(Editor’s note: The following essay provoked a firestorm in the forum, so we are running it for a second day. The author is Mario Cavolo, a speaker, writer and media personality who has lived in China for more than a decade. His point of view is far more bullish than our own, and most of those who responded to it evidently do not share Mario’s optimism that the world’s financial crisis will simply go away. RA)
Let’s start with a core economic premise and build a scenario of supporting premises as we ponder the new reality of our global economic future without the rhetorical, crash and doomsday scenarios which almost never play out. Here is the premise to explore: Nothing will crash or collapse. Not the Euro, not the USD, not the stock market of this or that country; not anybody’s entire financial system. Assets will swing wildly up and down, systems will change, sometimes dramatically but doomsday collapse is off the table. People who constantly focus on threats of doomsday this and parabolic that are too addicted to the emotional thrills attached to such moves, or trying to sell you something; rather than applying a more genuine and balanced analysis of the global economic stage which is an increasingly complex, fluid, shifting entity.
Now let us build the supporting premises to see why, keeping in mind the intelligence of an elementary school sixth grader, to paint a picture of the new reality in the present and for the next 10 years. The global new reality world is a world with unfathomable trillions of sovereign debt over everyone’s heads. It is an ongoing reality, a big part of our new reality. This has been rightfully called a crisis of Biblical proportions. However, based on our premise for this essay, it is not. We just accept it as the new normal reality. We accept it and we adjust to it. Assets will adjust to it. The system will accept it and adjust to it. Individual assets in the system will respond to it by swinging up or down 30% to 50%, creating significant shifts in society and culture. We can’t make it go away, any more than we can change the color of the sky or the rising and setting of the sun.
So then, applying a little common sense, how will the assets of the world economic system respond to the fact of massive sovereign debt hanging over everyone’s heads in the coming years?
Interest Rates
This is easy. Yields will go up. Higher and higher debt loads scare lenders, and they will therefore demand higher and higher yields in return. Even sixth-graders get it. This phase of the cycle has begun with Australia, India, China and the United States during the month of February 2010.
Interest rates moving up means stock and bond prices moving down. That’s why last month Nassim Taleb, author of Fooled by Randomness and The Black Swan; The Impact of the Highly Improbable, said everyone should short U.S. Treasury bonds. However, this doesn’t mean stocks will “collapse.” That’s mostly rhetorical nonsense. We can state there is a very high probability that stocks do not enjoy bubbles that are possible when interest rates are low because people don’t want to leave their money in the bank earning next to nothing. When interest rates are rising, people shift their priorities to avoid risk if possible. Why try to earn 15% with the risk of owning stocks if I can leave my money in the bank at 5% with no risk? Even sixth graders get it.
Future Is Inflationary
Please don’t make the mistake of improperly relating this point to the “failing banks” issue. Yes, we all know there is too much debt and that both sovereign and corporate default on debts is a danger to the financial system. That’s a given over the entire system that must be adjusted to. The stock market will not experience a doomsday “collapse” simply because the future is inflationary per the rising-interest-rate scenario that exists. The cost and price of everything will go up, including the price of equity shares. Most agricultural commodities are going up in price for the simple reason of increased global demand from a growing population. More kid stuff.
Stocks may be worth relatively less when measured against some other asset such as gold or dollars or Euros or coffee. Just look at a long-term chart of the U.S. stock market and you’ll understand the point. When the market declines 30% over a much shorter period of time than it required to go up 50%, many investors want to freak out. But in fact, the market will once again adjust, respond and start climbing again. It is important to have a sense of the long term reality of global economics and stock markets. Ignore most of the shorter-term media spin, which has little to do with helping you be wiser and smarter.
Global Currencies
Currencies will continue to devalue. They are in a competitive devaluation game because a lower currency value means cheaper exports to the rest of the world. Right now, the Chinese are in the lead with their refusal to revalue the yuan peg against the dollar. The purchasing power of any currency will continue to decline as it has historically. It is a natural consequence of the global economic order. Sixth graders get it. Due to economic forces on the three major continents, individual currencies will keep dancing up and down 30% against each other. Last year it was US dollar down, Euro up; this year, it’s Euro down, US dollar back up Anyone can look at a chart and see which way the wind is blowing. The point is that, in the end, the total sum balance of all the currencies added together equals a basket we’ll call Basket A, which has the purchasing power to buy a basket of goods and services we’ll call Basket B.
Gold
Gold is just another asset to store value which in general keeps going up in value relative to currencies. The part most people miss is the relativity, i.e., recently gold went up against the Euro, right? No! The Euro is going down, so the price of everything, including gold against the Euro, is going up priced in euros. To someone holding euros, the price of gold and the price of a vacation in the U.S. are both going up.
Knowing that interest rates are going up long-term and that currencies are devaluing long-term, we can safely assume that gold will also continue going up long-term. It will also go up as it is regarded as a safe-haven asset against government instability and volatility in the global economic scenario. We can see there’s plenty of that going around. Your final clue on the floor of the price of gold is that China and India and George Soros are buying lots of it at around the current $1000-1100 price range.
Oil and Energy
The price of oil is tricky to get a handle on for a number of reasons. First, the price of oil is highly manipulated and controlled by traders and speculators with billions at their disposal in the futures markets. Meanwhile, the oil industry has become more like a mainstream McDonald’s or Nike brand. They are now running a massive, orchestrated “the world needs oil” PR campaign while the world is quite intent on going on a low carbon-fuel diet. You do know that big corporations, including thee oil giants, retain PR and marketing firms, right?. That’s not just for crisis response on oil spills. Seems weird, doesn’t it? I mean, they’re just supposed to be providing a commodity, and what the heck are they doing getting involved in PR and branding? Anyway, the second point about oil is that demand is not going to skyrocket. At best it is going to slowly rise. The third point is that oil production levels are dropping, but again this scenario can change significantly.
