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Steen Jakobsen: Get Ready For The Biggest Margin Call In History

A recommendation to move to cash
Sunday, April 19, 2015, 1:02 PM

Economist Steen Jakobsen, Chief Investment Officer of Saxo Bank, believes 2015 will be another "lost year" for the economy. And he predicts the Federal Reserve will indeed start to raise rates later this year, surprising the market and taking the wind of out asset prices.

He recommends building cash and waiting to see how the coming storm -- which he calls the "greatest margin call in history" -- plays out:

0% interest rates at $0 down has not created the additional momentum to the economy The Fed was hoping for. The trickle down effect, the wealth effect, has instead made for bigger inequality in society. So I think we’re set for a rate hike in either in June or in September. I think this will be the biggest margin call in history on the asset inflation created by the Fed .

That’s where I differ from most Fed watchers. Everyone else is looking at employment, inflation targeting. I don’t think Fed is at all looking at those. They are saying “Listen, the 0% interest rate is getting us absolutely nowhere, we think it’s very, very important for us to move to a more neutral place”. At the same time we will communicate that we are open-minded to additional programs or whatever needs to be done to secure the long term growth of the economy. But that will be on the down side, not on the up side. And as year has progressed, and I’ve said this publicly, I think 2015 is already lost in terms of recovery here. And that will take the market by surprise.

The market will ask in September when the Fed hikes: “Why are you hiking interest rate when growth is below target, inflation below target”? Well, the Fed's response will be “Because this is the biggest asset inflation we’ve seen in human history and we need to address it”.

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What the Fed is saying is that we have unintended consequences of low interest rates. Money is chasing yield: it's going to real estate making it over-valued, and flowing into the equity markets making them over-valued. And then the Fed says “Well. we have two choices. We can allow the market to run into a bubble, or we can burst the bubble and start all over again”. But they wrongly, in my opinion, believe they can actually micro manage that, even macro manage this. So what they would rather do is "lean up against the market". To take some of the excess out of prices by going in and telling in the market “We are concerned, we don’t want you to have more leverage. We want you to have less. And we certainly would like to see that market become flat-lined for a while in terms of return." Which by all metrics of measurements is actually also the expected return of the stock market. Don’t forget three, five and seven years expected return at the present multiples is exactly 0%.

Given this, at a bare minimum, I recommend taking the leverage out of your own portfolio so you sit with a nice pot of cash if the market does correct. If it doesn’t, you’re not really losing out much because again, they expect a return is 0% for the next couple of years.

Some time the best advice to anybody is to do nothing. And of course being, part of an online bank I’m not exactly popular with management for putting this advice out there.  But I have to give the advice I believe in and share what I do myself; and I’m certainly reducing whatever equity I have in my portfolio to a minimum. So I’m scaling back to where I was in January last year.

I'll put it another way. I’m advising a hedge fund in London, analyzing 10,500 stocks from the bottom up. How many do you think of these 10,500 world stocks are cheap? Only 23. Which means 98% of all stocks are either fairly-priced or expensive.

Click the play button below to listen to Chris' interview with Steen Jakobsen (40m:27s)

Transcript: 

Chris Martenson: Welcome to the Peak Prosperity Show. I am your host Chris Martenson. You know, a couple of days ago a key Fed official came out in support of additional asset purchases by the Fed if necessary, which is code speak for "print up some more money and hand it to the financial industry." Now what are we to make of this? Clearly the world is mired in low growth and it can be said with certainty that lots and lots of money printing has not delivered us into a future of high or even much higher economic growth. And the cross currents and conflicting signals are driving even the most seasoned of investors I know absolutely batty. So how do we begin to make sense of all this?

Fortunately returning to be with us today is Steen Jakobsen, Chief Investment Officer of Saxo Bank. He has more than 25 years of experience within the fields of proprietary trading, alternative investment. He joined Saxo in 2000; he is now the Chief Investment Officer. Steen, it’s a real pleasure to have you back.

Steen Jakobsen: I’m very pleased to be back Chris, thank you.

Chris Martenson: Well let’s start with the most anticipated event in all of human history: Will the Fed raise rates in June?

Steen Jakobsen: "In all of human history" is probably a little rich but I like the set up. So I think what’s important to realize on the Federal Reserve is that the market right now seems to think that we have a traditional economic-based projectory of interest rate driven by data watching. I think the Fed is in a very different place. I think Fisher—since he came on board—Stanley Fisher has been instrumental in addressing the issue that the fact that we have zero interest rate zero bound has not created the additional momentum to the economy. The trickle down effect, the wealth effect is, if anything, the other way around; it makes for bigger inequality in society. So I think that we’re set to move either in June or in September. I think this is the biggest margin call in history on the asset inflation.

And that’s where I really differ from most Fed watchers, everyone else is looking at employment, inflation targeting. I don’t think Fed is at all there. They are saying “Listen zero interest rate is getting us absolutely nowhere, we think it’s very, very important for us to move to a more neutral place. At the same time we will communicate that we are open minded to additional programs or whatever needs to be done to secure the long term growth of the economy." But that will be on the down side, not on the up side. And as the year has progressed I think, and I’ve said this publically, I think 2015 again is already lost in terms of recovery here. People are using the weather again in the US; I find it very surprising that you have winters in the US and it tends to surprise all the economists, but it’s a bad excuse because of course it was only the East Coast in the US that really had problems with the weather and that’s not big enough really to have a material impact on US economy. So the US economy is simply again going to be a 2% economy and that will take the market by surprise.

Why would -- the market will ask in September when the high comes, “Why are you hiking interest rates when growth is below target, inflation below target”? Well the response will be “Because this is the biggest asset inflation we’ve seen in human history and we need to address it”.

Chris Martenson: Well they certainly seem to be nervous about it because another Fed official came out yesterday and said that when they raise rates of course they are going to watch and see how the market responds. They’re getting much more direct in being clear about saying that they are watching the market somewhat nervously; do you share that perception?

Steen Jakobsen: Yeah and we’ve been warned. Don’t forget that the regulation, the capital requirement driven by [Inaudible 00:03:54] at the Federal Reserve has been more and more restrictive; so restrictive actually that now you probably saw that JP Morgan is selling off deposit accounts because they have too much requirement of capital on them. So the maximum leverage in the US society after all these regulations is 1 to 12; we are down from 1 to 30, 1 to 20, to 1 to 12. The old system is being deleveraged; there’s already on the regulation side, on the capital requirement side been a margin call, which by the way has driven interest rates at least 25 basis points lower than would be in the normal cycle because they need these treasuries to set aside for risk perspectives.

Chris Martenson: So when you say a margin call on assets—decode that for our average listener.

Steen Jakobsen: Yeah so what the Fed is saying is that we have unintended consequences of low interest rates which is that money is changing [Inaudible 00:04:54] it is going into real estate which is becoming overvalued, it's coming into the equity markets which are becoming overvalued. And then Fed says “Well we have two choices. We can allow the market to run into a bubble, burst the bubble and start all over again”. But they wrongly, in my opinion, believe they can actually micro manage that, even macro manage this. So what they would rather do is what you I think in the US calls "lean up against the market." They'd rather sort of take some of the excess out of the market by going in and telling in the market “We are concerned, we don’t want you to have more leverage. We want you to have less” and we certainly would like to see that market became flat lined for a while in terms of return. Which by all metrics of measurements is actually also the expected return of the stock market. Don’t forget three, five and seven years expected return at the present multiples is exactly zero.

Chris Martenson: I’m surprised it’s that high. When we look at the CAPE adjusted returns it’s in what historically is fairly elevated territory, the case could be made that it could be negative returns.

