Is The Debt Crisis About To Be Reborn In 2020? – Part IIThere are some key elements of political and economic Super-Cycles that all traders must stay aware of listed below. But if you have not yet read PART I do so now.
The Transportation Index has not recovered to levels from the September 2018 peak. This lower price rotation in the Transportation Index suggests the global economy is not expecting growth in the near future.
Other than Precious Metals, the Commodities sector has rebounded off of recent lows but has yet to see any real price advancement – suggesting that demand for raw commodities is rather weak.
The Real Estate sector in the US is starting to falter near a current high price level. We are seeing price decreases hit the markets as sellers are desperate to attract buyers. This could be a warning that a price revaluation event is about to unfold in the US.
Super-Cycles suggest a moderately sized price rotation between now and early 2020 (likely greater than 20% in size). This rotation, should it happen, will become a price revaluation event that could attempt to “shake loose” some of the sector pricing and forward expectations we’ve mentioned (above).
Our bigger concern is the localized state and federal pension and retirement issues that continue to respond with higher levels of financial commitments and greater levels of annual budgets as related to ongoing capacity and operational activities in the US.
If an unwinding event was to unfold in or near 2020, it is our belief that a pricing revaluation event related to any of the core economic factors above (particularly with Real Estate, Economic Cycles, the US Presidential Elections, and a soft/weakening US economy) could result in a much larger price revaluation event taking place. This would create extended pressures on local State and Federal expenses and highlight debt issues that can often be hidden behind “creative accounting” tricks.
State and Local Government Debt Securities and Loan Liability levels have stayed elevated, yet somewhat flat over the past 10+ years. It is very likely that these debt levels have been contained because of the US easy money policies of the past 10+ years. When the US Dollar is cheap and easy to repay, these debt levels don’t look so difficult.
Pension and retirement systems/fund are a completely different story for State and Local government agencies. Asset flows have dramatically increased in volatility after 2000. Additionally, the depth and magnitude of asset outflows have become quite dangerous while price revaluation events were unfolding (2000 to 2004 and 2008 to 2015). Outflows in state and federal pension and retirement funds create large forward operational pressures and shortfalls in expected funding levels. These decreases in funding should be made whole by the State or City – but they are rarely ever repaid in full.
As these “wholes” in the pension and retirement systems continue to fester (resulting in decreased funds for pensioners and decrease fund to be deployed as investment assets), the problems begin to compound over time. More and more retirees and pensioners start drawing benefits while the system continues to take in less and less – never actually catching up in total value.
One big revaluation event, or possibly two, from now and we believe the entire system will create a multiple Trillion Dollar debt crisis within the US and possibly throughout the modern world. We believe the under-estimated state and federal pension/retirement funding issue is the next shoe to drop and that it will take a price revaluation event to expose the risks that are evident within this failed “Ponzi” scheme. Read the recent news about Chicago and Illinois to learn just how dangerous these entitlement contraptions really are.
Let’s assume that a revaluation event does take place within the next 5 to 10+ years – this would be something like a Real Estate price correction or some type of stock market, asset market price correction related to local or global economic issues. Could these massive asset funds handle an extended DRAWDOWN from their funds while Cities, States, and Federal agencies attempt to deal with declining revenues? How much time would it take for these pension and retirement funds to fall into crisis or insolvency?
By our estimates, the current asset levels in the US retirement/pension system have just started to breach the lower asset level channel originating from 1970 to 1999 attribution levels. It has taken 20+ years of US Fed and global Central Bank market manipulation, as well as President Trump’s incredible US economic and stock market rally, to recover to these levels.