The fourth point in the oil discussion is the one we sense the oil industry’s PR campaign is trying very hard to downplay in order to postpone a decline in oil prices – i.e., that there is now a massive global commitment to alternative energy sources. The buildup in the combination of wind, solar, natural gas and nuclear energy has the potential to put a much more significant dent in the demand for oil than makes the majors happy. Of these, nuclear will be most significant because it is already a well-established industry; moreover, due to advances in technology, nuclear safety today has improved multiple generations beyond what it was in the days of Three Mile Island. Over the next few years, as hundreds of new nuclear power plants come online, most located in America and China, a complementary pro-nuclear PR campaign will insure that images of nuclear disaster will drift out of the collective psyche. (By the way, my family lived near Three Mile Island the week its reactor had a breach. We high-tailed it to Grandma’s back in Yonkers for a few weeks!)
Big Oil’s Wish
We can sense that big oil wants oil in the $80-$90 range while in reality, the price of oil belongs in the $55 to $70 range. That would also be much more supportive of the global economy. Finally, the use of alternative energy sources in daily life will cause the routine of our daily lives to change. You will not own a big fat SUV: You will own an electric car, electric bike or even electric golf cart-type vehicle that you use only for local trips at 20 mph. You will not buy gas. You will drive home and plug your electric scooter in the wall every 25 miles. You will in fact enjoy the change and appreciate saving money. Electric bikes and scooters have been mainstream transportation in China for years, along with buses and subways. Why do you think Chinese have so much cash? In America, think Sun City where the residents own golf carts to get around the neighborhood. In the future, that lifestyle won’t be restricted to retirees.
It is true we are facing global economic circumstances which can be painted with a doomsday brush. We could also use a Chinese silk brush to paint the picture less harshly. If we take the time to look at the situation with long term eyes and through the eyes of a sixth grader, it enables us to understand that whatever is happening in the world of scary global economics, the parts of the system, the various assets in the global economy, adjust and respond in cycles along the way. We must become smarter so that we too, know how to adjust and respond as effectively as possible, living as we do, here in the new reality.
Bak’s Sand Pile
Giving more weight to the more extreme view, I greatly favor Bak’s sand pile model as a way of understanding the state we’re in. However, when the sand pile randomly breaks and flows downward, its quantity remains the same and it is still sand, ready to be built up again one grain at a time.
Information in this article comes from sources believed to be reliable. Mario Cavolo is not a registered investment advisor and does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. His research, point of view and opinion are informational and educational only. The author may or may not hold positions in issues referred to in this article. No representations are to be taken as advice or recommendation by the author to buy or sell any asset. Copyright 2010, Mario Cavolo. All Rights Reserved.
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{ 42 comments }
Nothing like a scooter! It was our “family car” when we first got married in Taiwan. Allowed us to save a lot of money … but safe it is not. Managed to see more than a couple of folks killed riding these things in traffic.
Stocks going up? Hasn’t worked so well in Japan the last 20 odd years.
Oil at 55-70? – The production costs of new oil are higher than that now. We only go to $55 if demand plummets.
So then my corrupt Government will win in the end and stay in power? My Obama voting friends will be right? Ron Paul won’t be the next President and I have to go back to work, selling into the US Construction industry.
I was looking forward to Doomsday!
Kudlow’s cousin, by chance? I wish I knew this guy so I could make a wager.
RA, please re-post this with his reasons why he was wrong after the crash.
While I am not going to predict any moves in the market or market sectors such as commodities, etc, I do take issue with the logic of the author’s argument: that markets will not incur a dramatic crash or parabolic actions, and such fears are to be dismissed because we’ve somehow reached a new normal; the markets will “adjust”, etc. This argument does not stand up to logical critique and a critically-thinking individual would have no problem running circles around the empty basis of these assertions. The very fact that history provides sobering examples of devastating hyperinflations/deflations and market/monetary crashes is absolute proof that the future may very well hold such events in store for those who choose to ignore possible warning signs. While I do not espouse enduring self-inflicted sleepless nights worrying about such matters, I certainly do not think casually dismissing such possibilities is wise. Always be prepared. Currencies and markets can act in unusual manners despite the best attempts at managing them or regardless of the perceptions of those that might be counting upon a new normal to keep the emotions of the players at bay in the heat of the moment. It is indefensibly illogical to contend otherwise, since history has proven the author’s contentions incorrect. I will not hang my hat entirely upon “history repeats itself” as a defense, but, rather might defend my position with wave theory and propose one not invest money based upon hopes and unfounded assertions that the world has somehow evolved, (financially), into a new-normal and is able to control or mitigate any future events that might suddenly cause the markets to misbehave. It is illogical to assume the financial systems are going to be able to contain massive gyrations; you’re hanging upon hope itself, given financial history—a much more concrete basis for prediction. Who would have thought the world financial systems could have become so indebted? Anyone who really, truely thinks this is controllable, given human dispositions and emotions is, in my humble opinion, the one doing the wishful thinking—instead of critical thinking. The “core economic premise” and “scenario” supporting it have aggreeable attribues, but, the fact the author admits fearful crashes “almost never play out” is disconcerting at best if one thinks of the implied ramifications of another one “playing out” while invested in the S&P. “Almost never” means just that: “almost”…never. That’s because “history” prooves it can happen, and logic dictates we must respect that fact. It might be wishful thinking the “new reality” and the “system will adjust” to it are something new and real. I contend this has all been tried in the court of economic hardships before and histoy has treated such “reality” harshly. I have little “faith” in systems that become so systematically bereft of order/equalibrium. This could end just as it has ended in the past—poorly. Reaping what has been sown is nothing new. Human nature seems condemned to repeat history; we learn nothing because we choose to ignore the past. Human behavior is what really enslaves us. Let the wise man beware. There will be nothing new in how this ends, if it ends poorly. We’ve seen this before, we just refuse to admit it. We’re human, after all, aren’t we?
