China – the biggest paradigm shift in a century?

By Steen Jakobsen,
Chief Economist & CIO / Saxo Bank
  • The 19th National Congress of the Communist Party of China starts next week
  • It will be the single biggest event this year, of unprecedented significance
  • Xi will cement his position and secure his legacy at the Congress
  • China is changing and has changed more than the market gives it credit for
  • Under Trump, the United States has abdicated its global role
  • What we are witnessing is a geopolitical reality show
  • The rise of China and the decline of the US will spawn a new FX king!
great Hall
 The 19th National Congress of the Communist Party of China will take place at Beijing’s Great Hall of the People, starting October 18.Photo: Zhao jian kang / Shutterstock.
The 19th National Congress of the Communist Party of China kicks off next week in Beijing and promises to be the single biggest event this year for financial markets and the international balance of power. This makes it a true paradigm shift – an important change that happens when the usual way of thinking about or doing something is replaced by a new and different way. That’s exactly what this Congress will be and it’s the reason why it is of historic significance for each and every one of us and for the global economy.
Let’s throw some context around this. China already leads the world in credit creation, growth and now in most technology fields. My take remains that President Xi will focus on quality over quantity, that reducing pollution is the number one social issue in China and that the Party is taking more and more control. The net output will be:
  • Lower than expected growth for the next 18 months (while China converts its economy from export engine to one of productivity gains – President Xi wants 2010 GDP per capita doubled (Rule of 72= 72/7% GDP per year = 10 years) which means an objective of 7% growth per year, but most of this will be productivity driven which means investment first (hence lower growth), then higher.
  • Reduction of pollution = electrification of cars –  by 2030 100% of cars will be electric vehicles – this will catapult China to leadership in battery technology, E-engines, and pollution reduction. (Don’t forget that from 1900 to 1910/13 the US went from 100% horse carriages to 100% cars!)
  • High ratio of R&D and innovation to gain leadership. China is already dominant, but will be even more so in E-commerce, payments and fintech. (See McKinsey report below).
  • Slow gradual openness in capital account, more access to the market for foreigners and a big focus on converting global trade from USD to CNY.
  • Weaker CNY post-congress.
  • Major negative credit and growth impact on the rest of the world.

Change comes much faster than we human beings like – our brains are simply not designed to accept quick changes, and one of the few shortcomings of the brain is that it likes (and uses) the recent past to extrapolate the future. We think in a linear fashion but world the evolves in a super log-normal way. An excellent example is seen in the pictures below from New York in 1900 and 1913. Notice the difference in street traffic in the space of just 13 years.

I think the next 13 years will surpass those years in way back then in New York in terms of change, dynamics and how we act, analyse and live.

NYC 1900
NYC 1913
The upcoming 19th Party Congress is highly anticipated but we technically know most of what will be said courtesy of the modus operandi of The Party and the excellent work by Charles Panton(*) “predicting” the President Xi speech at the 19th Chinese Party Congress. Turns out most of  it is “given” and here is my copy-and-paste from Charles Panton’s work:

(*) Charles Parton worked as a diplomat in both the British and EU services, spending much of his career in China. Since retirement, he has set up his own consultancy, China Ink, as well as being London Director of China Policy and Special Adviser on China to the House of Commons Select Committee. He is shortly to return to Beijing as Internal Political Adviser to the British Embassy.

  • …a constant theme of Xi Jinping’s speeches is the need for innovation.
  • …he (President Xi) was in charge of the drafting of the report delivered to the 18th Party Congress by his predecessor Hu Jintao.
  • The deeper purposes of the Congress and the report are to reaffirm the Party’s importance to itself and to the nation.
  • “Ecological Construction‟, added “Making Great Efforts to Promote Ecological Progress”. Neither addition is surprising, given that Party legitimacy would be threatened by popular dissatisfaction if areas such as education, health, social security, as well as pollution and food safety, were not put higher up the political priority list.

There are likely to be 13 major sections….(See table below for 16th,17th and 18th Congress comparison…)

The Past Five Years. To judge from the past, this section will aim to set a positive tone in order to remind the Party and people that only the Party could have achieved China’s rise.

Party Theory and Ideology. This section is likely to be relatively short. It will restate the principal tenets of “Socialism with Chinese Characteristics” and the need for and benefits of reform and opening up. Xi has spent much of his first term emphasising the importance of ideology and continuity with the Party’s roots, so even if shorter, this section will be hard hitting.

Xi Jinping Thought, Theory or Concept? This congress may well see the apotheosis of Xi’s “important series of speeches” into “Xi Jinping Thought”, “Xi Jinping Theory” or the plain “Four Comprehensives”, Xi’s contribution to the CCP’s canon of Marxist-Leninism, Mao Zedong Thought, Deng Xiaoping Theory, the Three Represents (of Jiang Zemin) and the Scientific Outlook on development (of Hu Jintao). The academic prophet, gazing at the Party’s liver to predict the future, will pronounce on the importance of the difference between an “ism”, “Thought”, “Theory” or just a simple description (as Jiang and Hu gained). In practice, what actually matters is that Xi is more powerful than his two predecessors at the start of a second term and may become more so than Deng: at the level of policymaking and personnel, he is getting his way, even if at the level of implementation and down among those who hold real power in China, the 2,862 Party county secretaries, his writ runs less effectively). But for what it is worth, I think that we shall be hearing of “Xi Jinping Thought”. Interestingly, an article in Research on Party Building magazine, a monthly publication on communist theory, published an article in its July edition on “Xi Jinping Thought”.

Building a moderately prosperous society in all respects. Traditionally, this short section looks forward to the big tasks of the next five years, mainly in the area of the “Five Constructions”(economic, political, cultural, social and environmental). It is likely also to remind cadres of the importance of themes dear to Xi Jinping’s heart, such as poverty alleviation, innovation, Belt and Road Initiative, corruption and Party discipline. And judging by the meetings of late July, the main theme, not surprisingly, will be稳中求进 “progress amid stability”, a phrase we shall see often.

The environment and ecology. This was a new section in the 18th Congress Report reflecting ecology’s rise to become one of the five “constructions” and its addition to the Party constitution. Quite apart from the lamentable state of the environment itself, a major driver for inclusion was the threat to social stability: according to some Chinese academics, around half of protests involving over 10,000 people had an environmental cause. (This is a new key in our opinion!)

Party building. This is always a lengthy and important section, hardly surprising, given that this is, after all, the Party’s congress and given that “comprehensively [and] strictly govern the Party‟ is one of the “Four Comprehensives”. The 18th Congress report was much harder and more urgent than its predecessors on ideals, faith in Party ideology, working for the people, corruption and discipline. This report is likely to be harder still. Over his first five years Xi has not just launched an unending and deep war on corruption, but also carried out a series of campaigns to instill discipline and cut abuse of public funds by cadres. It is traditional to have a section on intra-Party democracy and Party unity; we can expect the former to be more by way of lip-service, the latter to feature prominently. Xi will undoubtedly recommit to the war on corruption and is likely to doff his cap in the direction of the new National Supervision Commission, which is due to start work in earnest next March. Nor should it be forgotten that the Party Congress elects a new Central Commission for Discipline and Inspection.

