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Teresa N. Fischer

The Stock Market's Shaky Foundation

Crumbling fundamentals in both the short term & long
Wednesday, February 26, 2014, 8:21 PM

According to the stock markets in the US and in Europe, the world’s economy is not just in good shape, but is in the best shape it’s ever been

The S&P 500 hit an intraday new record high of 1,858.71 on Feb 24, 2014, and is now 18.6% above the peak it hit in 2007, a moment everybody now recognizes was heavily overvalued.

An almost 19% gain above the prior all time high is an enormous and unusual event. Surely, you are thinking, there must be an equally compelling story and loads of fundamental data to support such a bull market?

Well, there really isn’t. 

Not a lot has changed between the prior 2007 peak and today. From a fundamental standpoint, not much at all. Per capita income is only up 8.1% between now and then, and yet the equity markets are rallying like the biggest income boom in all of history has occurred. 

Worse, the per capita income data is obscuring the fact that what little income gains have been recorded went almost entirely to the top ten percent of the population. So there’s no broad prospering middle class to drive an economic expansion of the sort that stocks seem to be pricing in.

Of course, the main narrative right now has nothing to do with anything fundamental. Rather, it centers on the idea that as long as the central banks of the west and Japan continue to print, everything financial will just continue to go up in price while -- somehow -- price inflation will remain tame.

Our view here at Peak Prosperity is that this narrative is wrong in every respect; except, perhaps, for those using a highly compressed speculation timeline that ignores both fundamentals and history.

In the immediate term, stock prices gyrate based on various assumptions that are often completely disconnected from reality.

But over the medium and longer terms, fundamentals drive prices; as it is ultimately corporate income and ultimately dividends that determine the value we ascribe to equities, and it's the prospect of future earnings growth that drive the price multiple.

We’ll show in a moment just how far equity prices have diverged from the fundamentals.

But First, The Big Picture

Over the long haul, which we think needs to be kept front and center at all times, equities are nothing more than a means of sharing the wealth that companies create, which itself is a product of the extraction and processing of real things from the real world. 

Everything we think we know about the ‘fair value’ of equities was developed over a period of time when the future could always be counted upon to expand exponentially. 

You know, sayings like "Over the long haul equities return 10%".

Such a statement can only be true in an exponentially-expanding world where exponentially more things are being extracted from the real world as time goes on.  In a world where there is only so much 'stuff,' it's not possible for said 'stuff' to always be present in expansive and expanding quantities.

[Wonk note:  Equities could also advance via productivity gains, assuming more utility was derived from the same amount of resources. Perhaps we might assume a world where productivity climbs by 10% per annum to deliver our desired equity gains – but that’s never happened, and certainly will never happen for very long because it implies a 100% improvement every 7 years.]

A huge enabler of the economic expansion of the past century has been oil. Without a doubt, petroleum is the master resource for a global economy. And it is no longer cheap.  The reason why it is no longer cheap, and never will be again, is a larger story than we have time for here, but recent data should suffice to show that global oil has averaged more than $100 per barrel for more than three years. That's 4x higher than the 1987-2004 average of $23 per barrel:

(Source)

To me, the anemic economic growth in the OECD countries, with their horrible job creation statistics and generally tepid recoveries (at best), is the very predictable result of what you get when oil becomes expensive.

If you hold the view, as we do at PeakProsperity.com, that the future economy cannot possibly grow at the same rates as it did in the past (and that likely someday all growth will cease), then equities are in for a serious correction at some point.

Perhaps that day is still far in the future. But there must always be an eventual reckoning between the number of claims on the world's wealth world and the actual wealth itself.

Further increasing the risk for equities is the fact that, as claims on wealth, they are the least senior of the lot.  The holders of bonds and preferred shares come first.  So when we wander over to that other, and much larger, corner of the financial universe where debt resides and note that all forms of debt, but especially corporate debt, have continued to grow exponentially both before and after the great 2008 credit crisis, we see that equities are whistling past this part of the story too.

Of course, a huge proportion of all the new corporate debt taken on since that little hiccup in 2009 has been used to buy back shares and thereby goose (through accounting, not by value creation) the earnings per share numbers so widely reported by the financial press. 

Eventually, though, all that corporate debt will have to be paid back, and that activity will drain future cash flows and earnings. Again, steadily rising – nay, exponentially rising – levels of corporate debt are a massive collective bet that the future will be exponentially larger than the present.

The only narrative I can imagine that can accommodate a long-term decline of per capita resources coupled to steadily worsening net energy from petroleum, AND simultaneously support the continued exponential expansion of claims against those resources, is one that steadily transfers this wealth into fewer and fewer hands.

After all, if relatively few people end up owning most of the remaining wealth, does it really matter to them that there’s less of it to go around on a per person basis?  No, not if they have plenty for themselves.

As the recent travails in Ukraine have showed us, there’s only so far that such a deranged, kleptocratic view can go before it breaks down.

Alternatively, and far more likely, there’s no actual rational narrative of any sort in play right now -- and so the center mass of the investing world is simply operating off of untested and unexamined beliefs that mainly rest on the notion that a prompt and perpetual return to exponential growth is what the future holds.

Again, we see this as dangerously myopic. But sadly, this view is not only rampant on Wall Street, but it's also prevalent with our government as well as endowments, pensions, and insurance pools -- entities with long-term fiduciary responsibilities that really aught to be asking themselves some hard questions these days.

Conclusion

In summary, over the long haul -- by which we mean the next ten to twenty years -- current equity prices are making a colossal bet that exponential economic growth (which itself is linked to cheap oil) is going to quickly resume and persist long into the future. Are you comfortable making that bet? I'm not.

Of course there are a lot of variables in this story; but one could do worse than to simplify one's economic prediction down to this: Until and unless the global supply of oil gets a heck of a lot cheaper, anemic economic growth will persist and therefore the holders of expensive financial assets that are priced for perfection will be badly disappointed.

Spoiler alert:  There are no new sources of cheap oil. We've already tapped the easy stuff.

So, there's lots to be concerned about for those holding stocks for the long term. But what about the short term?

In Part 2: The Time To Short The Market Is Approaching, we explain why 2014 is beginning to look an awful lot like 2008; only worse. The ability of stock prices to deviate further from the fundamentals appears to be topping, and a heck of a mean-reversion looks in the cards. 

Click here to access Part II of this report (free executive summary; enrollment required for full access).

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55 Comments

sand_puppy's picture
sand_puppy
Status: Gold Member (Offline)
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Posts: 453
Drunk on Petroleum

“Dear future generations: Please accept our apologies. We were rolling drunk on petroleum.”

― Kurt Vonnegut

chwik's picture
chwik
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Posts: 6
Chris wrote

"And it is no longer cheap.  The reason why it is no longer cheap, and never will be again, is a larger story than we have time for here, but recent data should suffice to show that global oil has averaged more than $100 per barrel for more than three years. That's 4x higher than the 1987-2004 average of $23 per barrel"

I would say that oil is expensive in terms of peoples (and nations) affordability, but extremely cheap in energy terms and usefulness to society. I think it was Nate Hagens who wrote that 1 barrel of oil is equal to 5.7 million BTU's which translates to 1700 kwh of potential work. It takes 11 years for a human to work (digging ditches etc) to generate the labor of one barrel of oil (assuming an average of .6 kwh per work day and 260 working days). I costs us today $100 to substitute $500.000 worth of labor! What a trade! 

Also, to me it looks like (for now) governments (through the central banking system) in most OECD countries are subsidizing peoples lack of oil/energy affordability and industrys rising energy extraction costs (EROEI) through low interest rates and credit creation (who knows how long that can continue...). We have an overshot financial situation, but in energy terms we still have a heck of a lot of energy and it is cheap!      

Quercus bicolor's picture
Quercus bicolor
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Posts: 245
chwik wrote: "And it is no

chwik wrote:

"And it is no longer cheap.  The reason why it is no longer cheap, and never will be again, is a larger story than we have time for here, but recent data should suffice to show that global oil has averaged more than $100 per barrel for more than three years. That's 4x higher than the 1987-2004 average of $23 per barrel"

I would say that oil is expensive in terms of peoples (and nations) affordability, but extremely cheap in energy terms and usefulness to society. I think it was Nate Hagens who wrote that 1 barrel of oil is equal to 5.7 million BTU's which translates to 1700 kwh of potential work. It takes 11 years for a human to work (digging ditches etc) to generate the labor of one barrel of oil (assuming an average of .6 kwh per work day and 260 working days). I costs us today $100 to substitute $500.000 worth of labor! What a trade! 

Also, to me it looks like (for now) governments (through the central banking system) in most OECD countries are subsidizing peoples lack of oil/energy affordability and industrys rising energy extraction costs (EROEI) through low interest rates and credit creation (who knows how long that can continue...). We have an overshot financial situation, but in energy terms we still have a heck of a lot of energy and it is cheap!      

That's a good statistic to remember.  There's just one correction, though.  I believe your figure for oil does not account for the efficiency of the engine/turbine while your value for humans already accounts for the efficiency of people in turning food into work.  Let's apply an efficiency of 20 to 40% for most engines.  Even then, it's still 2-4 years of human labor per barrel.  At that rate, our labor is worth $25-50 per year!