Gold, too, has PR campaigns …. you referred to this in the latter half of your first paragraph:
“People who constantly focus on threats of doomsday this and parabolic that are too addicted to the emotional thrills attached to such moves, or trying to sell you something.”
The difference is, in my opinion, that oil is a truly precious commodity. We actually need oil and use it.
Thanks for a very well-written commentary.
Oil and Energy
“[...]Meanwhile, the oil industry has become more like a mainstream McDonald’s or Nike brand. They are now running a massive, orchestrated “the world needs oil” PR campaign while the world is quite intent on going on a low carbon-fuel diet. ”
That’s an interesting take, especially since it’s widely known that China and India sunk the Copenhagen deal with their NO! stance on cap and trade, which had been anticipated long before the climate summit even took place. It’s also widely known that energy companies have been heavily invested in whole “21st century revolution” that is the green movement.
http://junkscience.com/Wanted/index.html
Exelon, Duke Energy, Conoco Philips… Not mentioned are BP Amoco, Shell, Enron, T. Boone Pickens, and Al Gore (whose family history in the oil biz is, shall we say, rather suspect, given the list of rent-seekers already mentioned). I’m sure there are more, but that’s enough.
Nonetheless, the story persists, as do the ideas of man-made climate change/peak-everything-that-requires-massive-reengineering-of-how-we-live, that “Big Fossil, Inc” is working against the “alternatives”. And speaking of the alternatives…
1) Wind: It’s been known for some time that wind power, aside from being a massively inefficient use of land, isn’t available when it’s most needed…
http://www.numberwatch.co.uk/2008%20February.htm#starts
“The reason is that extremes of temperature in winter and summer occur when there is a stationary high and when there is a stationary high the wind does not blow. We can put it another way: The only reliable thing about wind power is that you know it will not be there when you really need it.”
I would go with the idea of using it to pump water up hill, but why build that means when you have plenty of coal? Some might call it malinvestment to do so.
2) Solar: The amount of energy per square meter is fixed. No amount of technology is ever going to make solar an economical deal. Not on this planet, anyway. And before anyone mentions it, I’m well aware of the water-heating variety. Trouble with that reasoning is that the places most suited to take advantage of nature, water isn’t exactly in high supply.
3) Biofuels: Massive inefficient use of land and energy. Enough said.
4) Nuclear: Doesn’t have the potential here in the states yet, and in my estimation it won’t be viable for centuries unless we have several baby booms starting this year, or a huge industrial revival. We just don’t have the density, nor do our neighbors, in order for nuclear to be viable. If China wants to do it, fine. If France wants to pat itself on the back, that is fine too. I’m talking about the U.S., not the rest of the world.
http://network.nationalpost.com/np/blogs/fpcomment/archive/2008/05/13/the-limits-to-nuclear-mccain-shouldn-t-try-to-follow-french-disaster.aspx
But we should just accept that we’re “running out of oil and coal”, and get used to the idea anyway, right? I mean, sixth graders know that we will some day run out, after all, right?
I did some math on that a few years back (which I wish to god I had saved, but didn’t figure it worth keeping on my HD). Anyway, I concluded that thus far we’ve not used a Lake Mead of oil in the entire history of man, let alone a Great Lakes worth. And if oil (or “economical oil”, if you prefer) was really in such short supply, irridium would not be the rarest thing in the crust earth. Oil would be, and I’ve never seen it mentioned in any genuinely scientific literature that oil is indeed that scarce. Where I do see the idea printed over and over and over again, however, is among investment pitches. A fool and his money are quickly parted.
So you’ll have to excuse me if I don’t buy into the whole peak energy issue, and especially the “Big Fossil, Inc conspiracy” surrounding the so-called alternatives. Sixth graders probably do have a higher level of “understanding”, but then again they are called kids for precisely the same reason that I was when I was their age.
Made an error in my post. I dug through my HD and found what I was looking for.
I should have said Lake Tahoe, not Lake Mead! Lake Mead was the first lake I measured oil against. The gallons of oil that man has consumed since he first started to is roughly twice the size of Lake Tahoe. Two times the volume of Lake Tahoe is roughly 1% of the Great Lakes, combined.
There’s a word for that kind of thinking. Panglossian.
We have had several doomsday crashes- one after another, and now, we have the luxury of saying: ‘what, me worry?’
Aside from having a massive housing crash in the U.S., a market corner in oil which blew out spectacularly, a banking crisis the likes of which were never seen before, gargantuan bailouts, the onset of sovereign risk in the G7, chronically low short term interest rates, that, as long as we have inflation, all is falling happily, logically into place?
You would have to be the greatest doubting thomas on a planet of doubting thomases or have the copper crazies.
LOL! CNBC should give him a job. Maybe he could be Cramers PA or something. Like you said Rick: “Mario Cavolo, a speaker, writer and media personality” well, duh. “Rick’s Picks” deserves better argued rosey colored glasses scenarios than this guy, who basically offers nothing more substantial than “it won’t be doomsday because that’s for pessimists”. Methinks you posted this guy on purpose, as a tease, to get us all riled up
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Sometimes it’s beneficial to second-guess oneself, Jack. We should always leave a little room for optimism, no? RA
God, he sounds like he should be Bernanke’s publicity agent.
