The End Game

It is interesting that, nearly 5 years after the setting of the EMERGENCY interest (Base) rate of 0.5% we are still at 0.5% and our illustrious ‘capitalist’ government is borrowing £110 Billions per annum (to add to the admitted-to debt of £1100 Bns and the off balance sheet further liabilities of £4000 Bns).  Carney, at the Bank of England, and Osborne, the Chancellor and Alexander, his puppy, tell us the recovery is locked in.  And most believe them.

And yet we have an emergency interest rate and the govt is borrowing £110Bns pa.  Locked in???  It is all about bailing out bankers, the hyper rich and the political establishment.  This is not capitalism.  It is socialism for the rich and powerful.  And I very much doubt we will see capitalism again for at least a generation, if at all.  This is step by step encroaching Marxism and surely everyone knows how that ends?

Either we move to higher and higher inflation and interest rates, and the economy dies…

Or we are, in fact, turning Japanese, rates stay low (go even lower to effectively NIL%) and we are mired in deflation and the economy dies.

There is no way out.  Either of these will last the best part of a generation, at least.

Think about it.

They tell us we cannot take higher rates.  They are right.  Given the vast amount of debt around, it will create business busts (not banks…) and home repossessions by the hundred thousand.  The economy would melt down.  To avoid it, if they can, they’ll print money in ever increasing quantities.  £110Bns pa will become £200 Bns, then £500 Bns and so on per annum.  Our currency would be decimated.  We would not stop at mild inflation.  We would go to hyper inflation.  Think wheelbarrows and an economy in ruins like Zimbabwe or Argentina, in the last decade or two, or Venezuela right now – the result of Marxists who cannot abide admitting they got it wrong.

Remember when all the British Socialists in the Guardian and the BBC were lauding Hugo Chavez as a conquering hero with all the right answers.  Well have a look at what he did to his people and what his successor Maduro is doing to them.  As at the end of last year the inflation rate in Venezuela was 56% per annum.  It will probably go into the hundreds of percent per annum – literally.  Just yesterday they devalued their currency (again).  This time by 40%.  Overnight, food and fuel rose in price 40%.  There is practically nothing in the shops.  Those of you, reading this thinking that inflation is not actually a bad thing, have never lived through hyper inflation caused by Marxist zealots.  As if people like us didn’t say over the years that it would end in repression of liberties, mass murder and poverty.  But the Socialist media knew better…  NB.  I couldn’t find the Venezuelan situation on the BBC site.   But Justin Bieber was on the News front page…

Enquiring minds may want to read this

So, do you want to move to higher and higher inflation along with higher and higher interest rates?  What would happen to the economy and house prices if businesses had nothing to sell, they went bust and unemployment went stratospheric?  The answer is pretty obvious.

On the other hand, staying in deflation will drive us also to continuing slow or no economic growth while successive governments continue to use taxes to pump money into banks and do so by cutting welfare and public spending – including reneging on welfare and health etc promises as well as public sector salaries and pensions.   That is effectively what happened in Japan in the 1990s and 2000s.  For the last 5 years we have done exactly what they did in their first 5 years of the quarter century bust.  And there’s more to come of this.  The result in Japan, may I remind you, was an equal 80% collapse in Japanese property prices and their stock market.  Unemployment rose in Japan but did not go stratospheric.  This is because they have ridiculously inefficient employment practices eg the Salarymen who do little work, during all the hours God sends.  Yeah, that’ll help the economy grow.  Also, even now, the norm is when a woman marries she has to leave work.  Thus, you solve the unemployment crisis.  Of course, you lose the experience and expertise of half the working population.

But we don’t have Salarymen and it is illegal to sack a newly married woman.  Do you think unemployment here would be stable in a deflationary depression?  And if they have no income, due to rising unemployment, how will they pay their mortgages however low the borrowing rate?  They won’t.  So what will happen to non-performing mortgages?  The houses will be repossessed.  I have reminded you many times that the one thing those in power cannot do the next time we have a recession is slash interest rates.  They’re already near rock bottom and 0.5% to 0.05% will not make the blindest bit of difference to anyone.

