charleshughsmith
Executive Summary
- The Fed's inability to recognize the true dynamics of the 2008 crisis has re-inflated a market bubble and unfairly rewarded the big banks
- More credit/liquidity cannot solve valuation/collateral crises. But that's exactly what central banks are trying to do.
- How the Crisis of 2014/2015 will differ from 2008
- Why this time, failure of the system will collapse under its futility
If you have not yet read Why 2014 Is Beginning to Look A Lot Like 2008, available free to all readers, please click here to read it first.
In Part 1, we noted the similarities between early 2008 and 2014, and dismantled Alan Greenspan’s claim that the global meltdown of 2008 was unforeseeable. If markets are fractal, as argued by Benoit Mandelbrot, then we can anticipate more “once in a lifetime” crises than economists expect, and that such crises will be less predictable than expected.
After reviewing some technical charts that suggest trouble ahead in 2014 (or perhaps 2015 if certain cycles hold up), I asked how asset bubbles can be considered a “social good” if the current bubble is not boosting employment or income for the vast majority of Americans. I also wondered how the presumed fundamentals of “growth” (sales, profits, creditworthiness, etc.) can continue expanding if income is stagnating.
In Part 2 of this report, the goal is to examine the policies of the states (central governments) and central banks around the world that have boosted assets such as stocks, bonds and real estate to new highs. What repercussions are they creating, why they are failing, and why they will cause a crisis that will be as damaging as 2008 — yet unfold quite differently…
What Will Be Different About the Crisis of 2014/2015
PREVIEWExecutive Summary
- The Fed's inability to recognize the true dynamics of the 2008 crisis has re-inflated a market bubble and unfairly rewarded the big banks
- More credit/liquidity cannot solve valuation/collateral crises. But that's exactly what central banks are trying to do.
- How the Crisis of 2014/2015 will differ from 2008
- Why this time, failure of the system will collapse under its futility
If you have not yet read Why 2014 Is Beginning to Look A Lot Like 2008, available free to all readers, please click here to read it first.
In Part 1, we noted the similarities between early 2008 and 2014, and dismantled Alan Greenspan’s claim that the global meltdown of 2008 was unforeseeable. If markets are fractal, as argued by Benoit Mandelbrot, then we can anticipate more “once in a lifetime” crises than economists expect, and that such crises will be less predictable than expected.
After reviewing some technical charts that suggest trouble ahead in 2014 (or perhaps 2015 if certain cycles hold up), I asked how asset bubbles can be considered a “social good” if the current bubble is not boosting employment or income for the vast majority of Americans. I also wondered how the presumed fundamentals of “growth” (sales, profits, creditworthiness, etc.) can continue expanding if income is stagnating.
In Part 2 of this report, the goal is to examine the policies of the states (central governments) and central banks around the world that have boosted assets such as stocks, bonds and real estate to new highs. What repercussions are they creating, why they are failing, and why they will cause a crisis that will be as damaging as 2008 — yet unfold quite differently…
Executive Summary
- The erosion of community is due to many factors
- Understanding these factors enables us to begin combating them
- The 10 reasons American social capital is declining
- What it will take for a revival in social cooperation
If you have not yet read The Erosion of Community, available free to all readers, please click here to read it first.
In Part 1, we surveyed a number of explanations for the erosion of community, starting with the landmark 1950 book, The Lonely Crowd, and found that no one theory adequately accounted for the decline of social capital in America.
Here are ten other factors that could be factors in this long-term erosion:
1. The explosion of choices in the mass media (mentioned by Robert Putnam and Kevin K.) now offers endless opportunities to form a protective bubble around oneself: if you only want to hear views that confirm your existing biases, it's now very easy to do so, and you don’t even need to go out into the real world to do so.
Since confirming our own beliefs is safe and comfortable, our collective reaction may be to avoid people who might disagree with us. Eventually, such isolated individuals “socializing” in self-selected groups online lose the ability to function productively in diverse groups of real people in a real community.