I don’t know about the rest of the world, but for the USA, Unemployment Benefits and government jobs that are now disappearing are all that are keeeping us going.
Calling a collapse an adjustment doesn’t change it’s effect on the millions of helpless US citizens left in the lurch over the past 30 years. Reminds me what some foe of Imperial Rome had to say about Rome’s foreign policy. “They create a desolation and call it peace.”
I guess the author keeps quoting 6th graders because thats as far as his education got .
OK, the price of almost everything goes up, including the cost of quickly depreciating currencies.
Lots of markets and systems adjusting quite well, thank you.
And those without jobs, unemployment checks, shelter, and savings are going to what, just calmly accept their fate? How well “adjusted” will those hungry, desperate parents and their six graders going to be?
Gang, I’m afraid we’re al doomed to prosperity…The worldwide inflationary boom of unparraleled proportions that Don Wolanchuk called for way back in the late 1980s is alive and well–back then he was talking about the fall of socialism/communism and the recognition of capitalism…
I totally concur with “Paulie”: the logic of the Mario Cavolo’s argument is indefensible at best, and utterly facile at worst. Has he been living in a cartoon world with no anchor to any outside reality? This man is laughable, if one could muster any laughs. He is either completely naive, or else utterly stupid. What else could he be? (Other than a disinformation agent?) He shows an extraordinary ignorance of the huge forces behind the scenes that manipulate markets and control major events. Has he heard of the military-industrial-pharmaceutical-financial complex that is the effective secret government of our times, or does he think that what CBS or NBC spouts is the “real” reality? Has he any awareness of the major market cycles, the super-cycles, the Kondratieff cycles? Has he read any of Martin Armstrong’s analyses of the background to such cycles? Who does he think has been suppressing the gold price all these years? Or does he believe that there has been no suppression? Because if that’s the case, this man has a very bad case of cognitive dissonance, and should be removed for his own good. Has he visited the GATA site ever? Has he perhaps ever thought to read up on the background to the Federal Reserve System, and discern what it actually is: a massive Ponzi scheme? Has ever considered how all fiat money systems eventually implode, and we are getting closer to that end result all the time now. Does he think this huge overhang of debt in the many trillions will just somehow go away, be forgiven, and that there will be no consequences? On a individual level, or a sovereign level, we are witnessing the death throes of something that could never regain any semblance of what we now call “normal”. The global currency system is BROKEN, and the slow-motion car crash that we are flailing about in now is going to end in a very different place to the one that he blithely believes will come. Please, get this man away from me!
I think Mario is spot-on. Good advice. I for one agree with Mario in that the earth will not open up and swallow our civilization. The “new normal” is postulated simply because we are not seeing this debt condition is a single economyor region; but rather it is being played-out through the entire world. The historical trash heap of tragic economic implosions always occurred in a zero sum condition. Assets flee from the distressed to the safe-haven. The “new normal” occurs because discounting cannot occur vis a vis seperate, unaffected sovereigns. All sovereigns are in the same boat with the same fiat system…the same usery system…the same excess debt conditions…the same bloated social programs…the same unfunded liabilities. So in this scenerio the assets will continue to trade in and out of regions based on the ebb and flow of trader pschology. This is exactly what we are seeing play out here and now (as Mario points out).
There are some inarguable truths in his commentary. With the balance sheets of the Western sovereigns such as they are, long term rates WILL go higher…regardless of what the short end does. Has anyone seen a yield curve that looks like a flag pole?
The system will not collapse…but adjust.
Benjamin,
One alternative “fuel” is geothermal which is often overlooked. It can substantially help reduce heating and cooling needs and is always there. Once installed the only energy it requires is the fan to circulate the air through the pipes. If every house and corporation had geothermal installed, we’d be burning a lot less carbon, natural gas included.
Dusty
I am a bronze sculptor of wildlife and Native American culture. I have no family history of finance, and stock markets. In simple terms I am a six year old when it comes to money and markets. I read an article recently in The New Yorker in regard to the men who made it big in the housing crash. They did their homework and put forth graphs to see on paper the “bubble”. Because of my simple view I put the graph history of the stock market ‘on page’ and viewed a radical upward thrust that has not been relieved to a normal balance in what I call the Laws of Nature and Natures G-d.
In order for society to operate in a new paradigm of electric cars, and green energy society must be compressed into less and less space with less and less Freedom. Controls must become more and more oppressive to control the natural urge for a certain biological buffer between one man and another. In such confined space or ghetto the risks of a catastrophic failure compound. Certain men will not survive within the constrains of ghetto type life. A genocide of free thought and invention descends as those remaining of ghetto mentality bring greater and greater controls that force compliance.(see the idiocy of congress and the offices) I studied rats and population density in college. When given enough free space there is relative peace. Given too little space the rats begin to act like our current governmental form. Gangs form ‘Republican’ ‘Democrat’, disagreement is met by violence, and eventually a ’shortage’, or disease creates disaster.
A simple look at a graph of the entire history of the stock markets looks like a bubble that has not been corrected. Every ‘bubble’ says this is the new deal, and this is the new way, this time it is different. To say that an Asian country with no land mass that feeds off of the Freedoms of other Men is the way of the future misses many great points. There are many forms of slavery – debt being the most effective. Create a system of debt where no man may be free of that debt, and wow – voluntary slavery – enforced via the commerce clause, and a new feudal ‘debtors prison’ not because one owes a debt, but; because one did not file the ‘form’, breach of contract – conspiracy to avoid the involuntary promise to the agency.
Sovereign Debt is better defined at Hamilonian Slavery. Those who control the movements of man want the debt to be unpayable. This too is a bubble based in electronic clicks on a screen designed to show a fiat tally of how deep the individuals slavery is – how many generations to pay off the debt of the father.