So, in summary, I put it to you we are near the end game.  Either higher interest rates or deflation and in both cases the economy is … toast.  If anyone can convince me otherwise I shall inform you immediately.

This is why we remain bearish in our outlook though we are, currently, bullish on certain asset classes.

The case for deflation is quietly strengthening.

The chart below is the interest rate at which the US government borrows, over 30 years.  (The UK rates are very similar.)  Over the last 30+ years it has fallen from over 15% to just 2.5% in the Summer of 2012.  The pundits and bankers say that the rise to 4%, in the last few months, presages the great multi year (multi decade?) rise in interest rates.  Indeed, with reduction of QE, announced just before Christmas, they said that rates would now soar.  We, however, have been highly sceptical of that.  As of yesterday, the rate has fallen, since the start of the year, from c4% to c3.68%.  Not a huge fall you may say.  Agreed.  However, it points strongly to the notion that rates will fall and inflation will fall contrary to what the media has been selling.


If rates fall, this would show, beyond much doubt, that we are heading into long term deflation – in interest rates, stocks and property – just like Japan.

Similarly, as Government borrowing rates are falling, so the prices of Bonds (the generic term for loans to Governments or companies) are rising.


We have been saying for months that we can expect the 30 year rate to fall to c 3 – 3.2%.  Similarly, that means TLT should rise to $115 give or take.

THEN we will be intrigued to see what happens next.  Do rates turn back up and keep on rising, bringing the price of Bonds down and down and down – over years or decades.

Or the opposite?  Intriguing, no?

My gut tells me the latter but we shall let the market tell us.

Inflation or deflation?  Good question but, as I say, I cannot see any result but that they bring the same to economies and real people’s experiences.

So, if Treasuries are rising what does that normally mean for equities?  Normally – though by no means does it happen religiously – if bonds fall, shares rise and vice versa.  During 2011, bonds rose and equities fell and the opposite occurred right through to a few weeks ago.  There is, potentially, a change developing in the relationship.  It appears, as 2014 gets going, the markets may be seeing shares are overpriced and bonds as underpriced.  So, the former is being sold and the latter bought.  The chart is the relationship between TLT and the S&P 500 shares index.  If this develops, bonds will soar in price while shares collapse – absolutely to the contrary of what all the pundits said would happen.  On verra.


As you see, below, TLT just might have bottomed in price, long term.  If the case, this would confirm the ‘Turning Japanese’ prospect.  For the last 10 years you can see the price of long term bonds rising each time it hits the (green) trend line.  If this line is again the bounce point, and prices rise again significantly from here, interest rates and inflation will fall.  As will risk assets such as stocks and property.  Significantly.

TLT long term

The following chart is another reason why we remain extremely bearish on US shares (there are other reasons too).

Margin debtWhat it shows is the amount of leverage (borrowings) stock market participants have taken on to invest (!) in the shares of the S&P 500 index.  It stretches back nearly 20 years.  It shows that the debt level peaked in 2000 and 2007 either exactly at or within weeks of the then massive peak in the stock market.  It also shows where we are now (or at least at the end of last year).  Clearly, traders are so manic they are at extreme levels of borrowings.  Can it go higher?  Sure.  Is it likely?  I doubt it.  I am by no means the only person on the plant who has seen this chart.  On the contrary, it is freely available on the web.  Thus, ‘everyone’ knows it and many will be concerned about it.

This is but one example of how markets often do the opposite of what the bulk want, just at the time they are most exposed.  As I have written, markets which are ‘loved’ often crash and burn.  Markets which are ‘hated’ often rally hard.

How would a stock market crash affect the thing the media are always banging on about – ‘confidence’?  And how would it affect other assets?  That is ‘intermarket analysis’ and the powerful school of thought that informs much of our thinking.

There is a some way to go but the big-picture deflation case is building.  You need to consider this when making medium to long term financial decisions.  I am not saying that I KNOW that we are in a deflationary depression.  (How can I possibly know?)  I am saying the evidence is building.  We had 40 years of rising debt and falling interest rates.  In effect, those days are over.

What our view on this is – we would argue – is irrelevant.  If, on the other hand, rising inflation and interest rates come what will that do to the economy and assets?