Steen Jakobsen: It depends whether you start your statistics after the crash in the 20’s or before it. I think the main point Chris however, is it doesn’t matter where the metrics is because at zero interest rate everything is priced to perfection in terms of spreadsheet and calculation. When you discount by close to zero you have infinity as a return. As I said very often, I can go to my bank manager and ask him to buy and operate 100 hamburger stands in a spreadsheet that would have infinite return.

Chris Martenson: At zero percent it’s infinite.

Steen Jakobsen: At zero percent it will have infinite return. All of them, a hundred next to each other on the same street.

Chris Martenson: So let’s talk about this going from the zero bound -- when we’re talking about the Fed raising rates, what are we talking about? My assumption is it’s going to be a quarter point and I think that’s going to be fairly meaningless. Is this really one of the most over hyped moments in history?

Steen Jakobsen: I think it will turn out to be, but it will be surprising because they are data watching not margin watching. And I think the second thing is that they’re going to do 25% as a token gesture to show that they are moving toward normalized and they want to keep it. I think the yield curve will flatten significantly. I still think that 10 years and 20 years and 30 years US interest rate is going down. I think 10 year as a target is minimum 1.5 against nothing, 1.9 and overall I think the interest rates are still coming down because exactly what I said before. The capital requirement means that banks and pension companies need in their asset and liability they need to buy yield. And the US you know, trading close to 2% in 10 years it’s just about the most yield rewarding bond market in the world ironically, despite the fact it is the biggest, the deepest and the most accessible bond market in the world. You know every single European country in 10 years is pretty much below the US yield now; so people will be chasing yield, but I don’t think it will have a material impact on the economy on anything. It is leaning up against the margin inflation as I call it, and it is a token hike to show the market that you need to reign in this complacency under which you operate right now.

Chris Martenson: So if usual tug of war is between stocks and bonds—I noted that Mohamed El-Erian is now sitting in cash, a lot of cash, and his argument seems to be why sit in zero percent bonds when you can sit in zero percent cash? Why do you -- is that a viable move at this point? Do you see a risk to bonds in this story as well?

Steen Jakobsen: Not really. As I just said I think there’s going to be sort of a replay of that and people get nervous but I don’t think -- the thing is El-Erian is ignoring the fact that there is a huge institutional need. I mean don’t forget that the pension sector is almost 100% of GDP. So your 401k, 30-50% of that is in fixed income, they need constantly to be buying. There is a shortage of AAA and AA papers in the world. No, I don’t think that it is a matter of choosing one or the other. I’ve got a lot of press unfortunately sort of misunderstood when I was in Dubai last week said “Well my advice to anyone would be to sell your stock portfolio down to where it was January 1 last year and then take the cash and take six months vacation with your family and spend some quality time”, which I guess is pretty much the same thing. Because my argument is the same, if you -- what we have right now is that the companies, the companies which are listed, they are taking more and more leverage onboard at zero interest rate to facilitate a higher volume and margin. So they have lower volume, lower margin. The only way you can keep up with this game of course, is to increase your balance sheet leverage. At the same time your portfolio is up 30-40% since last year so you are also having more leverage.

So I’m just pointing out listen, you can not do anything about getting the CEOs to get less risk because they have to make their own mistakes but at least at a bare minimum take the leverage out of your own portfolio so you see with a nice pot of cash if the market does correct. If it doesn’t, you’re not really losing out much because again, they expect a return of zero for the next couple years.

Chris Martenson: It seems like a great time to take a few chips off the table and go get a drink.

Steen Jakobsen: Absolutely and that is my point. It’s -- sometimes the best advice to anybody is to do nothing. And of course being an executive at an online bank I’m not exactly popular with management for putting this advice out but you know I am -- I have to give the advice I believe in and how I do it myself and I’m certainly reducing whatever equity I had in my portfolio to a minimum. So I’m scaling back to where I was January 1 last year. I want some exposure. Energy plays are cheap.

Put another way, I’m advising a hedge fund in London, they do bottom-up analysis, 10,500 stocks in the portfolio. How many do you think is cheap in a bottom-up filtering process in the US right now? How many stocks do you think out of 10,500 developed-world stocks is cheap?

Chris Martenson: Oh gosh, 1,000?

Steen Jakobsen: 23.

Chris Martenson: [Laughter] That’s a rather precise number. 23 are cheap.

Steen Jakobsen: I can even provide the names. But most of the names are actually in the energy sector, funny enough. Something like ConocoPhillips would be one, Chevron would be another one. So I find it very interesting that you know -- that is the only good thing I get out of actually advising anyone is I get to see some of these reports. And I find it very, very interesting personally because 10,500 stocks, 23 is cheap. Which means 98% of all stocks is either fairly priced or expensive relatively to their data they are providing themselves in the economic condition under which we operate.

Chris Martenson: There are some that are horribly expensive. When I do my little screen and I ask the question, “Show me stocks with PE’s over 200” I get screen after screen of results.

Steen Jakobsen: Exactly and that is my point. We do not know -- we do not have a crystal ball but there are some times in life when it is best to -- the best advice you can give anybody is just get off. Get off at the next turn and just sit back and take the next bus when it comes in.

Chris Martenson: So let’s get back to these pension funds and their big buying needs. The news recently—which actually did make my eyebrows go up a bit—that Switzerland sold ten year debt with a negative rate of interest. Now this is a first in history kind of a move. You’re the chief investment officer for a major bank; tell us how do you process that news?

Steen Jakobsen: As long as inflation expectation is below that it’s a tangible and reasonable thing to do because you need the duration in the portfolios. So basically what -- if you think about a pension sector or anyone who has long- term liabilities your problem right now is that your stock market portfolio, your fixed income portfolio is pretty much at all-time highs, both of them. So that’s good, you have a lot of money around but you’re -- in terms of the discounting at zero your expected liability is just blowing up and in order to keep up with the blown up expectation for return in the future you need to be buying yield. The only yield on offer in Switzerland and Denmark by the way is negative yield, but they still buy it because without it they’re going to be short on duration. But they will constantly be short on expected return because they do know, as I said three times now, the expected return is zero. So it’s good for now but it’s very bad for the future and so we are creating this overhang of below-par returns for the market to normalize. And in that environment there’s going to be huge pressure on anyone who is involved in asset liability management because again, zero percent interest rate—it makes your assets very, very high but it also makes your future liability infinitely high.

Chris Martenson: Yeah let’s talk about that for a second because you know you can’t crack a paper without reading about some badly underfunded pension program here in the US and this is after several years of near record stock gains. But they’re getting zero or close to zero on the bond portion of their portfolios so they’re actually losing ground. So when I crack open these pensions and I look at their assumed rate of returns they’re still saying 7, 7.5 you know, somewhere in that zone and obviously they’re not getting anywhere close to that. So they’re just compounding their difficulties, aren’t they?

Steen Jakobsen: Well to be fair to them they have done 7, 7.5 recently but the expected return which they don’t see as a reality yet is different. And clearly pension funds should be putting more money aside. Instead what they do is to get -- again as I said a few times, they are increasing their financial leverage by borrowing money to buy back their own stocks. So I think there has been a short term quarter by quarter management of the stock price where at least it should have been 50/50 trade off between the managing the stock market price and you know, making deposit into the pension scheme. So they will remain so because of zero interest rate, their liability is infinite.

Chris Martenson: So this is something that I think got surfaced in Bernanke’s first blog offering which, by the way, set me on edge a little bit where he said he was concerned about savers but first he had to hurt them to help them was how I interpreted what he said. We’re now seven years into the "hurt" part of this story. I don’t personally see that there’s any chance of interest rates getting back to normal. It’s going to take years and years; what’s your view?