What happens to Man lies in untold, and in yet unmade history in regard to what happens when one steals the energy of the wind via a windmill, and takes the heat of the sun via a solar panel and turns that into electrons. The Laws of Nature, physics, say that every action has an equal and opposite reaction. Take the energy of the wind in Oregon affect the climate in Africa. That is not a bubble, not a dream from a pipe, and it will never be GREEN because the effects of this logic take from the Natural, and give to the unnatural. Corn grown with urea from natural gas is not green in the common belief of GREEN no matter how clean the battery charged in a ghetto cart.
Much as the writer did in his original piece I wander to try an counter a flawed theory that somehow the Laws of Nature will be avoided in the future. Change is coming because People like me will vanish in the future of ghetto and electric cars. My simple minds says nothing changes, only time changes in depth in regard to how long it takes to come back to the mean. At a greater level has society become a bubble in illogical thinking, and abuses of power to enslave the masses via lies about realit, and; what is debt ?
Very short term I look at what the banks have done to me – I appear as an involuntary slave abused by the masses via Nash’s Non Co-operative Game Theory. Free men and current economic theory are not compatible. Medium term I am looking at the graph of the history of the stock markets and trying to see if there is a bubble that has not yet deflated to a mean line. Long term I believe all things get overdone and the ‘bubble’ must go proportionally below the mean before another mean is established.
Are we ‘there’ short term, midterm, and long term ? Some will guess looking for a fortune, some will guess looking at survival. Very few can be or do both.
I reckon if I were into real estate in China, as Mario is, then I would have a pair of rose-colored glasses as well!
http://www.telegraph.co.uk/finance/china-business/7339669/China-risks-property-bubble-as-prices-rise-20pc-a-month.html
Not mentioned in the article.
1) The demographic reality in the US of the aging baby boomers as to our entitlement system.
2) The reality of peak oil (which really speaks to any commodity). The world has to work harder and spend more to dig up commodities which are scarcer and scarcer. Thus, the market price must be worth the expense. Jed isn’t finding any ‘Texas tea’ by shooting into his backyard anymore.
3) Oh yeah – casually dismissed is the economic reality that YOU CAN’T KEEP SPENDING MORE THAN YOU MAKE. My favorite part was this line ” Yes, we all know there is too much debt and that both sovereign and corporate default on debts is a danger to the financial system. That’s a given over the entire system that must be adjusted to”
ADJUSTED TO??!!
Mario,
Thank you Mario for this thoughtful, well written essay. You obviously gave it much time and thought. For the rest of you, who don’t have the time, here is the Cliff’s notes version: “THIS TIME IT’S DIFFERENT”!
Mario…you say things will lumber along indefinitely…please defend this assertion in light of the USA’s 12.5 trillion in debt that is rising exponentially with the concommitant annual interest payments that are also exponentially rising. How will this be paid without causing a hyper-inflationary collapse given falling tax revenues? How can stocks continue the upward trajectory given that real profits are falling, and many, if not most, companies have survived the past couple years by dumping their own shares at inflated prices? Will P/E ratios go up forever too? You seem to forget all the devastating wars and diasters that have punctuated the general calm throughout history. Periods of peace have ALWAYS proven to be the calm before the next storm. Every empire has ALWAYS fallen. Every paper currency has ALWAYS gone to zero. Why should things be different this time?
As for the altrnate energy argument you made, you clearly are discussing a subject that you don’t understand. I think it can be put in the truism category that oil is a finite substance. Oil is used for a lot more than producing unleaded gasoline that we burn in our cars. Asphalt uses oil. Ditto a host of chemicals that are essential for our lives. Please provide me some evidence that a good alternative has been found for oil guzzling airplanes, trucks, and tractor trailers, that make life as we know it possible. Solar and wind energy have use in some limited instances, but anyone who thinks they will make a dent in oil demand is a fool. Natural gas and nuclear energy have much potential, but are unlikely to put a serious dent in oil dmeand. As Americans slowly wean themselves off of oil, the demand will be replaced and then some by the 200,000 people being born each day, and the similar numbers of children growing into adults daily.
I guess in the “new normal” it will be acceptable for 6th graders to ignore the fact that homeless and unemployed people even exist… since that knowledge is inconvenient and difficult to think about.
I’m certain Neil Howe of 4th Turning fame might label Mr Cavolo as a member of a “Hero” generation… willing to run right out and solve any problem, but lacking the skill or discipline to be able (or willing) to accurately quantify the problem first.
“What problem? If we simply declare this as a new normal, then it is normal, only newer…. and therefore not a problem, right?”
Give me a break.
Next comes the chant- repeat after me:
Debt if OK, if we all agree it’s normal…
Debt is OK, if we all agree it’s normal…
Debt is OK, if we all agree it’s normal…
“There’s nothing so absurd that if you repeat it often enough, people will believe it.”- William James, The father of modern Psychology- with the following historical variations often quoted:
“Any lie, repeated often enough, eventually becomes truth”- Vladimir Lenin
“If you repeat a lie often enough people will eventually believe it” – Joseph Goebbels
Mr Cavolo- your custom fitted shackles are ready and your house of bondage awaits.
Well im going with the doomsday,the hole system is rigged do yr reasearch Rick,who are u peddling for
guy knows zip about exponents.
Rick- I’m shocked to see you allow this ‘pablum for morons’ rhetoric disgrace your site. I’m confident that the vast majority of your readers innately sense the unspoken, noxious Orwellian double-think throughout this “Essay”. This type of mindless, thoughtless babble not only insults the intellect , it’s also DANGEROUS. If this guy seriously believes the contradictory delusion above, he should keep it to himself. Those who are less informed of the unfolding financial sorcery may fall victim to his utopian hallucination. I read this site for intelligent, educated insight……Please keep it REAL.
