The beginning of an end

If you want money more than anything, you’ll be bought and sold your whole life – Rumi

Forget the seatbelt, enjoy the free fall

Fasten your seatbelt, we are approaching crash landing… No, wait!!! No use of a seatbelt it’s not crash landing it’s a nosedive. So, sit back and wait for the massive jolt. Whoever survives will be given a passport to the new world. The end of the world we know is here. Ok enough of scaremongering, let me rephrase it, the end of the world economy as we know it is here. Isn’t it the same?

This article is about the worst economic crisis in human history. The object in the mirror is closer than it appears. No one will be spared. Our lives are about to change. There is not much anyone can do to stop this plunge. Let’s see what, how, why, and when of the bleak prophesy about global economic doomsday.

Disclaimer

The article is based on my personal interpretation of hard facts, information available on the net, various articles, and YouTube videos. I am not an economist or financial analyst. I am trying to understand and correlate various unrelated developments leading to a certain pattern. The article is also inspired by the wisdom of one of my ex-colleague and good friend. He is a super quant (quantitative analyst) and has unmatched knowledge and understanding of financial markets and the economy. The prediction of the financial tragedy will remain a conspiracy theory till it happens. The purpose of this extensive article is to show the grave possibility and how we can embrace this life-changing phase. All right, so let’s forget the seat belt and jump into this abyss.

Mother of all crashes

The mother of all crashes is imminent. The climax is about to begin for this ugly drama taking place on the stage of the world economy. Novel coronavirus was just a small chapter in this unfolding drama. So, this is not about the post-pandemic world. The script is being written many years before the outbreak of the coronavirus. Let’s understand the quantum of this crisis.

1. Mother of all crashes is not about just the stock market crash but a worldwide catastrophe for financial systems and the global economy. This is not about Market Correction. The market correction will keep happening on the side. I am writing about a massive 80% wipe-out from all markets across the globe.
2. This time it is not a cyclic recession but it's going to be a great depression larger than the world experienced from 1929 to 1939.
3. The crisis would have the potential to completely displace the monetary and financial systems as we know them today.

Of course, life will go on. The new world order will be written, and everyone will live happily ever after (till we experience the next one). We humans hardly learn from history and mistakes.

The Chaos Theory

I was always fascinated by chaos theory. The chaos theory can be used to interpret certain events in today’s complex global economy. The flaws in the global economy are visible. There is a clear pattern of how bad money is percolating across multiple layers and geographies. If anyone could see this pattern, they will realize how the extremely dire situation we are in. The more dangerous part of this whole equation is the random parts, unrelated and unexpected events taking place over decades since the last great depression. There is a dangerous pattern developing with these non-linear dynamics. A perfect storm is brewing.

Black Swan Event

Black Swan event is an analogy used in the book The Black Swan: The Impact of the Highly Improbable?by Nassim Nicholas Taleb. A surprise event that appears unprecedented and unexpected till it happens. But when we reflect, we realize that it was bound to happen. The black swan events are exceedingly rare and difficult to predict but have the power to toss the entire world upside down. Please keep this analogy in mind as you read further.

House of Cards

The world economy is like a house of cards. It’s built on a shaky foundation. Any card in this card castle can pull down the whole tower. The house of cards comprises thousands of elements. It is difficult to say which card(s) will trigger the fall. Following are some of the top elements of this fragile house of cards.

Let's look at a few of the pillars of this shacky structure which is set for a complete collapse. There is a landmine about to explode under each of these pillars of the global economy.

US National Debt

is exploding day by day. While publishing this article on 1st September 2021, the US National debt is at $ 28.709 trillion (Reference https://www.usdebtclock.org). Interestingly since I started writing this blog 3 days back, the US debt has gone up by $10 billion. When you read this section, do open the US Debt Clock site in another window and check the current US National Debt.

The debt to GDP ratio for the US is at 115%. Overall, 8% of the GDP goes towards the interest payment of these debts. While these are official numbers, and many believe that the actual numbers are significantly higher. As per Congressional Budget Office (https://www.cbo.gov/publication/57038)

"The US Federal Debt to GDP ratio would surpass 200% in less than 30 years. In the same period, the GDP deficit would go to 13% out of which a significant component will be debt interest payment. The GDP deficit in 2021 would be at 10.3% against a 50-year average of 3.3%."

