So this is looking about as grim as I can remember it. In some ways 1973 was worse - we had a leader that was looking more and more like a crook and America was rudely alerted to the notion that support for Israel and a foreign oil addiction didn’t mix. Vietnam had divided the nation and we lost our first war. Anyway, 1) Treasury and the Fed have pretty much used up their bullets. The solution to this problem isn’t coming from gov’t monetary authorities directly. It would almost be better now if they stopped trying. They blew it and further flailing might just make things worse. 2) There is no responsible leadership in DC now that can solve this problem GWB doesn’t even seem to care and Pelosi is worse than useless. The Senate cares so much about this problem that they funded up children’s wooden arrows with the bailout bill. Nice job guys. 3) The credit problem is the big problem and the difficulty isn’t money to lend, it’s figuring out how to lend it. This is a ray of hope here - money-lending is a profitable business. Everyone is shell-shocked now, but no gov’t or recession could kill money-lending. It’s been with us forever and will be back. Almost no matter what we do, credit markets will recover because there is so much incentive for them to recover. 4) We have to contain the dominoes. The big things we have to fear here are probably not recession. They are diseases from economic decay following population growth (Pakistan would be an excellent place to start a really devastating flu), nationalism (always good to blame problems on your neighbor or the Jews or the Chinese or …), and violent Islamic fundamentalism (we’ve set ourselves up for quite the backlash). So far I haven’t seen much thought about these much worse secondary effects and they could really trash the world. Here’s my story about the next few years (which will obviously be wrong) Economic activity all over the world continues to decline. It’s important for people to protect assets when their jobs might be in jeopardy and the economy looks grim. That starts a classic depression death spiral and the usual monetary interventions that smooth out business cycles don’t work to stop it. In fact, all these do is to create bizarre monetary problems that exacerbate problems. It takes awhile before central bankers catch on, but eventually central bankers adopt fairly stable monetary policies. Europe becomes an increasing fractious place over the next couple of years as monetary union clashes with local politics. This causes increasing protectionism in Europe and further dampens economic activity. America is bad, but Europe gets worse. Whatever pain is felt in America is felt much worse in Europe. Bet on the dollar to outperform the Euro over the next 2-3 years and European stocks to get smashed worse than American stocks. Afghanistan becomes a serious problem soon. We don’t have nearly enough troops there now (and far too many in Iraq) and in the next 18 months every unemployed young man in the world considers becoming a jihadist. Most of those who do head for Afghanistan. Pakistan become increasingly destabilized and starts a jihad pipeline to Afghanistan. Daj can’t get a job, but ultimately he will reject becoming a jihadist because he can’t post on AF from the front. The combination of increased govt surveillance, gov’t ownership of equity stakes in banks, and the need for increased transparency and recourse in lending means that gov’ts and banks form all kinds of crazy entanglements. The FNM/FRE model didn’t work and banks can’t be trusted to stay away from toxic securities. Your next mortgage will come from a heavily regulated govt entity and you won’t be able to default on it without dying in your house which is disappearing in a mushroom cloud. Western economies rework themselves in more productive ways. The president of Iceland spoke yesterday about the collapse of the banks and told Icelanders to go fishing. He meant that the banking business was not a stable basis for an economy, but fishing had sustained Icelanders for hundreds of years. Too many of American and European highly educated and intelligent are doing unproductive things for personal gain (lawyers, financial engineers, etc). An economic decline may be healthy so that we revisit how we allocate our best human capital. This realignment provides a basis for economic rebirth. Unfortunately, that means your CFA Charter is not as valuable as it once was. Peak to trough global stock markets decline by 60%. The stock market becomes less important in everyone’s lives (in 1977, people didn’t start conversations “Did you see what the stock market did?”). We see S&P 500 @ 1500 again in 2014. Urban decay becomes a problem again. Unemployment and declining tax revenues cause crime to increase which starts a death spiral. Americans move out of Manhattan in droves and move to newly inexpensive suburbs. Terrorist incidents caused by the American pull-out from Afghanistan and Iraq (a jihadist has to go somewhere) cause people to decide that concentration represents risk. Cities get to be bad places again (rent Death Wish videos). Manhattan real estate is among the worst performing investments over the next 10 years. A battle worn and old Donald Trump is tragic reminder of bygone times. Carolina wins 3 or 4 national B-ball titles providing a focal point of international rejoicing. Coach K is largely blamed for global economic decay and the world cheers each time Carolina smashes him.
Nice writeup and some interesting observations.
Joey what are your thoughts on the race going on right now?
uh, what race?
Oh that race. It’s over unless someone has videos of Obama having sex with Barney Frank.
crap, that reminds me I need to delete those fraternity pictures on my hard drive
If these videos existed, would you watch?
“A battle worn and old Donald Trump is tragic reminder of bygone times.” This is a great line. Some may say this is applicable today. Your analysis is very thought provoking. Hopefully things won’t be this bad.
I think we need future Bill and Ted to bring us together through rock music.
We need more orderly bankruptcies in the financial sector, the faster this occurs the sooner we will begin to turn the corner. There is no hiding from the losses that are looming and someone has to take the hit. There is still no transparency in the system either. I pray we don’t roll back mark to market accounting as that will really be the death blow.
I agree… we need more clarity if anything. Mark to Market isn’t to blame
Q: Is this the beginning of the end for the EURO currency? Milton Friedman said it wouldn’t last through it’s first real recession. Dom Dom Dom
I think buying a farm is the best investment decision one can make considering the structural change that will occur in the world.
farms take a lot of up-front capital… wonder if the gov’t will lend me a few $$.
I have a solution to all your problems: stop being the world’s policeman. Stop trying to interfere in others’ affairs. Build your own home. Sit down with people you have disagreements with and resolve and compromise. Stop bullying other nations. As someone who has traveled around quite a bit, I can tell you this honestly and sincerely that it baffles me how clueless Americans are. Our concepts of terrorism, democracy and freedom are created by us, for our convenience. Its not just the economy thats a bubble. We live in a bubble society.
former trader Wrote: ------------------------------------------------------- > I think buying a farm is the best investment > decision one can make considering the structural > change that will occur in the world. You mean other than the bubble in farm prices that have been caused by ehtanol subsidies, right?
mh7 Wrote: ------------------------------------------------------- > former trader Wrote: > -------------------------------------------------- > ----- > > I think buying a farm is the best investment > > decision one can make considering the > structural > > change that will occur in the world. > > You mean other than the bubble in farm prices that > have been caused by ehtanol subsidies, right? I took it as: Iceland is to fishing as Middle America is to farming.
I think we will be ok - markets seem to be in Post Traumatic Shock right now.