16th-18th
chart
Charles Parton concludes:

“…but it will give an idea of how he views progress towards those reforms, the priority of tasks needed to ensure their full delivery over the next five years, his political thinking, and perhaps his perception of problems. Foremost among those are implementation (by officials) and trust (of the people). Xi and Premier Li Keqiang have spent much time in the last few years railing against vested interests and failure to implement set down policies. Trust from the people in the Party is in short supply. One of the purposes of the Report is to show the people that it is right to entrust governance to a single party. Most people buy the line that under the CCP China has taken back its rightful place in the world; they are less persuaded by the claim that the Party rules in their, rather than its own, interests. That could be a worry if economic or environmental factors set back further progress towards prosperity’”.

It’s important to understand that the “economic plan” for China in the next 5 years is already in place as the 13th five-year plan was initiated in July 2016 – there are a mere 219 pages to read up for you…. (Link – China Five-year plan).

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Here are a few takeaways:
  • Marxism-Leninism, Mao Zedong Thought, Deng Xiaoping Theory, the Theory of Three Represents, and the Scientific Outlook on Development; and put into practice the guiding principles from General Secretary Xi Jinping’s major addresses.
  • The Chinese Dream of the rejuvenation of the nation and the core socialist values have gained a firm place in people’s hearts. China’s soft power has continued to become stronger. Notable achievements have been made in military reform with Chinese characteristics, and new steps have been taken to strengthen and revitalise the armed forces. A new phase has begun in the all-around strengthening of Party self-governance, and significant headway has been made in improving Party conduct and building a clean government. New heights have been reached in China’s economic strength, scientific and technological capabilities, defense capabilities, and international influence.
  • However, the need has become more pressing to improve the quality and efficiency of growth and transform and upgrade the economy. As the economy is experiencing a new normal of growth, there is a clearer trend toward a more advanced form of growth, improved divisions of labour, and a more rational structure. With the structure of consumption being more rapidly upgraded, broad market space, a strong material foundation, a complete industrial structure, an ample supply of funds, and abundant human capital, along with the cumulative effects of innovation that are beginning to show, our overall strengths are still notable. A new style of industrialisation, information technology adoption, urbanisation, and agricultural modernisation are experiencing deeper development, new drivers of growth are in the making, and new areas, poles, and belts of growth are becoming stronger. All-around efforts to deepen reform and make progress in the law-based governance of the country are unleashing new dynamism and bringing new vitality.
  • Maintain a medium-high rate of growth. While working to achieve more balanced, inclusive, and sustainable development, we need to ensure that China’s 2010 GDP and per capita personal income double by 2020, that major economic indicators are balanced, and that the quality and efficiency of development is significantly improved. Production will move toward the medium-high end, significant progress will be made in modernising agriculture, information technology will be further integrated into industrialisation, advanced manufacturing and strategic emerging industries will develop more rapidly, new industries and new forms of business will keep growing, and the service sector will come to account for a greater proportion of GDP.
  • Achieve significant results in innovation-driven development. We will pursue innovation-driven development, ensure that business startups and innovation flourish, and see that total factor productivity is markedly improved. Science and technology will become more deeply embedded in the economy, the ingredients needed for innovation will be allocated to greater effect, major breakthroughs will be made in core technologies in key sectors, and China’s capacity for innovation will see an all-around improvement. Fulfillment of these goals will help China become a talent-rich country of innovation.

The focus on innovation and the progress of it is somewhat surprising, at least to me:

McKinsey & Company’s report “China’s digital economy – a leading global force” is almost shocking!

China

Note: China has gone from 0.4% in 2005 to 42% in 2016, in mobile payment the Chinese do 11x more than the Americans, and most surprising of all, in Global Unicorns (start ups > $1 bn) China has 34 vs. US 46 but mostly the same valuation!

In terms of investment China is also already a global leader:

China

The context here is that China is 1/3 of the global growth impulse (source: IMF) and indirectly 50% of credit  – our own Christopher Dembik tracks the China Credit Impulse, which is the flow of credit:

credit impluse

This chart leads real economy by 9-12 months in other words. Nine months from now in mid-2018 China will be in severe slowdown, one which I believe China is creating through control of the banking system in order to to set up the release of productivity investments, where China comes from a level which is 20-30% of the US. The next five years will be one big technology R&D and innovation drive under “Chinese Characterstics”.

chart
 Source: Bloomberg LLP

Note: We see growth in 5.5% in 2018, 6.0% in 2019, and the current account @ 0% of GDP.

chart

Note: The slowdown in China is already dominant – add Credit Impulse and we have a negative contribution to global growth.

curency

Note: CNY is low down as a basket, but higher vs. USD “naked”. Overall China’s basket will have to drive lower in value to the tune of 1-2% per year.

This is all part of the plan and something President XI will be more confident in after the congress which will see him solidify his power.
Conclusion

China is changing and has changed more than the market gives it credit for – the typical Anglo-Saxon economist keeps his focus on banking system and debt, but unlikely the western world, China can accelerate growth through the release of productivity. The US, under President Trump, has chosen to “retire” from the global economy on the fundamentally flawed concept of America First while China is growing its importance, probably best illustrated by this chart:

chart

Source: Connectopraphy

Now China also wants a new world order in commodities. China will allow exporters to avoid USD payments for CNY or…. gold! A new gold standard? (LINK: Crude, Gold, CNY)

headline
 Source: Nikkei Asian Review

China is enjoying US indecision on foreign policy, which seems to be driven by indecision, spur of the moment changes and randomness. Opposite this sits China, with its One Belt, One Road, Asian Development Bank and the Shanghai Cooperation Organisation – there are in excess of three billion people in this alliance – and with Pakistan and India joining in 2015 that number will be four billion by 2050.

The future belongs to the countries and companies which can command the consumers, no one is better placed than China (and India).
We are witnessing a geopolitical reality show where one hegemonic power, the US, almost voluntarily is giving up its dominance.
The result is clear to me:
King Dollar is dead, long live King CNY!

– Edited by Clare MacCarthy

Source: https://www.tradingfloor.com/posts/macro-digest-china-the-biggest-paradigm-shift-in-a-century-8983318

Steen Jakobsen is chief economist and CIO at Saxo Bank

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Buy Oil With Gold-Backed Currency—Bypassing US Petrodollars

In a second ground shaking move in a week, China has moved to introduce yuan denominated oil futures contracts. Settlement may be in yuan or gold. This has huge long term ramifications for the US dollar as world’s reserve currency.