This is the grave state of the US Debt Crisis. China, Japan, and Greece have the worst Debt to GDP Ratios in the world. Interestingly the US owes most of its debt to China. We can imagine the cascading effect of debt default in any part of the world.

The total global debt as of 2020 was $281 trillion or 355% of Global GDP

Landmine 1 - The debt explosion will also result in increase of bad debts which could crash the banking system. Looming danger of expired debt ceilings in US will result in suspensation of debt issuance by end of September 2021.

Debt Trap

While growing global and US debt is been a problem for many years now. The US is now entering into Debt Trap. Debt Trap results in slowing down of the economy. Central Banks cannot increase interest rates. For example, the US would be just paying a yearly $1.5 trillion interest payment if the interest rates in the US are hiked to 5%. To make this simple, the US annual budget is $3 trillion. This means the US will never allow the free market to decide the interest rate. This means to counter US inflation, Fed has to literally stab the US economy right in the stomach. Still many think US Debt and Global Debt is been always there.

Inflation

The inflation in the US is highest since 2008. There is a debate over the correct numbers of inflation, but few industry experts believe that the US is heading towards hyperinflation. The disturbance in the supply chain due to ongoing pandemic, labor shortage, wage inflation, rise in crude oil price, soaring housing market due to migrations and speculations is fueling the inflation. While the common man may not worry about the rising national debt, inflation is one factor in economic systems which directly impacts each citizen.

The CPI in July was 5.2% officially but it is more than 13.5% as per John Williams from ShadowStats

Landmine 2: After pandemic world population is suffering with historic inflation. This will soon start eroding the purchasing power which will slow down the ecomony. Fed is not in position to raise the interest rates immediately to control the inflation.

This is an interesting phase where wage inflation and unemployment is getting hand in hand in the US. There are multiple reasons to this issue. Due to the ongoing pandemic, schools are closed and many people are not willing to go to work for child care or health issues. But more importantly, the majority of the working class in the US is getting addicted to freebies of unemployment benefits. This is creating massive disruptions in labor supply and wage inflation at the same time.

Interest Rates

Interest rate is a weapon in Government's hand to fight inflation. Theoretically, an increase in interest rate reduces the cash flow in the market which in turn controls inflation. Simultaneously rate change results in slowing down economic growth, increase in the cost of borrowing, and may shift investors away from equity. Interest rate is a double-edged sword and today's central banks have extremely limited leeway to play around with interest rates. The anticipated interest rate hike in the US will be done phased manner till 2023 and wouldn't be more than 25 basis points per quarter.

The current short-term interest rate in the US is close to zero.

Landmine 3 - Fed's delay tactics in raising interest rate till 2023 will aggravate the inflation. A minor change in rate can distrurb market dynamics in a big way

Quantitative Easing (QE) and Money Printing

Recently I witnessed my terminally ill close family member being kept alive with help of a noninvasive ventilator. The ventilator was pumping 50 liters of 100% pure oxygen per minute. As a first impression, the patient seemed all right on life support and in fact, showed few signs of improvement. But then the doctors told us the bitter truth, they said the moment we take off the ventilator the patient wouldn't survive beyond a few days or weeks. This is in simple words central bank's Quantitative Easing (QE) and money printing. Unlike the artificial oxygen that gets completely consumed by the patient, the printed money stays in the system. QE is done to support the economy during troubled times such as 2008, 2020, and 2021. Eventually, financial systems get used to this artificial support, and often the money lands in the wrong places. For example, QE by US Fed can boost up the Chinese economy, or the money gets used for riskier speculative investments such as equity.

In March 2020, US Fed had decided to pump $700 billion into the economy by purchasing government debt bonds and mortgage-backed securities (the famous MBS instrument). Now Fed is contemplating the timing to taper down monthly shopping of $120 billion by end of this year while there is a surge in covid cases due to delta variant.

Landmine 4: Jerom Powell (Chair of the Federal Reserve of the United States) is still hesitant to announce tapering plan for bond buying stimulous. The day Fed implements its taper plans it will send tremors through global markets.

