The scaremongers are at it again.

What’s new?

Who are the scaremongers you ask?

I refer to them as the folks trying to sell you something… and generally it’s a subscription service (of some kind) with a pitch that includes either “triple digit gains in unobtainium” or “why xyz market is about to collapse” and how you can profit.

Sound familiar?

There’s a ‘thousand’ of them all following the same (pathetic) script.

Fear selling is the oldest trick in the book.

Sadly it works too often as it plays on people’s emotions: ie fear and greed.

Today they were playing on the words of Janet Yellen regarding the next (pending) financial crisis. For example, the head of the Fed Reserve reportedly said:

“Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be”.

From my lens, this was reasonable language.

For example, Yellen is not saying there will never be another financial crisis. There most likely will be at some point.

However, as it stands today we are in a much better position than we were a decade ago (and I would hope safer)… and I hope it’s not in our lifetime either.

But we don’t know. No-one can say.

More importantly – she was not ruling it out.

However, the folks at The Daily Reckoning (DR) chose to interpret Yellen’s language as something altogether different. I quote:

The world is facing a major financial crisis…and yes, it will come in our lifetime.

The Institute of International Finance (IIF) tracks global capital flows. It has a good reputation for sniffing out risks. IIF calculated that global debt levels stood at US$217 trillion last month.

That’s 327% of global GDP… And there won’t be another financial crisis?

There you go folks!

The well-informed (and I assume educated?) writers at the DR have it all figured out. Search no more. Your quest for clarity is over.

There will be a financial crisis.

And guess what… apparently we are facing it as we speak. That is, “the world IS facing a major financial crisis”

How do we know?

Well, global debt levels are at US$217T dear reader… and that’s 327% of GDP.

That obviously means crisis right?

Apparently.

Yes debt levels are high as a function of output.

They have been high for over a decade (and perhaps why interest rates are low). And yes…central banks are unable to normalise rates… not anytime soon anyway.

But does mean a financial crisis is facing us as we speak?

No.

Not from my lens.

Today liquidity is abundant.

Furthermore, credit spreads are low. Interest rates remain very low. And the yield curve is reasonably steep.

Guess what… I will take all of those things over what I saw in 2006 and 2007.

For example, if we examine the yield curve in the lead-up to 2008 – it was warning of an impending recession – take a look:

10/2-Year Spread

And at the time – I was talking to how credit spreads were widening.

But I don’t see these things today (not as I write).

Sure, things like economic growth and productivity could be much better.

Far too much debt has been misallocated against speculative assets (eg housing).

That happens when you give away money for next to nothing. And yes, these assets will correct at some point.

No awards for that observation. We are not splitting the atom here.

But does that automatically imply a repeat of 2008?

Not necessarily.

And yet these scaremongers cite just one line to justify the comment that “the world is facing a financial crisis”; ie global debt levels at US$217T.

So what!

I would not be surprised to see global debt get to 400% of GDP over the next few years.

Why not?

I am not pretending to say that is a healthy situation… far from it.

Over the long-term – adding $4 of debt for just $1 output is going to lead to trouble… it’s not sustainable.

And that would have been far better language to use (rather than ‘facing a crisis’).

However, there is no reason debt levels cannot continue to climb without some imminent, pending crisis.

But Wait There’s More… 

Now if that wasn’t enough to scare you into action… they have more “hard data”.

Yes… crude prices are being “destroyed” (apparently). Surely enough to tip us over the edge?!

Here’s their language:

Investment and commercial banks have been wrong for so long, you just can’t take them seriously anymore. Similar to Ben Bernanke, they didn’t forecast the US housing crisis. Today, they have been proven wrong again with crude.

The crude price fell to US$42.08 per barrel last month. It’s trading at US$44.50 per barrel today. And while crude’s likely to remain volatile, I ultimately believe it will retest the 2016 low. That’s not great news for the world economy. To make matters worse, not many people are paying attention. The short-term story looks terrible… 

He is right about investment banks… they are often way-off with their forecasts.

Most forecasters are… and why we say it’s a fool’s errand.

But this is a classic case of the pot calling the kettle black!!

The folks at DR could not be any worse with their relentless “the economy is crashing” forecasts we have heard from them for over a decade.

Any day now we need to “buy baked-beans… gold… a shotgun… and head for the hills!”

Right?

Let’s take consider their choice of the word “destroyed” in relation to oil (to prove my point):

WTI Crude – Weekly Chart – July 11 2017

Is there anything about this chart which suggests “destroyed” to you?

Not from my lens.

In fact, if I was to be factual, WTI crude is working through a long-range distribution from between $30 on the very low side and $60 on the high-side.

Today it trades right in the middle of that distribution – or around $44.00.

Nothing to flinch at.

If it was $20… I might be leaning towards the word “destroyed”.

Yes, the weekly trend is now bearish so we favour lower prices. We noted the shift in trend in the first week of June.

I suspect prices might catch a bid around the mid-point of the structure — or more likely at the bottom of our distribution (at $38).

And even if prices dropped another $6… that’s within the distribution… I still would not use the term “destroyed”.

It’s interesting what language some people choose isn’t it… 

Be Wary of (Overly) Negative Language 

Not long ago I talked to some interesting research published in New York Times.

For those who missed the post – it’s worth repeating.

The choice of language from our friends at the DR immediately made me think of this article.

In short, in this experiment, two versions of a book review were given to two different focus groups.

One group was positive and the other a negative review

Now, what was interesting was the only visible difference between the two book reviews was that the positive adjectives in one review were substituted for more critical words in the negative review.

For example: inspired was changed to uninspired, capable was changed to incapable, great intensity to little intensity, and tremendous impact to negligible impact.

But every other word remain unaltered.

The objective was to determine which review sounded smarter and/or more trustworthy.

Again, only the tone of the words were altered.

The facts remained the same.

For example, the word inspired was merely changed to uninspired — the word was not replaced for another “more intelligent” word

And the results?

The negative reviewer was rated 14% more intelligent — while having 16% greater literary expertise than the complimentary reviewer.

So why did the negative result come out on top? Why was it deemed that much more intelligent and well informed?

In short, researchers found that the person who gave a negative review was deemed more experienced and trustworthy, while the positive reviewer was seen as more naive.

Fascinating.

Ring any bells?

Our friends talk to things like the financial crisis are currently facing… and the word “destroyed” to describe the price action in oil.

There is no financial crisis we are facing today.

That’s not to say there won’t be in the future – but there’s nothing to fear as I write. And oil is not being destroyed in any sense of the word.

Yes.. it’s trending lower and I am sure entities like OPEC would much rather see a price above $60… but destroyed?

This kind of poor commentary is deliberately designed to (a) monetise (uneducated) eyeballs; and (b) appear more intelligent.

Don’t let it fool you.

Putting it All Together… 

Tomorrow I will take a look at the charts which tell me things are moving along okay.

Yes, they could be better but things are ‘muddling along’ despite the $200T plus in debt.

The thing is you have a choice in this environment.

That is, you can let fear selling get the better of you (and your subscription dollar); or you can do your own research and make your own decisions.

For me, I choose the latter.

… trade the tape

When investing in shares, you can lose you some or all of your money. The potential gains on my blog are based on investing in Australian and US markets and don’t include taxes, brokerage commissions, or other fees. It’s important you seek independent financial advice regarding your particular situation. For any investment, never invest more than you can afford to lose, and keep in mind the ultimate risk is that you can lose whatever you’ve invested. If in doubt – always seek independent financial advice.

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