‘All the money printing in the World’ for the past 5 and a half years HAS NOT BROUGHT INFLATION because taxes are rising, incomes are flat or falling and few are prospering whereas most are just getting by or losing their standard of living.

We have said for ‘ever’ QE was not likely to succeed in bringing inflation.  Sure, there has been incredible inflation in UK, US and German share prices – much to our great surprise – but that does not mean a) presaging a future of plenty nor b) the rises are sustainable.  We reiterate our extreme caution on US etc share prices.  Indeed, while these soared most other assets were flat or collapsed.  This is extremely uncharacteristic of sound markets.

The last recession we had was 2008.  I thought the next one would have started by now as it did all over the EU (except Germany) and many other parts of the World.  In any case, these things come in cycles.  The next one is (over) due.  We expect a recession in share prices and a recession (global economic shock) in the economy.  However, actually, they may come at different times. If the latter comes, please please remember the policy makers cannot slash interest rates.


A quick word about the ‘Great White Hope for the World’ economy.  What an ugly joke China is.  In this Marxist paradise studies now show that senior people there have stashed $4 TRILLIONS (THAT’S $4,000 BILLIONS) in the Cayman Islands and the British Virgin islands etc, tax free havens used by all our friendly non-tax paying multinationals and billionaires.

Last year alone saw £3.5 Billions of London property bought by Chinese.

Those who say China cannot collapse should perhaps wonder why all the top people have moved their ill gotten gains out of China.

They should also wonder what those people will do when China collapses.  If it were me I’d take my money back out of London and the Caymans and buy buy buy at 10c in the $, back home.


One absolutely final point.  If you’re wondering where to go for your holidays this year, from a financial point of view, you may wish to consider Turkey.  The Turkish Lira has fallen in value by A HALF over the last 3 and a half years.  Thus, everything should be dirt cheap out there for a Sterling/Euro/Dollar/Swiss Franc payer.

No doubt the tour operators’ margins have widened markedly by cutting prices far less than they truly have fallen in cost.  However, no doubt there are ways of obtaining true prices.  Also, the advertised prices look attractive nonetheless.

Copyright Jonathan Davis 2014

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42 Responses to The End Game

  1. elomax says:

    I’m yet to be convinced by deflation here, but I have an open mind.

    The problem I see is that the central banks will definitely print money at any hint of deflation, it is a great excuse for politicians to get money money to spend by debasing the money already out there. The money they print definitely displaces other money that would have been invested in bonds, this money then gets spent on other areas (building ghost cities) that consumes resources, so to me more money=inflation.

    Sure the economy becomes more and more disfunctional, but we can limp on for a long time before that really becomes a problem (food riots, energy crises would be needed), and right now a large portion of the economy is just government funded already.

    While the economy does not become too disfunctional the only other threat is people becoming disillusioned with the currency and moving to an alternative leaving us to collapse into hyperinflation. That is definitely a risk imo, but it requires an alternative currency that is judged sound by others, in the past that has always existed, but right now the US, UK, Japan and to some extent the EU are debasing their currencies at the same time.

    I’m sure that if we announced and launched QE1 while everyone else was protecting the value of their currency we’d have been swapping wallets for wheel barrows…

    That’s one other thing I don’t get, I do get that the EU has several nations that are heavily in debt, but the Euro has not been printed to the same extent as the dollar, Yen and Pound, so why is it not held in higher esteem? Is it purely because too many lenders are threatened by their main trading partners collapsing? As otherwise it looks a better currency (or did I miss news on the extent of the number of euro’s printed? I know there are crazy loan deals going on there, but they seem tame compared to printing up £375 billion pounds).

  2. Robin Banks says:

    I think we will see deflation and then hyperinflation. This year should see a major correction (Minsky Moment) as stocks catch up with the real economy (see Baltic Dry Index down 50% so far this year) which is deflating. The scum at the central banks will then panic, like the Lehman crisis, and press the print button at a $1 trillion plus per month leading to a currency collapse and hyperinflation.
    The Chinese are right about one thing; we live in interesting times.

  3. I can see that people do not realise there is no practical difference between fascism and marxism to you and me. Ultimately, it is a small elite taking all the spoils and freedoms and we are left with nowt.