2. The mobility demanded of labor. The mobility of labor in America–that workers can pull up stakes and move to better job opportunities–is often lauded as the key to the U.S. economy's flexibility and resilience. This is no doubt true, but that mobility eviscerates community: if you move every 2-3 years (as required of military personnel, Corporate America managers and many others), what's the motivation for joining and contributing to local groups?…
The 10 Factors Destroying our Social Health
PREVIEWExecutive Summary
- The erosion of community is due to many factors
- Understanding these factors enables us to begin combating them
- The 10 reasons American social capital is declining
- What it will take for a revival in social cooperation
If you have not yet read The Erosion of Community, available free to all readers, please click here to read it first.
In Part 1, we surveyed a number of explanations for the erosion of community, starting with the landmark 1950 book, The Lonely Crowd, and found that no one theory adequately accounted for the decline of social capital in America.
Here are ten other factors that could be factors in this long-term erosion:
1. The explosion of choices in the mass media (mentioned by Robert Putnam and Kevin K.) now offers endless opportunities to form a protective bubble around oneself: if you only want to hear views that confirm your existing biases, it's now very easy to do so, and you don’t even need to go out into the real world to do so.
Since confirming our own beliefs is safe and comfortable, our collective reaction may be to avoid people who might disagree with us. Eventually, such isolated individuals “socializing” in self-selected groups online lose the ability to function productively in diverse groups of real people in a real community.
2. The mobility demanded of labor. The mobility of labor in America–that workers can pull up stakes and move to better job opportunities–is often lauded as the key to the U.S. economy's flexibility and resilience. This is no doubt true, but that mobility eviscerates community: if you move every 2-3 years (as required of military personnel, Corporate America managers and many others), what's the motivation for joining and contributing to local groups?…
Executive Summary
- Will profit-chasing bring corporate capital back to the U.S.?
- China's dwindling T-bill leverage
- The decline of dependence on Mid-East oil
- Autarky may be the best investment for the U.S. (and similar nations)
If you have not yet read Part I: What If Nations Were Less Dependent on Another? available free to all readers, please click here to read it first.
In Part I, we sketched out a framework for evaluating the trade-offs implicit in autarky; i.e., national self-sufficiency. In Part II, we’ll explore a few potential ramifications of America’s declining consumption of energy and increasing ability to replace foreign-supplied capital, resources, energy, and expertise with domestic sources.
The core issue of autarky boils down to: What are the risks and costs of exposing the nation to the vulnerabilities of dependence for the convenience and profitability of remaining dependent on foreign providers?
Of the potential consequences, let’s focus on several high-visibility possibilities:
- China’s ownership of U.S. Treasury bonds possibly giving it leverage that amounts to blackmail-type veto power over U.S. policies.
- The dependence of U.S. corporations on foreign sales and the weak dollar for profits
- The decline of oil imports changing the calculation of U.S. interests in the Middle East and other oil-exporting regions
Profits as Priority
As I have often noted, the stupendous profitability of U.S.-based corporations is largely the result of non-U.S. sales and the profits reaped from a weak U.S. dollar. When the euro was at parity to the dollar a decade ago (1 euro = $1), U.S. corporations reaped $1 of profit on every euro of profit gained from sales in the European Union. Now the same one euro in profit generates an additional 35% in dollar-denominated profits due to the exchange rate.
I have also noted that the enormous importation of goods made in China has generated remarkable profit margins for U.S. corporations such as Apple, while the Chinese suppliers are eking out net profits in the 1% to 2% range for the privilege of manufacturing goods that generate gross margins of 50% to 60% for U.S. corporations.
In other words, the Chinese did not impose this trade on U.S. companies – the U.S.-based corporations extracted maximum yield on capital invested by moving production to China, not just in terms of lowering manufacturing costs but also in the enhanced proximity to the world’s great consumer-profit opportunities in developing Asian nations.
In other words, while other nations may focus on self-sufficiency, the American priority is profitability and maximizing return on capital invested. If and when profitability is threatened, capital pulls up stakes and relocates to whatever locale makes the best financial sense.
That the locale that makes the best financial sense is the U.S. is a new thought for many…
The Consequences of American Autarky
PREVIEWExecutive Summary
- Will profit-chasing bring corporate capital back to the U.S.?
- China's dwindling T-bill leverage
- The decline of dependence on Mid-East oil
- Autarky may be the best investment for the U.S. (and similar nations)
If you have not yet read Part I: What If Nations Were Less Dependent on Another? available free to all readers, please click here to read it first.
