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Some Black Swan Events Are Too Frightening To Acknowledge.

|Includes: ESRX, FCX, Lennar Corporation (LEN), MSI

It is often stated that a Black Swan event is something that we didn't see coming and was unexpected. Per this definition, the subprime mortgage crisis in the U.S. and the associated failures of major investment firms may not have qualified as Black Swan events. Bill Clinton's Affordable Housing Act (AHA), which was championed by community organizer Barack Obama in litigation vs Citibank in Illinois, snowballed into the subprime mortgage crisis many years later. We like to pretend that we didn't see the resulting demise of Bear Stearns or the Lehman moment coming.

But many did see this slow motion train wreck occurring over a period of years. And the rest of us should have seen it also. Why? Because the lesson that was already well-known prior to Clinton's AHA was, "Do not tamper with the free market." But politicians of various stripes lack the ability and/or discipline to follow this important lesson. These politicians seem to have a predisposition to make dangerously incompetent choices when it comes to messing around with the free markets that capitalism depends upon. Can anyone say, "Quantitative Easing or QE?" QE sounds like an idea developed by really smart people with its fancy name. It is not. QE may very well be another ticking time bomb hoisted upon the American people by short-sighted politicians. The rounds of QE that have taken place in the U.S. and the EU in recent years have created mountains of debt that now puts investors in America and Europe at great financial risk as rates have begun to rise.

The artificially low rates fabricated by federal reserve bankers in the world's largest economy of the U.S. have encouraged a global accumulation of debt greater than at any other time in world history. In the world's second largest economy there is another slow motion train wreck predicated upon gargantuan mountains of unsustainable debt and extreme government manipulation of markets that has been occurring in plain view for decades. Well, maybe not plain view. But in the opaque, communist, lies of a managed Chinese economy type of plain view. Let's put it this way: The Chinese debt problem may be one helluva lot worse than the lying sons of guns at the PBOC are willing to tell the rest of us. And we all have suspected this for some time now. Does any reasonable individual even attempt to dispute this statement?

So rather than emerging as a Black Swan event the largely obscured, but clearly out of control, levels of runaway debt in China's private and public sectors are a gargantuan train wreck that has been occurring in slow motion while the world pretends not to see. Perhaps we are all too frightened by the likely consequences of an implosion of China's debt-ridden economy. Certainly, this would bring our own mountain of QE-inspired debt crashing down upon us in the west as well.

Basically, we are talking about nothing short of a complete collapse of global economies due to the unsustainable amounts of public and private debt that has been acquired during the artificially low interest rate environment engineered by central bankers during the last eight years of the Obama administration. The world's third largest economy in Japan also now has one of the world's highest debt to GDP ratios. The world is now swamped with debt that was acquired in large part during the last eight years without generating much growth.

QE was a bad idea that has yet to come home to roost and it may prove to be one of the most short-sighted financial manipulations in history. As interest rates are now beginning to rise, much of this debt that was acquired during the artificial low-rate years of the Obama administration could become unsustainable when rates return to historical norms that are much higher than current rates. This low-rate debt will either adjust to higher rates or have to be re-financed at higher rates at some point. It is doubtful that any significant amount of the many trillions of recent debt incurred will be paid off prior to rates rising much higher. The world is awash with debt predicated upon low rates but now rates are rising. There is a risk that much of this debt both public and private could become unsustainable at higher rates.

So let's trace back to how this entire QE and insanely high debt situation all got started. Perhaps if we know our history without the liberal media's revisionist tactics, then we will avoid similar mistakes in the future. A dishonest media really is the enemy of a constitutional democracy and its citizens. A truthful media that holds all politicians accountable is the watchdog that a democratic society relies upon as a check and a balance against corrupt and incompetent individuals who worm their way into our public offices.

Bill Clinton and the community organizer Obama worked hard to push their political agenda for housing, the AHA, upon the banking system. The banking industry's executives argued that manipulating the free market was a bad idea that could have disastrous consequences. But the ignorance/arrogance of warped minds like Clinton and Obama told the experts in the banking industry that their hundreds of years of experience in making mortgage loans meant nothing. Narcissistic fools who were elected by an uninformed electorate knew much more than the hundreds of years of expert banking experience acquired by professionals in the mortgage loan industry. Aren't politicians wonderful? And why does the political profession seem to attract so many with a dubious mental health profile?

