Blog

Time to Choose

A fundamentals-driven breakout seems imminent. But which dir
Friday, February 8, 2013, 7:44 AM

[This piece is intended for those who are new to PeakProsperity.com or to our general perspective. Feel free to share with anyone whom you think might benefit from the central question it raises: Which side do you choose?]

Whether you're aware of it or not, a great battle is being waged around us.

It is a war of two opposing narratives. Regarding the future of our economy and our standard of living.

The dominant story, championed by flotillas of press releases and parading talking heads, tells an inspiring tale of recovery and return to growth. 

The other side, less visible but with a full armament of high-caliber data, tells a very different story. One of growing instability, downside risk, and inequality.

As different as they are in substance, they both share one fundamental prediction and this is why you should care: This battle is about to break. And when it does, one side will turn out to be much more 'right' than the other. The time for action has arrived. To position yourself in the direction of the break you think is most likely to happen.

It's time to choose a side.

The Case for Playing Offense

The past several months have seen a surge in positive stories celebrating the U.S. emergence out of recession and back to solid economic health.

1) Tapping into shale oil and gas deposits is ushering in a new energy boom. Domestic energy production is on the rise, creating jobs and increasing exports, while reducing our dependency on foreign suppliers:

U.S. close to energy independence by 2030 (UPI)

The United States may be close to self-sufficiency in energy by 2030 because of a "shale revolution" in the country, said BP's chief executive officer.

2) The stock market is thriving, with several indices at record highs. Corporate earnings and investor confidence are booming, and the expectation of a Great Rotation of massive amounts of capital from low-yielding bonds into the stock market is high:

BofA Declares: The Great Rotation Is Here (BusinessInsider)

The big theme of 2013 – according to investment strategists at shops across Wall Street – will be the "Great Rotation," a massive move out of bonds and into stocks.

Economic growth in the U.S. is expected to accelerate, facilitating the shift.

3) The global economy has made it out of the woods and is increasingly robust. In the US, the unemployment rate is down several percent from its recession high. The fiscal cliff was averted. The 2013 deficit has been reduced below $1 trillion for the first time in five years. The crisis in Europe has been successfully managed.

Groupthink in Davos: The Financial Crisis Is Over (BusinessWeek)

There is no official declaration, or even a formal survey. But the chatter at the World Economic Forum in Davos, Switzerland, is about the end of the financial crisis that began in 2008 and dragged on through last summer’s spike in Spanish and Italian government bond yields. “There’s a crystallization of thought that the financial crisis is over,” says Scott Minerd, managing partner and chief investment officer of Guggenheim Partners, a Santa Monica (Calif.) firm with about $160 billion under management.

4) Housing, the engine of consumer wealth, is in recovery. Home prices are on the rise after years of punishing declines. And a rebound in consumer spending is visible across a wide spectrum of home-related services:

Housing Packs Punch for U.S. Growth in 2013 and Beyond (Bloomberg)

The housing rebound is broadening to other parts of the U.S. economy and will likely lend impetus to growth through 2013 and beyond.

Climbing home prices are lifting household wealth and boosting the purchasing power of consumers. Declining mortgage delinquencies and foreclosures are buttressing bank balance sheets, giving them greater leeway to lend. And rising property- tax revenue is fortifying the finances of state and local governments, alleviating pressure on them to cut budgets.

“The housing recovery will kick into a higher gear as the year progresses,” said Mark Zandi, chief economist in West Chester, Pennsylvania, for Moody’s Analytics Inc. “We’re going to get a lot of juice from the channels” through which it affects other parts of the economy.

5) Jobs are being created and consumer income is on the rise. U.S. personal income recently experienced its biggest increase in eight years. Non-farm payrolls have increased every month for the past two years. There are increasing examples of local job markets experiencing a true employment "boom":

Silicon Valley job growth has reached dot-com boom levels, report says (Mercury News)

"Employment growth in Silicon Valley is impressive, very impressive," said Russell Hancock, president of Joint Venture Silicon Valley. "Some might even say the job growth is cause for euphoria."

Last year, the nine-county Bay Area added about 92,000 jobs, according to the study. Of that total, Silicon Valley -- defined as Santa Clara and San Mateo counties -- accounted for 46 percent, or 42,000 jobs.

"This is prodigious job creation," Hancock said. "The growth is crazy and it's getting crazier."

A Rosy Picture

Taken collectively, it's hard not to feel optimistic even strongly so about our future prospects. With these messages constantly being delivered and reinforced, it's little wonder that the status quo is not under attack. That the energy behind the Occupy movement has dissipated. Because a better tomorrow lies ahead, right?

Right?

The Case for Defense

As alluring as the offensive narrative sounds, it contradicts starkly with the preponderance of underlying data. Data that requires some but not too much digging beneath the headlines.

In counterpoint to the above narrative, a sampling of this data reveals the following:

1) Expensive oil is here to stay and will handicap economic growth for decades to come. Peak Oil is alive and well, despite the "shale miracle". The four major global oil producers, including BP, continue to report declining total production numbers despite more than doubling well drilling activity since 2007. Gas prices this February are the highest they've been in history:

Consumers Taking Financial Hit From Rising Fuel Prices (CNBC)

Consumers have been spending more on gasoline than they have in nearly three decades. 

With pump prices at their highest level on record for this time of year, the stage is set for an even greater climb in gasoline prices and expenditures than in 2012. Retail gasoline prices have surged 17 cents in a week to top $3.50 a gallon on average, posting the highest prices on record for the beginning of February

Meanwhile, the U.S. Energy Information Administration reported Monday that gasoline expenditures in 2012 for the average U.S. household reached $2,912, or just under 4 percent of income before taxes. This was the highest estimated percentage of household income spent on gasoline in nearly three decades, with the exception of 2008, when the average household spent a similar amount.

2) Financial security valuations are dislocated from the fundamentals of the underlying companies. The trillions of dollars of liquidity pumped into the market by the Fed is, yet again, blowing asset bubbles in stocks and bonds. Respectable veteran investors from Bill Gross, to Jeremy Grantham, to Jim Rogers, to Bob Janjuah, to John Hussman are warning of a coming calamitous correction. Corporate insiders, despite their proclamations of record profitability, are voting with their feet and selling over 9 times more of their company stock than they are buying:

Sucker Alert? Insider Selling Surges After Dow 14,000 (CNBC)

Insiders have been pulling out of stocks just as small investors are getting in.

There have been more than nine insider sales for every one buy over the past week among NYSE stocks, according to Vickers. The last time executives sold their company's stock this aggressively was in early 2012, just before the S&P 500 went on to correct by 10 percent to its low for the year.

"Insiders know more than the vast majority of market participants," said Enis Taner, global macro editor for RiskReversal.com. "And they're usually right over a long period of time."

3) The economic "recovery" is anemic at best, and skewed heavily to the top few percent. December saw negative GDP growth and last week saw the persistently-high unemployment rate creep back up. December's reported personal income increases was primarily a one-time event, as companies sought to pay out excess income and dividends in advance of anticipated 2013 income tax increases. Payroll taxes will rise on all employees, but carried interest and capital gains rates (how the wealthy earn their income) remain unchanged at historically low levels. Nearly two-thirds of Americans now expect anemic economic growth to define our "new normal" way of life:

Bad Economy Is New Normal, More Americans Say (Huffington Post)

More Americans believe today than they did two years ago that their country will never fully recover from the Great Recession.

Fifty-six percent of Americans surveyed by the John J. Heldrich Center for Workforce Development at Rutgers University in August 2010 said they believed the Great Recession would permanently change the economy. In a January follow-up survey, 60 percent of respondents agreed with that sentiment.

"Five years of economic misery have profoundly diminished Americans' confidence in the economy and their outlook for the next generation," Rutgers professor and survey co-author Carl Van Horn said in a statement.

Most survey respondents -- 73 percent -- had either lost their jobs or knew somebody who had. More than half said they have less money than they did before the recession, and 61 percent believe they will never fully recover.

4) The housing market will not return to its former glory. With no real wage growth and further de-leveraging still needed, the consumer is not driving the modest price growth seen in many housing markets; instead, hedge funds are they are buying up huge tracts of foreclosed homes, renting them out, and securitizing those rental streams. This will not result in the competitive bidding by multiple parties that drove the appreciation pre-bubble collapse. In fact, the entire concept of looking at a house as a financial investment is eschewed by the founder of the Case-Shiller Housing Index:

Shiller Sees No Major Rally in U.S. Housing Market (Bloomberg)

"Housing traditionally is not viewed as a great investment. It takes maintenance, it depreciates, it goes out of style. All of those are problems. And there's technical progress in housing. So, new ones are better."

"So, why was it considered an investment? That was a fad. That was an idea that took hold in the early 2000's. And I don't expect it to come back. Not with the same force. So people might just decide, "Yeah, I'll diversify my portfolio. I'll live in a rental." That is a very sensible thing for many people to do."