Yoxa's picture
Yoxa
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I don't understand this bit

I don't understand this (the bolded bit):

Quote:
 Until and unless the global supply of oil gets a heck of a lot cheaper, economic growth will persist and therefore the holders of expensive financial assets that are priced for perfection will be badly disappointed.

Is "persist" the right word here? Am I missing something?

Adam Taggart's picture
Adam Taggart
Status: Peak Prosperity Co-founder (Online)
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Posts: 1878
Good catch

Good catch, Yoxa. It should read "anemic growth" (we've added the missing adjective back in).

Snydeman's picture
Snydeman
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Wait!

But...but...but Janet Yellen is saying that this most recent downturn is due to weather! Thank God! I thought that maybe there was some underlying structural problems, but it was just the cold and snow.

Even though that only affected half the country.

And even though it was still the fourth warmest January on record, globally speaking.

*drinks more cool-aid* But hey, if Yellen is yellin' it, it must be true!

*sighs*

Poet's picture
Poet
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Posts: 1844
Question: Can The Market Also Continue To Rise?

Is it possible that the U.S. market can also continue to rise, similar to how others have risen during hyper-inflationary, money-printing times? At least for quite a while longer?

Here is what I mean: Zimbabwe's Industrial Index during the hyperinflationary period of the last decade:

German stock exchange during Weimar Period:

Poet

davefairtex's picture
davefairtex
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stock market, shaky foundations, and shorting

First of all, anyone expecting hyperinflation out of a debt bubble pop is likely to be disappointed, unless and until the Fed starts tripling the amount of money they print, and then handing that money to the government which (presumably) spends it into the economy.  Neither Zimbabwe nor Germany (nor Argentina) had the world reserve currency, so they couldn't borrow - they had to print.  We can still borrow so, no hyperinflation.

Now why is the market rallying?  Profits.  The various cartels are quite profitable - low cost debt, low wage pressure, overseas production, limited competition via regulation make for a very nice environment.  Add in the widespread skimming and regulatory capture from the financial industry and its a pretty happy picture.  As long as that environment persists, most likely the market will continue to move higher.

While the vast majority of the US people aren't doing so well, the top 10% are actually fine - and the top 10% are responsible for 50% of consumer spending, and they own 81% of the equities.  So the thinking goes, encourage the stock market to go up, and that 50% of consumer spending is locked in, and even growing.  Support the rest with various levels of social spending via deficit financing + money printing, and there's your recipe for success.

Likely, "new home purchases" are by those same top 10%.

Will this continue forever?  From a historical standoint, I think it is likely that the corporate profits won't stay at their all-time-high % of GDP forever.  Likely they will mean-revert.  When that happens, the pins will get knocked from under the market, and down we'll go.

As to when to jump in short - keep an eye out for that magical "lower high".  So far, that hasn't happened.  I thought it might happen this last time, but the rally back was too strong.  I went short, but bailed out - stops keep you from losing too much when you are wrong.  We still might double-top, but I'm going to wait for that lower high.

To short:

1) Option #1: the ETF "SH" - a non-leveraged reverse bet on the S&P 500.  It has some unfortunate counterparty risk (all the TBTF banks are taking the other side of the trade via "swaps" - so if one of those banks fails, that portion of your bet will be defaulted on) but short of a bank meltdown, SH should be great in either an IRA or a regular taxable account.

http://www.proshares.com/funds/sh_daily_holdings.html

So SH is both a bet against the equity market, and a bet FOR the TBTF banks.  Its important to know who is on the hook to pay off your bets.

2) Option #2: go short the "SPY" ETF.  It is holding actual stocks, so you aren't exposed to the TBTFs.  But you can't short in an IRA, if you are so inclined, and you also have to have your trading account set up for short sales.   And you have to pay the dividend.

http://portfolios.morningstar.com/fund/holdings?&t=ARCX:SPY

3) Option #3: sell short one or more ES contract (e-mini futures) which exposes you to $50 per 1 point of SPX change.  Market drops 40 SPX points = $2000 profit.  but...those are too exciting for most people: just one contract gives you a $92,500 exposure to the S&P 500.  One virtue of them is, they're traded 24 hours a day.

4) Option #4: buy puts.  They're insurance - however they decay in value over time, plus their price varies based on how volatile the market is perceived to be.  They can result in a big payoff for a small investment, but most of the time they expire worthless, so you end up losing 100% if you don't bail out quickly when you're wrong.  So unless you understand options, and/or you are dead certain you are right - and you'll be right within a specific timeframe - it is probably best to avoid them.

And remember stops.  Bail out if you're wrong.  There's no shame in being wrong and bailing out - but there IS shame in grimly hanging on watching your losses grow in spite of market signals to the contrary!

colleensc's picture
colleensc
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All this massive printing and hard to see Inflation...

Hyperinflation? Nope. All the major economies have printed so much and nothing, not a tick of Inflation. Do we need more proof than that? For 5 years! We will get a Deflationary event that may rival any before in history. From demographics to mountains of Debt layered on a Mountain of Debt will cause a cascade event that will destroy all in its wake. My quick 2 cents worth. Dollar rises, Gold (?)...

C

KugsCheese's picture
KugsCheese
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colleensc

colleensc wrote:

Hyperinflation? Nope. All the major economies have printed so much and nothing, not a tick of Inflation. Do we need more proof than that? For 5 years! We will get a Deflationary event that may rival any before in history. From demographics to mountains of Debt layered on a Mountain of Debt will cause a cascade event that will destroy all in its wake. My quick 2 cents worth. Dollar rises, Gold (?)...

C

Not a tick of inflation?  Do you shop or go to restaurants or live in a condo?  Serving size smaller and/or price rise.   Quality less.  Certainly in a big crash the speculative assets will nose dive.  Debt obligations (e.g. margin debt) will be defaulted on but the FED will surely jump back in with uber QE.  So I think we can expect initial asset deflation with secondary effects on the economy but then as the future obligations come due the fire hose of money goes into the economy and that will be the massive inflation.   So replace German war obligations with baby boomer retirement obligations and do the math.

Hrunner's picture
Hrunner
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Short only what you can lose

Otherwise, run!

Chris, a very careful and well-argued thesis for the potential for a market correction.

Dave, Colleen, Kugs, all, very good discussion.  I thought I'd throw my hat into the ring.

Chris lays out the case very well for correction (to me = deflation).  Colleen agrees, sees no inflation.  Dave seems to sort of agree, expecting fundamentals to catch up,  Eventually.

Allow me to take the other side of the trade.  

First and foremost- psychology, pride and pathology.  These people, Obama, Geithner, Lew, Yellen, like all statists and central-planners, think they are the smartest people in the room.  They are hard-core Keynesians, worshipping with the high priest Krugman.  They really believe they can eliminate the business cycle.  They really believe if they gather enough data, with supercomputers, with big data and 8 core microprocessors and n-dimensional models, they can run the economy like a thermostat.  Please understand that.  They really believe that.  I believe they are pathological.  

They think they are 'progressive' geniuses, but they are garden-variety tyrants.  Low on intelligence, high on hubris and sociopathy.

Rickards thinks they are dialing in a nuclear reactor, not a household thermostat, and that's a good analogy.  Throw in the fact that these are mere mortals, some with low intelligence and low intellectual curiosity (Obama, Biden), and we're ready to bake the melt-down cake.

Because of the pride and socio-pathy, they will stop at nothing.  Please understand that.  Proven over and over in history.  Hilter and the invasion of Russia.  Mao and the glorious Great Leap Forward.  King George and the Revolutionary War.  Most of the Roman caesars.

Chris, that's one thing you must keep in mind.  You've said it over and over 'if you told me 5 years ago we would be printing a trillion dollars a year and get no inflation, I wouldn't have believed you"

Chris, I think your fundamental analysis is spot-on correct and so well reasoned, but I don't think you really understand the pathology here.  Maybe you do and you don't want to.

I agree with you, the fundamentals are wrong and deteriorating, but that has been happening for 25 years.  Just accelerating now.  

Why can't companies keep up the charade of cheap loans, and some profits (see Dave's analysis), to buy back shares to infinity?  I know it's absurd, but P&G could buy back all but 10 shares and dwindle down to 1 dollar of profit and voila, we maintain a P/E of 10.  Great valuation, eh?

Personally, I think what's coming next is a bailout of the consumer.  It's an evil plot, but it could be tried.  What I mean is that the government could install big tax cuts (Republicans happy, no?), which would almost certainly stimulate consumer spending.  Now the federal deficit will explode (even more than it's doing now), and the bond market runs the risk of running away.  But the Fed has shown the resolve to buy up to 100% of the bond market, so problem solved.

Other variations- Fed buys back 1 trillion of student loans and refinances them at 1% interest (v. 8-9%).  Perhaps not as stimulative as the above across the board tax cut, but pretty good, now that Biff and Tiffany are now out buying new Mustangs and Abercrombie T shirts.  We all know this is madness and immoral, but it will support the stock market, the economy for a while.

I also think the Fed has the resolve, and level of immorality, to buy every market, from copper to stocks, from USTs to Bunds, to JGBs, to MBS.  It's only money and it's effortless to print to get magical aggregate demand.

What's the point of war-gaming these scenarios?  It's just to be very careful with the thesis that "corporate balance sheets are deteriorating, so get ready to short".  I gotta be honest, I don't know what happens next.  Chris, again you make good sense.  But I think I make good sense too.  In that environment, I want out.  If I play, I have to be like Trader Davefairtex, with my finger on the sell button 24 hours a day, and I simply can't live that way.