The other move this week was the US Federal Reserve signally their intention next month to start reducing it’s balance sheet assets by $10 billion per month. Again, the long term ramifications for this is enormous but will not felt immediately.

By Jay Syrmopoulos via The Free Thought Project

In a direct challenge to U.S. imperialism, China’s yuan-denominated contracts – backed by gold -will let oil exporting countries bypass using the U.S. petrodollar.

Beijing, China – In an effort to hedge against U.S. hegemony, and what could be a global game-changer, the world’s top oil importer, China, is preparing to denominate crude oil futures contracts in Chinese yuan to be convertible into gold. The move would allow oil exporting countries to bypass benchmarks denominated in U.S. petrodollars — creating what will almost certainly be the most critical Asian oil benchmark, according to a report by Nikkei Asian Review.

Typically, crude oil is priced in relation to Brent or West Texas Intermediate futures, both denominated in U.S. dollars.

The move by the Chinese will allow oil exporting countries such as Iran and Russia to bypass U.S. sanctions by trading in yuan instead of U.S. dollars. The move is a direct result of the U.S. proclivity to use the dollar as a weapon against countries that refuse to bend to the imperial will of the United States. To make the yuan denominated contracts more appealing, China intends to make the yuan fully convertible to gold on the Shanghai and Hong Kong exchanges.

“The rules of the global oil game may begin to change enormously,” said Luke Gromen, founder of U.S.-based macroeconomic research company FFTT.

According to a report by OilPrice.com:

Last month, the Shanghai Futures Exchange and its subsidiary Shanghai International Energy Exchange, INE, successfully completed four tests in production environment for the crude oil futures, and the exchange continues with preparatory works for the listing of crude oil futures, aiming for the launch by the end of this year.

Yuan-backed oil and gold futures mean that users can be paid in physical gold, said Alasdair Macleod, head of research at Goldmoney, a gold-based financial services company based in Toronto.

While some potential foreign traders have expressed reservations that the contract would be priced in yuan, according to analysts who spoke to Nikkei Asian Review, backing the yuan-priced futures with gold would be appealing to oil exporters — especially to those that would rather avoid U.S. dollars in trade.

It is a mechanism which is likely to appeal to oil producers that prefer to avoid using dollars, and are not ready to accept that being paid in yuan for oil sales to China is a good idea either,” Macleod said.

These recent moves by the Chinese are part of a larger de-dollarization strategy by other world powers intent on creating a more multipolar global framework.

As we reported in July, the formation of a BRICS gold marketplace, which could bypass the U.S. Petrodollar in bilateral trade, continues to take shape as Russia’s largest bank, state-owned Sberbank, announced that its Swiss subsidiary had begun trading in gold on the Shanghai Gold Exchange.

Russian officials have repeatedly signaled that they plan to conduct transactions with China using gold as a means of marginalizing the power of the dollar in bilateral trade between the geopolitically powerful nations. This latest movement is quite simply the manifestation of a larger geopolitical game afoot between great powers.

report by the Centre for Research on Globalization clarifies the implications of these most recent moves by the Russians and the Chinese in an ongoing drive to replace the US petrodollar as the global reserve currency:

Fast forward to March 2017; the Russian Central Bank opened its first overseas office in Beijing as an early step in phasing in a gold-backed standard of trade. This would be done by finalizing the issuance of the first federal loan bonds denominated in Chinese yuan and to allow gold imports from Russia.

The Chinese government wishes to internationalize the yuan, and conduct trade in yuan as it has been doing, and is beginning to increase trade with Russia. They’ve been taking these steps with bilateral trading, native trading systems and so on. However, when Russia and China agreed on their bilateral US$400 billion pipeline deal, China wished to, and did, pay for the pipeline with yuan treasury bonds, and then later for Russian oil in yuan.

This evasion of, and unprecedented breakaway from, the reign of the US dollar monetary system is taking many forms, but one of the most threatening is the Russians trading Chinese yuan for gold. The Russians are already taking Chinese yuan, made from the sales of their oil to China, back to the Shanghai Gold Exchange to then buy gold with yuan-denominated gold futures contracts – basically a barter system or trade.

The Chinese are hoping that by starting to assimilate the yuan futures contract for oil, facilitating the payment of oil in yuan, the hedging of which will be done in Shanghai, it will allow the yuan to be perceived as a primary currency for trading oil. The world’s top importer (China) and exporter (Russia) are taking steps to convert payments into gold. This is known. So, who would be the greatest asset to lure into trading oil for yuan? The Saudis, of course.

All the Chinese need is for the Saudis to sell China oil in exchange for yuan. If the House of Saud decides to pursue that exchange, the Gulf petro-monarchies will follow suit, and then Nigeria, and so on. This will fundamentally threaten the petrodollar.

“In 2014 Russia and China signed two mammoth 30-year contracts for Russian gas to China. The contracts specified that the exchange would be done in Renminbi [yuan] and Russian rubles, not in dollars. That was the beginning of an accelerating process of de-dollarization that is underway today,” according to strategic risk consultant F. William Engdahl.

Russia and China are now creating a new paradigm for the world economy andpaving the way for a global de-dollarization.

“A Russian-Chinese alternative to the dollar in the form of a gold-backed ruble and gold-backed Renminbi or yuan, could start a snowball exit from the US dollar, and with it, a severe decline in America’s ability to use the reserve dollar role to finance her wars with other peoples’ money,” Engdahl concludes.

About the Author

Jay Syrmopoulos is a geopolitical analyst, freethinker, and ardent opponent of authoritarianism. He is currently a graduate student at the University of Denver pursuing a masters in Global Affairs and holds a BA in International Relations. Jay’s writing has been featured on both mainstream and independent media – and has been viewed tens of millions of times. You can follow him on Twitter @SirMetropolis and on Facebook at SirMetropolis.
Source: https://truththeory.com/2017/09/13/china-moves-new-world-order-will-buy-oil-gold-backed-currency-bypassing-us-petrodollar/

Financial Markets Update 20092017

The US Federal Reserve concludes its two day meeting later today. It’s timely to recap where we are with market activity and our long term picture we call The End of the Long Game 2009-2018. The Fed will be signalling their intention to shrink the Fed balance sheet which sits at around $4.5 trillion. In effect this function can be seen as deflationary. As market traders comment, its akin to “taking the punch bowl away at the end of the party”. The main game which has been in play since the 1990’s is about to change in a very big way.

US Stocks

Stocks are completing the last few squiggles of it’s rise from March 2009. Stocks are running on fumes now and we anticipate stock market activity to be choppy as it makes its final highs.

