2019: The Three Trends That Matter

2019: The Three Trends That Matter by Charles Hugh Smith – Of Two Minds

Look no further than Brexit in Britain, the yellow vests in France and the Deplorables in the U.S. for manifestations of a broken social contract and decaying social order.

Among the many trends currently in play, Gordon Long and I discuss three that will matter as 2019 progresses: 2019 Themes (56 minutes)

1. Final stages of the debt supercycle

2. Decay of the social order/social contract

3. Social controls: Surveillance capitalism, China’s Social Credit system, social globalization

The basic idea of the debt supercycle is simple: resolving every crisis of over-leveraged speculative excess, evaporation of collateral and over-indebtedness by radically increasing debt eventually leads to an implosion of the entire credit-based financial system.

The final stages of the current debt supercycle are manifesting all sorts of interesting cross-currents: de-dollarization and the unprecedented expansion of debt in China to name just two.

De-dollarization describes the efforts of many nations to reduce their dependence on U.S. dollars for trade and reserves. Since the USD remains the largest reserve currency in both trade and reserves, this trend threatens to reorder the entire global financial system, with potentially disruptive consequences not just to the USD but to a variety of institutions and norms.

China’s total systemic debt has soared from $7 trillion in 2008 to $40 trillion in 2018. This is of course only a rough estimate, as China’s enormous Shadow Banking System is famously opaque, as are many of its institutional and corporate balance sheets.

China has embraced the narrative of “growing our way out of stagnation by quintupling debt,” but the banquet of consequences of this speculative orgy is finally being served: China’s dramatic slowdown in 2018 is just the appetizer course of the banquet of consequences.

This excerpt of a recent (and immediately censored) talk given by a Chinese economist illuminates the result of debt-fueled mal-investment and speculation on a grand scale:

A Great Shift Unseen Over the Last Forty Years:

Look at our profit structure. To put it plainly, China’s listed companies don’t really make money. Then who has taken the few profits made by China’s more than 3,000 listed companies? Two-thirds have been taken by the banking sector and real estate. The profits earned by 1,444 listed companies on the SME board and growth enterprise board are not even equal to one and half times the profit of the Industrial and Commercial Bank of China. How can this kind of stock market become a bull market?

When we buy stocks, we are buying the profits of the company, not hype and rumors. I recently read a report comparing the profits of China’s listed companies with those in the U.S. There are many U.S. public companies with tens of billions dollars in profits. How many Chinese tech and manufacturing companies are there that have accomplished this? There is only one, but it’s not listed, and you all know which one that is. [Xiang is referring to Huawei, the Chinese tech company.]

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