5) Our trading partners are as bad off, or worse, than we are. Global markets have rallied in recent months as the news from Europe grew quiet despite no real resolution to the core problems occurring. And in recent days, fresh concerns about forex rates hurting competitiveness, crushing unemployment, and excessive debt have erupted. Meanwhile, Japan is everyone's leading candidate for the first developed nation of the 21st century to implode under its debts. And China, whether it is able to avoid a hard landing or not in the short term, is staring at a mid-term food and water crisis that it has no solution to.

Europe's Crisis Not Over Say Bankers, Policymakers (Reuters)

International bankers and finance ministers warned on Saturday that Europe's crisis was not over even though the euro currency is now stabilized, it will take years to overcome economic malaise and mass unemployment in Europe.

After a private meeting of leading commercial bankers, government officials, central bankers and trade union officials, Swedish Finance Minister Anders Borg told Reuters: "There is a clear divide between the financial markets, who think a lot of this is fixed, and the people in the real economy and particularly from our side as the governments."

6) The risk of external shocks is under-appreciated and unplanned for. Currently financial markets and our just-in-time national distribution systems are geared for clear sailing ahead. Unexpected developments like superstorm Sandy, a Fukushima-like event, or an oil price spike could easily send prices and availability of goods swiftly awry. For instance, the global drought continues, engulfing nearly 100% of Kansas, Colorado, Nebraska, and Oklahoma in extremely dry conditions. The UN warns that prices worldwide could easily spike this year, as world grain stocks are near historic lows:

World food prices stable, low stocks pose risk of spikes: U.N. (Reuters)

World food prices stabilized in January after falling in the previous three months, the United Nations food agency said on Thursday, but it warned that adverse crop weather could cause violent price spikes due to tight grains stocks.

Global food prices surged in mid-2012 following the worst U.S. drought in more than half a century and dry weather in other key grains exporters, raising fears of a food crisis similar to the one in 2008.

"The weather could turn negative, and because we are in a tight situation, prices could react violently and rise," FAO senior economist Abdolreza Abbassian said.

FAO raised its estimate for world cereal use in 2012/13 by 0.6 percent to 2.326 billion metric tons, up nearly 13 million metric tons from the 2011/12 season.

A weaker dollar is boosting demand for dollar-denominated commodities, Abbassian said, and rising oil prices will underpin food prices in coming months, he said. Higher energy prices increase transport costs which farmers pass on to consumers.

Sobering Thoughts

Sadly, this list could stretch longer if I didn't feel the need to end it here to avoid overloading the reader. But suffice it to say that there is certainly enough evidence to at least dispel a material amount of the sanguine outlook of those cheerleading for an offensive stance at this time.

Picking Your Side

Offense

Those taking the optimistic view here argue that our economic engine has been running hard to pull us out of the hole we've been in for the past five years. And now that we're back on level track, the engine's built-up head of steam is going to move us forward quickly.

Expect better GDP growth, lower unemployment, higher income, high stock prices, higher housing prices, more innovation, and lower energy prices.

If this future comes to pass, you won't want to be left in the dust as the party roars past. Get on the train go long, perhaps with some leverage, and bet on America's grit and ingenuity.

To be frank, this has been the winning side for the past year and a half. Those who have sided with the bulls have been rewarded with sizable stock gains and stabilized (or growing) housing prices.

Defense

But if, on the other hand, you like me find enough reason in the data for doubting the optimistic case, you need to determine what your defensive plan should be.

The degree of defense you adopt should be based upon your own exploration of the data. Dig further than the samples I could only cursorily provide above. Come up with your own personal assessment of the probability and severity of the downside risks.

If you find you assess the risks at or above the 'moderate' level (which I do), then consider strongly the following guidance:

  • Exchange paper assets for tangible ones. Acquire exposure to the precious metals; we recommend having at least 10% of your net worth in gold and silver (for those new to owning precious metals, you may want to read our buyer's guide). Above that, if possible, invest in productive hard assets. Holdings like farmland, timberland, energy deposits, and mineral/water rights are assets that will produce units that will generate an income for you.
  • Find a sympatico adviser to manage any remaining paper wealth. For many reasons, most of us will still keep a percentage of our wealth in the stock and bond markets (in retirement/pension accounts, 529 plans, etc). If you're in the defensive camp, make sure the adviser managing your money is, too. There are several we endorse, but we're impartial about whether you work with them or not. The important point here is to work with the adviser whose outlook is most closely aligned with yours.
  • Cultivate resiliency. Most Peak Prosperity readers are well-aware of our recommendations here. Start at the individual level to prepare both physically and emotionally so that whatever the future brings, your quality of life is as least impacted as possible.
  • Cultivate community. Whatever your plans, a support network will help you achieve them better, and likely faster, too. Plus, it gives you the added insurance of assistance should your best-laid plans not play out as you expect them to (which happens frequently). Invest in fostering collaborative relationships in your neighborhood, or join existing communities relevant to your location or interests.
  • Defend your income stream(s). Assess your employment situation – how vulnerable is your income? Explore ways to make yourself more valuable to your employer, add additional source(s) of income, and/or create your own business. Steady income makes challenging times much easier to bear by giving you the flexibility to explore different approaches that may work better for the new reality. Without that ability to absorb failure, your options are often much more limited.

If you take the above steps, regardless of what happens, you'll be able to sleep at night knowing that you've acted conscientiously according to your convictions. And in the event the bulls turn out to be 'right', few of these steps will serve you poorly. In a secular bull market, hard assets should still appreciate measurably. And personal and community resiliency is always a net positive, regardless of the economic environment.

But if the bulls turn out to be the ones in error, the value of these actions could be priceless.

So get to it. Do your own personal calculus of the risks. Determine where you need to be positioned. And take the necessary steps to get well-situated where you assess you need to be.

It's time to choose a side.

~ Adam Taggart

Related content

52 Comments

Oliveoilguy's picture
Oliveoilguy
Status: Gold Member (Offline)
Joined: Jun 29 2012
Posts: 348
Pick Your Side AND Hedge

Chris,

I am in the desfensive camp as well, however I am keeping my bets near the middle because the greatest certainty in our New Economy is uncertainty. 

In my balanced portfolio things I did not think would do well have surprised. And things that seemed like a slam dunk have dissapointed,

My investments are 25% Precious Metals, 15% Energy, 10% Short Term Bonds and TIPS, 10% Large Cap Dividend Payers, 5% Utilities, and 35% CASH. 

I have eliminated fees to advisors. Compounded fees to advisors over the life of a portfolio can take a huge chunk out of your net worth.

AndyG's picture
AndyG
Status: Bronze Member (Offline)
Joined: Feb 29 2012
Posts: 33
Do I have to pick a side?

A great summary Adam. Thank you. I guess if you drew a continuum from, 'Everything is great <-> It's all collapsing', we would all draw a line in a slightly different place?

Can't we do both? 'Hope for the Best, Prepare for the Worst', as the saying goes. I'd hate to lose my nice, comfortable lifestyle however unsustainable it is. Sack cloth and ashes anyone? Perhaps we could correlate our picks with whether we are a 'glass full or glass half empty' type of person...

Perhaps this conversation in a novel by  Lucy Montomery [Anne of Avonlea] says it for me:

"Well, I always like to look on the bright side, Eliza."
"There isn't any bright side."
"Oh, indeed there is," cried Anne, who couldn't endure such heresy in silence." Why, there are ever so many bright sides, Miss Andrews. It's really a beautiful world."
"You won't have such a high opinion of it when you've lived as long in it as I have,"
retorted Miss Eliza sourly, "and you won't be so enthusiastic about improving it either. How is your mother, Diana? Dear me, but she has failed of late. She looks terrible run down. And how long is it before Marilla expects to be stone blind, Anne?"
"The doctor thinks her eyes will not get any worse if she is very careful,"
faltered Anne.
Eliza shook her head.
"Doctors always talk like that just to keep people cheered up. I wouldn't have much hope if I was her. It's best to be prepared for the worst."
"But oughtn't we be prepared for the best too?"
pleaded Anne.
"It's just as likely to happen as the worst."
"Not in my experience, and I've fifty-seven years to set against your sixteen,"
retorted Eliza.

 

westcoastjan's picture
westcoastjan
Status: Gold Member (Offline)
Joined: Jun 4 2012
Posts: 465
most excellent article!

This is a great article to use to introduce people to a different way of thinking. I have fowarded it to several people already! Thanks Adam!

Jan

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
Adam,

...every day!, I go through these very checklists. Yes, you could add so many more. If the economy improves then higher interest rates and the Fed is screwed as they have to start pulling cash out of the system. So many more that it is best to stop here.

I am with Hussman and Janjuah and pray Grantham is more correct, and we finally get a real nice clearing.

I like RISK, and the other side of the ledger, Inflation, is protected by Precious Metals and Land, Preparations and Resilience have been tested a few times in the last few years, and I sleep just fine knowing I only have to think about how I manage that moment in time, and NOT worry if my family has food and the essentials. That is really cool.

