The International Monetary Fund just published some dire forecasts this past week.
If you are alarmed by the fact that debt/GDP levels are at all-time highs and are well above 100% in many cases, then stop reading now because it doesn’t get any better.
For years, I’ve heard gloom and doom predictions, attached to specific dates, pinpointing calamity, but these are never accurate.
If someone wakes up every morning, predicting that there will be a financial meltdown, they will get it right eventually, but you should stop listening to these projections.
The “when” can never be exact, but it is important to think about the general environment at any given time. Howard Marks, one of the world’s best investors, a billionaire, along with Ray Dalio, hedge-fund rock-star and multi-billionaire, both foresee this as a time to be very cautious.
The IMF just laid out a major reason to be so. One of the most important players in the stock market is the pension funds.
We’re not talking about the small funds either, but the state-owned ones, which manage hundreds of billions in government-employee money.
These pension funds are already in the hole, missing several trillion dollars, and they will probably require a Federal bailout, at some point.
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It gets worse because not only do they lack all these trillions after a 10-yr bull market, but they are exposed to the risk of the market topping-off and eating away at their equity as well.
It is all but guaranteed that the states of the union, California, Illinois, Florida, Arizona, and others, will need assistance.
Pulling liquidity out the markets will, of course, drag down some of the biggest mortgage lenders as well, that being Freddie and Fannie.
The IMF went as far as saying that $5T of equity could be lost in a recession. Can you prop-up these sums once more?
It is possible, but not without creating much higher inflation and not without raising interest rates, which is another stumbling block for global growth.
The possible scenarios here are mind-boggling because what could end up happening is that the Chinese government steps in, loans money to some failed, U.S.-based pension plans, which would be considered an act of war.
I don’t like this one bit, so here’s my message to you:
If you’re relying on government subsidies, take a “haircut” approach and begin to figure out how to live with about half of what you are currently expecting to receive. Take a “haircut” on your expectations.
This is not a futuristic analysis, either.
We could start seeing cracks as soon as next year. 2019 and 2020 are shaping-up to be some of the most interesting times for modern society.
Best Regards,
Tom Beck
Research Partner, PortfolioWealthGlobal.com
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