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'Warned 2000 tech slide; predicted 2008 meltdown in 2007. Forecasted 2020 global economic collapse in 2011, AND NOW- BY 2050 - THE MOTHER OF ALL CRASHES"
Soon we will sail into the darkest months of the year. The possibility that both the economy and markets will not make it back to home port has never been greater. Human arrogance tests the limits of nature to unfortunate outcome. Welcome aboard!
Despite the sophisticated character of global markets, our instinctive behaviour still appears to be deeply tied to the rhythms of nature. Winter is coming, so mammals begin to prepare for the long dark days of the cold months ahead. Our instincts tell us to preserve, to protect, and to act with greater caution. This sets the stage for a fear-based panic, caused by a harvest of nuts that appears insufficient to survive the coming cold winter days. Our intelligence feeds an arrogance that we are above such primal rhythms. History suggests otherwise.
So with heads cleared of the giddy sultry summer days we revert back to the mean of our karma and revisit the cold facts. Starting with the most volatile August in recent memory, it reminds us of shore bound birds racing from the looming storm. This is a volatility no doubt tied to the debt of drunken economies that have eroded the possibility of prosperity by their very size. Still economists and policy makers continue to play parlour games with age-old ideas that have little to do with reality. So resources are dwindling. The earth is in overshoot. Shortages are growing. Hyperinflation is knocking. Social unrest is pandemic. Economic policies are trapped. So?
Drifting back to those Gatsby summer days of 1929, the markets then too began to sense that stirring of a storm. The economy was headed for colder winter days, with few nuts to be found. The roaring debts of those care-free times; had consumed, what was meant to be stored. Welcome aboard!
Two outcomes are certain in the next few months. Some people are going to make a lot of money. Most people are going to lose a heck of a lot more. You can take it to the Bank.
Face it the collapse of the Euro is inevitable as long as policy makers continue to hang onto old theories dating back to the 17th century. Abstractions. Abstractions. And more abstractions that have nothing whatsoever to do with underlying realities. Austerity programs in Greece, Spain, Italy, Ireland and the even the UK will lead to far less economic activity and even fewer jobs. Then less government revenues, more debt, more austerity. Welcome to the death march to a depression that will last for years to come.
Why are the economists and policymakers failing? The problem is they have been failing for years, by propping up a banking system where very little stimulus filtered back down to the real economy. The stimulus was used not to create concrete products, businesses and jobs, but to continue to inflate the financial assets of the select, elite and self-centred Banksters. The man on the street knows and senses, that a service-based financial economy produces nothing but hot air. And more hot air will not provide the job needed to feed his family.
So unless policymakers begin to refocus the stimulus toward the real economy and let these big banks with hot air assets fail, (they will ultimately anyway) the drummers’ march to depression grows nearer. The pace brisker.And, the Euro is doomed…
Comments on Goldman Sachs “not published” by NY Times???
Most likely, Goldman will soon follow the same villainous destiny as its famous younger siblings; Enron, Arthur Anderson, WorldCom and others. They too had been dark magicians who had also created “proxy fiat currencies" known as derivatives and such, then through the banking process converted them into real cash used to dispense huge fees to the overpaid Wizards of Oz. No one ever stood back for a brief moment of common sense reflection and asked, "How do you create billions in economic wealth by shuffling paper?
"RISK MANAGEMENT!" is the retort they will sing together. “Yes, you see we make it disappear.".
“Sure buddy! Well, listen I was born late at night; but it just wasn't last night”.
For with the magical alchemy brewed by their nefarious mathematicians, the coffers of the Federal Reserve were opened wide to these Ali Baba's of Wall Street. Sadly the metaphoric undressing of this emperor has a price tag of unimagined calculations. With unrecorded contingent (?) liabilities approaching close to a trillion dollars; the heartland of a nation will bear its taxing burden. Again.
And where did this money go? Risk management? ....Guess again!
As pitchforks rise to storm the caverns of EmeraldCity they will demand accountability. Where were the Regulators? Where were the auditors? Who has the stewardship for the calling of "we the people"? Who?
What is painful is that it is not the first time. The game is well exposed (see “How it Works? The Wall Street Gang " And "The Smartest Guys in the Room") Still, let's hope it's now the last. That we finally rid ourselves once and for all, of these over-abstractions of financial engineering and direct our energies, resources and efforts to the "real jobs" at hand. That is clearly the better way. It is the real job.
