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  • Podcast

    David Collum: The Vicious Cycle Approaches

    We'll regress to (and through) the mean
    by Adam Taggart

    Sunday, December 24, 2017, 6:03 PM

Whether or not you've had time yet to plow your way through David Collum's excellent 2017 Year in Review, our annual podcast with Dave always brings additional color to light — and this year's is no exception.

My model going forward predicts the next recession is going to be a real butt-kicker. That's why the Feds are so terrified. I think they realize that we're going to end up with a vicious cycle kicking into gear that the Feds aren't going to be able to control. They've already proven that they can't do much for the economy: someone tallied the annual GDP growth from 1930 to 1939 and then they tallied GDP growth from 2007 to 2016 and they're identical when annualized. So we've been tracking the Great Depression in terms of GDP growth.

So, you can be thrilled about the fact your 401K has appreciated — but it's sitting on a pocket of air because nothing is improved underneath the surface.

Over-valuation is appreciation pulled forward. And undervaluation is appreciation deferred. Once you're 2X overvalued, no matter how many more gains you get, you're just pulling form the future — and you're going to give them all back, either by price or by time or a combination of the two. You're going to regress to the mean.

You can pretend you're never going to die. But it's simply not avoidable. We will regress to and through the mean at some point. And when you're 2X overvalued, that means it is going to take either 30 years like with the Nikkei (in Japan), or massive, massive price adjustments. Neither one appeals to me. 

Click the play button below to listen to Chris' interview with David Collum (72m:36s).

About the Guest
David Collum

David Collum, is the Betty R. Miller Professor of Chemistry at Cornell University and is a regular and valued presence on the internet commenting on the financial system and the predicaments of our time.  David has contributed many Year in Review articles and podcasts to the Peak Prosperity community. 

2013 Year in Review

 

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10 Comments

  • Mon, Dec 25, 2017 - 11:27am

    #1
    treebeard

    treebeard

    Status Bronze Member (Offline)

    Joined: Apr 18 2010

    Posts: 551

    Localize your economy

    For everything you’re worth, it’s a matter of survival now.  We’re headed to a point if you can’t buy it locally, it just isn’t going to be available.  And we better all have some useful skills………

    btw. Merry Christmas 

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  • Mon, Dec 25, 2017 - 5:59pm

    #2

    -Casey-

    Status Member (Offline)

    Joined: Nov 12 2013

    Posts: 73

    Merry Christmas

    For Christmas my Gator grad engineer son designed and built an off grid solar system for my tower gardens for a tenth of what it would cost online.  Today I feel rich in every way that actually matters.  

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  • Tue, Dec 26, 2017 - 1:06pm

    #3

    craazyman

    Status Member (Offline)

    Joined: Jun 07 2012

    Posts: 20

    Always thought provoking & entertaining

    I’m not sure why it’s enjoyable to read such a litany of cultural and financial intellectual indictments but it is. I guess that’s cause I agree with most of it & reading it calms me with the implied sense of the company I keep. Erudite and informed. More than me, I can’t do this kind of heavy lifting myself. But it’s nice to have somebody else do it!

    A few things make me wonder:

    1. Debt & money — debt and money are weird things. I’m not even sure what they are. Say that obligations between husbands and wives become monetized and financialized. To support, honor, cherish, etc. becomes monetarily quantifiable somehow and measurable as a “debt”. Each marriage, and maybe each boyfriend/girlfriend relation creates mutual debt. The debt is measured and added. All the sudden “society” has it’s debts go up hundred or thousand fold! Each marriage counts toward the national debt, simply because the obligatiions are financialized and counted. But is reality any different? Is the before & after any different? Human behavior  before and after the financialization of marriage vows? I don’t know. That’s complicated. What is reality here and what is simply imagination? That’s not so clear.