In Part I, we sketched out a framework for evaluating the trade-offs implicit in autarky; i.e., national self-sufficiency. In Part II, we’ll explore a few potential ramifications of America’s declining consumption of energy and increasing ability to replace foreign-supplied capital, resources, energy, and expertise with domestic sources.
The core issue of autarky boils down to: What are the risks and costs of exposing the nation to the vulnerabilities of dependence for the convenience and profitability of remaining dependent on foreign providers?
Of the potential consequences, let’s focus on several high-visibility possibilities:
- China’s ownership of U.S. Treasury bonds possibly giving it leverage that amounts to blackmail-type veto power over U.S. policies.
- The dependence of U.S. corporations on foreign sales and the weak dollar for profits
- The decline of oil imports changing the calculation of U.S. interests in the Middle East and other oil-exporting regions
Profits as Priority
As I have often noted, the stupendous profitability of U.S.-based corporations is largely the result of non-U.S. sales and the profits reaped from a weak U.S. dollar. When the euro was at parity to the dollar a decade ago (1 euro = $1), U.S. corporations reaped $1 of profit on every euro of profit gained from sales in the European Union. Now the same one euro in profit generates an additional 35% in dollar-denominated profits due to the exchange rate.
I have also noted that the enormous importation of goods made in China has generated remarkable profit margins for U.S. corporations such as Apple, while the Chinese suppliers are eking out net profits in the 1% to 2% range for the privilege of manufacturing goods that generate gross margins of 50% to 60% for U.S. corporations.
In other words, the Chinese did not impose this trade on U.S. companies – the U.S.-based corporations extracted maximum yield on capital invested by moving production to China, not just in terms of lowering manufacturing costs but also in the enhanced proximity to the world’s great consumer-profit opportunities in developing Asian nations.
In other words, while other nations may focus on self-sufficiency, the American priority is profitability and maximizing return on capital invested. If and when profitability is threatened, capital pulls up stakes and relocates to whatever locale makes the best financial sense.
That the locale that makes the best financial sense is the U.S. is a new thought for many…
Executive Summary
- The productive class will increasingly look for ways to protect its income and wealth from State hands
- Geographic redistribution of classes will increase, favoring lower-cost locales
- Expect tax revolts to start breaking out
- Diminishing returns and increased fragility of the status quo will result in a resurgence of volatility
If you have not yet read Part I of The Trends to Watch For in 2014, available free to all readers, please click here to read it first.
In Part I, I listed eight more trends to watch in 2014, in addition to the eight that are still in play from 2013. Following last year’s format, here are some of the consequences to look for in 2014-15:
Outcomes
1. Opting out will become increasingly attractive for the productive class. Since the Status Quo suppresses political resistance (in official eyes, the line between protest and domestic terrorism is awfully thin) while it loads on higher costs of friction, complexity, junk fees, taxes, etc. on the still-productive, opting out—retiring, quitting, cutting back, selling out—becomes a compelling option for those who can afford to do so.
Many have opted out simply because they have no other choice. Those who are close to retirement age and unable to find employment that pays more than Social Security benefits opt to retire and take the benefits early. The Social Security Administration has professed surprise that Baby Boomers are retiring early in larger numbers than the SSA projected. (File under “Duh!”) Millions of others have managed to qualify for Social Security disability (SSI), another form of opting out.
The Affordable Care Act (Obamacare) is one of many forces incentivizing opting out. The perverse incentives of the ACA make it “smart” to not enroll and not pay the penalty, either, as the IRS has already said that it won’t enforce the penalty for some time.
The ACA also heavily incentivizes managing your income to levels that qualify the household for subsidies. Higher-income households have a big incentive to lower their incomes to avoid paying sky-high premiums. Those with salaries cannot easily adjust their incomes, but households with self-employed or contract workers can opt to work less and thus earn less…
Outcomes to Bet On in 2014
PREVIEWExecutive Summary
- The productive class will increasingly look for ways to protect its income and wealth from State hands
- Geographic redistribution of classes will increase, favoring lower-cost locales
- Expect tax revolts to start breaking out
- Diminishing returns and increased fragility of the status quo will result in a resurgence of volatility
If you have not yet read Part I of The Trends to Watch For in 2014, available free to all readers, please click here to read it first.