"Cause ya see buddy, I was born late at night; but.... "
The content of this article covers issues that some readers may find either upsetting or highly controversial, so in all fairness we believed you should be forewarned .The article has two objectives. First, is to provide an inside glimpse into the current discourse among leading global investors and economists. Next to outline the thinking behind variables as they pertain to the current structure, trends and conditions of the markets and economies.
Before reading the response below, we urge you to read Brain Bloom's original article that was published last week in the UK. The title is"The Real Impact of the Primary Bear Trend that Commenced in 2000" Brian is a published author, friend and savvy trader. There are differences in views and references brought out in this exchange that should spur insights and further conversation. You are also welcome to add and share any comments below.
Hey not fair...what's science have to do with economics?
Markets Will Gravitate to ZERO
Laws of Nature Win…Hooray!
Thanks Brian:
Great charts and clearly said. You should consider writing as a career.
A few points are salient and bring further concern to the analysis. First is the number for CPI. It is more than cooked, in my view; it is blatantly fraudulent and will be manipulated by governments in all the years ahead to fool the people. My view would be to use the changes in the price of oil or gasoline as a more realistic proxy for inflation. I think the numbers would be more shocking.
Related to CPI is the concept of global purchasing power. If a unit of such existed, measuring both bonds and stocks by this measure would find that both asset classes are seriously underwater. Certainly, the year 2000 was the start of the longest running bear market in our history. I draw one additional observation here. Most people treat all the numbers in your analysis as reality. When indeed, nothing could be further from the truth due to both the deliberate corruption and misguided conceptual models used. The true realty is somewhere behind the numbersthat very few comprehend or fashion to do so.
As a result, it leads to poor decisions at every level of society. And the planet, people and future generations will suffer considerable costs and harms consequently.
Reference to Hedge Funds provokes curiosity and questions of meaning. The term is applied to a vast group of entities who share few traits that are similar. The failure of that test means that they are not homogeneous and thus defy simple analytical concern. Some for instance also invest directly in operating companies, real estate and god only knows what else. So this mix of traits makes Hedge Funds even less relevant for effective contrast or comparison with the markets.
As to your conclusions, I agree that investing in China or Russia, and others for that matter, is dubious. The uncertainty of law, corruption and political stability must be measured in any investment evaluation. Thus deeming any venture of higher risk; requires a higher reward. If such reward is commensurate with the risk in your mind, by all means proceed.
Real estate is still a viable investment. It should be based on the flow of global liquidity and the prospects for future economic activity to centre itself in the geographic area of concern. The old adage, location, location, location...in some respects makes it a simple decision based on macro-eco trends and circumstance. For instance today, selling a million dollars worth of real estate holdings in BuffaloN.Y., and then using the funds to acquire an equivalent property near the tar sands in Ft McMurray, Alberta is a slam dunk transaction. A no brainer...as they say!
As to the outlook for gold, currencies, markets and economies; gold is now the reserve currency in the real world. In the official government and media world, they hold onto the false belief that the US dollar is still the reserve currency. All of us may get very, very rich as long as the majority of people have a belief in this foolishness. Their confidence will be shaken only when the ravages of hyperinflation arrive. That could be sooner than we think.
The coming hyperinflation is directly related to the severe imbalance of resources (supply) and population (demand). Remember too, that supply and demand are economic abstractions used to often misguide our decisions by creating false equations and stories. The real concrete equation is the resource/population mix that is trending to a severe “terminal imbalance”. Resources are disappearing and yet populations continue to expand. There will therefore be a hyperinflation that cannot be cured by the best economic magicians, "Sadly, very sadly, other measures will prevail in laws of man or nature".
To touch briefly on the stock markets, there is one physical reality and outcome that most rarely reflect on. Stock markets will gravitate towards zero.At some point in time the actual physical and mathematical realities will prevail and they will have no value whatsoever. Heresy? How? Pretty easy to understand actually, as we gravitate towards no resources; few if any, companies will be able to operate profitably. When there are no resources the answer is clear. No stock in the world will have any value. Thus by the simple rules of mathematics and physics, the gravitational forces of these object constructs will act to make all stocks worthless at some point. Few predictions may be said with a higher degree of certainty. Very few indeed.
