The Next Great Reset | Why The UK Is Collapsing

What's up, Graham? It's Guys here and it's official: the global economy is tanking. In the last 24 hours, Hong Kong and Chinese stocks crashed to a 13-year low. UK's Prime Minister resigned under financial pressure, holding the shortest term ever in British history. According to the International Monetary Funds, the worst is yet to come.

In fact, even though we've previously covered some of the economic fallout from China's broken banking system and economic collapse, the reality is this is affecting the entire world, and it's about to have a massive impact on almost everything. So today, we should break down and explain exactly what's going on: from the UK bond market, which is being called the slow-moving car crash; Hong Kong's 13-year stock decline; and the dollar crisis here in the U.S. Because, in a way, all these financial systems are interconnected.

When analysts are calling for a 98% likelihood of a global recession, it's worth listening to. Although, before we start, I want to give a huge thank you to Canada for sponsoring today's video—no, just kidding, guys, there is no sponsor. Although it would mean a lot to me if you guys appreciate these videos, just do me a quick favor and subscribe. It's totally free to do, takes you just a moment, and as a thank you, I will do my best to respond to as many comments as possible.

So thank you guys so much, and now, with that said, let's begin. All right, so first we have to talk about what's happening with the Bank of England because the situation is a lot more severe than most people think. See, this all begins with what's known as the defined benefit scheme, where employees are promised a proportion of their income through retirement. This has grown to a $1.6 trillion market.

However, there is a problem in that the government doesn't know exactly how long people will live. I know it sounds morbid, but financially, the government has a baseline in terms of how much they would expect to pay throughout a person's life. From there, those payments are adjusted on an annual basis to account for inflation. Simple, right? Well, wrong.

To ensure that the pension scheme is properly funded, there needs to be enough money in there to generate enough of a return to pay the population. Part of the way they do this is by buying UK government-backed bonds because, historically, they're very stable and they're consistent. Now, of course, as we all know, buying bonds on their own usually is not enough to generate the type of money that they would need. So, in order to increase those returns for retirees, they take on slightly riskier assets and they borrow money to purchase bonds.

This works really well until it doesn't. Now, in normal markets, they could very well go and borrow a million dollars, buy a million dollar bond, and then pay back the loan in full one year later while getting to make a little bit of profit off the top. But in a 2022 market, where bond values are declining, they could very well borrow a million dollars, collect less from the bond because values have declined, and then owe all money at the end of the term.

Now, typically funds like this would have some cash on the sidelines to cover any sort of unexpected emergency that would come up. But when funds were losing money at such a fast pace, they ran out of cash reserves and couldn't come up with enough collateral, causing them to sell off anything they could to stay afloat. This led to a bank run of sorts, where pensions began selling off their UK bond bonds to limit their exposure to falling prices.

This caused prices to fall even more, which caused even more pension funds to sell their bonds, which caused prices to fall even further. Until pretty soon, they just ran out of liquidity. As a result, the Bank of England made the choice to step in and purchase those falling bond prices to stabilize the market, essentially acting as a backstop to prevent the prices from falling even further. However, this was just the very beginning.

Now, the larger issue isn't so much the UK bond market collapse, but instead the fact that the world is beginning to lose faith in their government, who they believe may not be able to handle whatever fallout could come their way. For example, their latest Prime Minister took a massive gamble that abrupt tax cuts, loosened regulation, and government spending would help turn their economy around. However, the reality was that such a proposal would require an extensive amount of borrowing from a country that didn't have the resources to afford it during a time where inflation and energy prices are at a record high.

The market did the exact opposite of what they expected, and it tanked. After all, imagine if our economy is slowing down, inflation is at a 40-year high, stocks are falling, and the FED comes out and says, “Hey guys, actually, we're going to cut taxes, we're going to borrow more money, and issue more stimulus. So there you go; enjoy!” It would be a disaster.

So, weeks later, after a lot of backlash, UK's Finance Minister announced that all tax cut and spending plans would be completely scrapped. A few days after that, the Prime Minister resigned faster than this head of lettuce could go stale. But the damage was already done. The value of UK's currency relative to the dollar fell to its lowest point ever in history. Imports subsequently became more expensive because their currency is now worth less, and higher inflation pounds that value down even further—pun intended.

By the way, I've already covered this topic in detail in my newsletter, which I'll just make in the pinned comment of this video. So if you guys want to be a part of it, I'm usually able to cover topics quicker there than I can in the video, so feel free to join. It would be fun; it's totally free.

But anyway, besides that, if you're American, now is the best time to take that European vacation that you've always dreamed of. But with the UK losing a lot of its credibility for the global markets, it's not looking good. Now, of course, this brings us to second: China. In just the last day, Hong Kong's benchmark index fell to its lowest level since 2009.

Even though we've previously spoken about China's broken banking system and real estate crisis, this latest sell-off marks a slightly different transition. Right as a global recession looks more and more likely to start, COVID lockdowns are an ongoing concern. As it is, now China has a zero COVID policy to the point where lockdowns and tight regulation are strictly enforced, limiting their ability to grow and expand as an economy.

As a result, there is substantial damage to their entire business infrastructure. Nearly one in five of their youth is unemployed, and international travel is nearly non-existent. The second point regarding this policy is that no end is in sight. In fact, their leadership came on record to say that their citizens should look beyond the short term and see the trade-offs between controlling the pandemic and the resulting social and economic disruptions from a broad systemic long-term and political perspective, which basically means there's probably not a plan and this isolation is going to go on as long as they deem necessary.

