Tuesday, 8 May 2018

Synchronized global growth is a BIG FAT LIE!

Synchronized global growth is a BIG FAT LIE


We keep hearing, this phrase 'Synchronized global growth' all over the financial news these days.

"Synchronized global growth is a BIG FAT LIE!"

There is no 'growth', just a race to the bottom by central banks around the world.

Everybody and their mama are printing money like the daily newspaper.

All that money printing is going into asset purchases and stock buybacks.

On average, the markets are all positive but most equities all around the world are down. It gives a false impression of a recovery from the 2007-08 crash.

Averages mean nothing for a country if only a handful of companies are doing well while others are shutting their doors or are beginning to go out of business.

People are losing their jobs and companies are running on low-interest debt. Earnings are irrelevant if they are stimulated by low-interest rates. Earnings need to be organic, not artificially boosted by central banks all over the world.

Let me give an example, let's say I have an ice cream van, I sell Icecream, I can sell ice cream to customers at a price and use the profits to run my business. However, if the customers are all laid off, they are not going to buy any expensive ice cream. So, now I must reduce my prices in order to sell ice cream, but if I do that then my profit margin will reduce and may even be zero, I might even start making losses. In order to keep making a profit at a lower selling price, I can temporarily take out a loan and keep selling at a price my customers can afford.

Now, if I get a loan at a very low interest then I can borrow indefinitely as I only have to pay a very low-interest payment back to my lender.

Well, the governments around the world, mostly in the west, have such low interest rates, that companies can borrow a lot of money and pay it back slowly, in fact, they have borrowed so much money that any small rise in interest rates can make it very hard for companies to repay the interest, let alone the principal.

So, in our example we have done the same, we have been making a profit and earning a lot of money by borrowing at very low-interest rates, I don't really have to care about paying back the principal amount as the interest payment is very low.

And, I keep making lots of profit.

However, if the interest rates were to go up, even a tiny bit, I will start making losses from selling ice cream, in fact, each ice cream I  sell will make me another loss.

All that profit I was making selling ice cream was not organic, it was only artificially allowed by low-interest debt.

The lesson from this is we have 'synchronized global growth' only because of quantitative easing, as in, money printing and low-interest rates.

When the rates rise, and they will, we may have a
'SYNCHRONIZED GLOBAL DECLINE'.


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