So like the movie war games, 'the only way to win is not to play'.  Which you may not completely dismiss, Chris.  Buy things I understand without counterparty risk.  Gold, Silver, food, tools to make energy and grow food.  Land (maybe the glorious government won't take it away).

I do think this will all end with a dollar collapse.  Either hyperinflationary, deflationary, whatever.  I'm anxious to read Rickards new book, "The Death of Money", to get his highly informed take on what the endgame will look like.

The world will get tired of the dollar sooner rather than later, and likely replace it with a global reserve currency of gold-backed SDRs,  This is kind of a variation on Rickard's fiat SDRs- but there is good case to be made that the Chinese (and perhaps Russians and other ex-US countries) will like it because 1) they have gold, so they will have wealth and power (God only knows how much gold US actually have, but no doubt JPM will emerge after the reset with a 'surprise' horde), 2) they manufacture things, so they can continue their strong position, and 3) they don't want the downside and burden of shouldering a world reserve currency.

What are you going to do about it US?  Start a war?  China and Russia can certainly take care of themselves, and this would not go well.  I am very worried that the sociopaths in power, will suddenly find themselves very impotent, with an angry population on their hands.  These mental defectives and character midgets have the corruption to tell provable lies to our face day after day, aided by the utterly corrupt main stream media, under what I would characterize as mild to moderate stress.  Let that sink in before you have faith that this will end well.  They will have no problem starting a war.  Because the ends justify the means.  Except, as Chris and recent guests have chronicled, we are in a new era of alternative information, and great mistrust in our leadership.  Well-deserved mistrust, I might add.

So this could end up with a President saying "charge!" and nobody following him.  See Syria. I think this endgame will most likely turn into a domestic mess (highly technical word).  With domestic disruptions, government chaos, red state, blue state constitutional crises.  Boys and girls, we are going to do a lot of improvising in the next few years.

When the world repudiates the dollar, the stock market could still go higher nominally, due to high/ hyper inflation, as will the nominal price of everything else, but as we all know, that's in reality a default and it will be a very, very painful one at that.  Think Great Depression with 2000's civility and values. I have this nagging feeling we will look very much like Argentina.  If we are lucky.  Hopefully, I'm wrong.  I would really like to be.

H

colleensc's picture
colleensc
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Posts: 42
You stated all the reason why Deflation. Food...

well, of course, pretty obvious that isn't going down, maybe. People must eat. How much is what may drive down the cost. Remember, cash is tight so food intake is lessoned and that means demand drops, and that usually means lower prices. Inactivity means less calories and less need for food. Corn to fuel would most likely end, leaving corn to feed livestock cheaper, people, cheaper, other food stuff that relies on corn, cheaper. Supply and demand is a fundamental for all things. 

Everything is fair game. I just don't see where we disagree, except, QE has never worked and 4 Trillion or so later and zip, nothing, a little food inflation and if you cut coupons and shop for sales you can work that out too. Especially if you have a productive summer garden and buy in bulk. Besides, we have a great opportunity to stock up for nearly a year and that is a major benefit. Get prepared is a priceless activity. 

Their tapering because QE hasn't done a thing. Additionally, the Fed will not be able to get on a knee again and beg like the last time, and precious time to save what the Fed has accomplished just may be lost as congress dilly dallies. They will you know.

Now, hand me my last 5 years income tax in a jubilee then we can talk a bit about inflation. This is just a for instance and not something I actually believe will happen.

Personally, I have every reason to believe that 10,000 Baby Boomers a day is going to have its day. China will have its day, Europe and Japan too, and simultaneously. That looks and smells like a mess to me. Way, way worse than 2008 are my thoughts.

From the greatest spending generation ever on the planet to spending very little during retirement will have its impact. I would invest in food and adult baby diapers after the bottom has settled out somewhere below that 666 figure. I'm not kidding either. All drugs and health care will see a boom after the dust settles. Oh, for sure!  78 million drooling people and all that sugar will cause aches and pains, plus the drugs of the 60's will play havoc on the brain. Oh yes, invest in pharmaceuticals.

Who really knows, right? I know that you, myself and no one here have the date and time written down but we do know this correction is near. Massive Deflation is next and it could be a woozy, I know that much.

Not only the Retail investors are a little skittish as talked about in todays podcast but every investor of the last 14 years will hit the exits sure as sh... "watch your mouth". I cannot believe the dash hasn't happened especially since the upside is so minimal and extremely risky.

How long ago was China's policy on one baby per family implemented? 40-50 years ago? Bad planning.

Kug, I eat at home, mortgage is paid off, and yes, I do the grocery shopping. I am aware and appreciate what you said, I am just a little bit more concerned with this coming storm first, and not the sunny skies after.

The part that truly bothers me is when this thing hits, the blame game will begin, and it just may be the Fed who gets slapped. Congress has an approval rating of 10% or less, and they will need to get their house in order or the Elite won't have anyone to do their bidding for them. It may be that congress will have to even throw the rich/elite under the bus to actually save the rich/elite. These will be interesting times and Shelby, Corker and the bunch won't be bamboozled this time or should I say they will be more measured to benefit the politicians and gain the support they need for their own wealths sake. They must survive for their own greedy legacy sake, and to insure that the rich/elite still are protected as well. Besides, if the rich lost half their cash to forced give backs they could still pick everything up on the cheap. Win, win.

C

colleensc's picture
colleensc
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Posts: 42
H, that was interesting...

one question though: When everything starts to fall apart where will wealth go? All over the world it goes to the core, right? On this planet where is the largest core with the ability to secure your funds? It goes where you are comfortable, familiar, right? So, does the dollar really go to zero or does it keep everything together until some other system is put in place without literally throwing gasoline on a ragging inferno. 

Good night H, and incidentally, your thoughts are as good as anyone else. That was covered in todays podcast too. So many differing and diverse opinions bordering on paranoia and reality, must be the top, don't you think? I bet the HFT gets out the door first and is why I am shocked anyone would risk this market. We are not that smart. This is to those as befuddled as I: "This is your brain, this is your brain on drugs, don't do drugs". Stress kills, so be happy.

C

HughK's picture
HughK
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Posts: 386
inflation and deflation

Thanks, Poet, Dave, Colleen, Kugs, and Hrunner, for the discussion on inflation and deflation.  

Here is a link to some questions I have had about that topic in the Q&A thread.  As this is the biggest fiat money experiment in history, there may be a lot of unexpected results.  

I think we're eventually looking at inflation in US dollar terms, as the US tries to solve structural problems with liquidity, and resources continue to be depleted.  The dollar as a reserve currency is already starting to erode as well.  But, more importantly, unless we re-develop a manufacturing base or some other large export sector, then it's just a matter of time until the dollar loses its reserve currency status because declining economic powers always lose reserve currency status.  However, the timing on that is way above my pay grade.

One thing the US has on its side, that might be a negative feedback in terms of USD inflation, is our capacity to export food.  As food prices rise, food exports may increase demand for dollars.  (On the other hand, costs of agricultural inputs and transportation will also rise...)

Gail the Actuary seems to expect more deflation so I'm interested in learning more about this question.

Cheers,

Hugh

kaimu's picture
kaimu
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Posts: 41
SADDAM'S PALACE

Aloha! I am convinced when the House of Hubris collapses that it will be like Saddam's Palace in that nobody can even come close to fathom what market reality in terms of value is when there are so many unknowns. By unknowns I mean everything from hypothecated liabilities to hedge fund shadow bank fraud to derivative toxins. I believe, try as we do, that the central banking cartels are only letting us see the tips of the icebergs. Just go back to 2008, and it was not that long ago and recall that the entire banking system nearly collapsed when we had these venerable 100 year old investment banks like Lehman Bros and Bear Stearns collapse within days out of the blue. We even watched Mad Money expert Kramer place a very pricey public bet on Bear Stearns share price to rise on a Friday and by Monday his bet was a worthless $2 a share. Next thing we know this Goldman Sachs alumni is apologizing to America on Oprah!

The question we must ask ourselves is "what has changed since 2008"? Has bank leverage and high risk diminished? Are derivatives contained or have they been rehypothecated into death spirals waiting to happen? Since 2008 we have watched every major global bank defraud LIBOR, SIBOR, HIBOR and MIBOR in exchange for day old sushi! Let me remind you what was at stake there ...

Many financial institutions, mortgage lenders and credit card agencies set their own rates relative to Libor. At least $350 trillion in derivatives and other financial products are tied to the Libor. - Bankrate.com

Then we have a huge assortment of major mutli-billion dollar disasters like the London Whale and robo this-n-that where major global banks are expending hundreds of billions in legal fees and fines is insane. We read these scandals every day and then assign them to a box in our brain labeled "ho-hum"! We have been anesthetized to trillions in scandals and trillions in spending and trillions in QE and trillions in debt and quadrillions in derivatives. Its Alice in Algorithmland!

So what was oil at when Lehman Bros collapsed and took the entire financial system with it? Lehman Bros filed Chapter 11 on Sept 15, 2008 and crude oil was at $87. While I understand that high crude oil prices have a repressive effect on the overall economy I see that the collapse of Lehman Bros and all the other dominos that were triggered have had a far greater effect on the economy and our government. In fact an effect that we have yet to recover from on an economic basis.