One note even suggests that this could continue for another five years, which most likely would completely devastate the global markets. The third issue is that China has abruptly delayed their GDP release, sparking concerns that it's probably a disaster. After all, this would encompass everything from GDP, retail and property sales, trade data, and fixed asset investments, including home prices.

But we don't know the reason for the delay or if it'll ever be released at all. Some expect that this could be due to their president wanting to secure an unprecedented third term, and it's pretty obvious that their numbers are going to fall short of their own projections. Or it could be just an absolute nightmare. But whatever the reason, it's a strategic term, and the markets are not liking it.

Finally, there's still the ongoing concern that Chinese stocks could be delisted from the U.S. stock exchange. For instance, just two months ago, five state-owned companies were removed from the U.S. market, citing high administrative burden and costs as the reason for their decision. However, the timing just happened to come months after the SEC flagged those companies for failing to meet United States auditing standards, leading to the assumption that more companies could follow.

This prevents disastrous situations like Luckin Coffee, which was accused of falsifying financials, raising money in the U.S., and then collapsing once those numbers proved to be unsustainable. As of now, 261 Chinese stocks could be on the chopping block should they choose not to comply, and that's a reality that's at least worth preparing for. After all, China responded by saying that they're reluctant to let overseas regulators inspect local accounting firms due to national security concerns, and with the clock ticking, either China complies or almost a trillion dollars is at risk of being delisted from the market.

All of that combined is leading us to a topic that has some rather large implications: that would be the U.S. dollar crisis. Now, I've mentioned this before, but it's worth repeating because it's very important. The U.S. dollar serves as the reserve currency for the entire world. This means that every country trades in U.S. dollars because of its stability, global acceptance, and resiliency.

However, here's where things begin falling apart. Because inflation has become a worldwide problem, other countries are looking for a safe place to park their money. And because the United States has raised their interest rates faster than the rest of the world, they're going ahead and buying up the U.S. dollar. Or in other words, countries are abandoning their own currency for the sake of buying stable U.S.-backed treasuries.

That means even though our dollar is losing value here in the U.S. to inflation, it's increasing in value relative to the rest of the world in terms of what it can now buy. Even though this could be good for the U.S. because their imports are less expensive, and that helps drive down inflation, for the rest of the world, they're spending more of their own currency to buy less of our U.S. dollars. And that poses a significant risk that our dollar could become too expensive and actually work against us.

In fact, based on one report estimate from Credit Suisse, every eight to ten percent jump in the dollar leads to, on average, a one percent hit to U.S. companies' profits. However, it's easy to see why this is happening. With the UK's market in turmoil, China's currency becoming an unknown, and Europe about to face an energy crisis, the U.S. dollar is seen as a safe haven. That means the worse the global economy gets, the higher the U.S. dollar could go.

But in terms of the impact here in the United States, for most of the S&P 500 that operates internationally, a strong dollar is seen as a negative for revenue and growth. As a result, the market has fallen. For example, it's noted that non-domestic sales of companies in the S&P 500 make up around 35 to 40 percent of total revenue. So a stronger dollar makes it more difficult for their customers to be able to afford a purchase.

On top of that, it is said that industrials, materials, consumer staples, and technology are the most sensitive to a stronger U.S. currency. And when they make up such a large portion of the index, it's inevitably going to drag everything else down with it.

Now, on the opposite end of the spectrum, at the exact same time that treasury yields are moving significantly higher, with 12-month bonds paying a whopping 4.61 interest—the highest since 2008—Wells Fargo issued a statement that we don't need the 10-year treasury to act like a meme stock, implying that investors have been walking to treasury yields now that they've increased because there's really no other safe place to put your money. After all, stocks have been declining, real estate is falling, cash is inflating, and if you want any return on your money, short-term treasuries are pretty much it.

These numbers could also continue moving higher with the Federal Reserve expected to raise rates by another 75 basis points in November, risking a global recession. Will people hold on to whatever money they have left? As far as my own thoughts about what's going on, I agree it's kind of a mess, but we also don't know how much of this is already priced in.

For instance, it's already assumed that inflation is probably going to stay high, rates will increase, and spending will probably decline. CNN even cited five signs that the entire world is headed to a recession: from a high U.S. dollar wrecking havoc overseas, less spending, lower employment, falling prices, and war. As a result, some expect this to lead to a lost decade, with prices staying flat and taking a long time to recover.

Now, if this happens, the good news is that realistically you're never just going to make one investment at the very peak and then never again. Instead, you'd likely be buying consistently through the ups and downs. Because of that, you're likely to make a profit. For example, take a look through the years of 2000 to 2012. Even though you only would have made 4.66% total throughout 12 years, if you include dividends, your return skyrockets to 32%.

And if you consistently bought in month after month, regardless of where the lost decade was trading at, your cumulative return jumps to 24%, and with dividends reinvested, your return is as high as 42%. That's why even if we do see a lost decade or short-term pain in the market, it's only going to be a loss for those who stop investing entirely.

For anybody who continually buys in through the highs and the lows, you're going to have an opportunity to make a lot more money just by staying consistent and subscribing, if you haven't done that already. So with that said, guys, thank you so much for watching. As always, feel free to add me on Instagram. Thank you so much for watching and until next time.