A Palpable Sense Of Panic

Based the last few days’ headlines you’d never know the world is in year 10 of a pretty good expansion. Check this out:

Not terrified of a recession? These stocks hint you should be

Cyclical commodities continue to weaken, gold moves in relation

Italian banks on verge of new crisis on €400 million hole at Banca Carige

China rate-cut chatter becomes louder as growth risks gather

“iPhone story is showing cracks”: Apple slides under $200 after supplier forecast cut

Japan PM Abe calls for public works spending plan to help economy

What plunging oil prices tell us about stocks and the economy

Why Chinese authorities are freaking out

Note the strong words: “freaking out,” “plunging,” “slides,” “on verge of new crisis,” “terrified.” These headlines — which aren’t cherry-picked; they’re representative of what’s out there — display a palpable sense of panic.

What’s happening? The short answer is “time.” Nothing – long-distance runner, living organism or economic trend – continues in one direction forever because the longer the journey the more imbalances accumulate. In a runner, these manifest as muscle cramps and shortness of breath. In an economy, you get soaring debt, rising inflation, labor shortages, and overpriced assets.

These make it harder to keep going and increasing difficulty spooks traders and politicians, which in turn spooks the headline writers.

What happens next? People who were obliviously riding the growth wave try to make sense of this new pattern and discover that things aren’t as good as they thought. Maybe they find this chart (from Real Investment Advice) illustrating how pretty much all the “growth” the US has generated in the past few decades has been due to rising debt.

US growth and debt panic

Then they wonder what this means for their mutual funds, and find this chart from the same source showing that, contrary to recent experience, stocks don’t always go up.

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