In Part I, I listed eight more trends to watch in 2014, in addition to the eight that are still in play from 2013. Following last year’s format, here are some of the consequences to look for in 2014-15:
Outcomes
1. Opting out will become increasingly attractive for the productive class. Since the Status Quo suppresses political resistance (in official eyes, the line between protest and domestic terrorism is awfully thin) while it loads on higher costs of friction, complexity, junk fees, taxes, etc. on the still-productive, opting out—retiring, quitting, cutting back, selling out—becomes a compelling option for those who can afford to do so.
Many have opted out simply because they have no other choice. Those who are close to retirement age and unable to find employment that pays more than Social Security benefits opt to retire and take the benefits early. The Social Security Administration has professed surprise that Baby Boomers are retiring early in larger numbers than the SSA projected. (File under “Duh!”) Millions of others have managed to qualify for Social Security disability (SSI), another form of opting out.
The Affordable Care Act (Obamacare) is one of many forces incentivizing opting out. The perverse incentives of the ACA make it “smart” to not enroll and not pay the penalty, either, as the IRS has already said that it won’t enforce the penalty for some time.
The ACA also heavily incentivizes managing your income to levels that qualify the household for subsidies. Higher-income households have a big incentive to lower their incomes to avoid paying sky-high premiums. Those with salaries cannot easily adjust their incomes, but households with self-employed or contract workers can opt to work less and thus earn less…
Executive Summary
- Why the next stock market decline could be in excess of 50%
- What historic indicators of coming decline are telling us
- The case for holding cash now
- If the market does roll over substantially in early 2014, how long may the decline last?
If you have not yet read The Case for a Crash, available free to all readers, please click here to read it first.
In Part I, we attempted to answer the question, Which forecast is more likely to be accurate: that the Bull market in stocks will continue for years to come, or the market will swan-dive in yet another multi-year crash?
We concluded that there was little historical evidence to support the claim that the S&P 500 will extend higher for an additional three to five years.
Here in Part II, we’ll look for clues about the possible amplitude and timing of the decline that the five-year cycle of the “new normal” suggests is likely.
(A reminder on gold: I detailed a forecast on gold earlier this year based on price action around key support/resistance levels, and nothing in recent price action has caused me to amend that forecast. I have also noted that gold does not correlate well with either stocks or the U.S. dollar; i.e., its dynamics are largely independent of stocks and the USD. To the degree that gold is viewed as a “risk-off” safe-haven asset, it should do well if “risk-on” assets such as stocks crater.)
Forecasting the Amplitude of the Next Decline
A number of technical analysts have noted this megaphone pattern in the stock market, a pattern formed by alternating higher highs and lower lows. This is one basis of forecasts for the SPX to drop to the 500-600 level in the next downdraft, potentially retracing the entire Bull advance from 1995.
While this megaphone may not play out, it establishes a potential target for a crushing drop from current highs…
The Case for Cash
PREVIEWExecutive Summary
- Why the next stock market decline could be in excess of 50%
- What historic indicators of coming decline are telling us
- The case for holding cash now
- If the market does roll over substantially in early 2014, how long may the decline last?
If you have not yet read The Case for a Crash, available free to all readers, please click here to read it first.
In Part I, we attempted to answer the question, Which forecast is more likely to be accurate: that the Bull market in stocks will continue for years to come, or the market will swan-dive in yet another multi-year crash?
We concluded that there was little historical evidence to support the claim that the S&P 500 will extend higher for an additional three to five years.
Here in Part II, we’ll look for clues about the possible amplitude and timing of the decline that the five-year cycle of the “new normal” suggests is likely.
(A reminder on gold: I detailed a forecast on gold earlier this year based on price action around key support/resistance levels, and nothing in recent price action has caused me to amend that forecast. I have also noted that gold does not correlate well with either stocks or the U.S. dollar; i.e., its dynamics are largely independent of stocks and the USD. To the degree that gold is viewed as a “risk-off” safe-haven asset, it should do well if “risk-on” assets such as stocks crater.)
Forecasting the Amplitude of the Next Decline
A number of technical analysts have noted this megaphone pattern in the stock market, a pattern formed by alternating higher highs and lower lows. This is one basis of forecasts for the SPX to drop to the 500-600 level in the next downdraft, potentially retracing the entire Bull advance from 1995.
While this megaphone may not play out, it establishes a potential target for a crushing drop from current highs…
Total 177 items
by blaggers