What monopoly has ever been ethical and honest and totally transparent? Right now we have two gigantic all-powerful monopolies that control America. One is the two party political monopoly and the other is the US Fed, unregulated, unaudited and all powerful above Congress. What favorable outcome do you expect for the Middle Class under those circumstances?

Now even Keynes during Bretton Woods said that a USD reserve currency was a huge mistake and he even lobbied for a basket of currencies as a reserve currency,but he lost out. The US Military was Supreme and the world owed us plenty for the Marshal Plan. Keynes was no match for Eisenhower and McArthur! In that photo of the Japanese surrender on the Missouri deck I saw no economists, certainly not a British one! Going even further back Karl Marx feared the worst possible form of capitalism. He feared a bank dominated capitalist system ... like what we have now. While I never really supported all Keynes teachings or liked Marx or Communism it seems each of them had valid ideas, but valid economic and monetary ideas, like great trading strategies, are useless without one important component on your side. T-I-M-I-N-G!!!

My ultimate fear is that one day not even profits will have value ...

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Arthur Robey
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A Small Horizon. (My Nemesis)

You are all wrong.

What we are witnessing is the demise of the very concept of money. My definition of money is that it is a labour debt that society has to the holder of the note. I work for society today, as say a nurse, and society owes me all the labour that went into making up a tank-full of gas.

Let us make this clear- gold is free. Oil is free. Expenses start when you mine it.

So what happens when products have less and less labour content? (Labour -> 0). The death of money.

Confused? Of cause you are. Why would you not be? Labour has always been a big component of goods and services. But we are not talking about the past.

I was discussing this very topic with Young Blood this morning. I said that the Port could be automated. He said I was wrong because few ports were automated. His error (which I did not have the energy to debate) was to fail to complete his sentence. "Few Ports are automated Now".)

The poor dear has a very small horizon. Which brings me to my final point- don't expect a resolution for at least 40 years. These things take time to work themselves out.

Did I mention the Limits to Growth Report? That thing makes a mockery of everything I have said. It is my Nemesis.

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colleensc
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"You are all wrong"...?

Automated or robotics imply strongly a Deflationary future (my thesis). My gosh yes, and with every year you subtract more and more labor and add it to the list of all the not counted laborers. This is not inflationary are my thoughts. The "status quo" is on the long (?) descent.

Without any doubts if you impede labor from spending cash (no jobs) into the economy is a failed policy. Yet, production or rather productivity is still based in greed so automations growth will be rapid and most certainly Deflationary. An aside, automation will have the effect of removing cars from the road as no jobs means even less demand for fuels or transportation.

I so agree that demand for money will wane into a future more automated.

I am also looking at  debt here, and world wide, debt needs to be paid and growth must happen, and neither will happen. So by default (literally) the destruction of digits and bits will occur and lots of digits and bits. Further, there really is not that much paper in the system is there? Nope.

I still feel that we are creatures of habit and do not do well with change. So the dollar will rise and the dollar as world currency will be a long time coming before being replaced. When we do lose the reserve currency status it will be as orderly as possible. Just my thoughts, don't know for sure.

OT: I stated earlier that corn would probably be eliminated as fuel because its use as food will be crucial going forward. Not to mention that there is a price where it is not profitable to process corn for fuel.

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colleensc
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Kug,

I want to do the math but I have no clue what will be negotiated out of entitlements. The world is going to change here and tough choices will be made so any data I try now will just be futile in helping me/us draw conclusions.

Thank you everyone, this has been very stimulating and so needed as talking to myself is tough sometimes.

C

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Re: A Small Horizon. (My Nemesis)

After every currency crash in history it didn't take long for the economic forces to start on the currency path once again: precious metals banked then paper written on those assets and traded.  Then rehypothecated (i.e. fractional reserve banking), then fiat paper enforced by the gun.  Humans will never have a stable money because the psychopaths always rise to the top and institute policies that favor them (think politicians).

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The Lighter Side of Peak Oil- if that's possible

Seems like some Australians have heard the peak oil message

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SPX breakout

And just to confound my expectations - we have an SPX breakout this morning.  Best not to stand in the path of the oncoming train.  Move higher will be fueled by short covering...

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Colleen, Jedi Mind Tricks

Hi Colleen,

Good discussion, and maybe I can expand a bit more.

To me it all boils down to a matter of what is valuable, i.e. what is wealth?

In short, the current paradigm (to be clear, I'm not invoking a shadowy group, but rather the corrupt group of government officials and corporate finance cartels who are openly maintaining a system of currency that transfers wealth and favors a select few at the expense of many, and no Hugh, this is not capitalism, it is thuggery) is playing a Jedi mind trick on the masses.

They are convincing a large number of folks to exchange true wealth for fake wealth, maybe not value-less wealth, but exchange their hard-earned labor at a big sale price- should we pay police $35K a year and Wall Street commodities traders $2.5 million a year?  Who is providing valuable service and who is not?  Who is creating true wealth, the farmer or the Hedge fund manager?

Yes, we need a few bankers, it can be a noble and helpful profession.  We don't need 40% of our economy involving moving unbacked "dollars" around in a circular loop.

The alternative is don't let the parasites play Jedi mind tricks.  Yes you have to live in the present fiat currency system, and you will get paid in this fiat money, but you don't have to exchange your hard work and value creation for worthless dollars or anything that is mere paper and denominated in dollars.

The Arch Druid, John Micheal Greer, who I believe was a guest of Chris' a few moons ago, gave very cogent descriptions of the different types of value:

"I’m referring, of course, to the cavalier way in which the concept of money was treated in last week’s post. In terms of mainstream economics, it’s nonsense to talk about wealth or value without discussing how those things are reflected in some form of pricing mechanism – that is, how they’re measured in money. The widely held belief that the wealth produced by nature is valueless until it’s transformed into something else by human labor, in fact, bases itself largely on the fact that nobody has to pay the nonhuman world for that wealth, and so figuring out its price poses a major challenge – not insoluble, but significant enough that few economists have been willing to take it up.



Since Adam Smith launched modern economics in 1776 with The Wealth of Nations, unresolved disputes over the nature of money have formed a fault line running straight through the heartland of economic thought. Some economists – these days, the majority – treat wealth and money as interchangeable concepts. Others – the minority nowadays – draw a sharp distinction between them. Those who accept the identity of money and wealth seem most often to think of the rules governing money as something akin to laws of nature, untainted by human purposes and agendas; those who draw a distinction between them tend to see those rules as social constructs that benefit some people at the expense of others.



Longtime readers of The Archdruid Report will probably have little trouble guessing where along this spectrum of debate I can be found. It’s simple cultural chauvinism to insist that the particular, and peculiar, form of money used in contemporary Western societies is the only one that matters. Over the span of human history, money is a fairly late invention, and until very recently it played only a small part in the lives of most people even in the societies that used it; until the eighteenth century, even in the Western world, a majority of all goods and services were produced and exchanged within the household economy, or in local customary economies that made no use of money, and only the well off could expect to handle money on a daily basis."

[Nature, Wealth, and Money, The Archdruid Report,  http://thearchdruidreport.blogspot.com/2009/07/nature-wealth-and-money.html]

Chris, and others, have laid out in this blog entry a very clear way some strategies on how to make fiat currency with shorting, trading stops and strategies, and it's all good.  Good for Chris, and he is a very sharp guy who clearly wants to make fiat dollars out of the current paradigm.

All I am saying is that, whether you follow Chris' excellent advice and try to make extra fiat dollars, or take a more risk-averse approach where you stay out of dollar-denominated markets, IMHO, you better exchange those dollars quickly for things of use value and real value like gold, land, tools, solar panels, skills education, etc. 

I am concerned that sooner rather than later, those dollars will no longer have any exchange value as they do now, as they go the way of all unbacked fiat currencies.

Thanks for an interesting discussion,

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davefairtex
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is the USD an "unbacked fiat currency"?

I wrestled with what "backing" for a currency is for a long time.  Certainly in the old days, 35 dollars = one ounce of gold.  The currency had gold backing.  This was easy to understand.

But it turns out, you don't really need any explicit backing for a currency to be valuable.  (The USD is an "proof by existence" of this statement).  Currency is valuable at a core level because of the things you can buy with it, assuming an artificial scarcity mechanism exists to limit currency creation.

Thought Experiment:

If you live in the US, and you have a $100, it has value because you can go to the corner store and buy a very nice bottle of wine with it.

But now let's move you to Europe.  You have that same $100 bill.  It still has value - through an extended trade process, you could get that same bottle of wine, minus transportation costs.

Then imagine that, overnight, all the $100 bills were suddenly no longer accepted as legal tender within the borders of the US.  Most likely, regardless of where you are, that $100 bill would not be able to get you any wine at all.

So at its core, I claim that your $100 bill currently has value because people know it can eventually be exchanged for valuable stuff in the US.

All the discussions about "unbacked fiat currency" misses this important subtety.  In my opinion, we don't really have a fiat currency.  We have an economy/stuff-backed currency.  Unlike the old days, the currency isn't backed by a fixed amount of physical amount of gold, the sum total of all currency in existence is backed by the entire collection of wealth within the borders of the United States.  As that wealth varies, or as the supply of currency varies, so does the perceived value of the USD.  This yields the equation:

USD Value = Total US Wealth / Total Credit & Currency

This says if Total Wealth increases while Currency remains fixed, USD has more perceived value.  If Currency increases while Total Wealth remains largely unchanged, USD has less perceived value.

