What follows is an updated version of my very first post from late 2006. Clearly, in hindsight, the events that followed that original post during 2007/2008 were bad, but did not collapse the global Ponzi Scheme. The market has a way of testing us to separate the truly greedy and stupid from those who have learned their lesson. That's what I believe 2008 was - a test. It was a wake up call, and a last chance for all of us to accept reality. For those who heeded the warning and otherwise changed their ways by paying down debt and adopting a more sustainable lifestyle, then likely they will survive what comes next. For those who did not heed the warning, i.e. those still worshipping at the altar of greed or otherwise "bought in" to the status quo, they are going to be what we referred to in 2001 as - "FC.com". The most important point is that the over-leveraged structure and incentives of the Global Financial Ponzi have not been resolved one iota, except to become ever more leveraged by shifting the onus for debt accumulation from private citizens to sovereign governments in addition to global Central Bank monetization programs injecting $3 trillion+ of "hot money" into the financial markets. Unfortunately, the Idiocracy of the day can't complain that they had no advance warning that a collapse could happen...because one already occurred and they simply ignored it.
The Best Rally $7 trillion can Buy
Granted, it has been one hell of a market rally since 2009 - recovering 85% of the previous 2007 high. Staggeringly, the price tag here in the U.S. alone when combining fiscal and monetary stimulus comes to roughly $7 trillion. That equates to around $23,000 for every man, woman and child in the U.S. Add in the elimination of 5 million jobs which fell straight to the corporate bottom line, and soon you are talking real money. As one would expect of a Ponzi Scheme, the benefits of the past 3 years of Extend and Pretend accrued to only a fraction of people, while the remainder struggled under ever increasing debt loads and diminishing job prospects. Nevertheless, I must apologize for having been consistently premature in forecasting the demise of Extend and Pretend. I clearly had no clue how much money policy-makers would be willing to throw away in a vain attempt to sustain the unsustainable. That said, on a historical time scale, this forecast will be considered real time...
Which Gets Us Back to My Original Post (with minor updates)
The global Ponzi Scheme is unraveling and the rate of decline will accelerate exponentially. The first leg down was from 2000-2002, and the second leg down was 2008, but that was just a minor taste of what is yet to come. I am compelled to write now to describe the coming phase for two reasons: 1) because I think the pieces are now in place for an imminent decline 2) In case there is anyone, even one person, who reads this and benefits from the conclusions.
At this juncture, what most take for granted as the "status quo" is largely an illusion propagated by unprecedented ongoing fiscal and monetary stimulus. The global economy is nowhere near being self-sustaining and therefore debt levels are non-amortizing meaning additional borrowing is needed to refinance prior borrowing plus new spending. Therefore, what most people take for granted as the standard way of life, is neither scalable nor sustainable. Once other nations decided they wanted a seat at the big table, then the clock started ticking on our consumption-oriented lifestyle.
From a longer-term perspective, the U.S. economy peaked in the late 1960s and early 1970s in terms of industrial output (manufacturing), real median wages, and innovation. This trend was very apparent during the 1970s, but since the early '80s has been obscured by the massive "blowoff top" the Elliot Wave folks call a (terminal) fifth wave. Unable to rely upon innovation and manufacturing capability, starting with Reagan, the U.S. has been financing the last 30+ years' prosperity with debt and outsourcing (aka. estate sale). Debt at all levels (personal/household, local government, federal government), relative to income levels, is at the highest levels in U.S. history. Meanwhile organic job creation when adjusted for ongoing debt accumulation, is virtually non-existent.
The party looked to be stalling out in 2000-2001, but the Fed engineered another "recovery" by taking interest rates down to 1% (lowest level in history) and encouraging consumers to borrow yet more money to finance the current pseudo-recovery. The latest 3+ year Obama economic illusion is a pseudo-recovery, because it is not self-sustaining. How else to explain that in the 3rd year of an economic "expansion" government deficits equate to 10% of GDP? All of this debt, used to finance consumption, the Bush tax for the ultra wealthy, two wars etc. etc. severely limit the Fed's ability to stimulate the economy. Apparently very few economists, let alone people, comprehend how debt shifts consumption from the future to the present. Only debt that is spent to build/buy productive assets will enhance the growth of the economy. Debt spent to finance consumption is a burden on the future economy.