Overall Conclusions
Yes maybe for investment bankers their game has changed as the over-abstractions of financial engineering will pass into infamy. Because no algorithms designed by hundreds of MIT PhDs, can ever predict reailty. That is an irrefutable fact. Irrefutable! How we were fooled for so long remains a mystery; but there is no doubt, that the likes of Goldman Sachs and others have a much shortened life expectancy. Sooner or later, the algorithm of common sense rules the day.
However, as to the “Rules of the Game”, they have never changed. Just as we ignore the game of musical chairs pertaining to stock markets, we failed to appreciated or truly understand the “Rules of the Game”. These Rules are universal and include the principles of physics, mathematics, time relativity and thermodynamics. Ignoring these Rules has put currencies, markets, economies and our very existence at great peril. “Somehow this doesn't feel like a Game”.
Best of bests
“The Maverick Economist”
T A McNeil
CEO and Founder
First Financial Insights Inc.
Toronto, ON
This has nothing to do with Markets or Economics...Really? Think again!
Here we go. After forecasting the internet bust of 2000, then followed by the 2007 prediction that stock markets would soon face a major meltdown; and did in 2008, we put our record on the line this June, with the forecast of a global correction of historic magnitudes. Guess what’s happening?
So to help those in need of the primary drivers behind what is likely to be a financial storm of unprecedented magnitude, we decided to layout the seven primary causes behind this fiasco. Something that sets out the substantive points. Is handy. And, is simply, easy to remember. So, here we go, and we hope it helps to bring a little clarity to bear. The mother of all Bears that is.
The Economic Model is Broken
The meltdown in 2008 left one clear resounding message; all the economists had it wrong. There was something amiss in the theories and practises of the economic system that could not foresee and mitigate the crash long before it happened. Despite this, no major structural changes were made or proposed. Rather the same remedies that created the problem were embraced with greater froth. Print money, Create debt.
Same ole foolish and broken formulae from our Economic Doctors.
Too Much Global Debt and Circulating Money
Reason one then leads to the next cause. Global debt, inclusive of personal, corporate, government and derivatives, the total leverage some experts believe is now more than ten times world GDP. Frightening….you bet. There are two evil and powerful nemeses that are born from debt and its printing of money sibling. Leverage and dilution are reared to provoke levels of risk that are so unimaginable; the slightest wind blows the global financial house of cards into infamy
.
US Military Industrial Overreach
Two great Presidents warned America about the overreach of the Military Industrial (Congressional) Complex and that such an overreach could lead not only to the loss of democracy, but also the financial ruin of a nation. Why listen to the wise words of Washington and Eisenhower? What could they possibly understand? Rather, 737 US bases are now located throughout most of the world, and the country is involved in three conflicts, and a cerebral war on terror.
The economic consequences of the overreach are high, and well documented by history in the demise of Rome, Spain, Britain and others. The “addiction to standing armies and engagements”, deploys scarce resources to activities that have little future benefit (reusable bombs?).This leaves little room in the fiscal process to cut expenditures to prudent levels, promoting the path to greater debt and insolvency. More importantly, it crowds out resources needed by the conventional economy to preserve its progress, safety nets and well-being.
Major Countries Bankrupt
The list of nations facing this seems to grow by the day, as the perils of policies that encourage a debt induced economic demand and consumption is realized. When the nation does not currently have the resources to service its debts, and the possibility of future resources to pay its liabilities then the circumstances of bankruptcy prevail. Greece, Ireland, Portugal, Spain and perhaps even stalwarts such as Britain and America are members of this club.
America’s fiscal situation also castes a dark shadow on the club, due to its reserve currency status. The $12.4 trillion plus in debt, plus unknown contingent and unrecorded obligations, are beyond large, and certainly raise key questions. How will the interest be served when rates ultimately rise? In a world of depleting resources, the surety of repayment garners more than doubt. The debt at its total may even exceed the value of total oil reserves. A dark shadow indeed.
Growing Populations and Depleting Resources
The growth formula of the prevailing economic model is advancing the growth of populations and the speed of resource usage through consumption. For starters, no one ever questions the wisdom of perpetual growth. Does it not seem strange that a system pushing unbridled growth seems to simply grow larger economic and political problems? Perhaps to a point where solutions are no longer feasible.