That's my (simplified) theory anyway.  There's the safe-haven effects which distort things, and changes in confidence, perceptions, and expectations...but at its core, I think this equation tends to dominate over the long haul.

Gold-backing a currency is a useful mechanism that limits the creation of money & credit.  However, any other system which also limited the creation of money and credit would work equally well.  Ultimately, every currency is only backed by the stuff you can buy with it - be it a gold-backed currency, or our current stuff-backed USD.

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The money versus credit debate.

Surely all fiat currencies are unbacked (forced upon us through bankruptcy, and human resources are now the surety for these credit loans through government bonds, ie bondage into slavery or the birth certificate.

Bankers credit in the form of interest bearing promissory notes ie debt. Since all currency in circulation is loaned into existence, then any notes that we have in our possession count as someone else debt.

We don't buy anything with these IOUs, we can only discharge our liabilities (the west is bankrupt so there is no money only credit) in return for goods or services that come with no property rights, as our ability to pay was removed when the money (gold and silver) disappeared.

Just my tuppence worth.

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Bankers Slave
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The money versus credit debate.

Surely all fiat currencies are unbacked (forced upon us through bankruptcy, and human resources are now the surety for these credit loans through government bonds, ie bondage into slavery or the birth certificate.

Bankers credit in the form of interest bearing promissory notes ie debt. Since all currency in circulation is loaned into existence, then any notes that we have in our possession count as someone else debt.

We don't buy anything with these IOUs, we can only discharge our liabilities (the west is bankrupt so there is no money only credit) in return for goods or services that come with no property rights, as our ability to pay was removed when the money (gold and silver) disappeared.

Just my tuppence worth.

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we don't buy anything?

Surely all fiat currencies are unbacked (forced upon us through bankruptcy, and human resources are now the surety for these credit loans through government bonds, ie bondage into slavery or the birth certificate.

Surely I have no idea what you're talking about.

We don't buy anything with these IOUs, we can only discharge our liabilities (the west is bankrupt so there is no money only credit) in return for goods or services that come with no property rights, as our ability to pay was removed when the money (gold and silver) disappeared.

Well speak for yourself.  I buy stuff all the time with these "IOUs".  And if you have any left over you don't want, please send them to me.  I find them pretty useful.

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Doug
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Its all fiat

Thanks for this post.  Its a question I've wrestled with myself.  Seems to me, no matter how you slice it, all currency is fiat in that it is worth precisely what it will buy.  And, that is dependent on the whims of people in the final analysis.

The value of currency is, of course, measured in different ways.  The dxy places the value of the dollar according to a basket of other currencies, themselves fiat.

http://en.wikipedia.org/wiki/U.S._Dollar_Index

Quote:

I don't find that very reassuring.  I have to disagree with your formula for valuing the usd because there doesn't seem to be any correlation between our cumulative wealth and what the usd will buy.  For instance, yesterday the dxy fell by .63%.

http://www.marketwatch.com/investing/index/dxy

Did our national wealth suddenly increase or decrease by .63%?  I don't think so.  We can theoretically just buy less or more of it with a usd.  In fact, though, we can probably buy the same stuff we could yesterday.

Next, the Fed is creating usds/debt at a pace of $65B a month currently, down from $85B a month for the last few years.  Has all of that "printing" changed the value of the dollar much?  Measured by the dxy it is right about where it was in mid 2009 when Bernanke was cranking up the presses.  Of course there have been fluctuations in between, but has any of that reflected the real value of the usd?  I doubt it.

The same can be said for the value of gold.  It was valued at $35/ounce for 30 some years until 1971.  It is now $1,300 and something and has fluctuated wildly in the interim.  Did any of that have anything to do with real value?  How about bitcoin?

http://bitcoincharts.com/charts/bitstampUSD#tgSzm1g10zm2g25zv

Link to this chart · Larger chart

Use this link to bookmark or share this chart. Select "Custom Time" to create a permanent link to a specific date.

chart.png?width=940.4000000000001&m=bits

Does that look stable?

Quote:
Ultimately, every currency is only backed by the stuff you can buy with it - be it a gold-backed currency, or our current stuff-backed USD.

Ultimately, I think that is as much as can be said for the value of any currency at any time.

Thanks for the conversation.

Doug

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This discussion has me dialed in...

I do appreciate H, Kug's and Dave's input here because I understand that what you are saying is sincere through reflection and hard work. Not to denigrate anyone else, I just felt comfortable when reading your words.

I internalize only after processing what I see, the daily pulse of  transactions and allow a good bit of time to pass before I have my instinctive trends (somewhat formalized). The instinctive part is critical for me as I have seen over my lifetime trends that just repeat, and repeat again. It is why the recent podcast about how humans are just hot wired for bubbles made so much sense to me. This requires too that I read a great deal and apply it in the world I live. It is why (for now) all I can see is a battered system that has been on the brink of calamity only to be held up by confidence, hope, dollars, sometimes imaginary dollars, and imaginary dollars falls into the rhelm of the baffle them with BS. Still, baffle them with BS has value, right? So much of that goes on without a dollar of printing. I/we have to wade through that too.  Markets move on whether a word is an adverb or adjective.

The dollars I speak of is whatever dollar you use.  

I look at the fundamentals and historical data. I do this because I do believe we are hot wired and some things are just going to happen, and is exposed at some point to reality, and that's where history can be revisited and conclusions drawn. It is at this point in the data stream that the real meets the unreal, gets washed and battered before everything that matters is left standing. Supply and Demand, the strongest fundamental of them all and will always be most important. Where the world comes to grip with the 100 year cycle, give or take a few years is yet to be determined still, during this 100 years cycle. "Is this time Different" (NOPE).

I am really into the demographics part of the equation because older people do things a certain way. I see this, relate to it, and can easily understand the truth just by knowing how subsets of the human economy move from independence to dependence.

If we just look at the Baby Boomers we see approximately 78.9 million people at various stages of this 20 year grouping and will easily tell what will most likely be what they will demand at certain stages. Same with the new born to 20 crowd (Mr. Dent who appears on the front page here at PP does a wonderful job of setting this concept up for a quick catch up if you haven't followed demographic trends before).

Having already lived through 3 aging cycles I can relate very clearly with each subset. I raised the new born to 20 so understand that. Lived through and stayed abreast of the second cycle through my kids. Just arrived at the end of the next grouping, the 40 to 60 and have a pretty good idea of what I will be doing for the next 20 years with my peers. Really valuable to me is where we all came from, what we did and our experiences. Just critiquing myself I can tell you I will have to pay the piper right along with those I made mischief with. The added bonus is I have grand children so they are my love factor, important for my continued life cycle as they relieve stress which everyone at my age understands is a huge component to whether I need to save more cash for an added 10 years more of life because of the joy they bring me/us.

Now tying all this back to the economy and what money means to me. I  believe that money, be it gold, dollars or anything of value is backed by Confidence and Hope. It's what drives my desires to wait or spend on any particular item. This could be an exchange in barter, dollars or any item of value that I have that someone else wants, and visa versus (sp). It is the value I put on that item and the "I must have that now factor" which gets me to negotiate with my stores of wealth. The decision to use my wealth is my confidence in the system. Is the economy going to correct then I will wait and buy cheaper. Is the economy healthy and if so it is only going to get more expensive as more dollars chase after goods or services, so buy now. Confidence and Hope then, very important to me, and has value also, and is why I do all of this in the first place. My labors for understanding (perceived (?). 

I am not married to any values per se but can readily see that I/we are conditioned and have no choice really to use what the system has engineered for the ease of exchange which is dollar bills (pick your currency, doesn't matter). Now, I would gladly pay you in gold if you have something I want but I'll pay you in dollars and you'll have to go get the gold yourself because it is such a hassle to do on my own. I would have to measure up the agreed upon sum and now I see difficulty If this is unacceptable to you then I pass on the agreement to purchase. I would do this figuring I can get a less hassled exchange with someone else. Some things I could recognize as too important to negotiate though and would do as asked. My loved ones life, extremes like this would move me to action. 

Dollars has garnered a tremendous amount of confidence and is where most everyone feels safe.

The dollar (any) has intrinsic value too, Hope. It is nationalistic, represents a long history of struggles and gain and here we are, we made it through. Whew!

It is generational and is passed down. A great gifting that everyone appreciates. Your legacy, and is free to the gifted person. It is the essence of a Man or Woman's life of hard work and accomplishment. The measuring stick. Things more important are character, sound advice, the gifting of love to those you love and being kind and concerned are values greater than wealth but, still, free cash is always exciting. Besides, you are dead so being a good person is passed along down through your kids (hopefully). Cash though is for the living and that usually has a terrific side effect. 

Take this away and unbridled fear is soon to follow. The fabric frays and streets are filled with the discontented fighting for ideals. It is why I believe that as Reserve Currency and its effect in every corner of the world will take a tremendous amount of effort and negotiation to change this system. This just feels like a long way off. Given that just about everyone believes the Euro is a flawed currency and was doomed to fail from the beginning then I believe the world will still take up the dollar to protect and keep the engines at least sputtering along until change is made, and my strongest reason is that people are adverse to change.