Devaluation and risk of De-dollarization

Now we can start seeing the tangled house of cards based on exploding debts, soaring inflation, limited leeway with interest rates, shopping by central banks, and insane money printing. This directly results in a currency devaluation and diminishing trust in the dollar as the currency of global exchange. All economies in the world have gotten rid of the gold standard in their monetary policy long back. Thus, they can print any amount of money every year to keep the economy alive on a ventilator or to repay the debts. This money is printed without any productive goods or services in exchange. The unemployment benefits are an example of free money. The money printing is resulting in erosion into the value of US dollars. Many countries are now actively looking at alternatives to Dollar.

In 2020, the US printed $3 trillion worth of currency, the 40% of the dollar in existence today is printed in the last 12 months.

Landmine 5: Russia has already decided to stop holding assests in US Dollars. Many central banks are purchasing gold as they lost trust in USD.

Hyperinflation

As governments and the central banks continue to print money for political reasons and in response to the economic calamity, the world is living under the constant pressure of hyperinflation. You can google for hyperinflation in recent histories in countries like Venezuela, Zimbabwe, Argentina, Lebanon, and now Afghanistan. The statistics are mindboggling. The people in many such countries are struggling for daily essentials. Hyperinflation causes severe and immediate deterioration of quality of life and an increase in the cost of living. The rich can become poor and the poor can become homeless overnight. Hyperinflation is a direct reflection of lack of natural resources, corrupt and unstable governments, and stalled economic cycle. In the hyperinflationary environment, your retirement savings today would be worth far less or even become completely worthless by the time you retire.

Can you believe this?

In 2016, Venezuela entered hyperinflation. The inflation rate reached 274% in 2016, 863% in 2017, 130,060% in 2018 and 9,586% in 2019. Since 2016, the overall inflation rate has increased to 53,798,500%.?2021 the inflation rate is 5,500%

Landmine 6: As fresh as yesterday 31st August, Sri Lanka has declared economic crisis to control food prices. The inflation is at 6% and Army is being ordered to seize the food stocks. which country is next?

Overpriced Market

Just check the 1-year returns of the Indian, American, and Japanese share market. This is all happening in the middle of a pandemic. Look at the amount of borrowed money, personal savings put into the market by many. Imagine how much net worth will be wiped out in a matter of days if the prediction of 50% to 80% bust comes true. We experienced this phenomenon last year during March/April, it was triggered by uncertainty around recovery from the pandemic. The next crash will be based on fundamentals and will take a prolonged period (8 to10 years) to recover. Many may not even get a chance to jump out of this sinking ship. The choice is yours; you want to hold or book the profit today.

? "Fully fledged epic bubble" - Jeremy Grantham

"Greatest speculative bubble of all time in all things" ?"The Big Short" fame investor Michael Burry

The leading indices have shot up by astonishing % in a matter of 12 months between 1st September 2020 to 31st August 2021.

BSE Sensex 47.95%, NIFTY 49.36%, Dow Jones 24.36%, Nasdaq 29.46%, Nikkei 225 21.4%

Shanghai Index had lowest increase at 3.91%

Landmine 7: Market is reaching new high every day but why no one is Jubilant? Most agree that current levels are not sustainable. Imagine the amount of worth is about to get wiped out with every 5% to 10% correction

This concludes my analogy of a house of cards full of landmines at each level. I explained only a handful of cards out of thousands of complex and highly interdependent systems. A small credit default or bank failure will have a domino effect across the global economy. The systems which look very robust from the outside are prone to the sandpile effect.

The Sandpile Model

As of the last day of August 2021, the leading stock market indexes in India and the US are at an all-time high. Where are those ominous signs of gloom doom? What would trigger the fall? To know this better we need to look at Bak's sandpile model. Most of us would have built sandcastles on beaches or riverbanks during our childhood. We used to build nice sturdy-looking structures which used to start collapsing in some time after adding few more grains of sand. The momentum gained by rolling sand grains results in a complete landslide. The snow avalanches gain destructive energy using the same principle. The inherent structure of such systems results in the fall of the entire system. The modern-day economy and world have become extremely complex and less agile at the same time. This reduces the government's ability to intervene and prevent the further falls.