Will there be a big crash in October? No, we don’t think so but it will prove to be frustrating and choppy. Will there be a final spike, like 1929? Maybe. It doesn’t matter unless you are a trader with instant access. We have entered a phase where it is prudent to reduce risk. Certainly the DJIA can spike 1000-2000 points in a last gasp. Can the market run to the end of the year? We think so and that is our likely time target for the final top. Very late December into early January 2018. Something would have to change substantially to see a continued up move well into 2018.

Courtesy TradingView (www.tradingview.com)

It’s quite likely we’ll see stocks stagger into the top based on money supply growth rates which have remained weak over the last 6 months. Money supply growth gives asset values like stocks and property the juice to rise as they have done since 2009.

Our targets for a major top in US stocks is for the DJIA to reach as high as 25000 (SP500 2800) in a blow off final frenzy. Alternatively the major indices will wimper out between DJIA 22500 – 24000 (SP500 2520-  2688)

Gold

We had predicted gold would move to US$1525+/- in a counter correction to the long down move since 2011. It now looks like the deflationary forces gathering give rise to some darker alternatives.

Our bull scenario suggests that from around US$1290-$1305 we will see prices rise off the back of a weaker US dollar (see below). That move we see as very short term, a case of 1-2 weeks absolute max. Potential targets include US$1375 and US$1460.

Given that this is a counter correction in a long term correction phase we would anticipate the long term downward trend to reassert itself. We are looking for a long term target of US $770 and possibly lower.

Our bear scenario suggests prices move sideways from here before entering the downward move suggested above. That sideways range of US$1190 – US$1330 would indicate the underlying weakness in the global economy and markets.

US Dollar

Dollar Index 1970 – Present (Courtesy tradingview.com)

The dollar has been wrapping up the last phases of a consolidation time. Political force has been used to get the dollar lower to enhance US export activity. Essentially there has been a currency war in progress. Battling central banks around the world using interest rates and money printing to create a trading advantage for exporters.

Having come off it’s highs in 2017 we believe it is clearly a correction phase. That phase may be coming to an end now or in a couple of weeks time. We believe the US dollar is about to get very strong making new highs above the 2017 highs and potentially to the 2000/2001 highs.

Looking at individual pairs:

EURUSD: We see extending off the back of the US Fed meeting an advance to 1.22-1.23 and reversal back down with the EUR weakening over the coming months. Expect the German elections to play an important part in October and further developments in the Brexit negotiation talks impact on the Euro.

AUDUSD: In the short term may continue to advance into the 82-84 cent region before the longer term US dollar trend reasserts itself. Australia seems to be privileged in being the economy “leading the way” as political confidence continues to fail, bringing economic confidence with it.  This is also reflected in the stock market.

USDJPY: The dollar/yen may already have bottomed and is moving ahead of other pairs.

GBPUSD: Like the AUD and EUR we see it continuing to extend in the final phase of it’s rally. It will come under the influence of US dollar as that currency reasserts itself in the coming weeks/months.

Interest Rates

The impact of the Fed unwinding it’s balance sheet will, in the very short term have little impact on markets. The announcements due today may shake markets. In the longer term, as the Fed continues with balance sheet shrinkage, we will see the impact of tightening liquidity and ultimately raised interest rates. The Fed is keen not to panic the markets or the economy. The effect however will be to close an interest rate trap as rates rise and people holding long bonds are caught with losses.

In particular, pension funds have suffered with low interest rates. They have been forced to chase yield by buying lower quality assets or go offshore to buy foreign currency denominated yielding assets. They are set to extend their suffering as they get caught once again.

Similarly governments have profited by borrowing at low interest rates. They are going to find themselves with a rapidly blown out interest bill. We can comfortably predict (as economist Martin Armstrong says) “the hunt for taxes” will escalate to new levels previously unheard of.

This hunt for taxes, over-regulation of economies and peoples alike will set in motion a chain of events for liberal-democratic nations including civil disruption, secession of states and the ending of empires over the coming decades. If prudence prevails we may see the emergence of The Coming Four D’s.

BitCoin

BTCUSD 6 Months (Courtesy Bitcoin Charts)

We published our prediction for BTC to peak in a parabolic move on 07/09/17. It did shortly after without the added frenzy we were anticipating. It then fell some US$1392 or 29% before stabilizing. We view further falls lie ahead in the short term. There is only a low probability that BTC can make new highs soon. We need more time and price action to unfold before confirming this. For now, expect BTC to enter a prolonged consolidation phase.

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The coming changes to the financial market game will have a vast impact on economies and societies in the years and decades ahead. These changes are merely the impact of mistakes made in the past. Human history repeats itself. This is in keeping with our long term predictions. It is only the capitulation of  government’s desire to control everything and everyone that we see a new era emerge. By then the nature of the world will have changed forever. New generations of people will again move to repeat the glories and mistakes of the past.

The Coming Four D’s

Over the last 17 years we have witnessed an increasing loss of confidence by voters in liberal democratic governments around the world. The 17 years have truly exposed the fact that politicians have personal agendas beyond serving the needs of their electorates. As political confidence fails, economic confidence fails soon after. Despite confidence failing, the economy seems to totter on fuelled by the vast money expansion of the last 9 years, unprecedented in human history.

Nowhere is this more apparent than in Australia where voters prefer having a “hung parliament” than trusting government. Many Australians feel a sense of unease that something has gone terribly wrong with the “lucky country”. The spontaneous ordering of the Australian electoral process has delivered a series of difficult to govern parliaments reflecting the wishes of voters to minimize damage to themselves. Unfortunately, this situation is also leading to the collapse of political confidence in this country. When that happens, economic confidence fails soon after. Many indicators illustrate an underpinning weakness of the Australian economy and this is accelerating.

Emerging Events foresee a time coming (very soon now) when “The Four D’s” will come to bear in most liberal democratic countries around the world including Australia.

These Four D’s, like the Four Horsemen of the Apocalypse are:

  1. Deleveraging (reduce debt). In Australia it is not so much public debt that is the issue like the US, Japan, UK, Italy, France and others but private debt held in the form of home loans, car loans and consumer loans. Australians today are loaded with debt and at risk of a severe downturn in the economy and property prices. Remember that any debt is a claim on future labour.

2. Deregulation. Over the last 40 years we have seen a massive growth in the amount of red tape choking our ability to get up and achieve. It was Frederick Hayek, the famous Nobel Prize winning economist who said “there is no better way to enslave a people than to enmesh them in a fine set of regulations”. Disempowering career politicians is a powerful solution to ending their crony ways and getting more people into parliament with real world experience. It can be done by setting term limits for politicians. Let them “serve” the electorate for just a few terms before thanking them and sending them on their way.

