Big Trouble in Little Catalonia

This year is turning out to be a show-stopper in many respects: sports or economics or politics or weather, and in some cases, all four. Right now in California, we have the deadliest and probably the most costly wildfire in history still raging. And all that devastation was preceded by three major hurricanes in quick succession making landfall in the continental US at a cost of untold billions.

Those events have had a demonstrable effect on the U.S. economy with many experts blaming the loss of 20,000 jobs in the third quarter on the destruction left particularly in the path of Harvey and Maria. However, the billions of dollars in aid and in insurance claims around the country this year will likely spawn a resultant rebuilding effort that will have the opposite effect.

Meanwhile, the prospect of a tax reform package in Congress added to executive orders from President Trump on health care regulations have the stock market continuing its upward climb with no end in sight. The Dow most recently just broke through 23,000 on Tuesday, and it’s march toward what I’ve predicted to be a spike at least to 30,000 appears to be well within grasp.

All such stories are dominating the news. They’re loud news, meaning they drown out other stories for many with only limited time to listen, watch or read. One such headline holding my attention but being drowned out is from “across the pond.” I believe it is the most significant news we’ve had in months despite all the politically-driven charges & upheaval in Washington.

Catalonia is a small, quasi-independent province in Spain which has maintained a separate cultural heritage within the Iberian Peninsula for more than half a millennium When the marriage of Ferdinand II of Aragon and Isabella I of Castile united two competing kingdoms, Spain became unified. And over time, the Catalans gradually began to lose their culture and independence.

However, in recent decades, a resurgence of Catalan culture, pride and indignation at Spain’s lackluster political leadership and flagging economy have produced a perfect storm in which the province has spoken more boldly about the possibility of complete independence.

That soft rebellion reached a fevered pitch in the last few weeks when a referendum was conducted — against the will of the Spanish government in Madrid, which declared it illegal — wherein 90% of Catalan voters opted for independence. Since the vote and despite a crackdown by European Union police, the fervor for a formal declaration of independence by the Catalan parliament has increased. And talk of such a declaration has been met with dire threats from Madrid.

Why should we care much about what’s happening in Spain… or even this little part of Spain that you may have never heard of until just now? Because it’s a little “insider” peek at a much larger picture… a horror show if you will with an early act teasing at the carnage to come… while most of the world is distracted by louder news about sports, economics, politics & weather.

If you awoke tomorrow to headlines proclaiming: “The United States of America is teetering on collapse” how shocked would you be? You’d certainly feel blindsided. Where did this come from? How did this happen? Why didn’t I have some sense of this already? Imagine the mass panic. Imagine the massive fear. It’s almost an unthinkable concept. So brace yourself for my next sentence…

The European Union is ALREADY in a collapse scenario.

A major member is formally bailing out. Little pieces are wanting to declare independence and go their own way. Those on the dole will take all that they can get for as long as it is given. Those play country-sized loan officers do not have an endless well of reserves to loan. We can argue about freedom and justifiable levels of taxation and wasteful spending by the government, but at the end of the day one thing is clear: central governments must tax in order to pay both for what they are doing and for what they have committed to do in the future.

We need only look to Greece for a perfect example of what happens when a central government promises to pay for something and then runs out of money and can no longer afford it. Greek workers have for decades enjoyed early retirement buoyed by a fantastic pension system which guarantees those workers get to play golf and hang out for the latter third of their lives. All of this was paid for by taxes from the younger generations. The problem is that those older, retired workers didn’t have enough kids of their own. So naturally there aren’t enough taxpayers to fund the steep cost of pensions, not to mention the cost of government largesse.

So it quickly became inevitable a few years ago that the Greek central government began running out of tax revenue. That’s when they found themselves between a rock and a hard place. On the one hand, if you don’t continue paying pensions, you get riots and eventually revolution- which is what we saw on the television screens at the time. And on the other hand, if you don’t have enough revenue to pay for those pensions, you have no choice but to borrow. And that’s what they did.

Let’s jump out of the weeds now and combine the two concepts: demographics and economics. Just like that Greek scenario, what we have on our hands is a situation across Europe in which the populations expecting to receive promised benefits from their central government is the largest it has ever been in history. All the while, the ratio of people receiving benefits to those paying taxes to pay for those benefits is the smallest it has ever been. The former feels like they paid in to the system and are now ready to collect. The latter group is so small it doesn’t want- and maybe can’t- cover that big burden. When you are taxing 100 to give a pension to 20, it can be workable. When you are taxing 20 to give a pension to 100, it’s a dire situation, not easily resolved by typical means (higher taxes to the 20? cut pensions to the 100? Both?) It is a recipe for global financial disaster.

Now, leaders within the central governments aren’t entirely stupid. Math is math, and they know this is the situation. But political science and political will power don’t often meet. Congress knows we can’t afford the American retirement lifestyle any more than the Greeks, but leaders in Congress don’t have the will power to tell their constituents that we can’t afford to continue paying them benefits. After all, what elected leader wants to be voted out of office? [insert uncomfortable silence].

The Brexit (British Exit from the European Union) last year pulled the cornerstone out from under the already-flimsy foundation upon which the EU has rested for nearly 25 years. The three major economies shoring up that union were Germany, Great Britain and France (in that order). Now that three-legged stool is resting quite unsustainably on two legs.

The European Central Bank (the equivalent of the Federal Reserve in the U.S.) is doing its best to hide the numbers and kick the can down the road by lending ever more billions of dollars to the smaller ‘taker’ nations like Greece, Italy and Spain who cannot afford to keep running on their own. With the British now out of the equation, Germany and France are forced to shoulder the weight of all this debt on their own.