I wish during our childhood; we knew where and when to stop adding sand grains while building those wonderful sandcastles.

This leads to the next theory called The Minsky Moment which talks about reckless speculative activity.

The Minsky Moment

The Minsky Moment is defined after economist Hyman Minsky. It is based on the human tendency to overlook or underestimate the risk when everything is going well. The extended period of stability eventually results in casual behavior in the financial market. This eventually results in the sudden collapse of asset prices. The 2008 crash was a classic Minsky Moment. Debt leveraged instruments such as Mortgage-Backed Securities (MBS), Collateralized debt obligation?(CDO), or Collateralized Loan obligation?(CDO) suffer most when asset prices start diminishing. The impact flows through the external debts across many countries.

The exuberant behavior in the market and early celebration of a win over novel coronavirus is clear indications of us living in The Minsky Moment.

The other side of the story

The majority world does not (want to) believe in this economic doomsday theory. Following are counterarguments against any such economic Armageddon.

Argument 1: Financial pundits have been talking about this for many years now. Nothing has happened so far, and it will never happen.

My View: While this is true today, soaring debts, insane money printing, inflation, and speculative trading using borrowed money are reaching new heights every passing moment. If something has not happened yesterday, does not mean it will not happen today or tomorrow.

Argument 2: The economy is recovering fast from the pandemic, demand has shot up, GDP is showing signs of better growth compared to the previous year. This is the best time for the financial market.

My View: Either this is gross ignorance or denial to accept the reality. Many are downplaying inflation as transitionary. The labor shortage, wage inflation, the broken supply chain is being labeled as a temporary situation. The world has already declared self-proclaimed victory over the novel coronavirus while there are still many people who are either unsure about the efficacy of vaccines or are reluctant to take one. As I said the pandemic is an exceedingly small chapter in this drama. Many issues were prevailing long before the advent of the pandemic. Remember current recovery is fueled by printed money. The world has suffered irrecoverable loss during the last 18 months which is yet to be completely accounted for.

Argument 3: I don't invest in the share market, so I am least bothered about the market crash.

My View: First, we are talking about an economic crash or complete system failure and not just a stock market crash. Secondly, we all live in the same ecosystem. The turmoil in this ecosystem will affect each one directly or indirectly. Just go through the aftermath section below to see how our lives will be changed beyond our financial systems. Hyperinflation and currency printing have the power to wipe out your retirement savings. Run-on the bank will take away access to your savings in the bank.

Argument 4: I invest only in blue chip and selected stocks. My investments will have a negligible impact and would show a speedy recovery.

My View: The crash will have a snowball effect and will take down everything that comes in its way good or bad. Investors will want to do "all exit" in such situations to honor their obligations. The crash will not spare anyone and asset class.

Argument 4: I survived through 2008 crash. I will survive this one as well.

My View: This is an overly optimistic statement but true to a certain extent. The world has become far more complex in the last 12 years. The origin of the 2008 crash was in the US. It was primarily caused by sophisticated criminal fraud around subprime mortgages. This time economy is ailing on multiple fronts. The fundamentals are under question. This time economy is heading towards multi-organ failure. While most of us will survive through this crisis but it will be a lot more painful than in 2008 and will have a prolonged recovery.

Argument 5: India is the next economic superpower. The impact of any monetary crisis would be extremely limited in India.

My View: First, the Indian economy is also party to the crime of money printing, overpriced assets, and inflation. Secondly, in today's complex global economy, no country is immune to this economic pandemic. India will have an equally significant impact due to the size of our population, dependence on the US and China, political conflicts.

The butterfly effect in chaos theory is about how small incidents can create ripples in a complex system

The aftermath

Tomorrow may not be the same. I have listed potential fallouts of this historical economic crisis which could prolong the recovery over the rest of the decade before we embark on the new world order.???