Chris has always said to be thankful for this added time, and it has been most beneficial. Why? We have had a few close calls, and weather related issues that had me and perhaps us challenge our Preparations and Resilience and the stress never materialized as we were Prepared so bring it on.

Well Folks, you all have a great day, and I must now get to the task of removing about 10 inches of snow from drive-way, walk way and older neighbors (same).

Adam, this was a good essay, and timely. I vote the market is about to correct to the downside before it marches right back up as it did in 2009.

Good Luck Folks

BOB

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 2302
A Choice of Infinities.

I'll take both pills. But that's just me. The red and the blue.

There are exponential curves flying off in all directions.

In my estimation there is a non-zero possibility that the singularity may happen, If they make progress in Quantum Computing, be prepared for a very different world. Your thoughts will become amusing, but irrelevant.

After understanding just how the Higgs boson works I realise that we do live in a Quantum reality.

There is also a non-zero chance that Cold Fusion will deliver the goods. Professor Hagelstein is hard at work trying to interpret the empirical evidence. It is my impression that he is near a breakthrough.

There is a strong possibility that endocrine disruptors will make women of us all. Had a soft drink today? The aluminium can is protected by bisphenol a. That coud deflect the population growth curve in a totally unexpected direction.

And what did I do tonight? I learned what I could on anchoring my yacht because I am unable to discern which of the asymptotic curves will prevail. We are faced not with an infinity of choices, but a choice of infinities.

We Do live in interesting times, do we not?

treebeard's picture
treebeard
Status: Gold Member (Offline)
Joined: Apr 18 2010
Posts: 362
Humans or investors

Are we human beings or investors? If this rapatious, destructive, and violent system could recover, would we want it to?  The planet is dying and there is untold human suffering because we and the planet are one. The current economic calamity does not exist in the ethers of economic theory and statistics but impacts real people living real lives.  Let the talking heads on the bought and sold media outlets try to paper over the underlying tragety, but the crisis is still real and happening.

The failure of this system is a victory for all that is good and true in this world. If such a system could recover that means that crime pays and evil is good. The currnet failures mean that there is meaning beauty and love are built into the world.  It is not an amorphous meaningless mass of random chemical reactions that sentimentral humans project meaning onto. The world is alive and its foundation is love.  Systems based on exploitation, self centered greed and material accumulation, domination and violence cannot endure because the contrary to the very foundation of the world.

Remember that taking the right pill just brings you in contact with what is real, we must decide together how to move on from there.

Time2help's picture
Time2help
Status: Gold Member (Offline)
Joined: Jun 9 2011
Posts: 375
Which one is which?

I'll assume Blue is status quo, and Red is something different.  I'm gonna OD on the Red then.  When I look at my five year old son and his friends playing out in the yard, all I can think is that for their sake, this system needs a serious reset.  Gonna suck, but it's the only chance at something better in the long run (to summarize treebeard). 

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
Higgs boson,

http://simple.wikipedia.org/wiki/Higgs_Boson

I read it Arthur, and will again (add infinity).

I just came in from shoveling a whole lot of snow, it is now piled up deep around the edges of my yard, and after reading this I will get dressed again, and go stick my head in it!

Do mosquitoes bite you or leave you alone out of respect? Do love you Arthur.

Arthur, I just came back here to write this: Robots: Less jobs, lower wages, fewer taxes, Social unrest = Not Inflation. Now, I see it as trivial.

Happy Sailing Captain

BOB

Time2help's picture
Time2help
Status: Gold Member (Offline)
Joined: Jun 9 2011
Posts: 375
I second RJE

Never met you Aurthur, but I love ya too man.

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 3359
Bill Gross Nails It

I simply have to get a copy of my book into the hands of Bill Gross who seems to be edging ever closer to connecting the myriad economic dysfunctions he is cataloging with the other two E's.

In his latest piece, Credit Supernova, after articulating the strange mechanism of fractional reserve banking, goes on to note the illogical nature of our system that keeps on expanding exponentially:

Minsky’s concept, developed nearly a half century ago shortly after the explosive decoupling of the dollar from gold in 1971, was primarily a cyclically contained model which acknowledged recession and then rejuvenation once the system’s leverage had been reduced. That was then. He perhaps could not have imagined the hyperbolic, as opposed to linear, secular rise in U.S. credit creation that has occurred since[.]

While there has been cyclical delevering, it has always been mild – even during the Volcker era of 1979-81. When Minsky formulated his theory in the early 70s, credit outstanding in the U.S. totaled $3 trillion. Today, at $56 trillion and counting, it is a monster that requires perpetually increasing amounts of fuel, a supernova star that expands and expands, yet, in the process begins to consume itself.

Each additional dollar of credit seems to create less and less heat. In the 1980s, it took four dollars of new credit to generate $1 of real GDP. Over the last decade, it has taken $10, and since 2006, $20 to produce the same result. +

Minsky’s Ponzi finance at the 2013 stage goes more and more to creditors and market speculators and less and less to the real economy.

This “Credit New Normal” is entropic much like the physical universe and the “heat” or real growth that new credit now generates becomes less and less each year: 2% real growth now instead of an historical 3.5% over the past 50 years; likely even less as the future unfolds.

(Source

Yes, it is truly a wondrous thing that we can live with steadily decreasing 'bang for the buck' and yet when the Fed triples down on this strategy by creating even more leverage and more debt all you can find in the mainstream press are rah-rah cheerleading articles about recovery and rebound.

Yet for those with an eye for data, the trend is decidedly not your friend and it boggles the mind that so many are raucously cheering any and every effort to reignite that same trend. Where is the caution? Where is the sense that there's something terminally wrong with a system that requires more and more to accomplish less and less?

He continues:

Not only is more and more anemic credit created by lenders as its “sixteen tons” becomes “thirty-two,” then “sixty-four,” but in the process, today’s near zero bound interest rates cripple savers and business models previously constructed on the basis of positive real yields and wider margins for loans.

Net interest margins at banks compress; liabilities at insurance companies threaten their levered equity; and underfunded pension plans require greater contributions from their corporate funders unless regulatory agencies intervene. What has followed has been a gradual erosion of real growth as layoffs, bank branch closings and business consolidations create less of a need for labor and physical plant expansion.

In effect, the initial magic of credit creation turns less magical, in some cases even destructive and begins to consume credit markets at the margin as well as portions of the real economy it has created.

And this is all without ever considering the fact that oil is now permanently expensive relative to historical prices and that limits are being approached in fisheries, soil, fresh water, several key minerals, and innumerable other natural systems and resources. The idea of magically unending credit creation simply does not square up with a world of limits.

So what does the bond king, the main architect of one of the largest single piles of investment money in the world think about how one should assess the risks of a system whose very growth begins to feed upon itself?

If so then the legitimate question is: how much time does money/credit have left and what are the investment consequences between now and then?

Well, first I will admit that my supernova metaphor is more instructive than literal. The end of the global monetary system is not nigh. But the entropic characterization is most illustrative.

Credit is now funneled increasingly into market speculation as opposed to productive innovation. Asset price appreciation as opposed to simple yield or “carry” is now critical to maintain the system’s momentum and longevity. Investment banking, which only a decade ago promoted small business development and transition to public markets, now is dominated by leveraged speculation and the Ponzi finance Minsky once warned against.

So our credit-based financial markets and the economy it supports are levered, fragile and increasingly entropic – it is running out of energy and time. When does money run out of time?

The countdown begins when investable assets pose too much risk for too little return; when lenders desert credit markets for other alternatives such as cash or real assets.

REPEAT: THE COUNTDOWN BEGINS WHEN INVESTABLE ASSETS POSE TOO MUCH RISK FOR TOO LITTLE RETURN.

Visible first signs for creditors would logically be 1) long-term bond yields too low relative to duration risk, 2) credit spreads too tight relative to default risk and 3) PE ratios too high relative to growth risks.

++++++++++++++

Please re-read that main conclusion as many times as necessary until it really sinks in. Here it is again:

THE COUNTDOWN BEGINS WHEN INVESTABLE ASSETS POSE TOO MUCH RISK FOR TOO LITTLE RETURN.

Looking at his three indicators I would assess them like this:

1) Check

2) Check

3) Check

So, is it smiley face time or head for the shelter time? I know where I stand.

Also note that the endgame is marked when lenders desert the credit markets in favor of cash and/or real assets.  So much of the mainstream press seems desigend to lure the masses into a bad deal even as the truly smart investors are positioning their thinking and exit strategies around the idea of real assets.

It wouldn't be the first time. 

ckessel's picture
ckessel
Status: Martenson Brigade Member (Offline)
Joined: Nov 12 2008
Posts: 418
No fence in sight!

Adam,

Very timely article. I have long since chucked all blue pills into the trash as you well know! And there is no fence even remotely in sight anymore much less something to sit on.

I have often heard the saying that the the best defence is a good offense.  I'm not sure where that came from but it was probably a football coach.