The above causes begin to tie together in simple fashion. Growth triggers populations that consume more resources, thus needing further military industrial overreach to fulfill the needs. The overreach combined with debt induced consumption causes government to print more money and issue debts to maintain the flow. Ultimately too much debt is created and a bankruptcy occurs when resources no longer exist to service or pay debts, due to consumption by the ever-expanding population and overreach. A population once needed to fuel the growth originally believed of benefit to economic progress, aborts attaining this goal. Ironic?
No New Industries; Jobs; Consumption - Possible
The "growth economists" argue for more stimuli by way of debt to create more consumption and jobs, which in turn will lead to more industry. More debt…you have gotta be crazy? That’s what contributed to the mess in the first place. "No! No! they plead; this time is different, as it will grow us out of the problem". Sorry but the math and physics now dictate a more constrained view of reality. The clear constraints are in the future interest costs of the debt that may never be serviced when increased. Also, the unknown yet real constraints of resources that are not available to the nation to repay the total debt.
Thus new jobs and consumption seem highly unlikely as the additional debt is not practical, plus the printing of money has diluted its utility to a point where more debt has little impact on real industry. The hope of new industries is constrained by this and another reality. One observer pointed out that to retire the US debt equates to the market cap of today’s S&P 500. Now to create such comparable industry, requires the ingredients of more debt, consumption, population, growth and resources beyond the reaches of human ingenuity. Well beyond,
Goldman Sachs, Wall Street, Others
Lurking behind the curtains are the unknown, unknowns. And their magnitude is not known or measured by any. History has shown that as economies lose their resource and productive capacity bases, they shift to less concrete endeavours associated with finance, banking and technology. So too, in recent decades have we seen this burst into the mainstream economy, with purveyors like Goldman Sachs and others from the bastions of Wall Street.
The financial engineering of derivatives by their likes leaves a hidden liability that may one day be assumed by the global economy. This is sad, as not only have these practices distracted time and resources from real activity; they skimmed the outputs of these more concrete undertakings. When the curtain closes, as it did with the likes of Lehman Bros, Enron, Bear Stearns and many others, the resultant trillions of dollars in debt will be added to the global debt burden. Another drag on future prospects.
Seven Reasons or Seven Sins?
No doubt more contributing factors may be highlighted or reasoned at some future point. Yet within the context of these causes should be found an embedded thread. This thread has the potential to make this bear market much different than others. Much different.
It is different because growth should no longer provide the quick fix to the addictions of debt, consumption and military overreach. It cannot provide this fix because it is constrained by the laws of logic, physics and mathematics. Those constraints are real concrete obstacles that cannot be overcome with the past remedies prescribed. So there is a little clarity brought to bear. The mother of all Bears.
T, A McNeil
First Financial Insights Inc.
August 10, 2011
Recommended Readings:
Quantum Realonomics
THE WEALTH OF PLANETS
Invisible Genocide: Fallacy of Economic Growth
"The Free Economic System" - Existential Economics
WARNING: these comments may have certain theological ideas that are provided only for the purposes of "clinical analysis"and readers may freely include theological beliefs of their choice in the analysis without disturbing the conclusions
Where's the INVISIBLE HAND now?
Economic Collapse 2020: A Failed Theory?
A General Theory of Reality, Science, Economics and Money
Comments Swiss Bankers/ Economists, July 31, 2011
Thank you again for your comments and questions. Please let me take some time to respond to the others later Let me remark about the thrust of what I am trying to achieve. First no matter how complex the reasoning or analysis the final conclusions reached must be easy for all to understand and practical to apply. This clarity is critical.
There were a number of issues that brought me to where I am today. First it was apparent that the macro economic model had failed in 2008, meaning that all thinking up to then may be seriously flawed in someway. If the past theories were right; the world should never have reached the brink it had then.
Second a major part of the problem relates to the printing of currency both by the state and agents of the state such as banks, investment houses and corporations. The latter could also create surrogate currencies such as stocks, derivatives, bonds etc that could be converted to the state's currency through the "banking process”. These powers were in place for numerous entities to create infinite amounts of currency based on future events and resources. That is logically impossible as it assumes we can forever create goods and services from a finite source (earth) to provide everyday value for the currencies created by these entities.
Third, in looking to identify where the best future opportunity for investments might be, it was clear that the importance of the expected life of oil reserves was paramount to every element of economic activity. And the future investment possibilities too. Thus the exhaustion of oil reserves meant all economic activities, as we know them, could possibly cease. Worse, the best guesses as to the life of reserves were running anywhere from 15 to 45 years. How then could we be printing all these currencies and surrogates when the whole system would shut down in a very real sense in a few short decades?