Steen Jakobsen: I disagree because what we have -- and I think last time we talked I introduced my 2018 model where 20% of the economy is the listed companies and the banks. They right now have a funding rate which is 200, 300 basis point lower than a normal business cycle. That explains why we have very high stock market valuations. The price for that unfortunately is that the 80% what you in the US call the main street, the average company, the average guy is not having enough access to credit, he’s not having enough access to disposable income and the like. So as soon as you see money flowing out of paper and into the real economy, you will have a -- not a one for one tradeoff between increasing in earnings with disposable income and inflation but you will have a 1 to 3. Basically you will have exponential growth in inflation and growth as soon as you deactivate the model you presently have. And that serves perfectly back to where I started. What Fed and Stanley Fischer is trying to do indirectly is exactly that. He’s saying stop investing in paper and start investing in productivity. So you know my advice, which again is very difficult for an online bank like Saxo, is for people to go out and find someone to invest in. You know look people in their eyes and invest in what they believe in and the heart they have behind the idea they work with instead of buying Nestle in Switzerland and negative interest rates, bonds that are negative interest rate or buying you know dividend yields mindlessly in the US which give you 2% because it’s better than fixed income at 1%. That gain -- we need to understand that to have a productive society you need to increase your investment into education and productivity returning investments.

Chris Martenson: Well you know in many cases those productivity investments are leading to, perversely, what I think is a low inflation environment so if I robotize my factory and I put all this capital into my robots and I have fewer workers, we’re just dead in the water on wage inflation over here. It’s -- workers are getting no traction and given the overhang in the unemployment side of the story I think we’ve got probably 8-10 million people who are just anxious to jump into that labor pool. How do we get that inflation without wages?

Steen Jakobsen: First of all there’s some recent studies, I can’t remember from who, I think it was from Harvard that shows that actually a lot of these people not seeking jobs are doing it because they’re better off financially, one of the reasons. I think we also need to reset sort of what is people not seeking jobs—are they doing it for whatever reason? But taking your point about robots. In Denmark we did a very interesting experiment where the government said, “Listen we need to understand this robotics, how does it work”? So what it did they put aside a small amount, let’s say 100 million dollars which small companies could then activate and borrow from to buy robots. And so what we’re -- surprisingly Chris the robotic experience was that yes they lost factory jobs but they gained in marketing and foreign sales and everything else. And the company becomes more competitive. So it was an astonishing success; probably the biggest surprise was that the state was actually making money which they never normally do. But robotics is not going to gain jobs but it’s going to have, as you say, correctly, it’s going to have five to six years more of the whole economy re-balancing and re-assessing yourself. And that re-balancing is slowed down by the zero percent interest rates because that keeps in place the 2018.

I mean the US is -- I've traveled to 30 countries and I love the US but you have the worst infrastructure I know of. I mean going on the train from New York to Washington is a disgrace. Most of your airports remind of like when I was traveling to Eastern Europe in the 1980’s before the war came down. I mean think about it, you should be -- the States, the US government should guarantee every infrastructure. Then you should be able to buy an infrastructure bond for building a railway between Washington and New York, paying you a coupon of 4%. That is real investment, that is real jobs on the ground. Instead you’re buying Net Book or Net -- what are they all called? Net whatever. And that is the point; we have to own up to Chris, that we can complain but we also need to invest where productivity is and we need the incentive. We need a 3-4% coupon on infrastructure bonds in the US.

I really think we are making things way too complicated because there’s plenty of jobs, there’s plenty of things that need to be improved. The healthcare sector—you have the most expensive healthcare in the world. There must be ways around creating more jobs, better products and doing it. I just think we’re not ambitious enough. I’ve been thinking a lot recently Chris about when politicians and policy makers, my response to them at every given question is "you are not ambitious enough." I don’t want to hear your [Inaudible 00:21:13] solutions. I want to hear your big scale grand vision because we have no people with vision left in the world.

Chris Martenson: I totally agree. And to me you know what’s happening in my country, my analysis of it is that we’ve gotten into sort of CEO worship. This idea that the people who can accumulate the most stuff, somehow those are the people that we look up to and you know, we'll bid $500,000 to have breakfast with Warren Buffet or something like that. So we have this worship thing going on but at the same time what we’re seeing is there’s this huge gap between what we tell ourselves as a country about where we really are in the world and that train ride that you might take. If just anybody who drives around this country you can see all of our bridges have a collective D to D minus rating from the engineering association. We still have places which do not have internet and where we do have internet my internet is a fraction of what’s available in most other countries. We’re like 38th on that list. So there’s lots of places we could improve but for whatever reason, making those investments has become a politicized process, I’ve never seen my political environment more toxic than it currently is; so I feel stuck.

Steen Jakobsen: No, you are. But the beauty is—which goes back to my main theory on economics— we need to fail first. In a small way or in a big way you need -- you have pot holes in the roads in New York; it’s dangerous to drive your car whatever. I mean you need people to get so upset that they are willing to commit, but the problem is our generation Chris and the ones before us are what I call -- we are the entitlement generation. Everything we’ve ever done we’ve just been given pretty much; we really didn’t have to fight for it. I mean the generation that came after the war had to fight for rebalancing and had visions, you had great leadership. So I also think that this low interest rate complacency, update your life on Facebook but don’t live in the reality -- I know it’s easy to complain but everything is so cushy and you’re not really being challenged. You are not ambitious enough Chris, I am not ambitious enough and certainly the average person is not ambitious enough. I want you to be more ambitious. I want you to show me your best ideas. Stop complaining and tell me what you can do. We need to make a whole movement that says “Do not tell me what you can’t do, tell me what you can do”, right?

Chris Martenson: Absolutely. I’ve had this idea percolating you know we have all this horrible difficulty with our police force which is very militarized and it turns out that our police killed more people in March than the UK police had killed in the 20th century. Right, so we have this very aggressive sort of way of policing and to me it would be—the simple thing is just it’s around incentives again. My solution to that would be listen if the police want to behave that way, that’s fine. But when they lose a civil judgment that comes straight out of the police pension and it’s not made whole or topped off by the taxpayers. Trust me, after the police lose a few million out of their pension the local police, the retired ones will all get together and say “We can’t have that guy on the force anymore” and it will solve itself. I think market forces could solve this.

But we don’t -- here’s my assessment Steen: I don’t think we have market forces in my country. It feels like the political process and corporations and lobbying and money have all sort of spooled together where I personally—I think that 20 in your 80/20, the 20 has sort of a stranglehold on that and I don’t personally see any way through this before a failure that requires us to say “Oh gosh, maybe we should be doing this differently”.

Steen Jakobsen: No, no you know my number one choice is that the confrontation, the [Inaudible 00:25:00] whatever happens to start it, but having said that the reason that is the only solution is you are too complacent Chris. I know you are very active and I respect a lot of the things you do of course, but again you need to challenge people to be more in the face of people. You need to have incentive structure; you need to be pushing people to go into politics. You know in Europe we have youth unemployment 25% pretty much across the board. When I go to university I tell them “You are the most intelligent people, kids ever educated in terms of your at-hand knowledge but you’re also the laziest intellectually. You live your life through update on the social networks. You are not able to conduct yourself in a big room”. I mean it’s all about just creating incentives to be better and at least in America you have one thing going for you, you are very good at looking at successes. In Europe this is a little bit different but Chris we need people to be ambitious. "Be ambitious" should be the slogan for anyone who runs for president in the US. And Chris, US is still a great society. Yes the market is right there underneath the surface. I have no doubt that US will come back. Maybe that is -- what I think the big challenge for the US is actually what’s going on in Asia right now with China doing the AIB bank and the whole Silk Road. That, in my opinion, is the massive wake up call to the US. You failed on the foreign policy to be able to be part of the construction, but this construction will carry 3 trillion dollars worth of orders every single year, which by definition, by US not wanting to be in it, they are excluded from, at least directly.