Unfortunately politicians need to be seen to be doing their job and of course that job involves passing legislation. It’s actually cheaper to send all those Federal politicians on junket trips overseas than to see them pumping out more legislation. Their need to regulate your life is the Progressive agenda and Progressivism is the “strong presumption that government intervention (force) will produce a better result than voluntary society”. In other words, they know better than you how you should lead your life.

3. Deflating the economy. This really means letting prices of everything find their own level rather than being artificially propped up. Since most asset values are overpriced anyway given the quantity of paper money that has been inflated enormously over the last 40 odd years. What we are suggesting is the value of money be allowed to recalibrate at 2016 values to allow money to once again represent a store of value as property, shares, and others assets do today. In other words it should have equal status as an asset.

The best way of achieving this is by making money a store of value again, thereby stopping politicians from endless borrowing and creating endless inflation. While 1 or 2 % inflation may not seem much, it is enough to keep you like a rat on a treadmill, constantly grinding to maintain your standard of living. It doesn’t have to be this way folks. The rising perception that inequality is increasing in many liberal democratic countries stems directly from the expansion of money supply.

  1. The first three D’s will happen regardless of all the politicians and all their minions’ attempts to control the levers of the economy and society at large. The belief they have any control is delusional at best and the consequence of this belief in the long term is, inevitably, a totalitarian state. The fourth D, possibly the most important is up to us and possibly the most important in securing all the rights and privileges available to you from the liberal-democratic tradition you have inherited. The fourth D is about decentralizing or devolving power now concentrated in the hands of federal government. By that I mean we need to devolve power concentrated in the hands of federal government to state and local governments.

We need to remember the political class makes its living from centralized power and the attendant division it causes. But why should ordinary Australians accept the false choice between one brand of centralized government and another, when the obvious solution is staring us in the face? Breaking up power politically is far more practical, and far more humane.

There are two pressing questions you need to ask yourself. Is centralized governance desirable in a vast country like Australia with a population of 24 million people? More importantly is it even really possible? Are overarching political solutions workable, or does politics simply enrich Canberra politicians while feeding the rapidly deteriorating social and economic wellbeing most Australians are experiencing?

In politics, the principle that a central authority such as a federal government should have a lesser function, performing only those tasks which cannot be performed at a more local level is called “subsidiarity“. Subsidiarity as a peaceful approach for devolving centralized power is the first step toward making government smaller and less powerful in our lives. National and even supra-national governments are the biggest threats to human liberty and flourishing because they have a monopoly on violence and coercion: armies, police, missiles, central banks, economic sanctions, centralised taxation, healthcare and welfare. These are the elements of systemic contagion that should terrify us.

Decentralization of power requires more than just devolution of a few powers here or there, but a society-wide commitment to transferring power, authority, and responsibility back to the grass roots. From federal to state, from state to local government. A diverse society can sustain itself peacefully when its members are committed to solving problems as locally as possible, involving higher levels of government only when absolutely necessary.

Your local council may be incompetent, but at the very least it is far more accessible to you. Its damage is likely to be contained, and your ability to change local council may only require moving a few suburbs away.

Subsidiarity is the most realistic and pragmatic approach to creating more freedom in our lifetimes. Winning majority support for supposedly universalist political principles is a daunting challenge. We would do well instead to consider the Swiss federal model, which champions the subsidiarity principle where:

Powers are allocated to the Confederation, the cantons and the communes in accordance with the principle of subsidiarity. Note this was how the Australian constitution was originally set up.

The Confederation only undertakes tasks that cantons (equivalent of shires) are unable to perform or which require uniform regulation by the Confederation.

Under the principle of subsidiarity, nothing that can be done at a lower political level should be done at a higher level.

One of the problems the EU faces at present is that they have lost sight of the subsidiarity principle. More and more control has been handed to Brussels. This is one of the factors why many Britons decided to vote to leave the EU.

Imagine Bill Shorten or Malcolm Turnbull campaigning on the idea in 2019: “I can’t claim to know what’s best for Maroubra, Sydney or Frankston, Victoria or Bunbury, Western Australia in every situation. I’m not omnipotent, and neither are the 150 members of the Commonwealth House of Representatives. We should leave most things up to the people who actually live in those towns. Vote for me if you agree.”

Subsidiarity is not perfect, just better. Freedom, in the political sense of the word, means the ability to live without government coercion. It does not mean the ability to live under broadly agreed-upon social norms, simply because truly universalist political norms are so elusive.

Free societies don’t attempt to impose themselves politically on electoral minorities any more than they attempt to impose themselves militarily on neighboring countries. Politically unyoking different constituencies in Australia makes far more sense than attempting to contain the hatred and division created by mass majority outcomes.

The world is moving toward decentralization, flattening itself and replacing hierarchies with networks. Subsidiary is real diversity in practice and a key solution to restoring the inequities that have arisen in our societies.

Whether we embrace these Four D’s or not, some or all of them will soon be imposed on us anyway.

The Coming Four D’s

Emerging Events examines The Coming Four D’s where Deleveraging, Deregulation, Deflation and Decentralization become the driving forces of change in liberal-democratic nations around the world.

The article focuses on Australia which exemplifies many of the problems liberal-democratic nations face today. We show how “subsidiarity” can bring a peaceful, more content and free society by devolving centralized power.

This is how Big Oil will die

From WHMP / clipart.com

It’s 2025, and 800,000 tons of used high strength steel is coming up for auction.

The steel made up the Keystone XL pipeline, finally completed in 2019, two years after the project launched with great fanfare after approval by the Trump administration. The pipeline was built at a cost of about $7 billion, bringing oil from the Canadian tar sands to the US, with a pit stop in the town of Baker, Montana, to pick up US crude from the Bakken formation. At its peak, it carried over 500,000 barrels a day for processing at refineries in Texas and Louisiana.

But in 2025, no one wants the oil.

The Keystone XL will go down as the world’s last great fossil fuels infrastructure project. TransCanada, the pipeline’s operator, charged about $10 per barrel for the transportation services, which means the pipeline extension earned about $5 million per day, or $1.8 billion per year. But after shutting down less than four years into its expected 40 year operational life, it never paid back its costs.

The Keystone XL closed thanks to a confluence of technologies that came together faster than anyone in the oil and gas industry had ever seen. It’s hard to blame them — the transformation of the transportation sector over the last several years has been the biggest, fastest change in the history of human civilization, causing the bankruptcy of blue chip companies like Exxon Mobil and General Motors, and directly impacting over $10 trillion in economic output.

And blame for it can be traced to a beguilingly simple, yet fatal problem: the internal combustion engine has too many moving parts.  

The Cummins Diesel Engine, US Patent #2,408,298, filed April 1943, awarded Sept 24, 1946

Let’s bring this back to today: Big Oil is perhaps the most feared and respected industry in history. Oil is warming the planet — cars and trucks contribute about 15% of global fossil fuels emissions — yet this fact barely dents its use. Oil fuels the most politically volatile regions in the world, yet we’ve decided to send military aid to unstable and untrustworthy dictators, because their oil is critical to our own security. For the last century, oil has dominated our economics and our politics. Oil is power.