In other words, the idea that currency was acting as a device to symbolize that a store of value would be in existence at some future point was likely a fraud. An economic system highly dependent on oil and energy to generate its economic stores of value would soon in all likelihood no longer exist. Yet many nations and their agents continued and continue to create more and more currency based on the almost magical belief that "we could learn to create another planet earth" at some point in the future. That's collective insanity
In the last analysis, this meant that the actual printing of money needed to be logically tied to the finite resources of the planet. The printing of money needs to be better controlled in a world where that relationship exists. Think for a moment about what will logically happen when we create more and more money and people; yet there is less and less everyday utility available to meet basic needs. Prices must rise sharply and social unrest will be widespread as currency (or gold too) no longer converts to the store of value needed for everyday use. Why? Because there is none...and so, the final days of money should be extremely unpleasant.
Did we really think that money would last forever? What was the "scientific logic" behind such a belief? In reality...none. Most, I believe will be shocked to discover, that for money to be eternally operative we must conquer the laws of thermodynamics. Not likely; so to extend human survival, we must decelerate both the use of resources and population growth. (In turn this extends the useful life of money too) Then build a macro-economic model and its related currencies around realities of the physical sciences of our planet. A new theory of economics and money is thus required to better tie economic goals and activities to the planet's "likely physical constraints"
In order to begin building the new economic model we would first need a practical theory of reality and a conceptual framework that could be applied to all fields of knowledge. It is amazing that, so far, no one has documented or theorized such a framework. Instead we see reality generally being defined within individual fields of study or by religious doctrine that is in opposition to the clinical or existential method. It appears that out of real necessity that logic brings us to the need to define such a framework.
The elements of this framework derive from the pillars of common sense. There are first concrete constructs, that are defined to exist by our five primary senses and cognitive functions.(dollar bill, water, electricity mathematics).There existence is confirmed by object device or observation Then second, there are abstracts that cannot be defined to exist through our primary senses and cognitive functions (Invisible Hand, Fairy Tales, Santa Claus, Supreme Beings). These matters are largely created in the mind and cannot be objectively confirmed to exist by any devices or object means external to the mind. They are imagined.
Both constructs come in two forms; they are either visible OR invisible. Invisible concrete constructs are elements such as air, gravity, magnetic force, oil reserves etc. Visible concretes are readily apparent and too numerous to mention. Visible abstracts come in the forms of art, music, symbols and money among others. Imagined or invisible abstracts no doubt progress well beyond the last eternity. There is no doubt too, that a body of work exists on this framework that may lead to exotic metaphysical discourses, however a rudimentary view should suffice for this discussion.
As shown in the diagram (see article) many objects or ideas overlap and are found to have the characteristics of more than one construct creating confusion. Human nature it seems when faced with an invisible construct that requires everyday utility; "creates a visible concrete construct(s) to symbolize its existence". The human species ironically did this for both Supreme Beings and money. Much could be discussed here.
Thus the human mind operating with elementary cognitive functions converts these symbols of the abstract construct into a "real concrete construct". The elementary mind cannot distinguish between what is by nature an abstract or concrete construct. In its mind the abstract constructs are as real as Santa Claus is to children or as the Invisible Hand is to Economists. Money also takes on the realty of its existence through its everyday use. However without human cognition the symbol in its simplest form is paper, metal or a number on a page. That's reality.
Much more will be discussed about money in later remarks, as it one of the most complex objects we use. Moreover it strongly blends many of the characteristics of concrete and abstract constructs. It is a "virtual concrete construct” of sorts because everyday we convert it into other usable constructs or utilities. So it is easy to confuse its classification.
Sorry, these comments are longer than expected, such are a few lines. My thesis works on the view that the foundation of the current economic thesis was built at a time when the world seemed to have unlimited resources, in the 1700s.Thus it was started and based around Adam Smith's book, "The Wealth of Nations"
Today we know in reality that the premise of unlimited resources is false. The new economic model should therefore entail this reality and focus on theories and concepts recognizing the physical constraints as to "The Wealth of Planets" This overall line of reasoning ties to the "AustrianSchool of Economics," but with more integration with the natural sciences added.
Hopefully this helps to bring together the central thrust and gives the puzzle pieces more connection. Folks let me know if you have further questions, or where you think further clarity is needed.