So I think maybe that is the challenge that you need some outside force, you need a stupid Danish economist like me to tell you to wake up and then you’re going to push back against me because I think our role, your role largely is to provoke people to think differently, to get people a little bit uncomfortable. But also for them to push back because you live in a great society Chris, you have to acknowledge that. If not, you are not thankful enough for where you are. But you are under-invested in real things and over-invested in paper things.

Chris Martenson: I couldn’t agree more, I couldn’t agree more. You know I was talking with a gentleman who framed this constellation of predicaments that we’re facing that what they really do is they’re calling us to greatness. Like if we don’t bring our very best selves and effort to this we’re going to be extremely disappointed in what happens next because you can’t open the paper without seeing that ocean fish stocks are collapsing and where’s the phytoplankton going and these sentinel ecological species are suddenly disappearing without saying “This doesn’t look like it has a great future in front of it”, you know? And so that conceit that we can lose these things and ignore them until they really slap us in the face is more a psychological problem than a technological problem as far as I’m concerned. But the kids today, they need to know that they’re stepping into something where they can make a difference and I see a lot of them feeling very cynical, a little disconnected from the process and feeling somewhat powerless.That’s what I see in my country.

Steen Jakobsen: And you will see that across the globe. The thing is everything I just said about US you could say pretty much the 30 countries I go to on average everywhere. I mean the thing is there’s no reform, there’s no ability politically to connect and we have the worst vision ever in history. I mean that is basically the story wherever I go; so to some extent my job as the economist part of me is very easy. It is for people, it is call to order and people to be challenged and I also think we need to have greater demands on your politicians, on your kids, on the local grocery store but not in terms of the -- we need to realize we can’t be everything to everybody Chris. I think US; every single state in US needs to define what are the three things we’re going to focus on. Any politician in the US should not be allowed to talk on more than five subjects. He can have five subjects he really wants to pursue; everything else has to be left to the market place.

Chris Martenson: Interesting. Well I’ll tell you I would have a quick list of things that I would be working on but not -- right at the top of my list would be re-fashioning the energy infrastructure towards that future we know is coming when we run out of oil, right? And whether that’s in 100 years or 500 years or in 50 years depending on whose numbers you like; it doesn’t matter. We’re going there and we’re totally unprepared for it.

Steen Jakobsen: So energy, very good topic; so the way you want to do that of course is to have best of breed. You have one opinion; you want to have the exact opposite. You will promise me you will go find the guy who has exactly the opposite view, Big oil or whatever it is; so that’s where we need to be. We need to be able to disagree with respect and the only thing we do now is disagree with disrespect. So the open discussion, the open really true, "what do I believe in, what will I fight for" that’s nowhere to be seen in politics and nowhere to be seen in corporate life either. And I think to some extent that’s why we have this disconnect. We have inequality being the worst ever in history and we have corporate profit highest ever and that is a function of a lot of things, among them of course your interest rate. But it is also a function of people’s inability to connect.

You know to be honest Chris, the stock market, the S&P 500— that impacts 10-15% of the US population, the rest couldn’t care less. But they do care about the 80/20 model being in place. They don’t know they care about it, but care about it because Main Street is being hurt because there is no commitment; you have the police force as you said having issues right now in terms of justifying what is happening. All this is a symbol of too little self respect, too little integrity and too little accountability in my opinion. But again it is, let me stress, this is not US specific. This is a global phenomenon because we pretty much have been playing a game called pretend and extend. Pretend that there isn’t a problem and extend by buying time.

Chris Martenson: So let me go onto that because I’ll tell you what Steen, personally I’m growing more and more worried the further the "extend" part of this program goes. It feels to me like we’re just taking one more step up a very tall ladder and when we do fall off of it the chance of that really hurting grows. And so you know what I look back at everything that I really thought was a problem back in 2008, almost all of them are larger, not smaller today, right? Our too-big-to-fail banks have been enshrined as systemically important financial institutions, they’re SIF’s now. Sovereign debt is higher, not lower on debt to GDP on aggregate amounts; however you want to measure it. When we look at total derivatives that are outstanding out there which really I’m not comfortable people really have a handle on how that market is going to behave when things get turbulent. And we have the Fed just sort of locked into a program of printing and trying to micro manage the market in order to keep expectations with their fingers crossed behind their back hoping for growth that hasn’t returned. That’s how I add all this up; so those to me are larger, not smaller risks and those risks are just like pressure on a tectonic plate, sooner or later you get an earthquake.

Steen Jakobsen: Everything you just said is only about the 20%. The beauty here is that if you wanted to -- let’s put it differently. If you wanted to reduce inequality in the US there is one simple solution: make sure the stock market goes down by 50%; then you have less inequality, right? The same argument carries through your argument that the reason you have to be positive is because think about the economy right now. I think you pointed out yourself, it’s never been less market oriented. What comes next will be a more market based economy. We know that because that’s the only way you can get an economy to function. When I did my economic study there was only one sentence I can remember from my studies in economics but it was a very important one. It says for society to function you need to allocate capital to the marginal cost of capital; so what it says in common speak is that you should only invest -- money should flow to where the highest investment return is, right? And that is where the highest productivity is in terms of utility function. We don’t exactly -- we are allocating capital to the highest nepotism, to the 20%, to the safe place, to the complacent place. So the counter argument is things are actually so bad that they can’t get much worse. If the stock market goes down 30-40% I’m not bothered to be honest Chris, it’s not going to make a material impact on Main Street. It does mean that people will stop buying stupid dividend yield plays and invest in real capital and real [Inaudible 00:33:56] in SME companies and making sure the loan credit union gets -- is the facilitator of the credit. We’re in a much better place.

We need to stop the 20/80 model, that is really everything and as soon as you do that you have exponential growth and jobs and disposable income and with that inflation will be back at a 3 to 3.5% and your saving rate will be up, your return for the ones that have net savings will be paid again 4%, 5%.

Chris Martenson: What about this view then that the central banks are deathly afraid of a market correction because—and this is my interpretation of it—they’re afraid that when it gets started they won’t be able to control it?

Steen Jakobsen: They -- to be honest [Inaudible 00:34:39] they know they can’t control it but they would love to control it. They are power people, they only -- the only thing that really went well for Bernanke in his time as chairmen of the Fed was the stock market, right? Everything else was wrong, he left the Fed which were the inflation target was significantly below where the labor market in terms of the -- the long term unemployment remains very, very weak. The participation rate, the worst ever, the inequality the highest ever. I don’t think that is a legacy that goes down in the history books as good. But the one thing he had was the stock market.

The stock market is seen, wrongly, as the only market which is a true market because the fixed income market has been distorted by all the quantitative easing and the monetary [Inaudible 00:35:25] that has been going on. But there are no markets and that is the beauty. You know when the market comes back we will have a two-way street, we will have good -- the good stocks will survive, the bad ones will disappear and that’s not bad news Chris, that’s good news. Will it cost them savings, some money again because they get lured in? Probably. But that’s for people to realize. What they should realize right now is that’s too much liable, leverage in the banking system, there’s too much leverage in the corporate world due to buy backs and missing payments into pension schemes. And that is the risk; if people want to play that game I think they should. I mean I’m not the one, there is probably a 10% upside but there is also a 30% down side. Or put differently we are playing a game of musical chairs but in traditional musical chairs there’s one chair missing when the music stops. I think the risk is there’s going to be three chairs missing, but its three chairs; it’s not the end of the world.