I read all the stories on China and the vast gold reserves. I see this as potentially a new reserve currency. What I don't see is when? We can all guess and make prediction but so much time and negotiation will need to be done amicably before that is dropped into the worlds lap. Why? So much Debt and the world is really very insecure, and will be for many years that to drop that into the world would cause undo hardships that could have at least been measured and slowly implemented. It will be a Great Depression, world wide, before that emergency measure is enacted are just a huge guess on my part.

Bottom line, everything is a medium of exchange. Its just that the dollar as it sits in the world today is most familiar, most respected, most liquid, and to my knowledge has always given me fair value with every dollar spent. I am sure this is because "I want that now", and was able to negotiate its price and took it home. 99.99999% of the time using US dollar bills, or checks, or debit card.

Finally, the only issue of value to me right now is DEBT. World wide, and is why every Central Banker is throwing everything at the system now. Simply, we have too much, and this means default, and default is destructive by definition, and Deflationary by definition. So it isn't really a stretch to think that all the Central Banks efforts since 2008 has only led to more Debt instead of letting the great unwind happen. It will unwind, no doubts here, To give some added gasoline to the fire, China went from 9 Trillion to 24 Trillion in added debt in just the last 5 years (since 2008). Based on collateral. If this collateral is in any way impaired (it most certainly is: Housing (?) then 2008 will be a do over at some point going forward and may result in lower lows but it will NOT go to higher highs, that is something I will bet on in the not to distant future and I will do this with US dollars. Well, it very well could go to higher highs but the risk to the upside for minimal gains that will be lost in the great unwind, and quick as the HFT sell isn't worth it. IMHO

Note: I am aware of the flip sides to any thought experiment so I am trying to be real for the next 10 year time frame with myself, only myself, and anticipate that I will need to be flexible. Believe me when I say this that since I have signed up here at PP you people have helped me shape or refine many of my thoughts. As so many have at other Blog sites. Zerohedge is invaluable for instance. I will concede I have no idea what the future holds and are not looking to upset anyone's own thought process. I respect all of your determinations. Just to even attempt to make any guess at the future is heroic. I do respect the efforts it takes to make determination and then live ones own life accordingly. This isn't a game, but I take to it, and is a bunch of guesses and I wish everyone success in just feeding and taking care of loved ones. Succeed at this and you have all the wealth in the world. 

C

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markcle
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US Markets goin much higher

Why? People with dough got no where else to go!

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exomatosis
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Option 5 - Don't Play This Game

davefairtex wrote:

1) Option #1: the ETF "SH" - a non-leveraged reverse bet on the S&P 500.  It has some unfortunate counterparty risk (all the TBTF banks are taking the other side of the trade via "swaps" - so if one of those banks fails, that portion of your bet will be defaulted on) but short of a bank meltdown, SH should be great in either an IRA or a regular taxable account.

http://www.proshares.com/funds/sh_daily_holdings.html

So SH is both a bet against the equity market, and a bet FOR the TBTF banks.  Its important to know who is on the hook to pay off your bets.

2) Option #2: go short the "SPY" ETF.  It is holding actual stocks, so you aren't exposed to the TBTFs.  But you can't short in an IRA, if you are so inclined, and you also have to have your trading account set up for short sales.   And you have to pay the dividend.

http://portfolios.morningstar.com/fund/holdings?&t=ARCX:SPY

3) Option #3: sell short one or more ES contract (e-mini futures) which exposes you to $50 per 1 point of SPX change.  Market drops 40 SPX points = $2000 profit.  but...those are too exciting for most people: just one contract gives you a $92,500 exposure to the S&P 500.  One virtue of them is, they're traded 24 hours a day.

4) Option #4: buy puts.  They're insurance - however they decay in value over time, plus their price varies based on how volatile the market is perceived to be.  They can result in a big payoff for a small investment, but most of the time they expire worthless, so you end up losing 100% if you don't bail out quickly when you're wrong.  So unless you understand options, and/or you are dead certain you are right - and you'll be right within a specific timeframe - it is probably best to avoid them.

Option 5 - Don't play this game
 
It simply amazes me that intelligent people fall prey to this ploy again and again.  Haven't you all seen the evidence, again and again, that this is a sucker's game?  Vampires need blood.  Why do you want the vampires to thrive by giving them more blood?  Why not deprive them of your blood?  If you're a retail investor, stay out.  If you're dumb money, stay out.  You will never effectively compete against the big boys, especially in these times.  Unless you have inside information or have some level of control or influence, the odds are stacked against you.  Like a casino though, those who (temporarily) win will crow about their winning, drawing in those who lose.  Ignore the squawking crows who are, not infrequently, simply screen staring dweebs scrounging for scraps among the financial detritus.  The best suggestion is STAY OUT OF THE CASINO!
 
Open a business. Open two businesses.  Open three businesses.  And really think about those businesses.  When another thread here mentioned business possibilities or bemoaned the lack of business opportunities, I was struck by the lack of creativity that was displayed.  There are ALWAYS business opportunities, whether an economy is growing, in steady state, or collapsing.  The point is to be sensitive enough, quick enough, agile enough, and responsive enough to capitalize (there's that dirty word, so some) upon the opportunities presented and then be ready to move on.  
 
Why own a share of a business that you have no control over?  Why not own 100% of a business that you control, that you make or break?  But for pete's sake, don't open some dimwit business that doesn't have a snowball's chance in hell of surviving just because you happen to like what that business is about.  I've seen that happen all too often.  Go into it with open eyes and a discerning, thinking, creative mind.  Hard work alone doesn't cut it but hard work you will do if you want to succeed.
 
Am I going to tell you the business ideas I've personally implemented?  No.  Why should I?  I did that at one time in the past but never again for a variety of reasons.  Does that seem somehow "not nice"?  Well think about how many of you have regularly read Dave Fairtex's information or Tyler Durden's information and yet you know nothing about them.  Most of the time the information is very good.  But sometimes it isn't.  Have you recognized the difference?  Do you realize the advantages that can be obtained when the occasional bit of inaccurate information is passed off as accurate and the mass recipients of it act accordingly.   
 
Here's a hint about one strategy though.  You will be copied after being successful but by that time you will already be moving on to the next idea.  Americans in particular love newness.  They will go after almost anything that is new ... for a while.  Until they get bored and move on to their next novelty/attention fix.  Build the business quickly, building on the newness momentum and then sell it at its peak.  Hard to do, just like selling a stock when it's skyrocketing is hard to do.  But long standing, stable, single focus businesses will become harder and harder to profitably sustain.  Flexibility is the key.  Proactive flexibility will serve you better than ex post facto, reactive resilience.
 
 
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davefairtex
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play or don't play - and free will

If you looked at the genesis of the thread it wasn't, "SHOULD I be shorting the market" it was "HOW do I short the market."  Given that - you think I should have answered, "I know better than you - don't play!" and its corollary answer "I'm not going to tell you!"

I had (basically) two alternatives.

Option #1: Don't tell the original poster how to play, don't educate anyone, and say "oh my no, you couldn't possibly do well, I know what's better for you, just stay out of the game" and keep them in the dark.

Option #2: Educate and enable someone, giving them some simple rules that if followed will keep them out of 90% of the trouble they will run into, and then hope for the best.

Given this is a site whose main philosophies are "education", "understanding the world through data" right alongside "trust yourself" ... my instinct was to provide the information rather than holding it back "for their own protection."

Trading is hard, mostly because of human emotion: the desire to be right, the fear of missing out, the greed that springs to life when you see everyone else making easy money.  Its the 2003-2007 housing bubble AND 2008-2009 crash, but in real time played out over hours and days rather than years.

The thing is, mostly I think you are right.  People are generally better off doing stuff they understand, that is close to home, over which they can exercise a fair degree of control.  But who am I to interfere with someone else's free will by keeping information from them?

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davefairtex wrote: If you

davefairtex wrote:

If you looked at the genesis of the thread it wasn't, "SHOULD I be shorting the market" it was "HOW do I short the market."  Given that - you think I should have answered, "I know better than you - don't play!" and its corollary answer "I'm not going to tell you!"

I had (basically) two alternatives.

Option #1: Don't tell the original poster how to play, don't educate anyone, and say "oh my no, you couldn't possibly do well, I know what's better for you, just stay out of the game" and keep them in the dark.

Option #2: Educate and enable someone, giving them some simple rules that if followed will keep them out of 90% of the trouble they will run into, and then hope for the best.

Given this is a site whose main philosophies are "education", "understanding the world through data" right alongside "trust yourself" ... my instinct was to provide the information rather than holding it back "for their own protection."

Trading is hard, mostly because of human emotion: the desire to be right, the fear of missing out, the greed that springs to life when you see everyone else making easy money.  Its the 2003-2007 housing bubble AND 2008-2009 crash, but in real time played out over hours and days rather than years.

The thing is, mostly I think you are right.  People are generally better off doing stuff they understand, that is close to home, over which they can exercise a fair degree of control.  But who am I to interfere with someone else's free will by keeping information from them?

Dave,

So, going along with your line of reasoning, if people asked you the best way of killing themselves, you would educate them, give them data, and tell them to trust themselves, since they're probably going to do it anyway and you feel morally obligated to inform them and not interfere with their free will? 