    • Ron Redworth says:

      Bang on, a lot of people forget that the proper name for the German Nazi party was the “National Socialist German Workers’ Party”

    • Anonymous says:

      at extreme ends, perhaps, but there is a world of difference between the kind of socialism you hate to denmark, holland, germany or switzerland.

      • What you don’t get is that Socialism is the precursor to more and more of it. Be careful what you wish for

      • Anonymous says:

        that is not true – apart from taking on bank debt, most countries outside latin america are privatising more of the public realm. i know it is one of von mises’ deluded axioms, that “a little socialism leads to more socialism”, but that has not happened, has it? even sweden and denmark have seen huge privitisations, like the UK, transferring the public domain to carpetbaggers like serco, g4s etc.

      • Anonymous says:

        you could also argue, in exactly the same way, that free market capitalism is the precursor to corporate fascism and feudalism.

      • Anonymous says:

        NL is becoming much less socialistic, and not for the better. we still have student grants and very low tuition fees, the equivilent of the AA is still a mutual, the nationally owned railways are cheaper and more reliable than the UK and the water system remains public and is the best in the world. but there are huge pressures to sell off everything to private carpetbaggers, decrease workers rights and reduce our famous civil liberties.

      • Anonymous says:

        how about your hero harding’s socialist child welfare policies?

      • Anonymous says:

        switzerland has had direct democracy, social elements to the economy and has nationalised their failed private railways (over a century ago) and health service (decades ago) by referendum – still waiting for them to collapse into a marxist tyranny as von mises claims is inevitable. another favourite of hus is the assertion that fascism is better than, not just social democracy, but than ANY egaliterianism.

  4. Anonymous says:

    good article, although jonathan davis doesn’t know what marxism means and attributes every ill in the world to it. interesting fact re china – HSBC has been there since 1865 but were kicked out by the japenese, only to be invited back by david rockefeller’s pal, Mao. funny how capitaliists like dictators, communist or fascist so much.

    • Real capitalists despise them. But we are so few in number.

      • Anonymous says:

        funny then, that rockefeller funded hayek, von mises and rothbard. rockefeller grants were von mises only source of income – never even had a real job after working for dolfuss\ austrofascist regime.

      • Anonymous says:

        don’t you find it suspicious that the people who fund all of you “freedom to starve” rubbish, are monopolists who inherited multi-billion trust funds like rockelfeller and koch (who built much of stalin’s industrial capacity) and soutern “gentlemen” ex slave owning landowners, like the john birchers and southern successionists?

      • The best way to help the poor is hand them everything.


        The best way is to bring down costs of living and let people get on with it.

      • Anonymous says:

        well i left the UK about 15 years ago after working a 50 hour week and struggling constantly and got a lower level job in NL earning 50% more for fewer hours, 13 months pay and 200 euros a month travel expenses. despite a min wage of nearly 1500 euro a month, my supermarket shop is cheaper.

        which mythical country do the poor thrive in due to low costs and deregulation? not switzerland or singapoer, for sure.

      • Yeah NL hasn’t had a lending/house price bubble and it won’t be affected by the crash

      • Anonymous says:

        and in the UK and US, where terrible wages dominate the lower end, the nanny state has to intervene with tax credits, food stamps and housing benefits for working people to prevent starvation, whereas in NL they can afford to live without claiming in work benefits. which model is more socialistic?

      • American and British.
        Banbankbailouts Hikeratesnow Bringbackcapitalism
        Bring down costs of living
        Vastly reduce state and state “supports”.

        “I’m ftom the Govt. I’m here to help” Run for your lives and liberties.

      • Anonymous says:

        look how capitalism has turned your railways into the laughing stock of europe – you pay THREE TO TEN TIMES as much for an inferior service, and then we dutch, germans, french and hong kong subsidise our excellent railways.

      • Yeah noone is subsidising eu rail fairs via socialism which will end well.
        No doubt uk system is crap. Capitalism? No.

      • Anonymous says:

        The UK subsidises their railways more than anyone else, then pays the highest fairs for the most backward, filthy and overcrowded service. the dutch or germans would not tolerate it. the swiss public system is the most efficient in the world – where is your mythical private railway? atlas shrugged?