Yet I argue here that technology is about to undo a century of political and economic dominance by oil. Big Oil will be cut down in the next decade by a combination of smartphone apps, long-life batteries, and simpler gearing. And as is always the case with new technology, the undoing will occur far faster than anyone thought possible.

To understand why Big Oil is in far weaker a position than anyone realizes, let’s take a closer look at the lynchpin of oil’s grip on our lives: the internal combustion engine, and the modern vehicle drivetrain.

BMW 8 speed automatic transmission, showing lots of fine German engineered gearing. From Euro Car News.

Cars are complicated.

Behind the hum of a running engine lies a carefully balanced dance between sheathed steel pistons, intermeshed gears, and spinning rods — a choreography that lasts for millions of revolutions. But millions is not enough, and as we all have experienced, these parts eventually wear, and fail. Oil caps leak. Belts fray. Transmissions seize.

To get a sense of what problems may occur, here is a list of the most common vehicle repairs from 2015:

  1. Replacing an oxygen sensor — $249
  2. Replacing a catalytic converter — $1,153
  3. Replacing ignition coil(s) and spark plug(s) — $390
  4. Tightening or replacing a fuel cap — $15
  5. Thermostat replacement — $210
  6. Replacing ignition coil(s) — $236
  7. Mass air flow sensor replacement — $382
  8. Replacing spark plug wire(s) and spark plug(s) — $331
  9. Replacing evaporative emissions (EVAP) purge control valve — $168
  10. Replacing evaporative emissions (EVAP) purging solenoid — $184

And this list raises an interesting observation: None of these failures exist in an electric vehicle.

The point has been most often driven home by Tony Seba, a Stanford professor and guru of “disruption”, who revels in pointing out that an internal combustion engine drivetrain contains about 2,000 parts, while an electric vehicle drivetrain contains about 20. All other things being equal, a system with fewer moving parts will be more reliable than a system with more moving parts.

And that rule of thumb appears to hold for cars. In 2006, the National Highway Transportation Safety Administration estimated that the average vehicle, built solely on internal combustion engines, lasted 150,000 miles.

Current estimates for the lifetime today’s electric vehicles are over 500,000 miles.

The ramifications of this are huge, and bear repeating. Ten years ago, when I bought my Prius, it was common for friends to ask how long the battery would last — a battery replacement at 100,000 miles would easily negate the value of improved fuel efficiency. But today there are anecdotal stories of Prius’s logging over 600,000 miles on a single battery.

The story for Teslas is unfolding similarly. Tesloop, a Tesla-centric ride-hailing company has already driven its first Model S for more 200,000 miles, and seen only an 6% loss in battery life. A battery lifetime of 1,000,000 miles may even be in reach.

This increased lifetime translates directly to a lower cost of ownership: extending an EVs life by 3–4 X means an EVs capital cost, per mile, is 1/3 or 1/4 that of a gasoline-powered vehicle. Better still, the cost of switching from gasoline to electricity delivers another savings of about 1/3 to 1/4 per mile. And electric vehicles do not need oil changes, air filters, or timing belt replacements; the 200,000 mile Tesloop never even had its brakes replaced. The most significant repair cost on an electric vehicle is from worn tires.

For emphasis: The total cost of owning an electric vehicle is, over its entire life, roughly 1/4 to 1/3 the cost of a gasoline-powered vehicle.

Of course, with a 500,000 mile life a car will last 40–50 years. And it seems absurd to expect a single person to own just one car in her life.

But of course a person won’t own just one car. The most likely scenario is that, thanks to software, a person won’t own any.


Here is the problem with electric vehicle economics: A dollar today, invested into the stock market at a 7% average annual rate of return, will be worth $15 in 40 years. Another way of saying this is the value, today, of that 40th year of vehicle use is approximately 1/15th that of the first.

The consumer simply has little incentive to care whether or not a vehicle lasts 40 years. By that point the car will have outmoded technology, inefficient operation, and probably a layer of rust. No one wants their car to outlive their marriage.

But that investment logic looks very different if you are driving a vehicle for a living.

A New York City cab driver puts in, on average, 180 miles per shift (well within the range of a modern EV battery), or perhaps 50,000 miles per work year. At that usage rate, the same vehicle will last roughly 10 years. The economics, and the social acceptance, get better.

And if the vehicle was owned by a cab company, and shared by drivers, the miles per year can perhaps double again. Now the capital is depreciated in 5 years, not 10. This is, from a company’s perspective, a perfectly normal investment horizon.

A fleet can profit from an electric vehicle in a way that an individual owner cannot.

Here is a quick, top-down analysis on what it’s worth to switch to EVs: The IRS allows charges of 53.5¢ per mile in 2017, a number clearly derived for gasoline vehicles. At 1/4 the price, a fleet electric vehicle should cost only 13¢ per mile, a savings of 40¢ per mile.

40¢ per mile is not chump change — if you are a NYC cab driver putting 50,000 miles a year onto a vehicle, that’s $20,000 in savings each year. But a taxi ride in NYC today costs $2/mile; that same ride, priced at $1.60 per mile, will still cost significantly more than the 53.5¢ for driving the vehicle you already own. The most significant cost of driving is still the driver.

But that, too, is about to change. Self-driving taxis are being tested this year in Pittsburgh, Phoenix, and Boston, as well as Singapore, Dubai, and Wuzhen, China.

And here is what is disruptive for Big Oil: Self-driving vehicles get to combine the capital savings from the improved lifetime of EVs, with the savings from eliminating the driver.

The costs of electric self-driving cars will be so low, it will be cheaper to hail a ride than to drive the car you already own.


Today we view automobiles not merely as transportation, but as potent symbols of money, sex, and power. Yet cars are also fundamentally a technology. And history has told us that technologies can be disrupted in the blink of an eye.

Take as an example my own 1999 job interview with the Eastman Kodak company. It did not go well.

At the end of 1998, my father had gotten me a digital camera as a present to celebrate completion of my PhD. The camera took VGA resolution pictures — about 0.3 megapixels — and saved them to floppy disks. By comparison, a conventional film camera had a nominal resolution of about 6 megapixels. When printed, my photos looked more like impressionist art than reality.

However, that awful, awful camera was really easy to use. I never had to go to the store to buy film. I never had to get pictures printed. I never had to sort through a shoebox full of crappy photos. Looking at pictures became fun. 

Wife, with mildly uncooperative cat, January 1999. Photo is at the camera’s original resolution.

I asked my interviewer what Kodak thought of the rise of digital; she replied it was not a concern, that film would be around for decades. I looked at her like she was nuts. But she wasn’t nuts, she was just deep in the Kodak culture, a world where film had always been dominant, and always would be.