• Political Turmoil and Collapse of governments - The hyperinflation, unemployment, international debt defaults would trigger political unrest. It will have the power to topple well-established incumbent governments during the rest of this decade. This will be coupled with the period of political uncertainty and coalition governments. We will see an increase in civil unrest, protests, racism, and riots like a recent one in the US. The unemployed youth could show their frustration and anger through such means. The incumbent governments will have the challenging task to deal with this crisis.
• Increase in International Conflicts - We may see an increase in warmongering, terrorists' activities, border encroachments, invasions. This will be responded to with agendas of nationalism and localization. India – China, India – Pak, China - Taiwan, Afghan - Taliban - The rest of world conflicts can be used by governments to divert attention from genuine issues. Troubles in Greece, Italy, Spain could go out of hand. Germany is already feeling uncomfortable with the Euro arrangement.
• Quality of life will suffer big time due to these unpleasant developments. This could trigger relationship issues at the personal level. Life for retirees would get challenging with depleting the net value of their retirement savings. Many will need to mend their lifelong dreams of buying a new house, pursuing higher education abroad, relocating to a different country. Today's youngsters will be offered all these problems on a plate when they are ready to face the real world.
• Massive Unemployment - Economic downfall along with ongoing climate issues and technology disruption will cause massive job displacement in the formal and informal sectors.
• Migrations - Political unrest, climate issues, availability of jobs will cause unprecedented and more permanent migrations.
• Hyperinflation / Currency Devaluation could wipe out your complete net worth over a few weeks or months. Food shortage and starvation will grapple many countries.

Hope is not a strategy - James Cameron

Be humble towards others, be grateful for what you have, and be modest about what you are

This generation has witnessed the best time on the earth such as technological advancement, great infrastructure, improved health care, and access to good education. We have also witnessed the 9/11, 2008 financial crash the 2020 pandemic, and unprecedented lockdowns. The next 10 years would be the most eventful and happening times of recent and modern humankind.

The individual or for that matter even government won't be able to do much to avoid this eventuality. We can be more aware of this possibility and be mentally prepared to face it.

Preparing on financial front for the worst economic nightmare - Look for a place to hide, stay low

Flip your Asset Allocation

1. Equity Exposure - Check your asset allocation and exposure to the equity/bond market. Do your risk assessment and bring the exposure close to 0%.
2. Cash / Savings / FD -Check the amount of money kept in each bank. Ensure that your bank will be able to sustain this massive crisis. Avoid keeping money in one single bank. Prefer government-owned public sector banks. Sudden currency devaluation and inflation can result in negative returns on your savings.
3. Precious Metals - Increase your investment in physical gold and silver. Precious metals will retain value against insane money printing. We should thank God that the government can't print gold and silver. The digital and paper gold will be redeemed using government-printed currency on maturity. Digital or paper gold is not the same as holding physical gold. Make sure to take utmost safety of your investment in physical precious metals by using safety lockers. There is already a significant increase in robbery, burglary, thefts due to pandemics. Precious metal will not be immune from the damage caused by the crash, but it will show better recovery in a short time. The extent of damage will be far less compared to the stock market and a drop in the value of fiat currency.
4. Real Estate- The housing market in most parts of the world is in a bubble. This would be the wrong time to buy new property. Consider rental accommodation and defer buying your first home for the next 1-2 years. Hold on to your investments in real estate. It will have less value erosion compared to most of the other asset classes (except precious metals).
5. Cryptocurrency - Sometimes I feel the way the world is divided into nonbelieving atheists and God-believing theists, the world is also divided into cryptocurrency investors and cryptocurrency critics. The way fiat currency is not based on the underlying gold standard, there is no underlying value for cryptocurrency. When the entire world will run out of money, they would redeem every possible asset to pay debts and meet the daily expenses. The world of cryptocurrency will also crash as it is still funded by fiat currency from the conventional economy. Cryptocurrency is a more speculative assets class than stock. It's better to stay away from it completely.
6. Never mix Insurance and Investments - Insurance is not an investment. Don't expect your insurance to give you returns. Make sure you have personal health insurance coverage for the entire family including senior citizens, term insurance, home insurance, and vehicle insurance. Personal insurance at an early age is necessary even if your employer is covering you for life and health. Dependency on corporate insurance should not become an exit barrier for you if you want to be on your own. The insurance should sufficiently factor in inflation and future value of sum assured.

Preparing on Personal front for the worst economic nightmare - Look Inside

I quit my 25 years of a corporate job last year after many years of deliberations in my mind. I was preparing myself financially and mentally to take this leap. In this process, I devised my 5H Model for true contentment in life. My decision to quit the job and developing this 5H model was also a mock drill of times to come.