    2. Equlibrium — Dr. Collum is a scientist used to analyzing physical systems. Economists for a century have borrowed the mathematical metaphors of the physical sciences, mostly physics. Since Dr. Collum is a chemist, he’s surely a student of equilibriums. The healthy human body is a state of equlibrium, with 98.6 temperature, a certain pulse rate, respiration, perspiration, etc. A “shock” to a physical system, whether a gravitational field, a chemical soup or a body, can produce a likely predictable effect. But what about an economic system is manifested in the elements that arrange themselves in equilibrium? It’s not at all obvious. I think the more one reflects upon it, the less obvious it becomes until it disappears almost completely. But it’s the almost that gets interesting.

    3. Regression to the mean — Another idea that crumbles a bit upon examination. The mean is a simple mathematical measurement, but it’s validity implies a sufficiently large sample size and an underlying idea of similarity among the samples. The mean height of a population of football players, the mean weight of a class of freshmen at a college, the mean width of trunks of mature oak trees, etc. It implies quantity and similarity. How many market cycles have there been since the Civil War? how many interest rate cycles? Not too many. What about each cycle has been similar and different? Quite a lot has been different with each. Is the mean a statistically valid idea even in this context? I don’t know. I think so but I’m not quite sure how.

    The financial historian Peter L. Bernstein wrote a book called “Against the Gods: The Remarkable Story of Risk”. He wrote several books and they’re all good. This one is good. On pages 183-185 he writes about the history of stock and bond returns. For 100 years stocks always fell when their dividend yield got below bond yields. After all, they’re riskier and should “yield” more than bonds! Bernstein writes how this relation broke down in the 1950s. He writes “my partners, veterans of the great crash (1929) kept reasurring me the seeming trend was nothing but an aberration. They promised me matters would revert to normal in just a few months, that stock prices would fall and bond prices would rally. . . . I’m still waiting.” (written in1996). That time evidently it was different,

    These things always make me think. But still, my baseline scenario is pretty much what Dr. Collum believes and so do others referenced at PP. i.e. a 50%+ breakdown in stocks. I just wish I was sure enough to bet my nest egg on it. I need a 10-bagger that’s for sure. But I’m afraid i’d only get a 1/2 bagger at the end of the year — because something happened — central banks, academic ideas, globalization, technology, culture, the zodiac, alien spaceships, who knows what? — that made it different this time.

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  • Tue, Dec 26, 2017 - 1:59pm

    Reply to #3
    DennisC

    DennisC

    Status Bronze Member (Offline)

    Joined: Mar 19 2011

    Posts: 101

    Great Points

    But you had me at “half-bagger”, and I’m still in stitches!

    Reminded me of a Ron White skit (why, I have no idea but I go with the flow).  He was in a small commuter plane and just after take-off, one of the two engines failed.  The panicked person next to him asked “how far can we get on one engine?”.  He replied, “all the way to the crash site”.  Buckle up baby.

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  • Tue, Dec 26, 2017 - 6:35pm

    #4
    cowtown2011

    cowtown2011

    Status Member (Offline)

    Joined: Sep 12 2011

    Posts: 33

    Bitcoin Mining

    Good discussion. The bitcoin mining discussion wasn’t very accurate but I guess that is what the January Crypto webnar is for. It’s the miners using all the electricity (Estimated amounts seem overstated) to confirm transactions, not the users. The miners receive bitcoin rewards for confirming transactions and they pay the electricity bills. The miners would not do work unless it was profitable although it isdesigned to keep getting harder to confirm transactions going forward which may change the profitability over time. It can take days for your transaction to confirm depending on much you are willing to pay as a transaction fee (avg today around $28USD) but usually within an hour. Bitcoin is not currently setup for day to day transactions, more like a savings account and not a checking account. Also, why would you buy a pizza with BTC when the amount you paid yesterday may be worth 10 pizza’s in a weeks time. My quick take on it. 

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  • Wed, Dec 27, 2017 - 3:33pm

    Reply to #2

    Snydeman

    Status Member (Offline)

    Joined: Feb 06 2013

    Posts: 521

    ccwesq wrote: For Christmas

    ccwesq wrote:

    For Christmas my Gator grad engineer son designed and built an off grid solar system for my tower gardens for a tenth of what it would cost online.  Today I feel rich in every way that actually matters.  