Taking the defensive bullet points you mention and agressively pursuing them is in my opinion the only viable strategy.  Our dependency on the earths fossil fuel resource base has colored everything we look at with a hue of blue.  As that wears off (like a huge hangover) the human race will be truly seeing red!!!

Chris,

I continue to be amazed that liquid fuels are easily available at any price. In the design and construction business it takes huge quantities to create, move, store and install all of the components that go into creating even a very energy efficient building. Having long since downed the red pill I continually squint at the depleting resource trend and ask myself, when will the gas lines return to our way of life? How long do we have of available energy at any price to build the infrastructure, shelters, transportation and so forth that can carry us forward in some sort of sustainable fashion.

And I am grateful to have this time to continue to pursue those bullet points above! Cheers!

Coop

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
Adam,

( love you too Man as a lot of love today is being shared).

Gregor as you know wrote quite the essay, and the response from everyone was as it should have been with the Robots impact, and what it would/could mean. My question then: We have 150,000 employment numbers (+/-) every month now for some time. A growing economy should bring these numbers up, and we understand this. However, if we are to assume more and more Robots, displacing 5 laborers for every 1 Robot then what are the numbers of Robots anticipated per month going forward? A guest estimate would be reveling for sure.

I have looked all over the map for any numbers that would shed light on this. I don't know if the Robots being activated/planned for are taking the place of jobs that were lost or jobs now in the system. Can you shed anymore light on this?

My inclination is to think that management already has cut to the bone, and are looking for any advantage they can get, certainly as first movers of this technology would give them a huge advantage over their competitors. Labor would suffer, wages across the board would suffer, and tax collection too.

To conclude, if we are to choose one pill over the other then employment, wages, and tax collection would be necessary tools to make a better choice.

Note: Adam, I hate like hell asking questions that are just a data search from getting the answers but I am stumped a little on these numbers.

Thank you

BOB

Doug's picture
Doug
Status: Diamond Member (Offline)
Joined: Oct 1 2008
Posts: 2735
real assets

Quote:
Also note that the endgame is marked when lenders desert the credit markets in favor of cash and/or real assets. So much of the mainstream press seems desigend to lure the masses into a bad deal even as the truly smart investors are positioning their thinking and exit strategies around the idea of real assets.

I totally agree with this conclusion, but the question for me is what real assets I can invest in at the lower end of the financial spectrum.  I have what I consider sufficient PMs, but where do I go from there?  Real estate is a loser in my neck of the woods.  I've stocked up on things I may need to live reasonably   comfortably as energy becomes more expensive.  One asset I've been stocking up on is lumber that I buy green and stack and sticker so that it will be very usable in the near future.

Generally, my thoughts wander toward other kinds of tree products, including furniture grade wood, maple products and species that are dying off for one pestiferous reason or another.  But, what kind of investment products would capitalize on wood and wood products?  I have limited space, aside from my wood shed for firewood and small barn, to store physical wood.  Always looking for ideas.

Doug

Eye's picture
Eye
Status: Bronze Member (Offline)
Joined: Mar 7 2009
Posts: 88
TPTB have kept this boat

TPTB have kept this boat afloat for four years.  They have more tools now than they did four years ago.  If the sovereign states and central banks don't blink do you think the pension funds and private equity will?  Ever increasing proportions of the populations in developed economies are depending on some measure of wealth transfer and quantitative easing. Do you think this general populace is going to "abandon" the system?  While I am all in for being prepared I think a whorthwhile discussion could be had over what the collapsing progression will look like.  Where might the tremors first appear and on what fault line?  Will it be an acute fall or a gradual fall? 

Most of us have been shocked by the ability of TPTB to kick the can down the road.  We are shocked because we have been conditioned in our lives to operate within rule sets.  Our approach to investing has been similarly conditioned.  But the sovereign states and central banks are not beholden to any rules in their policy decisions and actions.  SO I say again, if you are going to talk about the collapse and the adjustments of allocations accordingly, what will it look like?  What series of actions will be taken by what parties? We are in a period of secular changes.  These take time to develop and as such give us time to anticipate.  I have my own ideas but I want to hear others first.

mazanda's picture
mazanda
Status: Bronze Member (Offline)
Joined: Jun 1 2011
Posts: 51
Thanks Adam

Thanks Adam for a well-reasoned and timely anlysis.  I add to your fundamental analysis, the technical side that clearly shows we have been in a secular bear market since the 2000 top when the Shiller P/E exceeded 44 and is yet to reach attractive values of 7-10 as prior bear markets provided at their bottoms. Current Shiller P/E is over 22, higly overpriced relative to the average value of ~ 16 and certainly overpriced relative to prior bottoms at ~7. Prior secular bear markets took 16-18 years to reach bottom from the top. This suggests we may have a few years left, but given the excessive valuations we saw leading to 2000 and the current global financial problems , I'm very defensive right here and right now!! As you point out any external shock can broing it down quickly. My portfolio comprises of cash, PM's and real assets(such as farmland).

Quercus bicolor's picture
Quercus bicolor
Status: Silver Member (Offline)
Joined: Mar 19 2008
Posts: 234
The Great Rotation?

BofA Declares: The Great Rotation Is Here (BusinessInsider)

The big theme of 2013 – according to investment strategists at shops across Wall Street – will be the "Great Rotation," a massive move out of bonds and into stocks.

Economic growth in the U.S. is expected to accelerate, facilitating the shift.

How can this not lead to some sort of debt crisis  when interest rates rise as people sell bonds?  Where will they go with their money then?

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
Qb, check out this most excellent essay from...

Professor Hussman, he's of high character, and a great source of truly wonderful analysis.

http://www.hussmanfunds.com/wmc/wmc130128.htm

Respectfully Given

BOB

tricky rick's picture
tricky rick
Status: Bronze Member (Offline)
Joined: Dec 9 2011
Posts: 74
Crumbling everywhere

What's that sound?  Oh, just a friendly neighborhood drone!

Adam...great article but all should remember...when the going gets tough...TPTB change the rules.

First to go:  the concept of legal protection for all (almost daily examples of this -  drones, banksters shenanigans, etc)

Without that protection?  We are woefully weak in our defensive positions...

Rector's picture
Rector
Status: Gold Member (Offline)
Joined: Feb 8 2010
Posts: 332
I've Got A Better Idea:

You should just start a hedge fund, short Treasuries and the Dollar on your first and only trade.  Once the system craters, you will have the type of psuedo credentials that world respects and THEN he may read the book.  All we have to do is time the market. . .

I'll send in the first $50K because sometimes I think you are the only guy (other than Kyle Bass) that gets it.

Rector

Oliveoilguy's picture
Oliveoilguy
Status: Gold Member (Offline)
Joined: Jun 29 2012
Posts: 348
Rules will be changed

tricky rick wrote:

...when the going gets tough...TPTB change the rules.

First to go:  the concept of legal protection for all (almost daily examples of this -  drones, banksters shenanigans, etc)

Without that protection?  We are woefully weak in our defensive positions...

Tricky Rick, 

You are so right on ......that the rules can and will be changed. Obvious investments like PM's and Commodities could be decimated. Diversity has saved many investors from ruin.

We need to distinguish between investments in the financial markets and our real investments at home. The financial markets are clearly rigged, whereas your true home investments such as your pantry; silver  stash; ammo; gardens; water reserves; shelter (hopefully not mortgaged); and fuel are less prone to confiscation and manipulation.

For those of us still linked to the financial markets in IRAs and 401Ks, I think it is foolish to go "all in" in any one direction no matter how sure you are that you are correct. 

In your home investments absolutely go "all in" and get prepared.

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 2302
Surging Stock Market.

If you look at Prof Husmanns graph of the stock market you will see a change in it's behaviour.

(I will not put the graph here because of his copywrite clause)

Since 2002 to me it looks like the surging of an engine that is running out of fuel

Nate's picture
Nate
Status: Gold Member (Offline)
Joined: May 6 2009
Posts: 460
Deja vu all over again

In January of 1974 my Calculus professor brought in a speaker to discuss our (1st) energy crisis. He outlined the now familiar DOE energy diagram covering both energy sources and end uses.  Walking back to the dorm during a brutal Iowa winter really drove home the points he had made.  There was nowhere to turn - so I bought lots of books and have kept them ever since.  A brief listing:

Producing Your Own Power (Carol Stoner) 1974

Handbook of Homemade Power (Mother Earth News) 1974

Practical Building if Methane Power Plants (L. John Fry) 1974

Methanol and other ways arough the gas pump (John Lincoln) 1976

I have many (~20) other books from the 1970's and keep them as a reminder to myself.

By the 2nd energy crisis I KNEW we were toast.  About this time a coworker and myself saw what was coming.  He heated with wood, had a huge garden, and planted a small orchard.  We were at different places in life so my preps consisted of oil company investments and junk silver.  And mobility.

I vividly remember Reagen getting elected.  We were scared shitless.  There was no way we were ever going to get out of this economic turmoil.  There was no way the North Sea and the North Slope would pull us out of the economic mess we were in.