Just to make clear: First Bill Clinton and community organizers like Obama created the root cause for the subprime mortgage crisis, which was a disastrous idea known as the AHA. The bank's mortgage experts told Clinton and Obama that this would end badly, but damn the torpedoes, these boys had votes to get! AHA full-speed ahead into what would blow up some years later during the incompetent watch of Dubya Bush. smh.

Next, in attempting to solve the problem that Obama helped to originate years earlier as a community organizer and attorney, President Obama's team kicked the debt can down the road and doubled our national debt from about 10 trillion to nearly 20 trillion in just 8 years. Even Forest Gump would tell you that, "Stupid is as stupid does." So dig deep into your bag of tricks, pull out your crystal ball, and look down the road into the future. What do you see? After Clinton, Obama, and Bush brought us the AHA and the subprime mortgage crisis; then Obama brought us QE. Ostensibly, QE was Obama's solution to fix his earlier screw up of helping to bring us the AHA in the first place. Does your crystal ball show you that this $20 trillion in national debt will serve our nation well as interest rates rise?

And what if a nation like China with huge amounts of debt has its own financial crisis that freezes the global debt markets? What will this do to America's now insatiable need to refinance its own mountains of debt on a regular basis? If the debt markets freeze up it is possible that banks will lower their metal screens across their doors and close early on that given day... with no date certain for re-opening. Corporations will fold en masse like lawn chairs. Gas stations will dry up. Grocery stores will empty of food. Think this could not happen? Really?

If China's out of control debt problem sinks the rest of the debt-ridden world, then what nation will be left with the financial ability to lend to the U.S.? What banks or corporations would have the liquidity to buy debt? And who would be willing to take that risk? The U.S. sub-prime mortgage crisis may have been the last really dumb sequence of moves that the global debt markets will tolerate. The next crisis will find that there is no longer a lender of last resort left standing. The next crisis will encounter a global mountain of unsustainable debt so staggering in scope that there is simply no way to make the math work to even cobble together any kind of a viable fix. No matter how fancy a name that central bankers conjure up to try to repair the damage done by the AHA that was replaced by the smartly named quantitative easing, the math just won't add up next time. QE should have been called LC for Last Chance to get our affairs in order. Did we learn anything from the AHA debacle or the QE scheme that has buried the world in debt? The new leader of the free world, President Trump, seems to have plans to give us more debt that we can't afford.

Obama's doubling of our national debt in only eight years has made us entirely vulnerable to the potential failure of China's monstrous mountain of debt collapsing. The same QE scheme and heavy borrowing has been employed in Europe and Japan. So all of the world's largest economies have fallen into the trap of the Obama administration's artificially low interest rate scheme during the past eight years. This is what happens when you put a socialist in charge of what used to be a capitalist economy. Now we will find out what happens next since all of the debt incurred has failed to spur economic growth. And now the interest payments on this debt are sapping the economic strength of nations that were already struggling to achieve growth. Rising rates will further exacerbate the problem.

Liberal Democrats were warned of the negative consequences of QE time and time again prior to and during the advent of QE. But of course these wonderfully intelligent politicians and central bankers with their Ivy League degrees know so much more than the rest of us who rely upon only our meager common sense to get by in life. Side note: I attended Harvard Summer School a million years ago and I was duly impressed with the academic prowess of my Ivy League peers. But once you pointed their noses away from a text book, then they were just like the rest of us who operate in the real world. In fact, some of these academic wizards seemed to be at a disadvantage outside of the classroom while functioning in the everyday world. The notion that an Ivy League education bestows some level of superior wisdom upon these individuals who attend these cult-like bastions of liberal group-think may not be entirely accurate.

What level of confidence would you place in an incompetent politician that helped to curse our financial system with the AHA in the first place? Would you believe that Obama had any ability to understand or be a good steward of capitalism and free markets? Obama's QE is the second ticking time bomb that he has played a key role in dumping upon the American people. Just as the AHA took some years to become the juggernaut that wrecked the lives and financial futures of so many Americans, QE has now become a liability so large that Paul Ryan has characterized our national debt as, "the most predictable economic crisis that we have ever had." Not good.