Chris Martenson: All right. Well you know it’s -- for me I am worried that this de-leveraging has quite a way to go because here’s my model. My model says that somewhere in the 60’s, early 70’s my country began running up our aggregate debt markets, our total credit market debt at roughly twice the rate of underlying GDP growth, even faster than nominal growth. And so any school child I think could work out with a crayon and a napkin to say you can’t grow your debts faster than your income forever. I think we had our first warning shot in 2008. Instead of saying “well maybe we should not have done that” the Fed has done everything it can to get us back on that credit train. But it’s a mathematically illogical place to be. Can our system function though, with -- and here’s why I think we’re really far up the step ladder. I think all those years, decades of over borrowing simply represent stored potential energy that needs to be somehow rung out of the system. I’m worried that ringing out is a painful process of deflation. That’s a concern, is that a legitimate concern?

Steen Jakobsen: It is but you again, you’re arguing in terms of the recent past. We just touched briefly on China. China has 4 trillion dollars worth of reserves, mainly US reserves, which they’re going to activate in renminbi into the Silk Road and the AIB. Meaning interest rate in the US will go up, it will force people to de-leverage, it will force people to save more. The US economy needs to be more self sustained in terms of its ability to access credit. The US have had the best of all worlds, lower interest rate, lower inflation and the dollar which were the main denominator in foreign trade. It's not the case anymore. I think Summers was out with a great article recently and I’m normally not a big Summers fan, but this Silk Road, this AIB investment bank in Asia is the biggest tectonic shift in monetary history since World War II, since the Marshall Plan basically. And the US is left behind. But I think that is a good thing because the US will now own up and the US will be back and the US will be stronger for it. But as you said yourself I think we agree on one thing, we need to see some sort of a failure in the system for people to wake up. I think it’s very close by and I think we agree on that, yes.

Chris Martenson: Great, so if I was going to summarize your position on stocks it would be the sentence, "first the fall."

Steen Jakobsen: Yeah.

Chris Martenson: Something like that.

Steen Jakobsen: Absolutely. But you know take six month holiday, 12 month holiday from the market and play with your kids and educate yourself. It’s not the time to be impatient about returns right now.

Chris Martenson: Well Steen this is why you, by far, are my favorite economist in the world and I love this conversation. You are absolutely a great thinker and I love the passion and I love this idea that what really has to happen here is not figure out how to weasel a couple more basis points out of this or that; it’s that we fundamentally have to get back in the game, become engaged and really take charge of our future or face whatever future gets delivered to us and that doesn’t seem right.

Steen Jakobsen: Yeah, I want US to be the most ambitious place on earth again. I think you lost that over the last two decades.

Chris Martenson: Ambition, I love it. Well Steen so for people who want to follow your excellent work, which I do, where would they go do that?

Steen Jakobsen: So they can go to Saxo Bank's research platform, which is very easily called tradingfloor.com and you will see -- it’s free to sign up and people can do that. And anyone -- you are facilitating on the call Chris, you know I’m very willing to put them on my private email list as well; so anything I can do to help. But understand I’m always just trying to provoke people to think. I think that is my main objective as an economist. Whatever happens in the world I cannot control, but I can point out what is wrong and through my travel experience I do see a lot of nonsense from policy makers and guys like myself.

Chris Martenson: Well fantastic Steen, always a pleasure. I love how you think. Thank you so much for your time today.

Steen Jakobsen: Thanks for having me Chris.

About the guest

Steen Jakobsen

Mr. Steen Jakobsen serves as the Chief Investment Officer and Chief Economist of Saxo Bank (Switzerland) SA. Mr. Jakobsen serves as the Chief Economist at Saxo Bank A/S, Research Division. He serves as Group Chief Information Officer and Managing Director for Business Area of Asset Management at Newcap Holding A/S. Mr. Jakobsen has more than 25 years of experience within the fields of proprietary trading and alternative investment. Mr. Jakobsen has been with Saxo Bank for 14 years with a short break from 2009 to 2011 as Chief Investment Officer of Limus Capital.

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24 Comments

treebeard's picture
treebeard
Status: Platinum Member (Offline)
Joined: Apr 18 2010
Posts: 590
Great Podcast

Productivity investments do make sense, thanks for that analysis.  This is the best financial discussion I have heard yet.  Thanks Steen for saying that a 30% to 50% whack on the stock market will only affect 10% of the US population and that is really what we need to turn around the investment classes.  Most of us are not concerned how far they fall of their step ladder, let 'em drop.  Our infrastructure is a national embarrassment second only to our educational system.  Our medical system follows as a close third.  (My father-in-law very recently passed away, we were fortunate enough to be able to care for him at home were he was able to have a peaceful death. Dealings with the medical system was an astounding embarrassment.  Hospice nurses were the one exception to all this).

Is this materialistic, wealth worshiping, me myself and I culture willing to sacrifice anything for something bigger than themselves?  I am afraid most political and economic opinions are based on the I want my cake and eat it too theory of life.  "If only there were less people, then I could have nice fat bundle of resources again to consume for myself, If only we had free markets, then everything would fix itself with no pain to me, if only we had sound money then everything would self correct with no pain to me."  Because of course we are the only smart diligent hard working people who deserve anything, everyone else, the sheeple as they are called, are indolent, lazy go for nothings who are after my hard earned stash of stuff, why should I sacifice anything for them.  I'm stocking up on amunition and armaments.  Why should I invest my hard earned money in the education of somebody elses kids, why should I help pay for a bridge that somebody else drives on, me myself and I, memyself and I, me, myslef and I!

mars ultor's picture
mars ultor
Status: Member (Offline)
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Posts: 1
Complete sense

This makes sense

The paper has reached its horizon - still paper is clouding it

 

Any turn has to turn sometime, at a time of fundamental shifts those who are

ahead, and aware can see how a shift from Wallstreet may serve all of us.

 

Thanks for a great riftvalley of content

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
Margin Call?

I an financially illiterate so for this podcast I had to first find out what it was.

Selling something you know has no value

From this trailer. 

Margin Call Trailer:

Petey1's picture
Petey1
Status: Bronze Member (Offline)
Joined: Sep 13 2012
Posts: 58
Challenge accepted!

I really like this guy. Time to stop complaining and start taking action. This is what I decided to do. I own some residential rental property in Florida. I first planted low maintenance Florida native trees and shrubs to block the hot summer sun and bring some nature back. Next I have started replacing light fixtures with led bulbs and started sealing the units for air leaks. My tenants have been very happy with the improvements and really like the idea of saving on their energy bills. The like it so much we are talking about me installing solar panels at my cost and they will pay me the difference in the electric bill until the panels are paid off or they move out. I am enjoying this so much I plan on buying another unit. This may not be the best return on my money but it feels good and I can still make a living. 

robie robinson's picture
robie robinson
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Posts: 1148
Petey1

That "feeling" is the feeling of "real" wealth.

congrats, robie

Oliveoilguy's picture
Oliveoilguy
Status: Platinum Member (Offline)
Joined: Jun 29 2012
Posts: 578
Solution to Police Brutality

Chris. Great interview.

I really like your proposal on a financial penalty for police brutality. " My solution to that would be listen if the police want to behave that way, that’s fine. But when they lose a civil judgment that comes straight out of the police pension and it’s not made whole or topped off by the taxpayers. Trust me, after the police lose a few million out of their pension the local police, the retired ones will all get together and say “We can’t have that guy on the force anymore” and it will solve itself. I think market forces could solve this."

This is a side bar to a great interview. On the larger point, I agree that we need to be ambitious and invest at home rather than chasing yield in an insane market.

Can someone please explain to me why anyone would buy a bond at a negative interest rate? 

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5064
why buy bonds at negative rates?