During lunch I spoke with a friend about where we were day after day.  He called me Mr. Gloom and Doom.  That didn't stop me from purchasing a small farm (1987) and learning as much about growing food as I could.  We still live on that farm today.

Fast forward to 2008.  Market cut in half.  PM's through the roof.  Horrible economy.  I vividly remember Obama geting elected and being scared shitless.  There is NO WAY we are ever going to get out of this economic turmoil.  There is no way the Bakken and Marcellus shale plays will pull us out of the mess we are in.

Time to Choose.  Despite the OVERWHELMING evidence Adam presented (great job, AT), and I am firmly in the Defense camp, no one knows the timing.  IMHO, Oliveoilguy get's it right (diversity).

Oliveoilguy wrote:

...... the rules can and will be changed. Obvious investments like PM's and Commodities could be decimated. Diversity has saved many investors from ruin.

We need to distinguish between investments in the financial markets and our real investments at home. The financial markets are clearly rigged, whereas your true home investments such as your pantry; silver  stash; ammo; gardens; water reserves; shelter (hopefully not mortgaged); and fuel are less prone to confiscation and manipulation.

For those of us still linked to the financial markets in IRAs and 401Ks, I think it is foolish to go "all in" in any one direction no matter how sure you are that you are correct. 

In your home investments absolutely go "all in" and get prepared.

evohep's picture
evohep
Status: Member (Offline)
Joined: Nov 17 2009
Posts: 10
Kondratieff Cycle.

Great article. Thanks Adam.

Although I’m not a paid subscriber, nevertheless Chris Martenson started it all off for me and I keep revisiting the crash course chapters.

I have a shortlist of websites that I trust and I keep revisiting. Peak Prosperity being one of course. All our assets are now split between productive farmland and precious metals. A direct result of ‘The Crash Course’ alarming me enough to really research more.

Just recently I came across the theory of the Kondratieff Cycle. Refined and clearly explained by Ian Gordon of Longwave Analytics.http://longwavegroup.com/financial-analysis

Facinating and I really get the logic.

I feel as if I’ve found a missing link that empowers me to an even greater degree that the strategy I’ve laid out for my family is the correct one.

Not for everyone... but it makes complete sense to me.

Just thought I’d share that.

Thanks for the great work Chris and Adam.

Best wishes.

Paul

UK

marky's picture
marky
Status: Bronze Member (Offline)
Joined: Jul 27 2010
Posts: 33
Great Rotation

As John Hussman says (much more eloquently than I can): market rotation is a myth.  Every bond and every piece of stock is always owned by someone.  So if the late comers are moving into stocks from bonds, someone is selling the stocks and buying the bonds.  And since the system seems well rigged to buy its own bonds, I think it's going to be a while before rates rise.

Quercus bicolor's picture
Quercus bicolor
Status: Silver Member (Offline)
Joined: Mar 19 2008
Posts: 234
Re: great rotation

So the system buys it's own bonds because if it doesn't, then the sellers lower the asking price (and cause interest rates to rise) until they find a buyer.  And everyone knows what rising interest rates mean.  I guess that's what's been happening all along as a way to keep bond prices up and interest rates low - which of course encourages people to buy stocks because who wants such a low interest bond other than the fed?

treebeard's picture
treebeard
Status: Gold Member (Offline)
Joined: Apr 18 2010
Posts: 362
This is increadible

There isn't a post here I wouldn't agree with, the clarity of collective mind and vision, we're doing it together. We're going to beat this thing and create an amazing future for ourselves.  Thanks to Chris and Adam for having the vision to put together this website, allowing those of us who have felt isolated and crazy all these years to connect to other sane voices in these rather turbulant times.

The world out there is so full of mind numbing BS, its hard to take it sometimes.  I used to listen to snippets of the local NPR station occationally, but I can't take even that any more.  But things are turning.  Our local transition town group has a film series that we are running.  Attendence is up and people seem to be more engaged.  I think that more and more poeple are being to understand that this mess is the new normal for the "system" and that if we want something better we will have to take matters into our own hands and create something better.  To borrow a phrase from times past that will show my age, drop out, tune it and turn on.  We may be near the 100th monkey moment after all.

Delphinium's picture
Delphinium
Status: Member (Offline)
Joined: Feb 9 2013
Posts: 1
More than 2 ways of thinking..

We DO have another option; one that has worked well at twice in our history; recommended by major economists.  Google - "The Chicago Plan Revisited", IMF Working Paper.  Iceland is considering non-debt money.  The idea is picking up steam... except with the Movers of the Universe (which include the 'economists', 'financiers' and banksters who didn't seem to see the collapse coming.... in 2005, or 2006... it wasn't hard in 2007.  

When the house of cards collapses, the time will be ripe to install a system that works for everyone..of, by and for the people.   And having as many people as possible educated about this feasible, tested, simple solution will make the transition as smooth as possible.  To learn more, check out Bill Still, Stephen Zarlenga, Michael Hudson, Positive Money, etc.  (I can't do this alone! :)

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 2302
Welcome Delphinium

 Iceland is considering non-debt money.  The idea is picking up steam... except with the Movers

Nice Moniker Delphinium. And a good observation in your first post. Welcome.

For our future big infrastructure projects we will need to to have access to  pools of capital. 

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
Adam, I asked the question on Robots...

...and because I did and with the snow, and a warm wood fire going in the fireplace I looked up everything on Robots, and its effect on labor.

A sample: http://www.nbcnews.com/business/holy-hal-robot-stole-my-job-1B8057232

I did not get the numbers still that I wanted. Basically, how many are being produced and deployed daily, monthly, yearly, and what orders are now in the pipeline going forward, where too and how many people will be displaced just in the U.S. Is it 10K, 20K, 50K,100K, 200K this year, next, 5 years? How many Robots can Robots build in a year? For whom?

If 50K Robots are built and deployed in the next two years, and they remove (now in the work force) 5 laborers each, and I think this is a modest amount of Robots then that is a lot of labor that has been removed. With no real end in site. Plus all that spent cash by humans into the economy, and spin off jobs that will be destroyed and this just goes on, and on,...>

However, what I did get was a genuine feeling that all business, all industry, and all manufacturing are on a mission to replace high cost labor with low cost Robots. In every corner of the market from flipping burgers, to flipping heavy steel objects, drilling holes and sanding the steel without skipping a beat. If I'm a CEO I want to move first.

This is the future, the first to use this technology can absolutely, positively, destroy or put a serious hurt on their competitors.

Further, unemployment will rise, and there's nothing the Fed can do about that. So one mandate will fail and miserably. Then again, I am sure the BLS and some Hedonic rational will use the Robot, and count it as 5 perhaps 10 laborers, and add this to the employment number. We just KNOW this will happen somehow, and of course be revised up or down depending. Sheesh!

Further, middle class Americans are all at risk, and risk is the name of the game so credit for those who have always paid their bills on time is NOT going to happen as it once did. No job, no credit. It is Not a stretch to think credit for anything will be denied because the trend is Robots and that is that.

If business doesn't take advantage of this technology, like yesterday, they are foolish. So, to the quick will be reward, and to the late, transition is only bankruptcy.

Amazon is a terrific and awe inspiring system. I use it for shopping first and last usually. They have a great business model, they get the product to me as promised, cheaper, and I have no hassles as I sit in my office chair and use NO fuel or other expenses. That alone will fracture the retail industry, retail space will lay vacant, and commercial real estate will go bankrupt. It looks like the not to far off future either. IMHO

The cost to the government (that's us, we pay the bills) in welfare entitlements are going to skyrocket from here. Already off the charts now, expect this to be a steady and ever rising strain.

OK, labor will not participate in any growth going forward, so housing that everyone outside of this site thinks is bottomed will just take another hit going forward as who can even consider asking for a 30 year, fixed mortgage from banks who are loaning the Big Bucks to corporate types who's plan is to eliminate your job. I personally would not give 20% down and purchase a home today if you paid me yourself. Well, maybe I would if that were the case but you get my point.

The Government who's mandate is employment and managed flotations (yes, a gentle bit of humor intended) will fail horribly in their antiquated modeled plan because they haven't modeled yet for Robots  as was so revealing when Krugman had his ah-ha moment. He plans on thinking about Robots in more depth but his inclination is to charge taxes on Robots as they replace labor. "OH, GOOD GRIEF"!, (stolen from Wendy as she used this phrase recently, and it reminded me of so many yesterdays with my Mom's).

Folks, if you didn't know this, Bernanke is Krugman's mentor, and spiritual guidance counselor, and Bernanke runs the Fed, and he prints lots and lots of money and he has a beard and Krugman has a beard and Krugman is now thinking about Robots. "Class, Class!, Class!!, shut up!!!, thank you". Krugman thinks the Fed hasn't done enough and who really cares about spending now ,just spend, spend, spend and we'll mop up the excess later. "Oh GOOD GRIEF" (Wendy).

Oil is near $100 bucks a barrel, is he mad, seriously, is he mad?

