Shipping, banks and hyperinflation
Posted on July 21, 2016 by GS Early
Shipping container
One of my geeky habits is to follow the Baltic Dry Index (BDI).
Before I explain what this is, and why it matters, I want to say that this isn’t a piece about BDI as much as it is a look at a number of indicators telling us the same thing: beware.
BDI is one of the major global economic barometers in the world of statistics. It basically represents all the cost of “dry” shipping in the world at any given point in time. Dry shipping means the index doesn’t include oil.
It includes iron ore and other industrial metals as well as other raw materials. It’s been a reliable real-time indicator of how well the global economy is doing. When the index is low, it means the global economy is in decline. When it’s up, it means the global is economy is booming.
For example, in 2008 the index was at an all-time high of around 12,000. It only bottomed out this February at around 290. That is a significant drop. It has rebounded since then, but still only sits around 700. Yes, that’s a 100 percent move off its lows, but it’s still 17 times lower than its 2008 high.
Even if it was an order of magnitude higher (around 7,000), it would still be almost 100 percent off its highs.
I’m not expecting it to reach 12,000 again for quite a while, but the fact that it’s wallowing at the level it is, and that it hit its low just this year, is very disturbing.
It means there is little in the markets that is signaling a pickup in global growth.
We continue to live in this bizarro world that has replaced the natural order of the virtuous cycle — savings (individual or institutional) converted to investment in physical capital creating sustainable productive output and growth followed by consumption and then income and profit — with a debt/consumption cycle.
Central banks continue to print money (create debt) to try to solve all the liquidity problems out there and it’s just not working. And there are few, if any, good ways to get out of the mess the central banks have made. The big banks are still in bad shape and have built their profit centers around the accommodating policies of the central banks. It’s a snake eating its own tail.
Here’s what we have:
The global economy, by every major indicator, looks extremely weak.
Central banks have resorted to negative interest rates to spur investment, but to no avail.
Many of the major banks in France and Italy are teetering; and many other European banks are in significant trouble, with nowhere to go for help. What’s more, property values in the U.K. have tanked due to Brexit, and the real estate market is now in chaos across Europe.
The U.S. dollar and Treasuries remain the global go-to buys as instability continues. But the U.S. isn’t doing so well either. Debt/credit is more a currency than cash, which has helped bankers keep their long con going but has put us all in grave financial danger.
Since 2008 in the U.S., new business closures have outnumbered new business start-ups every year. That has never happened before. That means small and medium sized businesses are being squeezed out, and large corporations are taking up the slack since they can get loans from the big banks.
Rural America is bearing the brunt of all these new dynamics.
So, what happens next? Hyperinflation is a distinct possibility if this whole house of cards collapses.
Or, we could have yet another big leg down in this ongoing Great Recession. And any number of situations in between. But the upshot is, whatever happens from here isn’t going to be pretty.
And in that chaos, the best place to stake a claim is in precious metals stocks, coins and bullion. This flight to the safety of gold and silver has already begun because gold is the ultimate insurance policy. Remember that with depreciation of the dollar, your money buys more gold now than it will in the future. And if central banks keep manipulating interest rates to prop up the markets and the dollar, it will eventually spark the hyperinflation people like myself and Bob Livingston have been warning about (follow this link for more information).
Gold has been heading higher for the past year, and now silver has joined in. These are a store of value, and when the global currency markets go up in smoke it will be very good to have something that retains its value. And even if the markets somehow avoid a complete meltdown, gold and silver will certainly be worth much more than they are now.