Because that's what most of them will do ... kill themselves, financially.

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Careful, Exomatosis

Dave is handling himself here exactly as he should.

PeakProsperity.com is a place for respectful idea exchange on topics relating to the Three Es (please familiarize yourself with our civility guidelines). We're all trying to gather facts and perspective before making our own individual minds about what to do.

Bullying people into silence -- through strawman hyperboles or otherwise -- is not welcome here.

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exomatosis: false analogy

So, going along with your line of reasoning, if people asked you the best way of killing themselves, you would educate them, give them data, and tell them to trust themselves, since they're probably going to do it anyway and you feel morally obligated to inform them and not interfere with their free will?

So equating shorting the stock market with death is a false analogy.

You can come back from a trade loss.  I know, I have done exactly that.  What's more, you can actually learn from the experience, if you really want to.  I have done that also.  Experience is a great teacher, and often its the only teacher that some people will listen to.  My intent is to arm a curious person with information, in the hopes that the loss will happen less often, and the learning will be more rapid.

On the other hand, death happens exactly once, and from that state, there is no coming back - at least for the vast majority of us.  And since there is no coming back, there is no learning that can occur, at least no learning that can apply to the current lifetime.

So in answer to your (rhetorical) question, because the two things are strikingly different - chalk and cheese as it were - I would treat them differently.

At this rate, I'm guessing a reference to Hitler is next.

http://en.wikipedia.org/wiki/Godwin's_law

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But you do

understand that you and me are the collateral for all the IOUs in circulation. Forced by coercion to work for and to pay our way in life with valueless paper of which the main purpose is the theft of our toil via taxation and inflation. Its created, owned by(they made it and it has their name on it, not your name or mine) and loan into existence by the onerous banking interests.  

Another reason why we cannot buy anything is because our parents were unwitting participants that gave up our birthright to own property when they signed our birth certificates. The public owns all that we have, the only thing that we do own is...nothing. This is another reason why we cannot buy anything, as that would indicate a property right, which as I have already stated we no longer have.

Communism anyone?

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Whoa partner

Adam Taggart wrote:

Dave is handling himself here exactly as he should.

PeakProsperity.com is a place for respectful idea exchange on topics relating to the Three Es (please familiarize yourself with our civility guidelines). We're all trying to gather facts and perspective before making our own individual minds about what to do.

Bullying people into silence -- through strawman hyperboles or otherwise -- is not welcome here.

No one's bullying anyone here.  I made a simple analogy.  Sounds like your finger is a little quick on a very sensitive accusatory trigger.  Actually, you're doing to me exactly what you're falsely accusing me of.  Is censorship the modus operandi here?

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collateral

...understand that you and me are the collateral for all the IOUs in circulation. Forced by coercion to work for and to pay our way in life with valueless paper of which the main purpose is the theft of our toil via taxation and inflation. Its created, owned by(they made it and it has their name on it, not your name or mine) and loan into existence by the onerous banking interests.

Well you should just speak for yourself.

I have no debt, I can live where I like, I'm not the collateral for anything, I buy stuff when and where I like using dollars, and it all seems to work great.  If you have a different experience with reality than I do - well it sounds unpleasant for you.

Sometimes life is what you make of it.

And if you have any of that valueless paper lying around, please send it to me.  I'll find something to do with it.  [I wish there were some real true believers out there who had so much faith in their belief systems that they actually sent me their "valueless dollars" just to prove me wrong...so far, no luck]

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Metaphorical vs. literal analogy, sans Hitler

davefairtex wrote:

So, going along with your line of reasoning, if people asked you the best way of killing themselves, you would educate them, give them data, and tell them to trust themselves, since they're probably going to do it anyway and you feel morally obligated to inform them and not interfere with their free will?

So equating shorting the stock market with death is a false analogy.

You can come back from a trade loss.  I know, I have done exactly that.  What's more, you can actually learn from the experience, if you really want to.  I have done that also.  Experience is a great teacher, and often its the only teacher that some people will listen to.  My intent is to arm a curious person with information, in the hopes that the loss will happen less often, and the learning will be more rapid.

On the other hand, death happens exactly once, and from that state, there is no coming back - at least for the vast majority of us.  And since there is no coming back, there is no learning that can occur, at least no learning that can apply to the current lifetime.

So in answer to your (rhetorical) question, because the two things are strikingly different - chalk and cheese as it were - I would treat them differently.

At this rate, I'm guessing a reference to Hitler is next.

http://en.wikipedia.org/wiki/Godwin's_law

I don't agree that it's a false analogy.  It's a metaphorical analogy.  When someone says, "You're killing me", it's generally recognized to be a figurative rather than a literal statement.  And I think I posed a valid question.  With regards to the Hitler reference, may I point out that you brought that subject up, not me.

But with due respect and consideration of your statement, forgive me for any error in the perceived accuracy of my analogy and allow me to restate, hopefully with more clarity and precision that unequivocally makes my point, what I had hoped to express. 

"Why would you not attempt to discourage someone from shorting this market when, in all likelihood, if they need your advice to understand how to short the market, they will most likely come out a financial loser when attempting to do so?"

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davefairtex
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that's better

"Why would you not attempt to discourage someone from shorting this market when, in all likelihood, if they need your advice to understand how to short the market, they will most likely come out a financial loser when attempting to do so?"

Your question is indeed clear and precise and everything I could want.  I say well done!

Now then, to your question.

I presumed that the person asking the question fits the general demographic of PP - relatively well educated, older, with money, is data driven, and in this particular case, is interested in gaining understanding about market mechanisms.  What's more, this was in the context of an article that talks about shorting the market, when to short, etc.  In that context, supplementing that article with HOW to short just seemed to be a logical next step, especially when someone specifically asked the question.

So there you go.  Fantastic to have a rational discussion - intelligent people can differ on how they respond - we agree on the perils of neophytes shorting more than we disagree - but my self-appointed role isn't to baby-sit, it is to educate, and that's especially true when someone specifically asks about HOW.

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I am my brother's keeper

Fair enough.  Your have your way and I have mine.  For me, educating someone involves a level of responsibility on my part for indeed being my brother's keeper.  I would have included a caveat.  Hopefully, those reading this thread will now be so informed. 

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Nope, you've got the wrong site

exomatosis wrote:

Fair enough.  Your have your way and I have mine.  For me, educating someone involves a level of responsibility on my part for indeed being my brother's keeper.  I would have included a caveat.  Hopefully, those reading this thread will now be so informed. 

Exo - your arguing style has been evasive and slippery and out of alignment with my general principles here.

The most important of our core values is that we are each responsible for our own actions and the decisions we make.

To say that providing educational market instruction is the same as providing someone with suicide instructions is over the top, emotional and ungrounded.

You can try to weasel out of that by calling it metaphorical, but you drew a direct comparison which, by definition, makes it literal not metaphorical.

Dave is providing market instruction, and I provided my own regarding market shorting in response to a question made about Part II.  And I might provide my views on going long the market, which I have done many times for being long gold and silver, as well as farmland and other investments such as solar thermal heaters.

I take it from your emotional response, which I categorize under the slightly pompous heading of I can handle the information you provided but I am worried about other people, that you think other people need protecting.  Presumably from themselves.

We've had many people use the same line of reasoning before and it really does not play very well here.  It's condescending and communicates a belief about one's intellectual superiority over and above other's.  

Those seeking gurus and and directive guidance while foisting the responsibility for their own decisions onto those gurus and providers of information are not the sorts we are attracting here, nor do they tend to stick around for long.

If you want to worry about yourself and take personal responsibility for your own actions, fine.  If you want to provide an education about why you consider market shorting to be hazardous and likely to me a money losing proposition for people.  Fine.

But you cannot take Dave to task in the way you did, or for the reasons you did, without running into club rules and the other long-seated patrons.  And, by the way, crying 'censorship!' doesn't play either.  We are not a government.  This is a virtual club, set up and run by people who expect the same civility in our discourse that would happen in a private gathering around a dinner table. 

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Social Contracts are Relationships

Nice to see the debate is still going. What I haven't seen in this thread is the notion that currency is really just a relationship, although Dave has alluded to it through the backing of stuff. A social contract really is just a collective relationship or agreement. Whether it be fiat, backed by gold, tulips, or otherwise, currency is merely an agreed upon means of exchange. Agreement implies relationship. Relationships are messy because they are a biological/human in nature, and nature is messy. 

What's going on with bitcoin is a prime example of the fallacy of models. Those that professed bitcoin couldn't be corrupted, or was out of reach of the government, etc. to me just ignored the relationship part of social science models. Models are based on past relationships, but try to predict future relationships and events.(call it behavior if you like, but then ask yourself behavior toward what?) Unfortunately, relationships are unpredictable and, well, messy. Even our natural laws are not necessarily laws, they are founded on the relationships of the universe...those may change.

Examotosis, you looking out for your brother is admirable, and opting out of the stock market isn't necessarily bad advice. But can we really be separate from the system? Can we really separate ourselves from any of this? The stock market will effect our lives one way or another. Even the person who "lives off the grid" still has to pay her property tax and most likely has to get in her car and drive down a public road. Taxes are just another social contract or relationship. Some see it as coerced wealth extraction, some see it as their societal responsibility. Both are valid and may depend more on your personality than reality. Even those that point the finger at the corrupt government, corruption can only exist within the relationship between it and the private sector/constituents.