I think too that there is a saying in the market that it will exact the most damage to the most people it can, and I'm wondering if that means the Fed too as they are actively in the market today. If so, then good. Then again it is OUR money they are playing with. 

104% of money managers are bullish. How is that possible. I thought 100% was the highest one could be bullish. That means a negative 4% are Bearish! Really? I must have misunderstood then. Then again, the numbers being bandied about all over the place are just not even to be believed. Make believe then.

Do markets tank in make believe land? Serious, is this possible? I'm guessing it can, and will. Why? 104% of money managers are bullish (if I read this number correctly), that seems like the optimum number to put a good hurting on, don't you think?

BOB

Note: All spelling errors are the spell checks problem, and I no longer care. Do you?

derelict's picture
derelict
Status: Member (Offline)
Joined: Aug 13 2008
Posts: 6
Gas expenditure > 4%

Just because I'm a stickler for accuracy, the article Consumers Taking Financial Hit From Rising Fuel Prices (CNBC) seems less than so: Meanwhile, the U.S. Energy Information Administration reported Monday that gasoline expenditures in 2012 for the average U.S. household reached $2,912, or just under 4 percent of income before taxes.

Well the median household income in 2011 was $50,054, so $2912 would be 5.8% of that.

What they appear to have done is used the number for median household income - married couple households, which is $74,130. Now your $2912 is 3.93%. But that's not really the "average U.S. household" now is it?

Here's an article with perhaps a more nuanced assessment: http://money.cnn.com/2011/05/05/news/economy/gas_prices_income_spending/index.htm

That's a year and a half old (not that gas prices have come down any, and median household income has declined the last two years in a row) meaning the numbers could be worse. This piece indicates 9%, and the reality that in low income locales the purchase of gasoline consumes up to 14% of household income (Mississippi). Household income figures BTW are usually given pretax, which also underestimates the bite anything takes - food, rent, insurance - on a percentage basis.

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
I meant to thank Gregor for motivating me with this...

...research and my knowledge now gathered on everything Robotics. Like most everything these days when I do research the subject matter soon becomes a major headwind to everything I have every known before in my life.

I have determined long ago that from here on out it will be Oil that motivates everyone to seek alternatives to powering Industry and Manufacturing, and that means Labor will suffer as it always has. Still, I remain positive and forward looking. That DNA marker I suppose will never be changed. The Human spirit then.

Thank you

BOB

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
"This Time is Different"?...

"Present market conditions now match 6 other instances in history: August 1929 (followed by the 85% market decline of the Great Depression), November 1972 (followed by a market plunge in excess of 50%), August 1987 (followed by a market crash in excess of 30%), March 2000 (followed by a market plunge in excess of 50%), May 2007 (followed by a market plunge in excess of 50%), and January 2011 (followed by a market decline limited to just under 20% as a result of central bank intervention). These conditions represent a syndrome of overvalued, overbought, overbullish, rising yield conditions that has emerged near the most significant market peaks – and preceded the most severe market declines – in history:"

http://www.hussmanfunds.com/wmc/wmc130204.htm

Perhaps these times are different. After having read all that I have about Robots (Gregor inspired) it is my firm belief that joblessness is the wave of tomorrow, next week, next month and YoY. 70 percent of the economy is consumer spending, and consumers are to be directly correlated with jobs.

You know, I had a thought while out this morning sledding with my grandson's (taking a quick break from the action) that if the Fed is printing and spending our forward expected earnings trying to get the economy going, and if the Fed is as clueless as Krugman (A Nobel Prize Winner) is about the effects Robots will have on the economy, and if we anticipate in loss wages and added welfare entitlements in the next 5 years then who will pay this massive Debt in the future? Default? Bankruptcy? I think lots and lots, and perhaps a title wave of a combination of the two. 

Respectfully Given

BOB

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 1460
Delphinium and the "Chicago Plan" for money

Since I am a budding, self-taught monetary theorist, I was intrigued by your posting.  What is this Chicago Plan I wondered?  As well, I wanted to understand what I have come to believe is the most important question one can ask about any money system;  Is there a printing press, and who runs it?

Well, I got my answer quickly with a bit of Googling;

In a nutshell, the Chicago Plan provides an outline for the transition from a system of privately-issued debt-based money to a system of government-issued debt-free money, transferring the real control of money creation from private sector banks to the government. By inference, the Chicago Plan would also eliminate the Federal Reserve's ability to create money as a private institution, as it would be nationalized by incorporating it into the U.S. Treasury. Further, such a system would eliminate the need for the FDIC (Federal Deposit Insurance Corp.) as banks could only lend from the deposits they actually had.

source:  http://www.istockanalyst.com/finance/story/6105849/forget-dodd-frank-rev...

OK, so we have our answer:  Chicao Plan = Modern Monetary Theory = Chartalism = $1 Trillion coin idea.  These are all fundamentally the same thing!

How could anyone think handing the printing press to the Gov't is better than having the printing press in the hands of the bankers?  Even without the printing press, our Gov't is spending us into bankruptcy.  If you want to see the results of the Gov't (effectively) controlling the printing press.. look to Venezuela and Argentina today.  When too much money gets printed, bad things happen.. no matter who is doing the printing.  This is not to say that bad things don't happen in a debt based money system when too little debt is taken out... they do.. but the bad things consist of those investors, banks, and other entities who made risky bets or loans being wiped out.  What ensues is Schumpeter's creative destruction and a wonderous process called deflation, whereby the money held by savers actually increases in buying power... imagine that!  The deflationary outcome is only theoretical at this point, as the bankers don't run the system as intended anymore... rule of law is gone, bankers always win, tax payers and savers always lose now. 

Reading about the Chicago plan, you can get flummoxed over terms like Dynamic Stochastic General Equilibrium (DSGE)... but don't!  When analyzing any system of money, consider the mechanism behind its creation, and who (if anybody) controls its scarcity, and the integrity of this scarcity?  

Let's review;

Money System            Who controls relative scarcity?          Tendency (Inflation/Deflation)

-------------------           ---------------------------------------        ------------------------------------

Debt based                  Banks, Private + FED                        Inflationary, with rare bouts of deflation

MMT                              Government                                       Always inflationary (see Zimbabwe)

Gold and Silver            Scarce in Nature                               Stable or deflationary

Bitcoin                        Algorithm limits production                  Deflationary by design, highly divisible. 

Government made money is not the answer.  While one might argue that Gov't will be more humane in how it distributes the money it creates vs. bankers... this does not change the fact that when too much money is created in relation to the real wealth that exists in the world, this imbalance can ultimately lead to the destruction of the money system.  Short term good (if you consider government's tendency to create cultures of dependency good), long term horror.  

You will see my reference, once again here on PP.com, to Bitcoin.  Bitcoin is endlessly fascinating to me because it is the only manmade form of money whose scarcity integrity is not in the control of any person, Gov't, or private entity.  It's scarcity is built into its digital DNA..  and eventually all Bitcoins will have been mined out, just like is the case with Gold and Silver.  Therefore, barring people rejecting it as a form of money (vs. the trend of growing adoption that exists thus far) the tendency of Bitcoin is to increase in buying power... deflation.  Great for savers!  Take a look at how Bitcoin has performed in dollar exchange terms of the last year;

http://bitcoincharts.com/charts/mtgoxUSD#rg360ztgSzm1g10zm2g25zv

Dwig's picture
Dwig
Status: Bronze Member (Offline)
Joined: Mar 5 2009
Posts: 99
Money systems

Jim,

Your  comparison matrix on money systems is interesting, and probably worth testing and expanding.  I do have one quibble:

Debt based   |    Banks, Private + FED  |   Inflationary, with rare bouts of deflation

Assuming "deflation" is roughly the same as "recession/depression", it's not particularly rare.  For example, in the US, there have been 20 such episodes in the last century, or an average of one every 5 years.

I share the unease about turning the system over to the government, although in today's context, the governments and financing networks are heavily intertwined in the Western nations and economies, so I'm not sure it would make that much difference in practice, whatever the theoretical basis.

In the broader context, I find it encouraging that the nature of the money system is being re-examined openly, and in high circles.

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 1460
On the eradication of deflation...

Thanks for the dialogue Dwig.  My statement about the inflation with rare bouts of deflation is based on the graph by Doug Short in this article.. sorry I can't get the graph embedded directly.  Note that the red areas below the graph represent periods of deflation;

http://www.advisorperspectives.com/dshort/updates/Inflation-Since-1872.php

The graph argues that since about 1950 the financial engineers behind the US dollar have effectively eradicated deflation from the picture.  Recession and currency deflation are two different things... and although it would make sense to have the two go hand-in-hand... Doug Short's data suggests that this is no longer the case.  Your loss of buying power for dollars held has effectively been a continuous process since 1950, which is why I said what I said.     

You said, 

the governments and financing networks are heavily intertwined in the Western nations and economies, so I'm not sure it would make that much difference in practice, whatever the theoretical basis.