Currently, the interest payments alone on our national debt are 6% of the entire annual budget. As interest rates rise, then so will our cost to service our huge debt. This will squeeze out our nation's ability to fund any and all aspects of our national budget ranging from the military, to healthcare, to entitlements, to research, to investment, and infrastructure, etc. Clinton's and Obama's AHA started a domino chain of disastrous events in the American economy that has resulted in another terrible idea called QE that now has us about $20 trillion in debt! Let's be candid: our founding fathers would have tarred and feathered these dangerously incompetent stooges for the amount of damage that they have done to our nation and to each of our financial futures in America.

We know that manipulating the free market generally incurs unintended consequences at some point down the line. Perhaps these slow to learn politicians did not grasp their lessons after their AHA snowballed into the subprime mortgage crisis. So after digging our nation into a deep economic hole resulting from the AHA, these individuals then hoisted QE upon us as a solution for the AHA problem that they created in the first place. And while the rest of us all recognize this $20 trillion debt monster for what it is, we are all too terrified to talk about what the consequences could be if the debt market freezes and shuts down on any given day.

Since China is an integral part of the global debt market, if China's runaway debt situation implodes it will likely bring the U.S., Europe, Japan, and the rest of the world down with it. And since the consequences of this looming crisis of Biblical proportions are so horrific, we keep our heads buried in the sand and refuse to acknowledge that the train may indeed already be off of the rails. So the global debt condition continues to grow unchecked and it gets progressively worse by the day. In this situation our complicit silence will likely prove to be anything but golden. If we have any chance of slowing or reducing the size and scope of the looming crisis that may be ahead, then doesn't it make sense for us to act immediately by taking measures to reduce our own national debt? Can we not at least even balance our federal budget? Or is the concept of a balanced budget just a relic of an idea that was last promoted by a group called the Tea Party that was much maligned by the liberal Left?

How long the Chinese can continue to manage their economy while lying to the world about what their actual state of economic condition has become is unknown. The world suspects that the Chinese are lying to us, but we seem to hope that the Chinese can buy time with these lies in order to fix their massive debt problems. From what we can surmise, the debt spiral in China is not slowing and it would require a super-optimist to believe that this group of communists who created their own living hell of a debt inferno can somehow work their way out of this situation. The biggest problem for the U.S. is that the recent QE programs have increased our debt levels so negatively that our own financial future is now inextricably linked to the precarious debt situation of a communist nation named China. Please pause for a moment of silence at this point. All common sense and financial intelligence has died a painful death in America over the last few decades of incompetent leadership in Washington, D.C. The socialists Clinton and Obama bear the brunt of the blame for this condition but George W. Bush was complicit in this disastrous mismanagement of our economic affairs as well.

China's manipulation of markets is now returning negative consequences as their debt spirals out of control. No emerging market has ever achieved such amazing growth the size of China's. And no emerging market has ever grown long-term without numerous corrections along the way. These corrections in debt, equity, and real estate markets are healthy. By allowing numerous smaller corrections to naturally occur in a free marketplace it enables market forces to work the excesses out of the system in a more orderly fashion. These corrections then provide for a more solid foundation to build upon in the next upward leg of a nation's growth.

But China's managed economy has not been allowed to experience these normal and healthy corrections over the years that are necessary to the long-term health of emerging markets. This Chinese debt phenomenon, which nobody really has a good handle upon what its size and scope really is, has created the largest debt bubble in history. The Chinese economy / debt market may be analogous to a huge fault line of seismic activity where smaller earthquakes serve to release pressure over the years, thereby avoiding the disastrous event of having one huge earthquake when the pent up pressure finally explodes. Since the Chinese have not allowed for these smaller corrections in their quest to grow bigly at any cost, they may now be trapped under an unsustainable mountain of debt. At some point the Chinese may find that they are no longer able to engineer solutions to keep their juggernaut economy with its massive debt problem afloat. This situation could end badly for the Chinese and drag the rest of the debt-ridden world down with China if their economy implodes.

But still politicians and central bankers believe they are smarter and more effective than free markets in the past, present, and likely the future. SMH and WTF are slightly more appropriate for this forum than the GYAandKYAGB comment that I should write. For the uninitiated this stands for "Grab Your Ankles and Kiss Your Ass Good Bye" and it is the comment that is likely to apply to the value of investor's accounts after the Chinese Black Swan event occurs. Pick a morning, any morning, that you feel will be the God-forsaken day when we all awaken to the news that the Chinese were not as adept at following the rules of capitalism and free markets as they wanted us to believe. Shocker.

