ideas that are coming from the political sector. … We’re looking at a continued rise in the agricultural side of the economy, along with shortages in food, and commodity prices continue to head generally higher into 2024. I think [the breakdown in confidence] is going to be broader. … If we look outside the United States, an awful lot of heads of state are up for election in 2022. After the way these people have treated their populations, do we really think that they can stand for election? … Let’s settle these issues, because we're talking about a level of confidence that is critical to maintaining the government.”
Armstrong offered substantially more insights in our recent interview with him on FS Insider. If you're not already a subscriber to our FS Insider podcast where we interview book authors, strategists and industry experts from across the globe 3 days/week on all things economics, finance and markets...
Written by Ethan D. Mizer