Central Bankers Are Hooked on LSD

Central bankers are beginning to learn (again) that there’s no such thing as a free lunch.

The consequences of all that free money are starting to emerge in Turkey, Latin America, and Elon Musk.

After a weekend at Elon’s, American rapper Azealia Banks (in case you’re wondering, I haven’t heard of her either) was reported to have tweeted …

‘“I waited around all weekend while grimes coddled her boyfriend for being too stupid to know not to go on twitter while on acid,” Ms. Banks wrote, referring to Mr. Musk’s girlfriend, the musician known as Grimes.’

CNBC 17 August 2018

If you believe Banks’s version of events, Musk’s grand plan to return his loss making enterprise into private hands was made while on an acid trip. How reassuring that must be for those who’ve financed his vision.

When the book is written on Tesla’s rapid rise and even more rapid descent, it should be mandatory reading for every budding economist and investment banker…on what awaits those who finance the dreams of brilliant but seriously flawed characters.

Elon Musk displays all the characteristics of Alan Bond and Christopher Skase reincarnated.

The bottom line is, big egos and easy money are a toxic for investors.

On a political level, the mix is lethal.

Whole nations suffer.

Turkish President Recep Tayyip Erdoğan has been in power since 2003.

Turkey’s Economy a Success… Until Recently

During this time, Turkey’s economy has been a tear-away success…until recently.

Since 2000, the Turkish economy had (at its peak) grown five-fold.

On face value this appears to be an outstanding achievement.

Graph of Turkey's GDP

Source: Trading Economics

[Click to open in a new window]

However, this so-called growth was nothing more than a debt binge financing a spending spree.

To be fair, the same story applies equally to Australia’s economic ‘success’ or the US ‘recovery’ or China’s miracle economy or Europe’s resurgent economy.

Financial expert Vern Gowdie explores why a credit collapse could occur in 2018, and how you can protect your assets. Click here for free action plan.

None of these ‘success’ stories have been achieved with real growth driven by the prudent investment of savings to improve national productivity.

GDP numbers, around the world, have ALL been artificially inflated by growing debt levels.

If you are wanting a real example of fake news, then look no further than the officially published GDP numbers…the numbers are a sick joke being played on an unsuspecting public.

Anyway, back to Turkey.

The following extract is from The New York Times on 15 August 2018 (emphasis is mine)…

For nearly 10 years now, the flood of cash from global central banks has financed shopping malls in Istanbul, booming cities in China and 100-year bonds in Argentina. Today, many of the malls are empty, property developers in China are riddled with debt, and Argentina has just submitted to a bailout from the International Monetary Fund.

Now, the borrowing binge that fueled rapid growth in emerging markets and piled up returns for their investors is looking like a problem.

‘Financial experts worry that the turmoil in Turkey, which for the better part of a year has been contained, will spread, following the path of other emerging market meltdowns like those in Mexico in 1994 and Asia in 1997.’

Turkey (like all those other ‘miracle’ economies like Japan, Ireland, Iceland Greece et al) is finding out that artificial growth has an expiry date…as do all Ponzi schemes

Eventually, the debt burden becomes too great of a drag to enable any further meaningful levels of borrowing. The system starts to collapse under the weight of unserviceable debt.

Turkey owes nearly US$500 billion in external borrowings.

Which means the bankers want to be repaid in euros or US dollars, NOT Turkish lira.

Graph of Turkey's Total Gross External Debt

Source: Trading Economics

[Click to open in a new window]

The collapse of the Turkish Lira — falling 38% this year — against the US dollar means Turkish borrowers have to come up with more Lira to satisfy their US$ or Euro debt obligations.

European banks — Spain and France in particular — have the lion’s share of exposure to Turkey.

Graph of Bank exposure to Turkey

Source: Mauldin Economics

[Click to open in a new window]

The markets are getting jittery about Turkey’s ability to meet these obligations.

Credit default swaps (CDS are insurance against default) have blown out to a level where the market thinks there’s a 50% chance of a sovereign default within the next 12 months.