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You should take a ‘lude, dude — and while you’re at it, try reading some of the comments that agree with Cavolo. If you polled CNBC guests, for one, you’d find that probably 90% of them agree with his thesis. The real dolts are those who believe the U.S. economy is in the throes of a strong and sustainable recovery. RA
Whew! Gentlemen,
I have gotten a strange thrill reading so many of your replies that I did not expect; your vitriolic, venomous posts, as if what I wrote was the gospel of my personal and business convictions rather than, as clearly identified, a premise-based essay. I would only begin here with my compliments to those of you who have learned so well the art of the English language as to so thoroughly and beautifully shred someone to bits with a razor blade. When I read that Bernanke line, I was in stitches!…and I am running to the Chinese version of Kinko’s to update my CV for that Cramer PA spot. Honestly, I could never give first place to which one of you is the razor blade master, cheers to the mastery!
The article’s premise did NOT state the world would lumber along. The article premised to eliminate the doomsday choice. The article did state there would be wild swings of asset prices, yes?….wild price swings are NOT doomsdays. There’s a difference between asset values adjusting and a doomsday. Oil swinging up to $140 was not doomsday and neither was the market plunge last year… Of course, along the way, people are screwed, the American way of life has been screwed for 50 million Americans, etc. yes yes yes, I’ve written about it all to protest plenty…hang up all the rich, greedy manipulative F*&^%%$rs by their thumbs in the town square for raping and pillaging society, for shining a light on the dark side of capitalism….yes, yes, yes and more yes.
But do any of you honestly believe that the European Union or America, and therefore the whole world, will end up with a global-sized Zimbabwe or Argentina economic currency doomsday scenario? Nonsense on that one.
Aurick, “Does he think this huge overhang of debt in the many trillions will just somehow go away, be forgiven, and that there will be no consequences?” I thought i wrote that yields and the prices of everything will go up in consequence, didn’t it SAY that? Geez, I had to pick on someone after today’s lashing.
Rick, provocative article…mission accomplished!!
Cheers and best of luck everyone, Mario
No, I said there will be hyperinflation
If there’s to be a hyperinflation, it would likely occur in the Pacific Rim in either Japan, or China. Allowing the Yuan to float and strengthen considerably to deflate the government ordained lending bubble in China would have been the correct course of action, but then again, nobody in China would accept the deflationary outcome. A great curiosity here is the Yen bull market against the $USD.
For the rest, it will be deflation round II. Japanese policy makers would suggest that deflation is inevitable, and while the rest of the world inflated, they deflated after their property bubble.
There’s also such a thing as hyper-deflation, which nobody considers. Imagine a government policy which strives to remove all of that ill-gotten liquidity in a panic move, and how that might affect prices. As long as gold can rise unrestricted to adjust for collapsing credit around the world, especially sovereign debt, then it acts as a mitigating factor by soaking up liquidity and devaluing currencies.
I’m glad I avoided the cauldron of first-day comments…I know some were really steamed. The most profound(?) thought I had while reading Mario’s comments and his muddle through scenario is: Is he not aware of quantum change? Everything from sub-atomic particles to collapsing hillsides and on to civilizations exhibit the character of a long period of relative stasis while imbalances accumulate, and then a quick reversion to a significantly different energy state or physical existence. The idea that we humans always have and always will be able to manage change of this magnitude isn’t borne out by the facts. You don’t know when it will happen, but it’s part of the warp and woof of the world. Personally, I’m pretty sure I see the cracks all over the place.
Mario, I am old enough to remember when this country was exporting crude oil, was a manufacturing powerhouse, and our coins were made of silver. Back then, having a United States passport put you in a class by yourself. I grew up in Bridgeport, Connecticut, which was a good example of a hardworking, productive, American town. Workers houses cost about 15 or 20 thousand dollars, and wages and prices were stable. I have seen us give it all away to the rest of the world for no good reason, and getting nothing in return. Compared to the world I grew up in, Doomsday was already a while ago. Finally, I will post a list that I have posted in the past. This is a list of factories that I saw shut down and leave the Bridgeport area since I was a little boy. It is a microeconomic view of part of the destruction of the American economy, the mirror image of what you see in China. Of course I am unhappy to see my America laid low to raise the standard of living in China.
I have no “Global” vision. If we can lay low the rest of the world to regain our dominant position, that’s fine with me.
Here is a top of my head list of factories in Bridgeport/Stratford that are now gone.
Acme Shear
American Chain and Cable
Avco Lycoming
Bassick Caster
Bead Chain Company
Bridgeport Brass
Bridgeport Machine
Bryant Electric
Bullards
Carpenter Steel
Casco
Columbia Records
Contract Plating
Dictaphone
Dupont
General Electric
Handy and Harmon
Harvey Hubbell
Jenkin’s Valves
Locke
Manning, Maxwell, and Moore
Metropolitan Body
McKesson and Robbins
Producto Machines
Raybestos Brakes
Remington Arms
Remington Electric Shaver
Singer Sewing Machines
Sprague Meters
Tek Bearings
Tilo Roofing
Sir,
For about 4 years now we have had two parallel universes – the financial universe and the real world so to speak. Comment from a Starbucks manageress in England to me recently, “We just had our busiest day ever.” Comment from manager of a local medium class restaurant….”We are busier than ever.” The UK economy [financially speaking] is on its knees and yet we have those sorts of comments. The key is interest rates, certainly in the UK. The author is correct if you believe that interest rates will stay low. The author is totally incorrect if you believe that interest rates will rocket. I believe the latter – in fact even a small rise in interest rates will do major damage.
