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Friday, August 12, 2011

The Mother of All Bear Markets..(Harvard Agrees? - VIDEO BELOW)

Stock Crash of 2011
The Mother of All Bear Markets

Seven Reasons Why?

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
Invisible Genocide: Fallacy of Economic Growth
"The Free Economic System" - Existential Economics
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Harvard Agrees?...WATCH