And I agree with you... the unholy alliance between governments and bankers has created a situation where the banks are the enablers of gross deficit spending.. almost as if our elected leaders had their hands on the printing press.  All I can say is, imagine how profligate would their spending be if there were no longer any debt-based drag to it?  The dollar would be toast in no time IMO.     

treebeard's picture
treebeard
Status: Gold Member (Offline)
Joined: Apr 18 2010
Posts: 362
Local Money

Any large centralized system leads to trouble, unless we have a sudden evolution in human consciousness (I'm not holding my breath). It matters liittle whether its a private central bank masquerading as a quasi federal agency or the federal government itself.  Lets have local community owned banks printing the money they need to support the level of local economic activity.  That way all the brilliant minds here could be on the local bank boards having real debates about actual monetary policy that matters rather than academic discussions about how fast to pull money out of a collapsing system.

Of course we would then need actual local economies, which we don't now (most important bit of work that we have in front of us).  Here in quasi rural New England (in my little piece of the world) what do we have for primary wealth creators?  Maple syrup, firewood, hay, some fruits and vegatabes, a dairy or two, some meat production.  There is some small hydro electric, wind power is close by to the north in southern MA. but nothing here.  A smattering of light manufacturing.  Almost all of it powered by nonrenewable fuel sources thousands of mile away.  We do have some local bakeries, but all the grain of course is not local.

Then of course the secondary economic tier, hospitals and doctors that we can not afford, other professional services, lawyers, insurance agents, etc.  The constuction industry which is flat on it's back, but all the building material are not local.  If a disruption happens lifestyles are going to change real fast.

Then there is the overhead, sources to spend discretionary income, retaurants, theaters, retail stores, bowling alleys, etc.  In my mind there is a place to start, if it ain't local don't go in a spend a nickel, if you know friend who is out of work and thinking of start something up, preorder something from them.  For the short term how the money is printed is less important than how and where you spend it.  We have the rest of the world taking our dollars and the biggest baddest army in the world making sure that they do.  It seems like this arrangement is not going to change for a little while anyway.

Then I would go after the creation of a local currency.  We have one to the north, don't know how well that is doing.  I know some of my northern neighbors are up in that territory post here regularly, how are the Berkshares doing anyway?  My two cents anyway.  I do get the occational wave of optimism, then I start to  think about how much work we have in front of us........but wait we have really high unemployment......hmmmm?

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 1460
Local money

Berkshares seem to still be functioning, unlike the Burlington Bread, and the Ithaca Hours, both of which have withered on the vine. 

http://www.vpr.net/news_detail/90075/despite-limited-success-local-curre...

(Kirschner) "The most popular businesses, always food businesses, would end up with a stockpile of bread, and they were always the ones who were dissatisfied because they had nowhere to spend it. We tried to get them to give it back in change but that was difficult, it literally didn't fit in cash registers, it was slightly too big, so it stayed in the back offices."

(Bodette) A business could accept bread in lieu of cash, but then couldn't convert it into dollars. So their only choices were to spend bread at another business that accepted it, or to pay their employees with it. Soon stores stopped accepting bread altogether.

Burlington Bread finally fell apart after ten years in circulation.

Kirschner says she learned competing with the U.S. dollar is not easy.

As with other local currencies, the problem I see with Berkshares is how they are created... the mechanism by which more shares come into being.  From the Berkshares website;

http://www.berkshares.org/whatareberkshares.htm

How are BerkShares placed in circulation?

BerkShares are placed in circulation when citizens exchange federal dollars for BerkShares at any of the BerkShares Exchange Banks (see list below). Some restrictions may apply.

Citizens may exchange federal dollars for BerkShares at any of the BerkShare Exchange Banks during normal bank hours (some restrictions may apply):

So, Berkshares are created anytime anyone wants to buy some with the a few of the infinitely printable US dollars.  In this way the future scarcity of Berkshares is tied to the future scarcity of dollars... therefore I would not participate as I would expect them to lose buying power over time.  I do support re-localization, and voted $800 last year to buy in to a boutique 15 share CSA around the corner from my house.  I don't think that local money is the key to re-localization.. these are two separate challenges... and I have become very opinionated as of late on the question of what makes good money.  

Good money cannot be printed to infinity, period.  That is why Gold and Silver will always be money.. and why Bitcoin will, in my opinion, take the world (literally) by storm... because it is the first and only manmade money that shares this unique quality.  It has other positive qualities as well.. but scarcity integrity is the most important one.     

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
Every month substantial new assistance is paid out...

...and that tells me that all means have been tried to stay afloat and bottom has now been reached. Sure, the schemers are playing the system but I still contend that even the schemers are doing all things necessary to maintain their current lifestyles. All these Folks are just hanging by a thread, and will have some serious unintended consequences at some point in the future. Make sense? This report certainly says one thing and that is things are getting worse and not better. It has been this way for some time now, and all the government reports are basically a wet finger to the wind, and fabricated to fit what is necessary to continue an illusion.

http://www.zerohedge.com/news/2013-02-11/chart-day-households-foodstamps-rise-new-record

The question now is, is this report good for the economy. We have to choose now.

Regards

BOB

rhare's picture
rhare
Status: Diamond Member (Offline)
Joined: Mar 30 2009
Posts: 1267
I have serious doubts about Bitcoin....

Jim H wrote:

and why Bitcoin will, in my opinion, take the world (literally) by storm... because it is the first and only manmade money that shares this unique quality.  It has other positive qualities as well.. but scarcity integrity is the most important one.

I don't think Bitcoin will ever have a future other than as a niche currency for short term transactions.  Why would anyone select using Bitcoin over using gold and silver?  Do you really trust that the algorithms are sound?  Plus your going to have a mighty tough time using Bitcoin in a non-digital world of things.  Try using Bitcoin to buy eggs from a farmer when the power/internet is down!

It's too reliant on technology and there are already well recognized, sound money alternatives.  I just don't see any advantage to bitcoin over gold, silver, platinum, etc.

I think a much more likely scenario is the world transitions to hard money and simply uses electronic record keeping methods to make it convenient.   Credit cards, checks, paypal, etc can all be used to represent movements of sound money just as well as they can fiat currencies.  In fact, my guess is we will simply transition to a government issued currency that is backed by gold.  This will last for at least a few generations until the next government convinces people that this current experiment was just not done quite right....

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
"not a single instance in historical data since 1871"...

“No. We've been here before, and the consequences – though not always immediate – have invariably been bad. There is not a single instance in historical data since 1871 when the S&P 500 traded above 18 times record earnings and there was not a low a year or more later that erased every bit of advantage over Treasury bills. Not one.”

http://www.hussmanfunds.com/wmc/wmc130211.htm

I guess there could be a first or a "This Time its Different".

I don't think so though.

This is the state of the market and I just shake my head, UNBELIEVABLE!

“You know Gordon, I agree with you, but let me take a different tack on this, alright? Let’s say you believe that China is making up the numbers. But if the stock market there keeps going up because of it, and you believe the government will keep priming the numbers, isn’t that sort of a reason to bet on the Chinese stock market?”

… and that’s why we’re all gonna die.

Regards

BOB

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 1460
Bitcoin as a niche currency

I actually agree with you almost completely rhare... certainly Bitcoin's future depends on a functioning internet... although the internet may fail in some parts of the world, I don't think it will fail everywhere.. and as long as it's functioning somewhere, and you have your Bitcoins (keys) stored on a non-volatile memory device, then you still hold them and they can still hold or even increase their value for later on. 

What I am pointing out is that there is a niche for Bitcoin.. and while I don't ever expect it to be as big as Gold and Silver.. there is still lots of growing room in this niche and I don't see much that can stop it.  I am not a computer programmer, but the underlying algorithm and the associated cryptology has so far proven rock solid... the only effective hacks have been to the digital purse technology that some people use to hold Bitcoins online.. there have been no problems with the more secure versions of purse technology that you can run on your own computer.

There is no arguing that Bitcoin is gaining value faster than they are being mined.. the free market is speaking day by day as the exchange rate of dollars to Bitcoins keeps rising.  We can sit around and express our doubts.. which is all well and good.. but you have to admit that something is happening.. for now, this thing is taking off and taking off big relative to any other non-Governmental currency.  Relative to anything before like Ithaca Hours, or Berkshares, it is a HUGE, HUGE, success, and it is a worldwide success.  

http://bitcoincharts.com/charts/mtgoxUSD#rg60ztgSzm1g10zm2g25zv   

leweke1's picture
leweke1
Status: Bronze Member (Offline)
Joined: Dec 18 2008
Posts: 98
Bitcoin Seems Just as Skewed as Fiat to Me

I just can't get comfy with the Bitcoin concept when it comes to money.  The same advantages that goverment and big banking have in everything else can be extended to Bitcoin if they decide the time is right.  How long would it take the NSA and other similar government agencies around the globe to track and stop Bitcoin transactions if they wanted to...?...not long IMO.  How long would it take to start fouling up transactions?  Consider it only takes a small percent of misdirected payments or missing transactions to make the whole system untrustable.  What if the HFT computers were rededicated to creating Bitcoins during non-trading hours/weekends?...I would be willing to bet "they" could create a Bitcoin glut and get rich at the same time under the right conditions if "they" wanted to.  I can't convince myself it's more reality than fantasy and thus could end badly.