Here is one example:

Let's imagine you are the CFO of a company in the Eurozone.  Your job is to make sure your company's bills get paid.  To do this, you must safeguard (let's say) a quarter-billion Euro in working capital - to make payroll, pay suppliers, etc.  It has to remain relatively liquid, but your top directive from the board is, "don't lose the cash, whatever you do."

Do you:

a) put it in a bank account, where amounts in the account over 100,000 euros are subject to bail-ins, and for which you receive no interest?

b) buy short-term euro-denominated sovereign debt (i.e. around 30-90 days), for which you pay a nominal fee of 20-30 basis points?

Hands down, the answer is "b".  Answer "a" will land your company in a world of hurt if you happen to lose "bail-in roulette" by having your deposits in the wrong bank.  And in spite of all those passed stress tests, "everyone knows" that the banks are over leveraged...which just happens to be true.

Just my opinion.

Jbarney's picture
Jbarney
Status: Silver Member (Offline)
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Posts: 233
Mixed Reviews

Hi,

Perhaps I need to listen the Podcast again, but I give this one a little bit of mixed reviews.  There is nothing wrong with some of the content, but I will share my "eh" reaction first.  Maybe it wasn't meant to come across this way, but I thought some of the "just stop complaining" comments came across as too simplistic, almost as though the interview was part motivational speaking, and don't worry about what you can't control. 

I can accept that to a certain degree, but while approaching 40 years old, it is kinda hard to look at the long term pension numbers related to my job, or social security, etc, and shrug it off as a "take control of what you can" moment.  I still have to pay into those systems.  That said, I agree with the content, as over the years I have been trying to accumulate other savings using other vehicles.  Perhaps the disconnect for me comes that there was an acceptance during the podcast that there would be a significant down draft in the market....but the discussion about the long term math related to our problems were not really addressed.

Some of the stuff I did like involved the numbers related to when the coming down movement occurs.  Putting things in perspective, if the market limps down 30% or 50%....I guess it really would effect those with paper assets the most....that said, I still wonder how that would hit the rest of us.  If properly prepared, hopefully in would be minimal.

Don't want to sound too negative.  Taking control of what I can is something I have been trying to live by for the last couple of years.  Since the sugaring season ended I have been heavily involved in trying to properly mulch my small orchard, planting different bushes and trees around the property, getting the garden ready.  So I guess I have been livng by the words spoken in the podcast.

Peace,

Jason

KugsCheese's picture
KugsCheese
Status: Diamond Member (Offline)
Joined: Jan 2 2010
Posts: 1428
There will be no political

There will be no political will to fix the crony based problems until there is painful full out crash.  Then the danger is a Hitler type character appearing.  Never again?   Remember Dynamite was supposed to end all war.  

Michael_Rudmin's picture
Michael_Rudmin
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Posts: 772
Brutality judgements out of pensions! yay!

Now who wants to put the bell on the cat?

Jbarney's picture
Jbarney
Status: Silver Member (Offline)
Joined: Nov 25 2010
Posts: 233
Taking Control

Re-read my post and thought it was too pessimistic....so...thought I would contribute something of value....

On the topic of taking control, those of us who have a little land to garden/build orchards....we should really investigate doing what we can to improve soil/make our land healthier one step at a time.

With spring finally here, I have been reading "Teaming with Microbes" by Jeff Lowenfels and Wayne Lewis, an excellent book about cultivating your soil...treating it the right way to ensure you get good compost, a healthy productive garden, and great soil for your orchards.

It is kinda text-booky....but I am shocked with how much I am enjoying a book about dirt.

Take control of what you can grow on your land...and you don't have to worry about buying it if something happens.

Peace,

Jason

RoseHip's picture
RoseHip
Status: Silver Member (Offline)
Joined: Feb 5 2013
Posts: 147
Let your habits go

Due to our algorithmal linear thinking habits it appears that we are becoming lazy. And most will agree. Yet the solutions are in opposition to most reactions to this important realization. I feel inclined to remind those that are feeling stuck, the lessons of the fog. And besides, the incentive structures are broken beyond repair. Do the things that help you not do, plant, teach, cook, help. Now is the time for visions to appear. A great power is unleashed when you pair patiently waiting with staring into nothing. Nature abhors that.

You can go ahead with believing we are in just a rough patch, yet remember the energy teachings Chris has shared and practice that internally first before practicing it externally. The great humbling is upon us. Support, love, friendship, respect, honor, ect... To help deal with the despair we share. Fuck it, we say lets go build a fish pond!

If you must do, then hasten this story's demise.

Petey1's picture
Petey1
Status: Bronze Member (Offline)
Joined: Sep 13 2012
Posts: 58
Thanks Robie

It's all about balance for me now. It is hard to make all the correct choices in this world we live in. You still have to make money to survive. What bothers me is how much waste our resources. I had to replace a entire stove because no one made a 50$ circuit board for it anymore. All the work and resources that went into the frame wasted. The stove could have lasted 30 or more years. It was less than 8 years old!

KugsCheese's picture
KugsCheese
Status: Diamond Member (Offline)
Joined: Jan 2 2010
Posts: 1428
Petey1 wrote: It's all about
Petey1 wrote:

It's all about balance for me now. It is hard to make all the correct choices in this world we live in. You still have to make money to survive. What bothers me is how much waste our resources. I had to replace a entire stove because no one made a 50$ circuit board for it anymore. All the work and resources that went into the frame wasted. The stove could have lasted 30 or more years. It was less than 8 years old!

 

A year or so ago my brother's dishwasher that was 4 years old went.   The GE service tech stated the part was no longer made so a newer model was needed.  I explained to him that this kind of equipment down to blenders used to work 15 to 20 years with minimal maintenance.   He replied back that replacing equipment more quickly is better for the economy.   

Oliveoilguy's picture
Oliveoilguy
Status: Platinum Member (Offline)
Joined: Jun 29 2012
Posts: 578
Thanks Dave....Makes sense
davefairtex wrote:

Here is one example:

Let's imagine you are the CFO of a company in the Eurozone.  Your job is to make sure your company's bills get paid.  To do this, you must safeguard (let's say) a quarter-billion Euro in working capital - to make payroll, pay suppliers, etc.  It has to remain relatively liquid, but your top directive from the board is, "don't lose the cash, whatever you do."

Do you:

a) put it in a bank account, where amounts in the account over 100,000 euros are subject to bail-ins, and for which you receive no interest?

b) buy short-term euro-denominated sovereign debt (i.e. around 30-90 days), for which you pay a nominal fee of 20-30 basis points?

Hands down, the answer is "b".  Answer "a" will land your company in a world of hurt if you happen to lose "bail-in roulette" by having your deposits in the wrong bank.  And in spite of all those passed stress tests, "everyone knows" that the banks are over leveraged...which just happens to be true.

Just my opinion.

This confirms that Bail-ins are now accepted as part of our financial landscape. That really sucks.

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
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Posts: 5569
Yes, assume theft is the "new normal"
Oliveoilguy wrote:
davefairtex wrote:

Here is one example:

Hands down, the answer is "b".  Answer "a" will land your company in a world of hurt if you happen to lose "bail-in roulette" by having your deposits in the wrong bank.  And in spite of all those passed stress tests, "everyone knows" that the banks are over leveraged...which just happens to be true.

This confirms that Bail-ins are now accepted as part of our financial landscape. That really sucks.

As we've long stated around here at PP, you must assume that the rules will be changed.  Uh, in favor of those in power (as if that needs to be said).