This graph plots the total units sold of film cameras (grey) versus digital (blue, bars cut off). In 1998, when I got my camera, the market share of digital wasn’t even measured. It was a rounding error.

By 2005, the market share of film cameras were a rounding error.

A plot of the rise of digital cameras (blue) and the fall of analog (grey). Original from Mayflower via mirrorlessrumors, slightly modified for use here.

In seven years, the camera industry had flipped. The film cameras went from residing on our desks, to a sale on Craigslist, to a landfill. Kodak, a company who reached a peak market value of $30 billion in 1997, declared bankruptcy in 2012. An insurmountable giant was gone.

That was fast. But industries can turn even faster: In 2007, Nokia had 50% of the mobile phone market, and its market cap reached $150 billion. But that was also the year Apple introduced the first smartphone. By the summer of 2012, Nokia’s market share had dipped below 5%, and its market cap fell to just $6 billion.

In less than five years, another company went from dominance to afterthought.A quarter-by-quarter summary of Nokia’s market share in cell phones. From Statista.

Big Oil believes it is different. I am less optimistic for them.

An autonomous vehicle will cost about $0.13 per mile to operate, and even less as battery life improves. By comparison, your 20 miles per gallon automobile costs $0.10 per mile to refuel if gasoline is $2/gallon, and that is before paying for insurance, repairs, or parking. Add those, and the price of operating a vehicle you have already paid off shoots to $0.20 per mile, or more.

And this is what will kill oil: It will cost less to hail an autonomous electric vehicle than to drive the car that you already own.

If you think this reasoning is too coarse, consider the recent analysis from the consulting company RethinkX (run by the aforementioned Tony Seba), which built a much more detailed, sophisticated model to explicitly analyze the future costs of autonomous vehicles. Here is a sampling of what they predict:

  • Self-driving cars will launch around 2021
  • A private ride will be priced at 16¢ per mile, falling to 10¢ over time.
  • A shared ride will be priced at 5¢ per mile, falling to 3¢ over time.
  • By 2022, oil use will have peaked
  • By 2023, used car prices will crash as people give up their vehicles. New car sales for individuals will drop to nearly zero.
  • By 2030, gasoline use for cars will have dropped to near zero, and total crude oil use will have dropped by 30% compared to today.

The driver behind all this is simple: Given a choice, people will select the cheaper option.

Your initial reaction may be to believe that cars are somehow different — they are built into the fabric of our culture. But consider how people have proven more than happy to sell seemingly unyielding parts of their culture for far less money. Think about how long a beloved mom and pop store lasts after Walmart moves into town, or how hard we try to “Buy American” when a cheaper option from China emerges.

And autonomous vehicles will not only be cheaper, but more convenient as well — there is no need to focus on driving, there will be fewer accidents, and no need to circle the lot for parking. And your garage suddenly becomes a sunroom.

For the moment, let’s make the assumption that the RethinkX team has their analysis right (and I broadly agree[1]): Self-driving EVs will be approved worldwide starting around 2021, and adoption will occur in less than a decade.

How screwed is Big Oil?


Perhaps the metaphors with film camera or cell phones are stretched. Perhaps the better way to analyze oil is to consider the fate of another fossil fuel: coal.

The coal market is experiencing a shock today similar to what oil will experience in the 2020s. Below is a plot of total coal production and consumption in the US, from 2001 to today. As inexpensive natural gas has pushed coal out of the market, coal consumption has dropped roughly 25%, similar to the 30% drop that RethinkX anticipates for oil. And it happened in just a decade.

Coal consumption has dropped 25% from its peak. From the Kleinman Center for Energy Policy.

The result is not pretty. The major coal companies, who all borrowed to finance capital improvements while times were good, were caught unaware. As coal prices crashed, their loan payments became a larger and larger part of their balance sheets; while the coal companies could continue to pay for operations, they could not pay their creditors.

The four largest coal producers lost 99.9% of their market value over the last 6 years. Today, over half of coal is being mined by companies in some form of bankruptcy.

The four largest coal companies had a combined market value of approximately zero in 2016. This image is one element of a larger graphic on the collapse of coal from Visual Capitalist.

When self-driving cars are released, consumption of oil will similarly collapse.

Oil drilling will cease, as existing fields become sufficient to meet demand. Refiners, whose huge capital investments are dedicated to producing gasoline for automobiles, will write off their loans, and many will go under entirely. Even some pipeline operators, historically the most profitable portion of the oil business, will be challenged as high cost supply such as the Canadian tar sands stop producing.

A decade from now, many investors in oil may be wiped out. Oil will still be in widespread use, even under this scenario — applications such as road tarring are not as amenable to disruption by software. But much of today’s oil drilling, transport, and refining infrastructure will be redundant, or ill-fit to handle the heavier oils needed for powering ships, heating buildings, or making asphalt. And like today’s coal companies, oil companies like TransCanada may have no money left to clean up the mess they’ve left.


Of course, it would be better for the environment, investors, and society if oil companies curtailed their investing today, in preparation for the long winter ahead. Belief in global warming or the risks of oil spills is no longer needed to oppose oil projects — oil infrastructure like the Keystone XL will become a stranded asset before it can ever return its investment.

Unless we have the wisdom not to build it.

The battle over oil has historically been a personal battle — a skirmish between tribes over politics and morality, over how we define ourselves and our future. But the battle over self-driving cars will be fought on a different front. It will be about reliability, efficiency, and cost. And for the first time, Big Oil will be on the weaker side.

Within just a few years, Big Oil will stagger and start to fall. For anyone who feels uneasy about this, I want to emphasize that this prediction isn’t driven by environmental righteousness or some left-leaning fantasy. It’s nothing personal. It’s just business.



[1] Thinking about how fast a technology will flip is worth another post on its own. Suffice it to say that the key issues are (1) how big is the improvement?, and (2) is there a channel to market already established? The improvement in this case is a drop in cost of >2X — that’s pretty large. And the channel to market — smartphones — is already deployed. As of a year ago, 15% of Americans had hailed a ride using an app, so there is a small barrier to entry as people learn this new behavior, but certainly no larger than the barrier to smartphone adoption was in 2007. So as I said, I broadly believe that the roll-out will occur in about a decade. But any more detail would require an entirely new post.

Source: https://medium.com/@sethmiller_59231/this-is-how-big-oil-will-die-38b843bd4fe0

 

How Small Events Trigger Large Events in Politics & Economics

The following video illustrates the power of small events to trigger large events. The Great Depression of 1929-33  was triggered, for example, by the default of a small bank in Austria called Creditanstalt. It declared bankruptcy on 11 May 1931 and was one of the first major bank failures that initiated the Great Depression at a global level.

