Digest: “The Mother of All Economic Crises”

Welcome to your weekly digest…my breakdown of the things we’re thinking about and talking about in the Global Intelligence world. 

First up this week, “the mother of all economic crises.” 

For well over a year, I’ve been telling you about a big emerging threat to Western economies—our staggering levels of debt. 

Over the past several decades, governments, businesses, and consumers across the Western world, including in the U.S., have been borrowing record sums…building up the largest mountain of debt in human history.  

In past years, this debt was somewhat manageable thanks to record-low interest rates, which kept debt repayment costs low. 

Now, however, interest rates are shooting up across the world. In the U.S., rates have moved from 0.25% to 4.5% in just the past nine months, as the Federal Reserve attempts to get a handle on inflation. 

That means debt repayment costs are shooting up too. 

I’ve been writing for years that, once rates started to rise, this would erode the ability of governments, businesses, and consumers to meet their vast debt obligations, potentially triggering an unprecedented global economic crisis. 

Now, some of the world’s leading economists are warning of exactly the same thing… 

Recently, the chiefs of the World Bank and the International Monetary Fund have both warned that growing debt burdens are raising the risks of a deep global recession.  

And writing last week, the renowned economist Nouriel Roubini said the debt situation could unleash the “the mother of all economic crises.” 

This is a problem with no easy solutions…or no solutions at all. 

My bet: Before the middle of next year, the Federal Reserve eases off on its rate hikes, and even reverses some of the ones already enacted, to lessen the debt repayment burden on Uncle Sam, businesses, and consumers. 

This will offer some small relief…but ultimately, it will just be kicking the can down the road a few years. 

Eventually, the bill will come due and the U.S. and other major Western economies will face a massive debt crisis, likely by the end of the decade. 

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Next up…a friendly reminder of the truth about inflation. 

You might have seen some media stories in recent days highlighting the “good news” about inflation. 

On Tuesday, the Bureau of Labor Statistics released new figures showing that inflation fell to 7.1% in November, down from 7.7% in the previous month. 

Major news outlets have been hailing the 7.1% figure…citing it as proof that the inflation crunch is easing. 

But this analysis masks the reality of how stubbornly high inflation remains for ordinary people. 

Food price inflation, for instance, continues to massively outpace overall inflation, growing 10.6% in November.  

Meanwhile, grocery prices rose by even more last month—12%. 

And these price rises are not easily contained since food price inflation is heavily influenced by factors beyond the control of Uncle Sam, like extreme weather, the war in Ukraine, and global supply chain issues. 

That means that inflation remains a huge problem for consumers in their everyday lives…despite the “good news.” And the sad truth is that it’s not going to get better anytime soon.  

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Finally, the fall of Tesla. 

I’ve long been bearish on Tesla stock. In fact, way back in May 2021, I warned that the company was massively overvalued and the share price could easily lose 80%. As I wrote back then: 

Tesla, as an investment, is 10% company, 90% hype built around a cult of personality. And that is the worst kind of investment. I mean, what does Tesla do that’s so special? Every other car manufacturer on the planet, including all the heavy hitters like Toyota, Porsche, Ford et al., are pushing full steam into electric. And there are tons of new electric vehicle entrants on the market. This space is seriously crowded, and Tesla ultimately is just another car company—egregiously overvalued, at that—run by someone with an ego bigger than his wallet. 

Well, this year, reality has been catching up with Tesla. 

As I write this, the shares are down roughly 50% on the year, faring much worse than its big peers in the auto and tech industries. 

There are two major reasons for this decline, both of which I alluded to last year. 

First, demand for its products is nowhere near as robust as the company and its backers would have us believe. The company has been cutting prices in China amid a supposed slump in sales, and Bloomberg reports that the company is reducing production shifts at its Shanghai factory. 

Second, Elon’s ego has gotten the best of him, as best evidenced by his chaotic takeover of Twitter.  

That 90% hype I mentioned… Well, hype can work as a business strategy if you nurture it. That partly explains the success of Apple. Steve Jobs managed to cultivate and protect a clear brand identity, which continues to propel Apple’s sales today. 

Musk, however, is a narcissistic child. His ego drove him to take over Twitter…which has damaged his brand and by extension Tesla’s brand. 

I know several people who’ve said that they’re no longer interested in buying a Tesla now because of the brand’s association with Musk and his insane Twitter ramblings. 

That’s why I expect Tesla’s stock will fall further from here. 

That brings us to the end of this week’s digest. Many thanks for being a subscriber. And if you have any feedback or questions, reach out through the contact form on the Global Intelligence website. 

Enjoy the rest of your Sunday.