So join me here in wondering at where we all find ourselves.  It is now possible to write the sentence "you might lose most of your money in a 'bail n' so invest in negative bonds" and if you had told me ten years ago that this would be written, I would have rebelled and rejected it as impossible because who could believe such a  thing?

khinnenkamp's picture
khinnenkamp
Status: Member (Offline)
Joined: Sep 2 2014
Posts: 7
Energy Conseervation, two main points

I moved to Florida in 2010 and bought a house here in 2011. Since then I have replaced the AC with a new high efficiency unit, replaced the air ducts, insulated the attic, and installed new energy efficient windows and doors. In 2012 I installed a solar hot water heater and installed solar PV. I also replaced the appliances and light bulbs.  

Payback on my investments will take 15 plus years, but I e did it to try to do the right thing. One thing I think is disturbing here in Florida is they passed a law requiring residents to be connected to the grid. What? Energy independence is illegal in the sunshine state? So even if I use no energy from the grid, I have to pay their fees to build energy infrastructure I may never use. Our state government at work.

Now another issue I have with government is the insane rules on hemp. We still can't grow it here in Florida where it could yield two or more valuable crops per year. Kevin Hodge is about to open a facility that can build hemp adobe homes near Reno, NV. Hemp adobe is highly energy efficient, insect resistant (no timber used in the building process), mold resistant and Kevin has tested hemp adobe with a 4 hour continuous flame with no ignition. Hemp adobe homes will come in at about $80 per square foot compared to a national average of $125 per sq foot to build with traditional materials. A 1,000 square foot home can easily be stood up on a prepared site in less than a week. Hemp adobe materials will be made into cabinets, counter tops, etc. Add your appliances and move in. 

We still face opposition to hemp in this country because of its association with marijuana, even though they are not the same thing. I get resistance from even discussing the benefits of hemp with some people as the lifelong impact negative government propaganda has brainwashed us into thinking that the cannabis plant is somehow evil. 

To be clear, hemp has amazing properties and potential benefits for mankind. The seed is among the most nutritious foods, including omega 3s, 6s, and 9s. Hemp can be used for fashion, paper, clean bio fuels, nontoxic biodegradable plastics and so much more. All of these benefits, yet the government and media are not educating the public. To learn about hemp, people need to explore the topic for themselves, but most don't have the time or inclination. They can't be troubled to think seriously about the future sustainability of the earth.

If we as a society can't even have a public discussion in the media about the huge benefits of a plant, how can we expect to get anything done about education, deteriorating infrastructure, pollution of the oceans or anything else? The powers that be have succeeded in controlling our consciousness to the degree that we have lost the ability and even the desire to do any analytical thinking for ourselves.We don't know what is good for us unless the media tells us what it is. Getting people to think in terms of the future preservation of the globe is too much of an uphill battle for them. Most are too apathetic to be bothered. People are conditioned to only concern themselves with themselves and their immediate families and situation. It is too much of a burden to think of anything else.

 

 

 

Christopher H's picture
Christopher H
Status: Silver Member (Offline)
Joined: May 29 2009
Posts: 148
I'm not as optimistic on America's future as Mr. Jakobsen

First off, I do have to say that this was a very thought-provoking interview.  I think that Mr. Jakobsen obviously brings a tremendous amount of knowledge and expertise to the table on the subject of capital markets.  And I did really like his argument to abandon paper instruments and instead look to actually invest in people you can shake hands with, who are doing good things to increase productivity.  Personally, I think that this is the next wave in investment (or, put another way, getting back to ACTUAL investment instead of speculation) -- but I also think there will be a lot of pain and destruction of financial instruments before we get to that point.  I also thought there was a great deal of logic behind his idea that a 50% correction in the equity markets will help to minimize inequality levels -- not by raising up the bottom to an unrealistic standard of living, but rather by reconciling the tertiary economy (financial paper) with the primary (natural resources) and secondary (manufactured goods and direct services) economies.

One thing I've noticed over time, though, is that when you often get financial and economic specialists branching out into other realms, what you too often find is that their conclusions are blinded by the assumptions nested within their specialty.  For instance, Mr. Jakobsen's belief that the US will have good times in the future, that nepotism/cronyism can be countered by holding politicians accountable, and the idea of investing in infrastructure bonds with a guaranteed rate of return as key to a better future.  I've spent a fair amount of my adult life studying history, both on my own and within a university setting, and I don't see any historical parallels suggesting that any of these things are going to happen.

Kevin Phillips, in Wealth and Democracy, details the manner in which elites within empires transition from investing their capital domestically initially (while returns are still good) to investing capital outside of the imperial center, or in speculative schemes (when returns on domestic investment wane).  It happened with the 17th century Dutch trading empire, and in 19th century Victorian England.  And it's been happening for 25-30 years here in the US.

Then there's the transition within imperial tribute economies, as pointed out by John Michael Greer perhaps most directly, where returns stop being based upon pooling capital toward productive purposes and instead become about gaming the system through corruption and nepotism.  Again, ask yourself where the US is on that continuum....

Lastly, there's the manner in which the people of the US are unconsciously trapped by the story of the frontier that is at the heart of the first 383 years of American settlement and development, dating back to the founding of the Jamestown colony.  As Fredrick Jackson Turner pointed out back in 1893 (http://nationalhumanitiescenter.org/pds/gilded/empire/text1/turner.pdf), the national character of the United States was largely shaped by the idea that there was always "more" just over the horizon.  Except, for the past 125 years, there hasn't been "more" in terms of land, and over the past 45 years there hasn't been "more" in terms of energy.  Yet, if you take into account our national consumptive patterns, agricultural policy, etc., we are still operating under this highly outdated software, acting as if there is still a "more" out there to be discovered and exploited.  Furthermore, the removal of this safety valve of a growing body of land available for settlement (after it was expropriated from the native peoples, of course) increased tensions within our society significantly during the time period following the closing of the frontier -- an increase that was only temporarily ameliorated by the ascendancy of the US to the status of a global empire with the tribute economy that goes along with that role.

I don't think that any of these factors, looked at as a coherent greater picture, bode well for America's future.  Then, add into that equation the vast majority of people who look to outsource as much of their own lives as possible (turning over their retirement funds to financial advisors, eating processed food-like products from the grocery store, cheering military adventurism abroad while insisting it is to be left to "others", etc.) so they can continue to while away their free time watching TV and engaging in consumptive activities (lavish vacations, playing golf, amusement parks, sporting events, etc.), and the picture begins to look even less rosy.  But it does make the work of those who have managed to pull our heads out of the sand and get busy taking control over more aspects of our own lives even more important, because when things do finally implode people will be looking for ways to hold on to at least a piece of what they've become accustomed to.  And unless we are there to say, "Here's what I did, and let me show you how I did it," they will turn to demagogues promising to return them to a mythical golden age.

aggrivated's picture
aggrivated
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Posts: 527
The American Frontier comment to CAH

You well said: 'Lastly, there's the manner in which the people of the US are unconsciously trapped by the story of the frontier that is at the heart of the first 383 years of American settlement and development, dating back to the founding of the Jamestown colony.' 

I am reading John Michael Greer's novel "Twilight's Last Gleaming". It's a great page turner.  But he is also such the dry humorist in his writing.  The name of his American president when the country finally is soundly defeated is 'Jameson Weed'.  For those of us who dabble in herbal medicinals the Jimsonweed or otherwise known Jameson Weed was accidentally served in a salad in Jamestown the first year of its settlement.  The dinner party was taken very ill with the hallucinogenic and amnesic affects of the Jameson Weed and took days to recover.  In a similar way, over its history America has been caught up in its vision of Manifest Destiny to the point of tripping out with the vision that the whole world was its own personal oyster. 

Greer's novel is an sobering look at a possible end to that hallucination.  However it actually ends, I think our sobriety will be hard at first.  My hope is that, after the hangover and headaches,  we can get beyond being a sober drunk and start treating the rest of the world with respect.

pinecarr's picture
pinecarr
Status: Diamond Member (Offline)
Joined: Apr 13 2008
Posts: 2237
Thanks for the book tip, Jason!