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 1460
Leweke1

Bitcoin transactions are peer-to-peer, and one could therefore protect the transactions like any other datastream via encryption, using a service like this;

https://secure.cryptohippie.com/products_why.php

Bankers and Governments cannot extend their powers over Bitcoin - it is fully decentralized.. like DNA, every instance of the program running on a mining computer contains the entire ownership record, so to speak;

https://en.bitcoin.it/wiki/How_bitcoin_works

I certainly can't, and would not, guarantee that the Government couldn't and wouldn't try to do something disruptive to Bitcoin at some point... but it really cannot be destroyed.  If you really wanted to kill Bitcoin.. the way to do it would be to act like a predatory Corporation that sees a small competitor nosing into it's space... buy the company out and let it die!  Yes, the most effective way to kill Bitcoin would be to buy every one of them at a premium.  In this scenario you make out great selling your Bitcoins to the Government.. and then you simply start trading in New Bitcoins when they (inevitably) get started.  

You said,  "What if the HFT computers were rededicated to creating Bitcoins during non-trading hours/weekends?...I would be willing to bet "they" could create a Bitcoin glut and get rich at the same time under the right conditions if "they" wanted to"

This shows a fundamental misunderstanding of how Bitcoin works.  More than 1/2 the Bitcoins that will ever be mined, have been mined.  There will never be a glut, as they get progressively more difficult to mine.  If the Government were to employ a powerful computer of their own to mine Bitcoins.. it would create the opposite of a glut, right?     

The beauty of Bitcoin is that no derivatives of it exist.. it cannot be sold short!  The bankers cannot effectively suppress its currency exchange value.. its price.  It is the only money, the only good that I know of that exists today in a state of pure, free market valuation.  It does take time to wrap one's brain around this.. it took me time for sure..

treebeard's picture
treebeard
Status: Gold Member (Offline)
Joined: Apr 18 2010
Posts: 362
money

By the time were all done we may be trading with pelts and shells.  I don't trust any system that can stretch beyond daily human awareness.  Gold can be manipuated as well as anything else.  If we go back on to the gold standard, what's to stop us from pulling off again in the future when it becomes inconvenient?

I would argue that putting our faith any monetary system as an enforcer of rational human behavior will lead to a brake down no matter how nobel and perfect the system may starts off as.  Wasn't it wars we couldn't afford, peaking of american energy production and unrealistic material lifestyle expectations that pulled us of the gold standard to begin with. Those are the root causes of the problem, monetary dislocations and shenanigans that happen after the fact to cover up for unrealistic, self delusional actions.

Berkshares may be tied to the dollar now, but there is a system in place that can be cut loose when the dollar goes haywire.  Consequences tied to local actions and reactions.  Communities living by local means and local collective awareness.

I think that the age of the one big idea, mass production, the one hero, the one size fits all system metric is dead. This is the time diversity and individualization when each person and small communities express their unique gifts to create a whole that is greater than the sum of the parts.  I think that things are fragmenting and become part of a more harmonious whole at the same time and these movements are not contradictory.  Let have hundreds of local currencies expressing the needs of peolpes in the own bioregions and temperments where monetary policy is no longer the driving force but the creative expression people living meaningful fulfilling lives.

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
Kunster

" Not since the Civil War (1861 - 65) has anything bad of this scale happened within the United States itself and the public is unprepared"

"There is also chatter among the paranoid that an imagined elite has deliberately engineered American collapse for fun and profit, with sideshows about the Department of Homeland Security promoting social upheaval in order to make a show of putting it down. This is all bullshit"

"The implacable contraction underway is the simple result of growing scarcity of cheap oil"

"One thing you can be sure of: the current sociopolitical weather will change. A front will blow through and sweep the fog away."

"it will be every community for itself"

I Completely Agree.

http://kunstler.com/blog/2013/02/state-of-the-union.html

Peace

BOB

Grover's picture
Grover
Status: Platinum Member (Offline)
Joined: Feb 16 2011
Posts: 507
Modern day alchemy

Jim H,

Perhaps the current version of Bitcoin is secure and limited. What is to prevent the folks who were smart enough to concoct this scheme from making another rendition(s)? If enough competitors to Bitcoin enter the marketplace, doesn't that effectively dilute Bitcoin's value as well?

All money relies on the acceptance of the receiver. Part of the internal calculation of value is the expectation that the money will have purchasing power in the future. I see lots of potential and unknowable problems with Bitcoin. Many of these problems have been identified by others on various threads.

You ride to the defense of Bitcoin about as fervently as you defend precious metals. For short term exchanges as a competitor to FRNs, I can see the logic. Bitcoins may even appreciate faster than PMs in the short term - good for them. As long as the status quo remains, it may be a profitable cause to defend.

What happens the day after?

Grover

Dwig's picture
Dwig
Status: Bronze Member (Offline)
Joined: Mar 5 2009
Posts: 99
Rasing the level of isolation...

You quote Kunstler:

"it will be every community for itself"

I suppose I'm a bit encouraged by the shift from "every person for him/herself".  But isolated communities are vulnerable for the same reasons that isolated individuals are.  In a region where many communities exist, they'll need to find ways to interact for mutual benefit.

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
Dwig,

"every community for themselves". Here where I live must be similar to where Kunstler lives. Here we have old farming, saw mill, and orchards. All located within very short distances, and the community size is 5000 or less for each. These communities still have their rail and old roads by way the crow flies, and have been here since well before the Civil War. Many streets in these towns are named after the good Folks who's great grandson's still farm with their sons, and little ones.

I suspect the relationship between all of our communities will revert back to old forms as this thing moves forward. Truth is we know quite a few families from many of the other communities now through activities shared together, and family marrying family. I expect these communities will do just fine, and the values of living this life will reemerge as this crisis grinds along down the backslide.

If you have ever been in a farmers repair barn you will see many items left over from the horse drawn days, and in this community the horse drawn days was still in existence in the 60's and 70's rather heavily.

Sure the internal combustion engine was the rave for farms but alongside still existed the horse, and still does but for recreation, and is more isolated but the infrastructure is still there. Only now it is the bigger cities in the area who provide the cash for many stables by renting and riding on nearby land.

So I can see where "every community for themselves" implies what type community do you/we live in now, and how far are you/we away from a historically sustainable community are you/we.

Every event of any measure has been survived by these communities, and I suspect we will survive this one as well. Fact is I think its a cinch that we will.

There was a saying more common as I grew up than I hear today and it will be common again: "There's no substitution for hard work than to work hard". We'll be fine, and manufacturing will be fine, and we'll have to turn inward and figure this thing out collectively as Americans have always done.

That or perish I suppose. When faced with those choices to adapt or perish then I think the vast majority will adapt. Population will correct on its own as many see that it is unsustainable. Our son's and daughter's will still have children but it will be 1, 2, 3 perhaps or none at all. It will be a choice born by what is right and economically feasible.

I just see things differently than some because I haven't seen anything in my area that looks like it couldn't be sustainable. All the lands were farmed as they sit now for a long time now, and food is critical so they'll get the energy that is available to feed the masses.

We have many creeks too, and they will be re-dammed, and power generated again for purposes once useful. We have the Canals, Rivers, and Lakes that will again be used for commerce and trade so I really am quite optimistic. Frankly, I see no country with the advantages that the US has with regards to navigational waters, and we share borders with friendly Folks. Canada and Mexico are really a blessing when looking elsewhere in the world. So, I think, good stuff.

Be Good

BOB

Dwig's picture
Dwig
Status: Bronze Member (Offline)
Joined: Mar 5 2009
Posts: 99
Good little essay!

Bob,

Thanks for the kind reply.  Among other things, it illustrates the point I made.  I quite agree that communities already living "closer to the earth", with a ready willingness to "figure this thing out collectively", have much less further to go than the urban/suburban environments where folks all too often don't even know their closest neigbhor.

Truth is we know quite a few families from many of the other communities now through activities shared together, and family marrying family.

There's a couple of important points embedded there: exogamy (intermarriage across community boundaries) and "activitities shared together".  This is the kind of interdependence that enhances resilience.

I think your post would make an excellent contribution to the Community Building wiki (http://www.peakprosperity.com/wiki/134/community-building).  Would you be willing to add it there?

Be well, do good work, and keep in touch...

Don

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
Don,

...I would if I could figure out how to move around this site as well as many of you have. I'm certain I could if I investigated everything here at PP but I just haven't taken the time yet.

I'm still trying to figure out how you Folks box quotations in blue for all to see. I have been embarrassed to ask. Go figure too because I don't embarrass easily.

Thank you Don for sharing your kind words as they are always appreciated.

BOB

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments