Coming Financial Recession


Thinking about the current economic situation


Considering the economic incidents we have currently been facing, it is entirely rational to assume that we are in a scenario where we will face a bubble before the next massive financial crisis. We discussed it in previous articles, but what should we do in the situation or the scenario? In this article, I will try to describe the current situation and consider how to counteract this situation.


From now on, the market will make you believe that the bullish market will continue forever,

The bubble is something that has historically happened repeatedly. You have to remember that there are no bullish trends that continue forever.

Generally, you lose money when your strong belief in the economy contradicts the reality.


You can slightly mitigate the risk of falling into that undesirable situation by knowing both possibilities.

One possibility is that the stock market goes up almost forever, while the other possibility is that the stock market crashes at some point, most likely around 2020. 

It, however, is unlikely that the stock market( it refers to indices) goes much further than the current price. 

To pile up short positions every time it goes up on Indices seems to have a higher probability than buying them without thinking anything.



Indices might be in a bubble.


There has been a prevalence of the information that tells us that we should buy ETFs and any indices. Historically, indices have outperformed almost any hedge fund and investors in the universe. Therefore, many people purchase indices with hard-earned money without caring about the actual economic situation.

That delusion might cause the bubble.

If you draw a linear Regression line on the S&P 500 chart( please look at the reference URL below the article), you can see something.

In theory, buying ETF, in the long run, might be the right decision because you will gain profit in 50 years anyway since the economic growth is continuous for sure. At the same time, however, if you believe the long-term economic growth exists and follows its linear regression line on the chart (it is the mathematical appearance of visible potential growth), it is not the time to buy ETFs or at least S&P500. My options are either to sell short on indices or to wait for the end of the next correction.

When it turns into a downtrend, there are many things to do.

Buying gold and Yen and selling short on indices seem to be rational decisions.


Disclaimer 

I do not force anyone to do what I wrote in this article. Investment decisions must be made by yourselves ultimately.

What can we do in the current economic situation which is, to say, very bad?


The fundamental indicators in my brain tell me that the economy is going down, but is it the case?



The Current situation

We seem to be in a situation where the entire world economy will depend upon the U.S. Economy again. As seen in the current political case between China and the U.S. and between Japan and Korea, international cooperation has deteriorated. Those things are usually strongly negative signs regarding the probability of coming depression. 


In 1929 due to the devastation of the First World War, almost the entire economy had to ask for financial help from the U.S. economy. In that era, the U.S. was the only substantial economic existence that could afford to help other countries. European countries were filled with debts from U.S. investors and the government. Amid that situation, European countries implied that without Germany’s paying Compensation stated in the Treaty of Versailles, European countries also do not pay back to the U.S. The fear and the anger of American citizens and investors came from the statement or attitudes that hindered international cooperation, which can be to blame for the lengthened period of the Great Depression in 1929 and possibly the cause of the disaster. Meanwhile, the U.S. financial system crashed in 1929, and the entire economy, which depended upon the U.S. financial market, also was devastated by the incident. 


Another example easily can be seen in financial history. In 2008, the world economy fully trusted the American housing market and invested in almost everything. The housing market crashed, and this affected the entire global market.


What can we hope for?

If there is any chance to turn the situation into a positive one, what would it be?


We can hope that the governments and the central banks will keep the economy rolling until the real economy comes up with the current bubble economy. There are inevitable and necessary demands for green technology, which is essential for humans to survive as a species on the earth for a more extended period.


However, I could say that it is easier to build the “green economy” by eliminating inefficient sectors and corporations from the economy by having an economic recession and rebuilding the economy with the ideas based on green technology.  


To return to the main topic, what should we do in the current situation?

We assume that the recession is inevitable, and there might be a bubble before experiencing an actual recession. If the assumption is valid, it is rational to buy Yen and Gold and sell short on indices or ETFs such as Nikkei 225 and S&P 500. I confirmed that Gold is no longer the best option because the prices of Gold have gone too high already. Buying Yen would be the best option I can consider.


Although I believe the contents of this article are accurate, it does not mean that I suggest that you should buy the things above. Nobody forces you to do some specific investment movement. Do anything at your own risk. Thank you very much.

It is apparent that investors worldwide think that the economy might be in a dangerous status.

Gold prices have continuously been going up, and the Yen value is also increasing.
The reason behind those movements stems from the uncertainty of the global economy.
Gold has been the best option to invest in because of two main factors. One is that inflation is possible because of monetary easing policies executed by the central banks in developed countries. The other is that under an unstable financial situation as we are experiencing, capital tends to be protected in case of economic recession. Gold is one of the options to safeguard money since Gold holds permanent value to some extent.
The Yen is also one of the safe assets.
A rise in the yen exchange rate partly indicates that investors are preparing to experience the subsequent depression.

The question is whether those acts mitigate the risk of the coming depression.
Gold is sucking money that could potentially benefit the sector that needs money. A strong yen suffocates the Japanese economy, which can eventually negatively influence other economies. On the other hand, investors can use money sucked by Gold to promote a capable economic existence when the next recession eliminates inefficient people and companies from the economy. The same goes for buying Yen. Therefore, I  can say that protecting capital by, for example, buying Gold and Yen is not more than the preparation for the coming Financial crisis.

At this point, it is rational to conclude again that financial recession is inevitable. Since the beginning of this year, I have reached the same conclusion, but it probably indicates that the decision reflects the truth.

Investment Strategy amendment 4th August 2019

Market updates

Rough review: Financial sector’s limitation is becoming apparent day by day.


More specifically, the Fluctuation of Gold prices and its strong support line tell us that investors worldwide think either inflation is coming or/and financial crisis is coming. Gold prices are moving in that way.


The Asian region is now unstable, and the EU has been problematic since a few years ago. U.S has been the only hope for us strictly like before the stock market crash in 1929 when the whole economy depended on the U.S economy in both her products and money.

Germany seemed fine until the world realized the critical problems of Deutsche Bank.


It seems like everything is ready to trigger the financial crisis, which is inevitable anyway, at some point.


What are we going to do now?


It might be a correct move to Sell short in Indices and buy gold after every correction.

Also, buying bonds is supposed to be recommended in theory. Still, the situation is perhaps different from something in a textbook because we have negative policy rates in some of our economies. What is more, bond prices may be already in the bubble.

Finally, considering the financial history and obvious things, the Yen might be an excellent option to buy in this current situation. The economy seems to be a fragile status than stable and secured.


Following up articles are coming soon. Thank you





The interpretation of the current economy

At the beginning of the last week, the market seemed strong. Therefore, I wrote that this was the beginning of the bubble before the next financial crisis. I was worried if I was right because the price chart indicated the economy's weakness, but I just confirmed that I might be right because the stock market now appears to be robust enough and ready to move upwards further. Also, as I have repeatedly been saying, many authorities want to help the economy go upward. For example, there is a possibility that the ECB will start buying stocks with the policy of quantitative easing, and The U.S. president wants the stock market to be more prosperous.
We are now ready to experience the bubble. However, we must remember a severe recession must follow this because there are many debts around the corner in the economy, and everyone can't be rich with stocks. However, the best scenario would be that there will be a bubble, and the actual economy will follow the bubbly trend, and the problem will go away. Every bubble popped, though.

MMT(Modern Monetary Theory) in A Nutshell

Introduction


This article is for those who want to understand a relatively new economic theory called Modern Monetary Theory (MMT) which is seemingly getting popular amongst the intelligent people in the Economics sector. An increasing number of people are now talking about this because this theory might be the saviour of this stagnant economy since roughly the end of the 1990s. Therefore, many overlaps can be seen if you have already read about MMT on this site. However, I think this is worthwhile reading again because it is more organised. This is the summary of what I have written about MMT. 


What is MMT?


MMT says it is acceptable for governments to expand their expenditure without considering its primary balance if necessary, especially when the economy has a destructive deflationary spiral. It is also assumed that the government deficit is simply a log of how much money is spent on the private sector.

This policy tries to maximise its potential and reach the physical limit of the production in the economy to get out of the stagnant economy or the economy in a deflationary spiral.


The way it works


In a policy under MMT, the government gives money to people by expanding its deficit and spending it. People will buy things or government bonds with allocated funds. People have now increased demands, creating jobs and increasing productivity until it reaches a physical limit of the economic system. In the conventional theory, people pay taxes before the government spends money because we conventionally regard a government as a household or a company. On the other hand, in the MMT theory, the government simply spends money before people pay taxes, and the purpose of collecting taxes is only to prevent inflation. The theory thinks that the government and the central bank are where the money comes from. 


Important questions.


1. MMT causes Crowding out. Will it be a problem?

First, the term crowding out is; If the government issues plenty of its bonds for its expenditure, the abundance of the bonds leads to a decline in Bond prices which also necessarily causes an increase in interest rates. This naturally affects interest rates to become higher in the private sector, which means it becomes harder for people to use money more than they have. Simply, it becomes harder for people to make a loan. That is crowding out when the government spends money on whatever it wants while citizens become unable to spend money without heavier restrictions or higher interest rates.

It, however, will not necessarily be a problem because if a government has a deficit, that means someone in the private sector is in surplus. Therefore, the government spending money to expand its debt means that it also is making someone's surplus bigger. MMT is more like helping the private sector rather than causing damage to the economy by crowding out. It is unsure whether MMTers would argue that MMT does not cause crowding out or insist that MMT causes crowding out, but it is not a massive problem because it has the systematical countermeasure.


2. Will MMT cause hyperinflation?

An MMTer would say no, it does not cause hyperinflation because MMT is forming a pair with the method of preventing inflation. The technique is mainly raising the tax rate.

Also, it is said that in a policy under MMT, inflation should be addressed case-by-case. For example, suppose it is detected that the inflation rate of housing prices is relatively higher than in other sectors. In that case, the government should address this issue by probably building more houses or simply raising the housing tax to prevent inflation.


3. What is the relation between the conventional theory and MMT?

MMT is some form of a combination of conventional theories but what it sees is opposite to what the traditional approach does.

In Keynesian economics, more government spending is considered an excellent stimulus to the economy. And in Trickle-down, economics attempted to enhance its production in the economy by spending money on rich people regarded as Job-creators.

Two of the theories above are partially combined in MMT. Instead of only rich people, the government spends printed money on general or targeted people who are possibly able to increase the demand with given money, and it is assumed that the demand is the best job creator.


4. MMT does not increase any actual assets or resources in the real economy.

How does it affect the actual economy?

First, it is not a problem for, at least, the U.S. government to give money to random or targeted people. Still, the problem is whether or not the system has enough ability to provide products to people who have increased demands due to given money?


About the influence of MMT on the real economy, by increasing demands by given money, the demand will create jobs which possibly can boost productivity. Also, the needs possibly lead to enhanced efficiency of, for example, digging up resources and planting and cutting processes of wood. Therefore, in theory, eventually, it will increase tangible assets to some extent.

If given money increases people's demands, it all makes sense. However, if it isn't the case, MMT is merely an empty theory.


5. Is a policy under MMT sustainable?

MMTers would say that if a government expands its expenditure and deficit to the direction of infinity, it will reach the equilibrium, meaning it will stop growing because it will cause inflation to some extent. People will then change their behaviour of buying things, and The authority will change the policy along with that:

  1. Inflation stops people from spending, reducing surpluses in the private sector. This naturally decreases the government deficit.
  2. People's behaviour changes if there is more money than enough because people would stop spending when their potential demands are satisfied.
  3. The government would change its policy to reduce its deficit when it thinks the policy fulfilled its purposes enough.

MMT is theoretically good to go, but it might ethically become wrong because money will be spent by human beings ultimately. Therefore, it might be rational to think that there would be corruption.


6. Is Japan implementing MMT unintentionally?

No, roughly speaking, Japan is executing mainly monetary policy, which is related to manipulating policy rates and buying financial assets with government money called Quantitative Easing (QE). On the other hand, MMT mainly utilises fiscal policy to stimulate the economy. Therefore, they might seem similar in that both try to promote the stagnant economy but are essentially different. The case in Japan, however, suggests good signs for MMTers. For example, the Japanese government's relatively excessive deficit has not led to inflation at all, and Japan appears to be OK with that deficit so far. This partly indicates that MMT might be correct in theory.


The problems with MMT


MMTers overlook something.

First, MMT is basically to maximise the economy's productivity, which is nice. Still, it also means more exploitation of resources from the earth might be necessary to maintain enhanced productivity. Also, there might be worsened general pollution because MMT naturally increases demands for environmentally destructive factories, things, behaviour and so forth as it increases demands for others as well. It does not seem like a perfect plan in terms of preserving our environment.

MMT is suitable for making everyone happy with the technology invested in human history. However, suppose MMT is combined with a sustainable and green economy. In that case, it can be the following ideology after Capitalism which has been perfect-fit for making human beings grow unbelievably and exponentially. Therefore, the conclusion is that MMT appears to be the future standard, probably the following ideology after Capitalism.


Another aspect of this is that while Capitalism focuses on boosting the economy's efficiency, MMT focuses on causing everyone's happiness with abundant resources. MMT seems to put less importance on efficiency. If it is the case, MMT will likely be followed by a correction, recession or even depression because they are meant to fix inefficiency in the economy.

The conclusion I have reached with learning MMT so far.

We have had a stagnant economy for too long!


We had had more than 5% interest rates before 2000 in the U.S. because businesses were profitable by more than 5%, but now, we have gotten 2~2.5% in the U.S. and nearly 0% in the EU and Japan because the economy is stagnant. This is either because average businesses will fail due to the lousy economy or because companies can only make a few profits because the economy has become too competitive.


The way out


There are two ways to get out of the current economic situation. The first one is to eliminate a lot of inefficient sectors and people from the economy by experiencing the Depression or Huge recession.

Some forms of correction and recession have traditionally meant to rid an economy's inefficiency.

The second one is to enjoy the inefficiency with MMT.

In a policy under MMT, people will increase their demands with given money by the government. More jobs arise due to the increased demands. Everyone would be happy with it, except that it is unsure whether or not the earth can endure the inefficient economy. More exploitation of resources from the planet might be necessary to maintain enhanced productivity. There also might be worsened general pollution because MMT naturally increases demands for environmentally destructive factories, things, behaviour and so on as it increases demands for others as well.


We have to choose anyway.


The economy we are in might be more terrible than you may think. The central banks execute Quantitative Easing(QE) and mess around the stock market by trying to cause another bubble. In addition, the debts around the world are still enormous and growing, and the societies in developed countries are ageing.

The point here is that we perhaps have to choose between the correction or MMT.

If MMT combines with the sustainable and green economy, it can be the following ideology after Capitalism which has been perfect-fit for making human beings grow unbelievably and exponentially. MMT is suitable for making everyone happy with the technology we have invented throughout human history.


I will soon sum up what I have learnt MMT so far again because it helps me understand MMT and possibly help others understand it. Bye for now.

Solar energy investment in 2021. It seems promising.

The sustainable energy sector seems to be a wise investment choice in 2021. Although it is still controversial whether climate change is e...