And because our wonderful thought leaders in the U.S. over the last eight years have chosen to double our national debt to nearly $20 trillion, on the heels of their wonderful AHA venture in prior years, and with the current new administration expected to expand the debt even further; each and every one of us in the U.S. is completely vulnerable to the impending collapse of China's private and public debt mountains. Aren't politicians, central bankers, and communist dictators all wonderfully brilliant?

The Chinese may be too far gone to return from the dark abyss of unsustainable debt that awaits them below. And the extra 10 trillion in debt issued by Obama's brilliance over the last eight years has likely made it impossible for the U.S. to walk back from the edge when China falls. And it looks like if we even had a ghost of a chance of surviving the coming crash in debt markets, then the new borrower-in-chief Trump will make certain that our economic futures are all completely destroyed with the new debt that he seems to be ready to heap upon Americans.

Maybe this experiment in constitutional democracy that was embarked upon in 1776 is coming to an inflection point. Unfortunately, we are likely to see if this is the case since the dior circumstances of a failed global debt market is becoming more and more possible every day.

Maybe Janet Yellen and super Mario Draghi can use their tremendous powers of intellect to financially engineer the U.S. and the EU out of harms way when China falls. Do you believe that Janet and Mario will be able to save us? Me neither. In fact, they are deserving of a very large part of the blame for getting us all buried this deeply in unsustainable debt. Americans may be back in the business of tarring and feathering government officials if the debt mountain collapses around us. Chicken ala Yellen may be on the menu in D.C. some day soon.

Here is what could be a best hope for averting the looming Black Swan tragedy that is the mountain of unsustainable debt in China. We often hear analysts and media allude to a "soft landing" in China. If the Chinese can engineer this soft landing, then what might follow could be a Lost Century in China. The concept of a lost century in China refers to the so-called Lost Decade in the Japanese economy after their unbridled growth for decades resulted in a Japanese brand of irrational exuberance. After the Japanese economy popped like a pinata, the nation experienced a period of economic stagnation and price deflation knows as, "Japan's Lost Decade" from 1991 to 2001. Many would question if the Japanese economy has ever really recovered since that time as they now own one of the world's largest debt to GDP ratios.

China's debt burden and economic excesses dwarves the debt and economic excesses with which the Japanese have had to cope. China's soft landing, if it could be engineered, might take many decades to pay down its debt bubble and shake out the excesses in their economy. Possibly, China might even require up to one hundred years to pay down its debt in an orderly fashion. Nobody knows. The looming debt crisis could result in a Lost Century of economic growth for China.

However, the Chinese and the world may not be entitled to the opportunity of a shake out of China's economic excesses in an orderly fashion. The end of China's growth and debt bubbles may end suddenly and violently. And because leadership in the U.S. has elected to take on a new bigger mountain of debt (QE) to satisfy the demands of an earlier mountain of debt gone wrong (started by Bill Clinton's AHA), the U.S. is extremely vulnerable to the collapse of global debt markets.

China may already be past the tipping point to sustain their mountain of debt. The significant amount of capital outflows from China may be analogous to a public corporation's insiders selling their own company's stock. If the situation was good in China, then it would seem reasonable that capital would be flowing into their economy, not out.

Nobody and no nation is too big to fail and no nation can manipulate market forces endlessly without having to pay the consequences. The Chinese have likely already learned this lesson, but they are trying to keep the bad news under wraps. And we all suspect it, but we don't want to openly acknowledge the crisis. We are hoping the Chinese can engineer the soft landing that will prevent a global meltdown of debt markets and enable the Chinese to begin the long process of working off their debt in an orderly fashion.

So the Black Swan event could be that the world simply acknowledges what is already suspected. China's debt problem is much worse than anyone knew and this debt level is unsustainable. Understandably, nobody is eager to discuss this possible truth since it could result in an economically devastating event that the world has not seen prior. Common sense tells us that it wrong to incur extremely high debt levels and that free markets should not be manipulated since it can cause unintended consequences. But it seems that Will Rogers was correct when he stated, "Common sense ain't common."

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We are currently long the homebuilder Lennar Corporation (NYSE: LEN), and short both Express Scripts (NASDAQ: ESRX), and Motorola Solutions (NYSE: MSI). We intend to add another long position in Freeport-McMoRan (NYSE: FCX) in the near term.

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Disclosure: I am/we are long LEN.