I just ordered "Teaming with Microbes", and Lowenfel's follow-up book on plant microbiology.  I need all the help I can get improving my gardening knowledge and skills!

Also, I don't think your previous post was overly pessimistic.  I thought it was an honest and fair assessment; nothing to apologize for at all.  However, I'm glad you did the follow-up post so I learned about the soil book!

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Jbarney
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Joined: Nov 25 2010
Posts: 233
"Teaming with Microbes"

Hi Pinecarr, (and other gardeners)

Thanks for the response.  To be honest, when I started prepping I never thought my direction would go in this one particular place, but I must say that I have really enjoyed a turn more towards self-sufficiency and having a homestead. After watching the Crash Course, aside from the fear, the introspection, and all of the preps, I learned that the things I could better do for myself put me in a better situation whatever way the future may unfold.

"Teaming with Microbes" is my most recent effort to become educated about how to best grow food for the long term.  As I stated before, much of it is like a text book, but the authors write well enough to make the subject matter applicable and down to earth.  The basic idea is that the movement in the 70s, 80s, and 90s, to apply pesticides, fertilizers, and chemicals to the ground was absolutely the worst possible thing to do.

The book argues, quite well, that the only true way to make sure we are eating good healthy food, is to become aware of those things which allow the food to grow in the first place.  Overall, it explains how bacterial environments and fungi environments can both be manipulated to improve soil quality and the quality of what we eat.  There are sections on composting, backyard gardens, and orchards/trees.

To tie this with the Steen Jakobsen podcast, I think it is naive to think the top 10% taking a massive paper wealth hit is not going to affect the rest of us.  Whether we like it or not, the top tier of incomes do influence jobs and pay all throughout the economy.  The wealthy taking a hit can impact a lot of different things.

So perhaps my investment in my land, in fruiting trees, in berry bushes and shrubs, in the knowledge about how to make my land even more fertile is akin to his comment about not worrying about what happens in the paper economy.  I hope is comments are in line.

I just feel safer gathering knowledge, learning, and developing skills which will give me more control over what happens to my family in the future.

In many respects I have taken it on as a challenge.  Before I watched the Crash Course, the idea of successfully growing my own fruit trees, of taking care of my own garden, seemed foreign and boring.  One of my responses to studying Chris's work has been to make sure I can put food on the table if something does happen.

Right after I finished "Team with Microbes", I picked up "The Tree Book" by Jeff Myer.  My girl friend purchased it for us after we watched the Crash Course, but I needed to get my first few seasons of gardening behind me first.  By every definition I am an amateur, but I am learning and getting better.  "The Tree Book", is good, very extensive.  I doubt I am going to go through and research all of the trees in this book, there are so many.  However, my plan is to research the diversity of the trees on my property and see what I can do to add more variations of productive nut and fruit trees.  I consider it a challenge to make my 3.4 acres as healthy and full of edibles as possible.

Hope you enjoy "Teaming with Microbes".  It was a great book.

Jason

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Christopher H
Status: Silver Member (Offline)
Joined: May 29 2009
Posts: 148
Building wealth through building soil

Jason -- Thanks for all the info regarding your gardening/homesteading efforts.  I was wondering if you are also familiar with the work of Dr. Elaine Ingham surrounding soil microbiology.  You can listen to her presentation at the 2014 Permaculture Voices conference via the Permaculture Voices Podcast -- I think I listened to it 4 times so far and still have not been able to absorb it all completely.

I'm currently taking Geoff Lawton's online PDC, and one of the phenomena he discusses in the soils unit is how, on his farm, when the soil microbiology is really in full swing, the beneficial bacteria will actually climb up the surface of the plant above-ground and form a "force field" of sorts around it, protecting it from disease and making it invisible to potential pests.  He has confirmed this by looking at samples of his plants under a microscope.  Geoff claims that when he has planted corn under these conditions, he gets up to 5 ears of corn per stalk!

I've been looking into soil microbiology a good bit over the past year or so, and it's where I have directed my attention in my gardening efforts.  I sowed clover mix cover crop on almost all the beds in my annual gardens to form a living mulch, conserve moisture, provide habitat for beneficial insects and spiders, fix nitrogen in the soil, grow fodder for my chickens and compost, and perhaps most importantly to create ideal conditions for favorable (aerobic) soil microbiology.  Those beds that did not get clover cover crop got a mustard/brassica mix instead.  I've sown a "good bug blend" of perennial plants around the edges of the garden plots to both confuse pests and attract pollinators/beneficials.  My aim in all of this is to increase the biodiversity within my garden plots to where it is able to maintain itself with minimal inputs while supporting the growth of bumper crops of veggies.  I'm sure that bringing chickens in to both work the beds at opportune times and help make compost by a variation on Geoff Lawton's "Chicken Tractor on Steroids" will only benefit this endeavor.

If my forest garden is any indication, it should work -- the most productive patch I have is the most biologically diverse by far, with comfrey and yarrow covering the ground between the fruit trees and bushes.  I have a 2-3 year old Nanking cherry shrub in this patch that is literally covered with blossom this spring, while another Nanking shrub planted at the same time in a different patch has a fraction of the blossoms!

Although there are certainly costs to be borne in all of this (I think I've spent close to $200 on cover crop seed alone), I share your view that it is one of the best investments that we can make.  Because everything you put into your soil will pay you back many, many times over -- and once you get that good biology established, it becomes self-perpetuating.  What paper investment out there is going to give you this kind of return?

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presentmoment
Status: Bronze Member (Offline)
Joined: Sep 22 2008
Posts: 57
America's Future

CAH,

I appreciate your post.  I agree with your observations about the prevalent culture here. 

"the vast majority of people who look to outsource as much of their own lives as possible (turning over their retirement funds to financial advisors, eating processed food-like products from the grocery store, cheering military adventurism abroad while insisting it is to be left to "others", etc.) so they can continue to while away their free time watching TV and engaging in consumptive activities (lavish vacations, playing golf, amusement parks, sporting events, etc.), and the picture begins to look even less rosy.  But it does make the work of those who have managed to pull our heads out of the sand and get busy taking control over more aspects of our own lives even more important, because when things do finally implode people will be looking for ways to hold on to at least a piece of what they've become accustomed to."

People who would blame other people for their conditions will not change their frame of mind that easily.  One of my concerns is the rise of more demagogues as you pointed out. 

One of hopes I have is a strong tradition of grass movements in this country. 

 

 

 

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Christopher H
Status: Silver Member (Offline)
Joined: May 29 2009
Posts: 148
The grassroots are dead. Long live the grassroots!

Presentmoment wrote:

One of the hopes I have is a strong tradition of grass(roots) movements in this country.

Most of the grassroots movements that came out of America past were a result of the widespread community organizations that existed here for the vast majority of our history, at least until suburbia conquered the landscape.  The grassroots did not have to be organized into a coherent force back then -- it was already organized and waiting for the call to action to go forth.

Contrast that with today, where the average American spends most of his/her free time engaged in consumptive activities, watching TV, or being entertained.  Community organizations are a shell of what they used to be.  As a result, the grassroots are a shell of what they used to be.

I agree completely that our populace is fruit ripe for the picking by skillful demagogues.  Combine that with the dearth of real grassroots community organization, and it's not a recipe for a rosy tomorrow.  Personally, I think we've moved beyond "fixing" any of these problems and we instead will have to navigate through the coming crises the best we all can.  Ultimately, I think that all of our chances boil down to how much we've invested in our households and immediate neighborhoods -- doing what we can to reinvigorate the local grassroots, as it were.  At least that's where I'm placing my sweat and savings.

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