This is the headline from Bloomberg on 16 August 2018…

Bloomberg Headline regarding Turkey's Credit Market

Source: Bloomberg

[Click to open in a new window]

Here’s an extract (emphasis is mine)…

‘Turkey’s financial turbulence has triggered a credit-market warning light.

‘The price of one-year protection against a sovereign default has jumped above the annual cost of five-year insurance, according to CMA credit-default swap data. So-called CDS inversions usually only happen to deeply distressed corporate borrowers teetering on the brink of collapse.

‘An inverted CDS curve “is a sign of intense pressure,” said Regis Chatellier, emerging market strategist at Societe Generale SA. Still, that doesn’t necessarily suggest a “high chance” of a Turkish default, he said.’

The pricing of CDS tells us the market thinks there’s a higher probability of Turkey defaulting sooner rather than later. 

The knock-on effect of increased debt servicing and credit market uncertainty has hit the Turkish share market hard…it’s down 52% this year.

Investors in European banks are also getting a little nervous about the heightened risk of default.

Spanish banks are owed US$83 billion.

The largest exposure is to Banco Bilbao Vizcaya Argentaria S.A. (BBVA).  The bank’s share price has fallen nearly 30% since late January 2018.

Bloomberg Headline regarding Turkey's Credit Market

Source: Yahoo Finance

[Click to open in a new window]

The higher interest rates and (supposedly) strong economic growth on offer in Turkey were too enticing to ignore.

In 2017, BBVA attributed more than 30% of its pre-tax profits from its exposure to Turkey.

Other European banks with significant exposure are BNP Paribas (France) and UniCredit (Italy). Both companies have seen their share prices fall in excess of 25% this year.

How the Dominoes Fall

This is how the dominoes can fall in this giant central banker run Ponzi scheme.

Turkey defaults. European banks teeter. Bank runs start. Confidence is lost. Capital controls introduced. Europe falls into recession.

US corporates (with heavy debt loads) generating revenue from Europe suddenly find cashflows drying up and they’re unable to service their debt obligations.

China slows down. The malinvestment within its ‘miracle’ economy becomes all too evident with large corporate failures.

Aussie banks — with a ton of exposure to an overpriced residential real estate market — find the cost of offshore borrowing rises dramatically. The increased interest rate costs are passed on to mortgage stressed over-indebted households. Defaults start. Mortgagee in possession signs go up. Bank shares tumble.

Everything is connected. When this bubble finds its pin, it won’t be contained to one country or one region. It’ll be a global problem…on a scale we cannot imagine.

For now, the pin has been averted. Turkey has been thrown a US$15 billion lifeline from Qatar. But this only buys time. The underlying problem of too much debt and an economy that’s not producing enough to service that debt has not gone away.

Turkish President Recep Tayyip Erdoğan doesn’t come across as someone who’ll accept responsibility for his actions.

In an attempt to stem the tide of lira leaving the country, he’ll introduce capital controls.

Then, when that doesn’t work, my guess is Erdoğan will initiate a sovereign default — relieving his nation of the debt burden — and justify his actions by blaming his country’s woes on the mercenary European and US bankers.

If you want to protect your family wealth, you need to know why this financial expert is predicting economic collapse. Find out more.

That’s when the proverbial hits the fan.

Turkey’s woes are part of a larger global problem…too much debt and not enough money to service it. Something has to give.

The central banker-engineered recovery of the past decade has been a giant con job.

Using more debt to solve a debt crisis was never going to be the permanent solution. It was a temporary fix…masking the underlying problem.

When it comes to big egos and easy money, there are none more dangerous in this world than central bankers.

Time and time again they’ve proven they cannot be trusted with managing an economy responsibly. The response to any downturn is the same tried and failed policy of more cheap credit.

While Elon might be tripping on acid, central bankers have an addiction to LSD — logic stupefying drugs.

This LSD dependency is the only possible explanation for them using the same strategy (in ever increasing doses) to solve a problem caused by that very same strategy.

A perfect example of Einstein’s definition of insanity.

Regards,

Vern Gowdie,
Editor, The Gowdie Letter


Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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