The 5H Model to survive

1. Health - The first H is about Physical Health and Financial Health. Ensure that you are fit, have good stamina, and have the right level of immunity for your age. The tough times can always aggravate your mental and physical health. I have already covered financial health and readiness in the section above. Revisit your asset allocation, perform a brutal risk assessment and act on it today. Make sure you have enough corpus to maintain the current standard of living without employment for the next 5 years.
2. Harmony - Be in harmony with yourself. Don't blame yourself if things don't go well during this phase. The loss of a job, a missed promotion, a lost opportunity, or the inability to buy a new house is not always a judgment on your capabilities. Your relationships will go through a litmus test during these daunting times. This is the time when you will need the complete support system of your partner, friends, and family. Invest in these relationships every single day. Believe me, you will need your parents more during this phase than they need you. Take care of old people. Spiritually strong people will be better equipped to navigate through these tough times. We will have to teach the next generation to develop emotional agility to face these brutal times. Ultimately no one can take away the power of your inner peace and contentment in your life.
3. Hobbies - What would you do if you don't have to go to work for a few months/years for voluntary or involuntary reasons? You are not your job. What's your identity beyond your designation? Your hobbies will keep you motivated when you feel you are maxed out with your career, work, role. Time is now to engage in some creative hobby. You might discover new you as you chase your hobbies. Your hobbies may pave the way for your career change.
4. Habits - The tough time has all potential to push you into unhealthy habits. It can shake up your routine. Make sure your everyday routine factors time for your health (fitness), harmony (relationships), and hobbies (anything and everything you love doing and are good at doing). Make sure not to fall into any kind of addiction.
5. Happiness - Finally the contentment in day-to-day life is central to our existence. Practicing Emotional Agility (Susan David) allows us to acknowledge our emotions instead of denial. You cannot say one day I will be happy once everything is all right. That one day is today. No matter what we go through, we have a truly brief time on this planet, let's make the best out of it.

The new world

While all this sounds devastating, it will allow humankind to rewrite the rules of the game. A complete rest would be the only solution. While A COMPLETE RESET sounds ridiculous there would be involuntary auto-reset of global debts, currencies, and many conventional monitory practices.

Even in the future, stable systems will inevitably go through periods of instability, but the following measures could prolong the next mega crash. This may sound too simplistic, a dream and socialist approach

1. Man-Machine balance - Keeping in mind that technology is for the betterment of humankind and not another way around. Singularity is a hypothetical future where the boundaries between humanity and computers will be erased. The technology growth will become irreversible and will get out of control. We must read the homo dues - a brief history of tomorrow by Yuval Noha Harari.
2. Climate Change - Absolute no economic growth at the cost of climate.
3. Less GDP spending on defense and more spending on education, healthcare. Access to basic needs of clean water, food, and shelter for everyone in the world. Efforts to narrow the gap between rich and poor
4. Current digital currencies have gone through an evolution since the barter exchange system. The current form of money is equally struggling like a barter system to facilitate the exchange of services and goods. The world might need a completely new way of seamlessly exchanging services and goods. This is the time for One World One Currency. The Special Drawing Rights (SDR) by the International Monetary fund (IMF) is loosely based on a similar concept. With de-dollarization world should not trap into another disguised version of the US Dollar.

The end has begun

I hope I am loud and clear. I wish I am completely wrong and will be happy to be proved wrong. I wish no one should suffer in this world. This is my wishful thinking. But remember Hope Is Not a Strategy.

Finally, the million-dollar question about the timing of this unprecedented event in human history. We may wake up any day to this unavoidable tragedy. No one can predict and time this event. While many financial experts are certain that this event would occur in 2021 or the first half of 2022. I feel this may go into 2023 as well. The delay does not reduce the certainty and impact of this historical collapse.

The beginning of the end has already begun. I wish I can directly wake up after a decade in the new world which is not built on borrowed money (leveraged), fake currency, bad debts and wealth generated using speculative gambles.

"Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better." - Nassim Taleb

Be Antifragile !!! Please share views, feedback, comments on this article.