And by the way if nobody believes the fantasy economic statistics the FED churns out why would you believe stats from the Chinese Govt.. I certainly don’t. The author must have stock in a Chinese company that exports rose coloured glasses to the US.
Mr Cavolo’s post above defending the premise of his essay is commendable- and I agree with his supposition that any further crises will not escalate into the complete annhililation of civilization.
However- that premise does still orbit around an unescapable question:
-What justification is there that 100% of the productivity of 380 Million people should be allocated toward re-balancing the after effects of the complete negligence and incompetence of fewer than 10,000 in WashingtonDC and New York?
When enough of the 380 Million are simultaneously asking that question, the revolt will be swift and the consequences simutaneously dire (in the short term) and enlightening (in the long term) for the human condition…
As always, the American people will lead the world into the new global awakening, and, as always, we will be chastised or even villified for it by those who relish the comfort of a systemic status quo- also referred to as a statis, or a quiescence, or a stagnation, or a coma, or a paralysis.
To Steve the Bronze sculptor- Bravo, brother.
I want one thing clarified. Does this “adjustment” come in the form of the 1930’s style adjustemnt or something much tamer.
I for one can’t fathom why we would not repeat the same fate that all bubbles created in the past. Are we really that much smarter? Surely the answer to that is already evident since we allowed the largest bubble in the last 300 years to develop.
Finally I think the debate over inflation or deflation has already been proven out.
The clear winner is deflation. The 4 largest banks in the United States alone have over 250 trillion dollars in debt derivatives on their books.
The path is going to be very painful with no winners other than those that held onto cash. The Gold bugs might or might not win out. To me its still a gamble owning commodities.
Mario wrote “But do any of you honestly believe that the European Union or America, and therefore the whole world, will end up with a global-sized Zimbabwe or Argentina economic currency doomsday scenario? Nonsense on that one.”
Is this the ‘too big to fail’ argument. It was only 15 years ago I was hearing how safe GM was for a longterm investment. That they will alwys be around.
Or is it a belief that the politicians in the US will make the hard choices as to our looming debt disaster and unfunded entitlement nightmare. I see no evidence for our leaders making such decisions, and rather believe they will let it crash and burn and then deal with what’s left. The fiat dollar will go the way of all fiat currency in history, but rather than be replaced with precious metals (which will be far too expensive) a new fiat will arise that is a global currency. The carnage in the meantime will be devastating.
This day of reckoning can be put off for awhile though. I would expect some sort of 10-20% wealth tax on all retirement plans (i.e. the rich as defined by anyone not solely dependent on social security for their retirement) as well as massive tax hikes before the nightmare hits. The cap on the social secuirty tax will likely be the first new tax hike to come. So guys like me who keep 12.4% more starting around SEP or so will not have that money to spend into the economy. But it will keep SS ’solvent’ on paper for a little longer.
But in the end, it is simple mathematics. We spend more than we can, and the ability for foreign nations to keep funding 100% of our debt will end.
Mario, can’t please all the people all the time as reminded when Rick was kind enough to post a few of my silly ideas here.
Predictions, particularly about the future, difficult to get right for profits, so we make up stories or use Big4 biggest traders for clues and Trailing Stops for money management.
Currencies like Yen stronger than the dollar may be easier to comprehend if we look at their higher debt to GDP ratios causing greater default-driven deflation.
Rick, keep up the great work.
Regards.
Can’t agree with him more.
p.s. On currency:
Robert Alexander Mundell said it’s best for the Euro at 130s range because it’s very good for their export which will help their economy greatly. The EU knew it. It also seems that they are intentionally let the Greek and the PIIGS game play out longer to drop their currency further. There’s the silent agreement among the G7 countries to take turn to drop or raise their currencies. When the US need to auction more Treasuries, they will try their best spin the rumors and play out the “US Safe Harbor” card. After the auction, they will spin different rumors again to drop the Dollar and the game continues….. After all there are so much sore spots and bad news for them the play out for the best effect.
Interest rates are too high in China to be called growth and stimulus far too large to be anything but a reaction to the same deflation that affected Japan. The curiosity in all this is Japan’s low interest rates.
I would speculate that you can’t simply declare a currency peg without having actual market forces behind it, so the Yuan peg is being held, not by revaluing the Rinminbi, but by buying up Yen, which keeps it place against the dollar without much error. And also by buying up other currencies as well, such as Euros, Swiss, Pounds, Loonies, Aussies, Kiwis, and selling the dollar. This is NOT btw related to anything going on in China, but on Wall St.
Should interest rates move any in Japan, then a significant melt up in that currency should occur.
There are by far too many ad-hominem attacks against Mario on the comments.
Probably don’t agree with a bunch of what he writes, but it is not as if his scenario is impossible, unlikely perhaps.
If you have read Mario’s posts in the past, then the vitriol is misplaced as to the person.
As to this comment:
“I for one agree with Mario in that the earth will not open up and swallow our civilization”
there is much in this “civilization” of ours, that SHOULD be swallowed up.
TahoeBilly has it right (“I was looking forward to Doomsday!”)
IF Doomsday will help this vapid American Idleized, Lost, carrot-top half-piper and tiger worshipping, vapid panem-et-circenses “culture” to end up like all the Colissea of old, then lets have it on!
Of course all of us who know better, even with the bunkered food, gold, guns etc, will get ours too then, no question, none will go unscathed.
And perhaps at some point, science will reveal that cell-phones and all wireless smart devices cause impotence and/or sterility, cancer, lower IQ, and heart disease, just to see how the addicted masses react.
