News

"International Deflationary Forces Are Growing Dramatically"

Peter Borish is a founding partner of Tudor Investment Corporation, and during a recent podcast interview, expressed concerns about deflation.

Here's an excerpt from an Oct. 17 Forbes magazine article:

"The international deflationary forces are growing dramatically," Borish said in an interview on the Contrarian Investor Podcast this week. The trend can be traced to the election of Donald Trump in 2016, which has ushered in an era of "building barriers."

The Trump administration's anti-free trade policies ended what was a 27-year cycle that was ushered in by the fall of the Berlin Wall in 1989, says Borish. This period was marked by "the free movement of people, capital, and ideas, the breaking down of barriers," and led to strong global growth, especially in equity markets. Now, "growth is slowing dramatically, not only here but around the world."

At the same time, a record amount of debt has put the world's central banks in a quandary. "If you're a central banker, you have to ask 'how do I solve the debt crisis by issuing more debt?' That becomes the term of pushing on a string."

Elliott Wave International analysts likewise view increasing amounts of debt as a portent of deflation.

Here are comments and a chart from the February Elliott Wave Financial Forecast:

Last month's Special Update on the surge in global debt made the case for a massive debt deflation that will create havoc in many areas of the global economy. On January 23, Credit Suisse took the opposite side of the argument with a comprehensive study "assessing the potential risks arising from the surge in global debt." It "concludes that while there are pockets of risk, the likelihood of a systemic crisis such as occurred in 2008 seems contained." One claim, which is also made by central bankers and other financial authorities, is that real estate-related debt is less burdensome than at the last peak in 2007. This is not necessarily the case in all countries, but it is essentially true in the U.S., where mortgage debt was $9.14 trillion at the end of the third quarter. In the fourth quarter of 2007, the total was $9.1 trillion; so relative to the size of the economy it is down. Still, it is historically high enough to become a problem, especially if real estate prices fall as precipitously as we expect.

The chart below shows that there are other dangers in the debt market:

ConsumersRecordDebt

Total household debt is up from the last top. The bottom graph on that chart shows why: a big jump in student and auto loan debt as a percentage of the household total. From approximately 11% of total household debt in the first quarter of 2008, these two debt categories have nearly doubled to 20% of total household debt at the end of the third quarter in 2018. Ironically, a recent study by the Federal Reserve shows that mounting student loan debt is preventing many would-be homeowners from purchasing homes. In other words, the reason that mortgage debt flattened out is that other IOUs prevented it from rising! This is not a recipe for solvency, much less for overall economic expansion.

Now is the time to prepare for deflation.

You can do so by reading the free report, "What You Need to Know Now About Protecting Yourself from Deflation."

By submitting this form you authorize EWI to send regular emails and updates. You may unsubscribe from our mailing list at any time.