Is the Next Credit Crisis a 'Near Certainty'?

Dec 15, 2015


Paris, France

The big news over the weekend was that the Paris meeting of climate foxes produced an agreement...

They will spend US$16.5 trillion of other people's money to raise more chickens.

'Forget 'Big Oil', proclaimed a Bloomberg headline, 'Get Ready for 'Big Solar'.

We don't have any knowledge or prejudice on the subject. But it sounds like the fix is in.

Like the War on Drugs, the War on Poverty, and the War on Terror, we predict that the War on Carbon Emissions will prove successful - but only for the warriors.

Near Certain

But how do we know? How do we know anything?

The future, as we remind ourselves almost daily, is a movie that hasn't been released yet.

A reader wonders:

  • I am a new subscriber and just getting a feel for the tone and quality of information presented in your your newsletter. A contradiction emerges: How do you reconcile your near certainty of a deflation induced collapse of the credit system with your view that one can never know the future?

Glad you asked...

Most people strongly believe - they are 'near certain' - that the sky will light up tomorrow morning just like it does every day. No one knows for sure. But it is probably a mistake to bet against it.

Likewise, if you are working in one of Baltimore's poor neighborhoods, and you leave your tools in an open van, don't expect them to be there when you come back. Just sayin'...

Markets follow patterns. They go up. They go down. Economies, too, have their good hair days and their bad hair days.

There are cycles in all aspects of human life. We are born. But we die, too. Our cities, countries, and empires flourish...and then stagnate and decay. We breathe in...and out. We are happy...then we get the blues.

Long observed and carefully described are the cycles in the credit market. Interest rates - which track the ups and downs - do not go only in one direction. Sometimes, they back up. They change their minds and turn around.

  Equitymaster Conference 2016  
23rd January. Mumbai, India
  It gives us great pleasure in extending you an invitation to join us at the Equitymaster Conference 2016. This is going to be one of our most important Conferences ever! And I strongly recommend you attend it.

At the Equitymaster Conference, our best ever line up of speakers, starting with Ajit Dayal (Founder, Equitymaster) and Bill Bonner (Founder, Agora Inc.) will aim to address all your questions about the current investment environment, thereby help you in planning your next steps. Including...

»  Where are the stock markets headed?
»  What should be your investment strategy for Indian stocks?
»  Is it finally time to get bullish on real estate?
»  Is the Gold story over?
»  What's next for India's economy, and the Indian Rupee?

Plus, at the Conference you will get an opportunity to rub shoulders with not just our speakers, but also like-minded investors from across India (Last year we welcomed guests from 33 cities, and 3 countries).

So if you are serious about your investments, The Equitymaster Conference 2016 is something you cannot afford to miss. More details about the Conference and our speaker line up are available here.

We suggest you move very fast on this invitation.

Reserve your seat under our 'Early Bird' opportunity!

One Direction

You can see why this has to be so...

Imagine if interest rates only went in one direction. Investors would know the future. They would anticipate the direction of the market (correctly) and buy investments to take advantage of it.

But how? Who would sell? Who would want to be on the other side of the trade? If rates only went up, who would bet on lower ones?

No... If people knew the future, there would be no need for markets (the purpose of which is to 'discover' prices). And the present would become a monotonous blur of sameness.

But markets cannot be obliterated. When they are outlawed...they go underground. When they are delayed...they build up energy. When they are denied...they reassert themselves, with a vengeance.

Credit expansions are enabled by low real (inflation-adjusted) interest rates.

Credit contractions occur when real rates go up. That can happen because investors are afraid they won't get paid back, or because they fear the money they get back will have less buying power than the money they lent.

Either way, real rates go up...and credit contracts.

After 66 years of credit expansion, and 33 years of a falling trend in interest rates, we expect a reversal.

As Deutsche Bank dryly puts it, 'U.S. looks late in the cycle on a macro and micro basis...'

A 'near certainty'?

Probably not.

A good bet?


And poor Janet Yellen - sheltered in the academic and regulatory world all her adult life - is about to see for herself.

The fix has been in for the past seven years. Investors knew - with 'near certainty' - that the Fed wouldn't allow long-term rates to rise. This week, she is supposed to begin 'normalising' the situation by raising short-term interest rates.

But markets don't reward the wishful thinking of regulators or the claptrap theories of professors. They have minds of their own.

Stay tuned...

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

A New Infrastructure Boom March 26, 2019
Selva Freigedo talks about the potential in 5G network and how it could transform the way we communicate.
A 40 Somethings Guide to YouTube Hits March 20, 2019
Vivek dwells into a new YouTube phenomenon.
As the Economy Slows Down, Maruti and Two-Wheeler Companies Cut Production March 19, 2019
The country's largest car maker has cut production by more than a fourth.
In Supporting Demonetisation, RBI Behaved Like an Old Uncle Not Willing to Take a Stand March 13, 2019
The minutes of the meeting of the RBI Board which happened before demonetisation have been released.

Equitymaster requests your view! Post a comment on "Is the Next Credit Crisis a 'Near Certainty'?". Click here!

1 Responses to "Is the Next Credit Crisis a 'Near Certainty'?"

Penugonda Prabhakar

Dec 16, 2015

My name is Penugonda Prabhakar in agora in availble in come janet yellen all debit. you consider.

Equitymaster requests your view! Post a comment on "Is the Next Credit Crisis a 'Near Certainty'?". Click here!