As a followup to the “too optimistic” scenario my article painted, here is my Four Year Future Forecast. Four years later:
1. The Dow will be close to 14,000 points.
2. The value of all real estate in the U.S. and Europe and China will be the same as current prices, plus or minus 10% max.
3. The yield on the U.S. 30 year treasury will reach 6-7.5%
4. Gold will be priced in USD at $2500
5. Oil in USD will be priced at $125. Natural gas will be $6.
6. The sticker price cost of daily good and services will be marginally higher.
7. The USD and EURO indexes against other world currencies will have continued declining an additional 30% or more, with 2-3 wild 25% swings along the way due to “crisis” announcements” that will send the world markets reeling.
8. The real cost of goods and services will have continued to go up worldwide an additional 30%, due to the continued declining in the purchasing power of the USD and EURO.
9. The Chinese RMB will continue to be controlled by the Chinese government for, practically speaking, eternity. China will over this next four years, have its expected roller coaster dips, continue to rise higher and higher in economic global power yet not open up its country to become international. If anything, they will more close their borders than open them.
10. In the face of higher USD Treasury and other bond yields worldwide, pieces of the sovereign debts, pensions, Social Security, etc.; will be somehow set aside, forgiven, defaulted, dissolved, off the books, renamed, re-categorized, hidden, re-classified, adjusted with more mark to market type shenanigans, whatever, they’ll DO IT.
Doomsday here? No, but it is quietly built in, isn’t it? Because currency Basket A will buy less and less value of goods Basket B, following history. As well pointed out, appreciated and understood by several comments, the “sovereign debt driven doomsday” is already here, the new reality, built in to this scenario, starting geographically at the center of it all, whereby the American Dream for the middle-class has been utterly destroyed, raped and pillaged. As writer Paul Farrell named the two groups: the “Average Joe & Jane” Americans of the world, yet this applies to Europe and China too. The other group are the “Happy Conspiracy” Insiders, comprised of two sets; the rotten rich bastards who have heaped this destruction upon us and continue to do so, and other people who are blessed to be well off, in quality situations, to have great careers and are nice folks.
That’s our life on planet earth in four years; fine for the rich who can weather and profit from the storm, and steadily worse for the “Average Joe & Janes of the world.
My wife and I want to have our first child this next year. I think with great concern and trepidation, “What is the state of the world we are bringing a child into?”
Cheers, Mario
“My wife and I want to have our first child this next year. I think with great concern and trepidation, “What is the state of the world we are bringing a child into?”
As a father with two young ones (6 and 3) I take solace in my faithful (but not necessarily religious) assumption that by the time they are productive adults, the current debt based system will have imploded and they will get to live their lives under the advantaged premise (and promise) of life, liberty, and the pursuit of happiness…
If we the people stand by and take no action while the idiots in Washington try to kick this can down the road for another 15 years, then we deserve what we get, but our children deserve none of it, and nothing will inspire me to fight more than the prospect that Washington expects my kids to live a life of perpetual taxation and limited prosperity.
Everyone knows what the fundamental solution to our problems is, and it ain’t raising taxes or inflating currencies. The solution is global default- Just press the big red RESET button already, and get it over with.
Mario- don’t let fear of the unknown prevent you and your wife from experiencing the ultimate joy that family brings- you would be doing yourselves a huge disservice
More on currency game:
China has been the front runner for a while. Then it turns it’s head looking back. It’s like “Darn on me! Dam dame everyone is falling far behind, why am I running so far ahead? Gun will always shot at the bird stick it’s head out. Everyone is if not in pile of debts one’s playing dead. Everyone now blames me for my currency and my growth and my “beggar thy neighbor exporting.” So I’m gonna to slow down and I’m gonna to laundry out my bag of dirt too. So here it is: Guys, I have lots of debt too like everyone else. Our local banks local governments are bad in debts. Our national debt now is >1 trillion. Our currency stay where it is. We are risk of lot of bubble. So you guys shut up. Are you happy now?”
ref: China debt exceed 1 trillion- http://www.henanci.com/Pages/2010361511070.shtml
This guy, like so many, don’t seem to get it. Bond interest rates are under pressure to rise, not so much because people don’t want to buy bonds, but more so because people don’t have as much free cash with which to buy bonds. The world is in a severe recession. This means there is less free cash entering the system for things such as purchasing bonds. And the bond market is a cash hog at this juncture in time. It is too big for the world to support, even with a healthy world economy. It needs to shrink substantially – probably by about 50% or so. And there are only a few ways to shrink it – one way is to substantially raise interest rates, but this will only damage the world economy more, the second is to allow bonds to default, but this too will also damage the world economy, or the third choice is allow inflation to reduce their value. The choice of governments of course is inflation. This is why the excessive printing of money has to continue. Of course, there will always be talk of raising interest rates and cutting back government expenditures, but that’s all it will be is talk. If Governments were to listen to the simpletons that are calling for balanced budgets, then kiss most of those pension plans goodbye as a shrinking economy accelerates bond defaults or as the inevitable high interest rates wipe out their value. Further, even more unemployment would occur, with even those who are currently employed and calling for reduced government spending, wind up being among the newly unemployed. The reality, there is too much savings in the world looking for interest. The reality, the best way to reduce the real value of this mountain of savings is by inflation. Folks in the know understand this, and this is why gold is rising in value right now.
Rick,
Your remark-”If you polled CNBC guests, for one, you’d find that probably 90% of them agree with his thesis”. Are YOU taking ‘ludes, dude??
“The media has put all those that listen into total denial of reality”- Jim Sinclair 3/19/10
“CNBS”- Ty Andros/TEDBITS
Zonewatt
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That is not my remark, nor do I take ‘Ludes. RA
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