      • Anonymous says:

        i thought competition would bring down prices and improve services? not a pure enough version of capitalism? you are just like marxists – utopian dreamers.

      • Anonymous says:

        railways are not built by individualistic, sociopathic rapsts like john galt – they are built by large teams of engineers and skilled workers, the vast majority of whom never earn more than 100k a year.

      • Anonymous says:

        well i have never had to apply for benefits here, even with a period on min wage as i was earnig tolerable money. seems to me that you need less state intervention if people at the bottom earn enough money to avoid pay day loans (another blight that does not exist here) – no idea how to do that other than collective bargaining or min wage.

      • And still you don’t accept costs of living way too high BECAUSE of State. Until you do I won’t be replying. If you drown me I’ll block you

      • Anonymous says:

        and if you think that our housing bubble, brought about by a switch away from council provision to flogging it all off (like thatcher) and providing unlimited tax reielf on mortages is a socialist policy, then you need to do some reading up on terminology.

      • Anonymous says:

        it can be that the state increases the cost of living through qe, or also from suppressing the wages and bargaining power of labour. it can also be the private sector through unregulated monopolies (like your shit, dirty railways and piss smelling busses) and wonga loans (illegal in most counrties, interest regulated to %50 in australia)

      • Anonymous says:

        the cost of living is very high in nowray, switzerland and singapore, but so are wages. where does your low prices miracle economy exist?

      • Now you’re ridiculous comparing Capitalist S’pore to us and Billionaire haven Switz to us and oil rich Norway w/ 5m people to us. Wake up!

      • Anonymous says:

        singapore isn’t really purely capitalist – the state owns all of the land, all of the infrastrucure and many private investment comanies outright. they also have a welfare state and spend huge sums on public education. switzerland has it’s share of billionaires, but most people work in SMEs with low pay differenyials and high wages at the bottom. where, then, is your low price paradise? in the real world….

      • Go and write a blog and send it to me. Ill then waste YOUR time clogging your blog

      • Anonymous says:

        i am out of here – it is impossible to have a debate with someone who will not respond to empirical information with anything other than thought terminating cliches and bullshit slogans, sponsored by robber barons, racists and trustafarians. enojy your piss smelling privatised transport, no-go area ghettos, morbidly obese children, miserable and freezing elderly and misty eyed worship or nacrissistic sociopath hypocrites. i should have known not to bother when i saw you re-tweeting ayn-fucking-rand.

  5. Uphill struggle says:

    I don’t see why you are surprised about rising equity prices in the face of all the money printing. As money loses value people are forced to look to assets. Abenomics?

    Margin debt is high…. but consider this…. has the interest on that debt ever been cheaper? So how do you equate the cost of that margin debt to say 2007 when interest rates were 5% or 6%? Does it mean it could go a lot higher?

    You say “please please remember the policy makers cannot slash interest rates”, no but they can
    print more money. Which again devalues money (inc earnings) and drives investment into shares and property. This means that the middle class are going to have to work harder and longer for less.

    The elites are on a train and the middle carriages are disconnecting with the middle class being derailed. (the back carriages were lost in the 1980’s). The elites don’t care because they are only looking forward, everything is fine in first class and the train is picking up speed.

    • Money printing QE 1-9 didn’t help Japan. It’s a myth.
      The cost is not the issue. As prices fall the margin calls will still come. It’s about size of leverage not cost of leverage.
      They will print more and more and more…as did Japan.
      The back carriages in the 80s were given every opportunity to get to the middle. if they didn’t their laziness and/or stupidity.

  6. Rob Gear says:

    Do you actually know what Marxism means? Or do you just use the word to ensure your reader knows you definitely are not one? You are surprised that share prices are rising? No one else is. If the government were giving my industry free money i would expand my share portfolio, want a reason for the problems we see? Its you , you and your sociopathic moronic mates who buy and sell imaginary bits of paper using real taxpayers cash, depending on your day to day mood swings. The end game? Hopefully when enough people realise the only way to stop this financial madness is to head up-to the city of london and start hanging you lot 1 by 1 as you come out for lunch. Have a nice day.

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