Meanwhile, the global 'economy' resembles a classic Ponzi (pyramid) scheme, in that a lucky few at the top are prospering at the expense of the majority at the bottom. In order to continue however, a Ponzi pyramid requires unrelenting growth. Meanwhile, the short-sighted wealthy sponsors of this Ponzi scheme are eagerly commoditizing every factor of production and job function so that they can package and sell the income streams and move the money to offshore cash accounts. This year, even as the minimum wage stands at a mere $7.25/hr and is lower (inflation adjusted) than it was in 1973, Wall Street is still taking home massive bonuses, despite almost collapsing the global economy back in 2008. Meanwhile the jobs of the majority at the bottom are being commoditized and rationalized, both through outsourcing and automation. Land fills are topping up with cheap junk and destroying the physical environment, while developing nations are competing to see who can offer the lowest wages and worst working conditions, in their bid to get a ticket to this insane lottery. Don't get me wrong, I understand that economic rationalization is a crucial part of capitalism, and I am not against private enterprise, however all levels of government have been induced to look the other way to ensure high returns on capital at the expense of returns on labour. This is classic 'Supply Side' economics aka. 'favour the employer over the wage earner'.
All of the above last point is moot, however, because all Ponzi schemes eventually fail. They fail because there are diminishing marginal returns to growth. Also, the scheme requires ever-increasing numbers of low income workers to expand the bottom of the pyramid. This constant flow of low wage workers into the world economy has increased profit margins to the highest levels in history, as high income workers in developed countries are swapped out for low income workers in developing countries. Beleaguered American workers, in a bid to maintain their lifestyles, have turned to debt in all forms. It's becoming ever more apparent that this strategy has now reached its predictable bad ending. Once we fall off that cliff into the depression, Dr. Bernanke won't have the tools to rescuscitate the patient. The American middle class will be dead on arrival (as will the middle class across most Western nations).
Here is what happens next:
The stock market has been in a bearish rising wedge since 2009, supported only by enormous amounts of ongoing monetary and fiscal stimulus. This is a dangerous market, because volatility is near recent years' lows and most investors are lulled into a false sense of security. Once the move to the downside begins, it will go far lower, far faster than the vast majority predict.
Once the stock market tanks, the economy will stall out and fall into severe depression, accompanied with massive layoffs. The Fed is now out of ammo, therefore prices of all risk assets are set to decline, including stocks, corporate bonds, commodities and precious metals. The Fed will eventually panic because their credibility is spent. Bernanke's approval rating is 70% going into this debacle, but he will soon be the number one blamegoat for this fiasco. Monetary policy is without doubt the biggest ponzi scheme ever invented and it's shelf life is quickly dwindling. The Fed will likely eventually resort to printing and distributing hard currency, meanwhile governments worldwide are already engaging in competitive debasement of their currencies. Therefore, beyond the initial deflationary credit collapse, I will eventually be looking to be a buyer of gold and silver (via CEF - Central fund of Canada) or GLD. Eventually could be measured in years...
Looking out further, people will lose their homes and jobs en masse and discontent will rise to levels last seen in the Great Depression. The major difference however, is that Depression-era people were hardy folk with useful manual labor skills. Also there were still a large proportion of family farms and farm jobs that were largely self-sustaining. Today's population of IT managers (me), accountants and Starbucks baristas won't have any useful skills to fall back on in a basic survival-based economy. Therefore, crime and violence will sky-rocket and personal security will become a high priority for everyone.
Looking out a couple of years:
1) The U.S. will abandon Iraq and Afghanistan to the terrorists
2) The Middle-East will descend into chaos beyond anything heretofore imagined
My strategy:
1) Avoid the stock market, invest in short-term Treasuries
2) Look for a large pullback in gold/silver and then start averaging in to CEF/GLD
3) Invest in personal security
Good Luck. We all need it.