     

    can I hire your son for 1/2 of what it would cost online?

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  • Thu, Dec 28, 2017 - 2:50am

    Reply to #2

    -Casey-

    Status Member (Offline)

    Joined: Nov 12 2013

    Posts: 73

    The thought has occurred to him

    I’ll certainly ask!

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  • Fri, Dec 29, 2017 - 8:52am

    #5

    Snydeman

    Status Member (Offline)

    Joined: Feb 06 2013

    Posts: 521

    One minor point:

    Great podcast! I would only correct one thing: Halt the country didn’t vote for Trump. Half of those who voted did, as about half those who voted, voted for Clinton. According to charts I saw from conservative as well as liberal news sources (and watchdog groups), about half the eligible voters didn’t even vote. 

     

    So it’s more accurate to say 1/4 of the country voted for Trump, 1/4 voted for Clinton, and 1/2 flipped the finger at both of them and stayed home. That’s supported by anecdotal evidence in my own life, where many people I know didn’t like either choice.

     

    Just sayin.

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  • Mon, Jan 01, 2018 - 7:41am

    #6
    planfortomorrow

    planfortomorrow

    Status Member (Offline)

    Joined: Dec 28 2017

    Posts: 17

    Love David Collum, this guy

    Love David Collum, this guy is all over the place, very well informed, smart and knows a lot of stuff. Is it useful or not? He is that self defacing. Always good to have a sense of humor with all the nonsense going on. He knows the known, questions the unknown, known, and guesses on all the conspiratorial unknown, unknowns! He’s awesome, and I am eternally thankful that Chris has him here for free..

    I too throw things into a clear plastic bin starting Jan1 until the final day of Dec 31st. I don’t go through it all but I’ll pull something out and give you a sample of what I do, and was motivated by Chris and Collum.

    Bitcoin is nonsense, to buy one coin would be to certify that I am insane.But! But!…

    AI and robots: First comers win big, no question about that so where are they? I think the turnover will be practically over night. Deflationary?!, no sense in worrying about inflation. Lower rates then by the Fed? Or slow as you go guys?

    Lots of cash back into the hands of Corporate with tax plan. Middle class bump. Upper class bigger bump. Offshore to Onshore 4 trillion. Infrastructure 3 to 4 trillion mostly private sector raised. Pays for itself: pay roads, user fees, etc…

    Iran will be an issue, soon. Venezuela will be heard and soon. OUT of GAS!!!: really?

    Saudi Arabia-Iran

    From Martenson: missile pointed at a vessel in Hormuz and the insurance companies end the oil movement game!! Well yeah! Profit taking event.

    Love Trump

    NO MORE GOOD QUALITIES: DO WHAT YOU MUST. DON”T FORGET TO KISS THE WIFE THOUGH> PET THE DOG> GOOD BOY

     

     

     

     

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  • Tue, Jan 02, 2018 - 2:34am

    Reply to #6
    planfortomorrow

    planfortomorrow

    Status Member (Offline)

    Joined: Dec 28 2017

    Posts: 17

    https://www2.deloitte.com/ins

    https://www2.deloitte.com/insights/us/en/focus/tech-trends/2018/no-colla

    I meant to leave one of this years articles up too, to show concerns about a quick and I think devastating replacement of workers (human) for a more productive and cheaper Labor force, (robots), one that must be considered Deflationary. Upon skimming the article I found many inconsistencies though: some opinioned that the human workforce would meld with machine and no workers would be displaced and this just makes no sense. If I can remove every human at McDonalds then I would. I wouldn’t keep but a few just to manage questions I might have regarding day to day operations. Anyways, the “no collar” work force will be in the nearest store by you very soon are my thoughts.

    Notes:

    The companies thinking Robots would do well to be first because great profits will had for those quick to the itch.

    .

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