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Monday, October 31, 2016

"Things Have Become Quite Precarious"

The popular economic theme being reported by the popular press still remains. That the economy is grinding higher. That growth is improving, albeit slowly. That blue skies are just over the horizon.

Naturally we have some misgivings. As far as we can tell, business is not humming along. Earnings are stagnant. Profits are slim. Moreover, corporate reductions in force (RIFs) are being executed with the imprecise targeting of a sledge hammer. Even Google’s laying off staff.

Most notably, if the economy were improving there’d be demand for raw materials and new construction equipment to fabricate it into stuff. This doesn’t appear to be the case at the moment.

Earlier this week, for example, Caterpillar CEO Doug Oberhelman remarked that, “Economic weakness throughout much of the world persists and, as a result, most of our [Caterpillar’s] end markets remain challenged. In North America, the market has an abundance of used construction equipment, rail customers have a substantial number of idle locomotives, and around the world there are a significant number of idle mining trucks.”

Oberhelman’s comments were delivered as part of Caterpillar’s third quarter earnings report. What’s more, he wasn’t too optimistic about the coming year either. “We remain cautious as we look ahead to 2017.”
Structural Deficiencies

Perhaps Oberhelman is being overly guarded. But given his company’s core market of providing equipment for mining and construction he gets a unique window into the demand for materials and construction. By Oberhelman’s account, global demand is poor. What to make of it?

The explosion of debt coupled with policies of mass money debasement over the last 40 years has relentlessly borrowed demand from the future. Tomorrow’s demand was already attained yesterday. Thus, in place of today’s demand, is an abundance of slack.

In other words, the world has been pushed well past the effectiveness of such policies. Stimulating new demand with new debt no longer results in new growth.

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