Imagine two strong men in a pool who can easily tread water on their own. Now imagine a half dozen weak men also in the pool who do not know how to swim. Naturally they’re going to grab onto the strong men in hopes of being saved from drowning. But eventually the strong will become exhausted from keeping themselves and the others afloat. And, yes, the result will be that they all drown. There are no life rafts to be thrown to them because everyone else in the global pool is either drowning or nearing exhaustion too.

The situation with Germany and France is deteriorating rapidly because they, too, are dealing with the exact same internal demographic vortex as in the U.S. So they’re coping with both internal and external pressure. It is completely unsustainable.

As a side note, why do you think Germany and France have been allowing all the Muslim immigrants and refugees to flood across their borders? Because they know what they’re not publicly admitting: they need more bodies (i.e workers and consumers) or they will die by demographic implosion. And that’s a sword that cuts both ways.

The result is that the EU is disintegrating before our very eyes and this is already creating- and will continue to create- global ripple effects. In the Asian Pacific, the second largest economy is Japan. If you thought the demographic situation in the U.S. and Europe was bad, think again. Japan’s fertility in 2014 was estimated at 1.4… and getting worse. The vast bulk of Japan’s exports are to Europe. But, as any businessman knows, when your largest buyer starts to fall on tough times, so goes the seller. So as the EU continues to falter, Japan will see a decline in exports because there are simply fewer consumers buying their stuff.

I predict that Japan will default on its debt as Europe falls further from its role as chief import partner. The Japanese have one quadrillion Yen in debt. Yes, a quadrillion Yen is a lot of money: in numbers, that 1,000,000,000,000,000 Yen. And here’s the ironic kicker: the Japanese culture is one that has always encouraged saving. They are the best savers in the world. The problem is that frugality kills an economy that is starving for consumer spending, which is why they have experienced consistent deflation for the last 15 years straight. So without spending domestically or internationally from Europe, Japan is a dead man walking. They will default on their insurmountable debt, which is 2.5 times the entire economy.

In China, which has a GDP of three times that of Japan’s, a similar phenomenon is happening. Through an equally dismal fertility rate, they lack a sufficient number of consumers to keep the domestic economy afloat, despite all efforts of a collective, Communist economy.

The only thing keeping China alive right now is exports to the U.S. And even with that reality in play, the China stock market took a 40% dive last year alone. That’s a correction which reveals what savvy investors already know: China’s economy is overvalued largely due to currency manipulation, which is their version of kicking the can down the road. Make things cheaper by printing more money so the world will continue buying Chinese wares. That is until the developed world can no longer continue buying anything.

Now, here’s where we find ourselves at a major crossroads. What do these foreign investors all over the world do when they see an entire economy become fundamentally flawed with a virus that infects every market? They yank their money and flee. To where? It must go to a safe haven? Where’s that? In spite of our own troubles, WE are generally viewed as the safest haven- the U.S.A. And THAT, my friends, is much of why the American markets are doing so well right now.

We’re not recovering from the 2008 Great Recession. We’re simply benefitting from the diseases & financial rot that is plaguing Europe and Asia. International investors are putting their money in the only safe haven left. And no doubt- they’re getting a great return on parking their money here. The U.S. markets have seen some greatest spikes and records in recent decades. Buoyed by the election of a very business- minded, pro-export, pro-protection president, investors believe the good times are back.

But what they either don’t know or are willfully ignoring is that the same demographic and national debt cancer is still eating away at the foundation. And there is absolutely no solution in sight.

So what we’re seeing right in front of our eyes is the building up of multiple bubbles that will dwarf the 2008 housing bubble in comparison. And when those bubbles pop, as they always do, there will be no international safety net to catch everyone because everyone will already be riding on hopes that the U.S. is that ultimate safety net… the safe haven of safe havens… the money market of last resort.

Meanwhile here, we’ll ride volatility caused by good news and bad news, good results & bad results, scandals and some stability, expansion & contraction, spin & spin & spin and some truth, and so on. I see big steps up and big slides down. We’ll flee our markets when it looks like it’s finally rolling over (which is likely to seem that way many times between here and DOW30K). And the fleeing (from seemingly worse situations) Euros and Yen will pour right in, buying up U.S. stocks, real estate, bonds, pretty much anything in which to park wealth in the ultimate safe haven. Volatility. Volatility. Volatility.

What I do NOT foresee: A smooth ride. I will- and do- bet big that the march from DOW23K to DOW30K will not be linear. This is not going to be sailing on a perfectly smooth lake. I foresee BIG swings- some measured in thousand point moves that won’t all be able to be spun as a freak “fat fingers” mistake. I would not be surprised to see us revisit a DOW in the teens again (about 3,000 points below the all-time record his this week). And I won’t be surprised to see DOW bull days just as spectacular. If you recall some of the hottest market days in 2008, you saw 700+ point swings up & down & up & down when the DOW was well south of where it is now. Obviously, a record high DOW repeating such events will simply amplify such swings.

Are you prepared to take good advantage of it? The bigger bull days and the bigger bear days? BOTH scenarios? Maybe you think you know a little but are not confident you know enough to actually put such knowledge to good- and profitable- use? If any of that resonates for you, reach out to me. Email me at Mike@MikeGaliga.com. My team & I are hard at work putting the finishing touches on a new operation to help individual investors just like you take full advantage of the wild volatility rapidly approaching all of us. Email me letting me know you want to learn and you’ll be the first I alert when our work is ready to be utilized. We’re here to help. Email me to let me know you want some of that help. There’s lots of money to be made in volatile markets. Let’s make it together.