Where you put your attention matters! I decided a few months back to invest myself into my relationships fully. I try not to complain but act now...this is the main reason I don't have much time to post anymore. I'm entering into my town politics again (running for select board) to embrace my community and help in anyway I can. I'm trying to implement the changes I feel are necessary to deal with what may be a breakdown in the collective relationships in the future. Even climate change is our relationship and connection with the world.

Build strong healthy relationships with the world around you and you will be fine despite what happens. Even if you're financially wiped out or even killed, building healthy meaningful relationships will be what matters. Currency will take whatever shape or form of the new relationship that is built after the old relationship dies.

Peace!

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Pot calling the kettle black

Chris,

Actually your response is far more emotional than anything that I wrote.  Labeling anything you're uncomfortable with as emotional seems to be a common out for you.  That very response is emotional as well.  There's a bit of the ad hominem as well in your post.  I'll leave it at that.

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Arthur Robey
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Egos Gentlemen.

Watch the Egos. Or I am going to prescribe DMT.

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Not emotional...

exomatosis wrote:

Chris,

Actually your response is far more emotional than anything that I wrote.  Labeling anything you're uncomfortable with as emotional seems to be a common out for you.  That very response is emotional as well.  There's a bit of the ad hominem as well in your post.  I'll leave it at that.

You're a hoot!

Again, you chose to shift the burden to perceived faults of mine and then not address the push-back directly.  It is an argumentative style I am quite familiar with, seen it before, and it's quite tiring.

So let me cut to the chase.  Either conform to our house rules and stick around, or don't.  

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Dave, Its a very very deep rabbit hole

that many will never dare to venture down. If you are as free as you say you are then that would indicate to me  that you have no birth certificate social insurance number or licenses or permits or pay taxes of any sort. These things are all indicators of humanities enslavement. You are obviously totally free from the clutches of federal government oversight, in a state of denial or willful ignorance.

I would send you all of my valueless paper credit, if it were not for the fact that I receive it in return for my sweat and forced to use it in order to survive. Ever wonder why Jesus reacted so violently towards the money changers (bankers) in the temple?

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Exo, Disagree but don't destroy

Exo, Bankers slave,

If I can wade in here, since I have often been on the other side of discussions with Davefairtex and Chris.

There are some nuances and principles you need to examine.

I speak from a few decades of experience, and many mistakes.

First, identify if your colleague is operating under a set of good faith principles or not.  I have believed from the beginning that Chris, Adam and Dave are men of good will.  Which means they are not lying or manipulating me to exploit me for their own personal gain.  Being a bit familiar with the Bible, I believe you should understand that dimension of why Jesus had righteous anger against the money-changers, they were liars and cheats and made taking advantage of others by manipulation their life pursuit and especially despicable in the name of serving God.  There are parallel opposite stories, the woman at the well being an example, a lost soul that Jesus embraced with compassion, even though he knew she was living a sinful lifestyle that he did not condone.  He had compassion for her, gave her words of living water, encouraged her to leave her sinful life behind, but left the final decision up to her.

You can probably feel there is an antipathy that you can feel in my posts toward our government leaders, who, on the one hand, are allowed to have a different political philosophy, but in my worldview are not allowed to lie, cheat, bully those in weaker position, propagandize, engage in corruption, create divisiveness by pitting the "rich" against the "poor", create false strawmen by saying that one side is declaring "war on women".  These are the tools of weak and evil leaders.  I believe people of good will must also resist evil.

I perceive by his comments that Chris feels the same way about financial "leaders".  I agree with him there.  I guess I put more responsibility on the shepherds than the wolves.

So principle number one is identify those of good will who disagree with you but do so based on their sincerely held convictions and data points.  It is totally within bounds to challenge data if it is false or very misleading.  It is out of bounds to say someone doesn't have a right to their own interpretation and implication of authenticated data.

Principle number two.  There is often more than one "right way".  On this very post topic, I have expressed my personal view that it seems extraordinarily hard to find a shorting strategy when the Fed has unlimited fiat dollars in its arsenal and seemingly unlimited will to gin up 'aggregate demand', and deeper into their psychology, to prove their control and omnipotence.  I have additionally stated that I don't have the lifestyle that allows me to live connected to a trading screen many hours a day.

But I appreciate Chris' and Dave's perspective, and education, and will weigh carefully their information, as I always do and see if it applies to my life.  I wish them both well in their trading ventures.   They may have better temperament or access to trading than I do.  That doesn't mean that I'm wrong either.  My defensive portfolio may look really good a couple of years from now if the dollar crashes or the world repudiates the dollar as a reserve currency, which most of the data I see point to that outcome.

Think of it another way, every year there are several stocks that have 30%, 50%, 100% gains.  If I pick one winner, and you pick another winner, we were both right.  Neither was wrong.

Principle number three, it's worth restating, God created you as a sovereign individual, imbued with rights and responsibilities to make free will decisions on your own.  Yes, we have a responsibility to help our neighbor, which can include truth-telling to our neighbor (why I take my posts here when I disagree so seriously).  To provide for our family.  To not cheat on our wives, and not cheat our business associates.  But we are not responsible for other people's free will decisions.  Even our spouses are ultimately responsible for their own decisions.  And reap the consequences of the decisions they make.  Some call this Karma, Christians call this the justice of God.  I just know this is a law of the universe that is inviolate.

Please consider these principles carefully, as one neighbor to another, who has your best interests at heart.

H

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"But can we really be seperate from the system?"

That's the/my point. In essence what we have is what we got until a mature and balanced new narrative is spoken about, and common sense change is implemented in stages. Any changes made on a whim will have the effect of a strong, mind altering drug on every living person on the planet. Rumors abound that China will just wake up one morning and decide to back everything by gold and this act alone will have devastating effects on all balance of payments. The thing is, China would need to change her psychological make up too and she is a closed society with many of the negative traits gold is suppose to measure. Like greed, nonsense, fraud, deceit, pandering to the status quo, managed society,...what will have been accomplished anyway? Debt is Debt and we are well past the stage of ever paying "THE" Debt off so until that clears we can never deal with any of our serious issues (there are many).

I said "I am beginning to like this site", and maybe spoke too soon when reading some of the attacking threads and the disrespect shown to perfect strangers with only a point view towards a clear question. In observing what was written, I would take sides with Davefairtex original answer to the question "How"... His answer was intelligent and competent. After that was just painful. The like us or lump us opinion by a site owner seemed corporate and "maybe" then emotional. After all, who pays the bills makes the rules. Must have rules then. Nothing wrong with that at all. I vote with my dollars and you have every right to do so as well.

C

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What is wealth?

Fantastic thread. Thanks Hrunner, Chris, Dave, Colleen, and all.

My takeaway is the desire to have a focused discussion on what is "wealth". (Adam Smith?)  My personal perception is that my land and house and tractor etc. represent wealth. The digits held by Schwab on my behalf do not seem real, and I don't have a confident feeling that they will be there for me at retirement. I am in the camp of not playing the market, and focusing on what is tangible, and what is Real.

My land seems to have wealth beyond the appraised value.  Recently I mined a bunch of stone off my property to build a retaining wall. Had I purchased that stone at a stone yard (fair market value?) it would have cost a lot more than the labor to extract it. So in my simple mind, the true wealth of my land has a very different value than the wealth value assigned by our local taxing authority. 

I see a lot of focus on PP by great minds and sincere people (Chris and Dave for example) on technical and fundamental market analysis, and the results have been mixed at best. I just wonder if those energies were focused on building a better greenhouse or inventing an improved gate design for ranches, or a new ergonomic garden tool, would not society benefit more?   Does extracting a few more fiat digits from the system by going long, or shorting the market, create any real wealth?  I don't know the answer to that, but I do know that my retaining wall has a real return on investment. 

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Hrunner
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Fiat is temporarily wealth

OOG,

I tend to agree with you about tangible over dollar denominated.  But we have to be truthful and realize that as we speak, these fiat dollars represent 'exchange value' in that they can be exchanged for some amount of the kind of wealth you and I like.  That is gold, silver, tractors, even useful labor such as farming, and tax returns.

Now understand, these dollars have no real intrinsic value, i.e. "use value" (see John Michael Greer's discussion on wealth linked in my post below), but as long as a government can convince the world it is stable, run by smart and capable leaders, and will repay the debt, then its currency should in theory be worth something.

The stability and faith in a country, and thereby its currency is related to how long a country can convince the world that it's people will continue to create new wealth, based on inventions, social stability (no riots or crippling strikes, please), productivity, natural resources which can be drawn upon like a bank account.

For those "educated" liberals who sneer at character, all the above rely on a generally sound culture with a sound value system and work ethic- see Germany.  A nation of cheats and lazies will find that no one wants their products or their currency.  Which in turn will make all their imported goods very expensive.

So, regarding wealth, I personally don't ascribe nearly as much value to the USD as others apparently do, but as long as the system will let me invest, trade etc in USD, and then convert those dollars into food, tools, seeds, land, clothing at bargain basement prices, then I will take them up on it.   I think it is a defensible strategy.  Just be thankful you can still buy so much at such a discounted price in dollars.  Never look a gift horse in the mouth, just lead it home to the stable.

H

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