Domino Chain Reaction

 As Henry Hazlitt explains:

“the bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of the proposed course; the good economist looks also at the longer and indirect consequences.”  

Nowhere is the power of small events more apparent than in politics and economics. The recent UK General Election has unleashed a bevy of unintended consequences some of which will not be realized for decades to come.

Political Risk in 2017-2018

In the UK, the conservatives it appears, will win a reduced majority to govern the UK and Brexit process. It is also clear that a loss or hung parliament  for the Conservatives will set the UK back a hundred years politically and economically in the confusion and discord it would sew.

There is a minor risk of a hung parliament where, like 2010, the new government may have to collaborate to hold office. This would make managing the Brexit process untenable. The loss of political and economic confidence that would ensue would bring chaos to the UK. Should there be an outright victory to Labor, we would see a reversion to the 1950/70’s style politics that would also be a disaster.

So, the stakes are just as high as they were in June 2016. What was a ‘sure thing’ bet at the start of the election process has become marginal at a time when the consequences are high. The spontaneous ordering of the voting process may check politicians from being able to achieve their agenda at the expense of the national interest. What hubris by PM May who put personal agenda ahead of the national political interest.

This is typical of the problems found in liberal democracies. Liberal democracies around the world are dying. Voters are cynical of the promises and ability of politicians to achieve anything.

Flag - EU 12Ironically, the EU have hailed Macron’s victory as a sign that right wing populism has peaked and in remission. With no mirror for self reflection the EU elite are back at ‘business as usual’. “Nothing to look at here – move on”! They needed a Le Pen win to shock them into making real change. Macron’s victory has only deferred the inevitable by a year. Meanwhile, the political change that is sweeping the world at present will continue with German elections in October this year. Merkel it appears is set for a heavy defeat.

And in the USA the left wing is continuing its attempt to undermine President Trump and effectively ignore the rule of law. Left wing forces operating at every level of US media, government and politics are moving to impeach Trump. Meanwhile the silent majority that elected Trump are watching and waiting and growing angry.

The last time we saw his level of scale of political unrest was 1740 – 1785 culminating in the French Revolution. The rising tide of political unrest in the USA, UK and EU is polarized by left vs right as well as the elite vs the people. Remember, when political confidence falters, economic confidence falls soon after. This is what is happening now. As pressures continue to mount in the USA and EU there is increasing risk of civil strife breaking out.

The phase June 2017 to December 2018 remains a time of escalating risk. Over this 18 month time frame, what transpires will shape the world and its history for the next 12 years and set up the circumstances that will shape the rest of this century.

Late in the Cycle

You know where we are in the business cycle when you start receiving calls about multi-level marketing schemes or offshore stock brokers call to offer a “trade of a life-time”. Maybe its a property deal in outback Australia, or opportunities to profit with 30-35% gains. This kind of behaviour merely reflects the emerging ebullience of social mood. Its the start of the lemming rush that occurs at or near a top. It is a confirming indicator and a useful signal that it’s getting ready time to get off the “escalator”.Monitoring social mood can indicate where we are in the business cycle. This type of unsolicited business activity – the hawking of schemes, stock market investments, too good to miss business opportunities always comes just before the top of a business cycle. You can be assured we don’t see stock spruikers at or near the bottom of a market. Instead at the low, nobody will want to talk about these special investment opportunities. By that time, sentiment will have reached an extreme opposite and become extremely negative to all forms of opportunity.

So if you’ve heard from someone wanting to show you an investment opportunity or a new multi-level marketing product beware. Its not the opportunity that matters, its the timing of the call that’s telling you everything you need to know.  

US Stocks for March 2017

We anticipate US stocks have entered a consolidation phase lasting a minimum of  several months.

Stocks have performed strongly off the back of the Presidential election. This has served to clarify where things are heading. Any short term ambiguity has now been cleared away. The recent top and pullback also coincides with the topping phase of the eight year stock market cycle that has continued for over 50 years. Note while March 2017 is the month time window for the peak, cycles of this length can take 1-2 years to complete their cycle top. Take the stock market top in 2000. While the highs occurred by March 2000. This was well before the 8 year cycle high of 2001. The then markets chopped around for another year close to the all time highs before pealing way into their 2003 lows.

The next 8 year cycle low will occur some time in 2025 and by that time stock market will be equal to, or lower than 2009 stock market lows. A lot  will have changed by then – politically, economically and socially.

We note the growing political, social and economic cross-currents that have been building over the last 2 decades. This is typical of major tops and is reflected by the difficulty investors and business people have in making business and investment decisions.

So anticipate US stocks pulling back between now and May to August of this year. into the  consolidation lows. The pullback should be quite steep and volatile with potential targets of DJIA 19500 – 19900, SP500 2000 – 2100. We note US money supply growth is declining rapidly which underpins the softening stock market.

Following the pullback we will see, once again, markets rise to new highs. The nature of the rise we foresee being accompanied by extremely bullish news. Typically, major corporate tax cuts would fit with this picture,  rising money supply growth and a rising, extremely bullish euphoria. This coming run should take the DJIA above 23000 to 25000.

We believe this is the last gasp of The End of the Long Game 2009-2018 and there is a high probability that it is ending in a 1929 style stock market blow off. Ironically the same factors that caused the 1929-1933 Great Depression are also causing the current bull market rally. This will be the peak in a 230 year cycle of human endeavor. We are witnessing history, a history that will stand for generations to come.

 

US Stocks Update 25/11/2016

We have reached an interesting juncture with this US stocks update. In the next few trading days – maybe as early as Monday 28/11, we anticipate stocks to open higher and then reverse to the downside. Failure to follow through with new highs within 5 trading days would indicate a major top has been made and a quick test of DJIA 15370 (SP500 1810) is due.

djia-3rd-qtr-2012-to-present

DJIA 3rd QTR 2012 to Present

It may be that the so called Trump rally is part of a larger consolidation phase and an even bigger rally is due to get underway after a sharp down move to shake out complacent longs.

Sentiment has become extremely bullish despite gathering storm clouds on the horizon (interest rate normalization, EU bank health, Trumponomics, US economic health). Stocks in the short term have become overbought so we anticipate corrections as a normal part of the process.

Quite likely we will see a low in gold and a high in the US dollar occurring near to this time. The Euro should take out its 1.04 -1.05 lows and gold should complete a low in line with our previous post around US$1180. Again, whether this is just a breather or something more substantial we shall have to wait for further clarification.

Pendulum of Government Overreach has Peaked

The pendulum of government overreach has peaked in most liberal democratic countries around the world (for now). The major political events of 2016 have shown increasing resistance to government given the rising number of breaches in civil liberties and failure of government to identify and respond to the disenfranchised members of their societies.

Many segments of society have felt themselves becoming impoverishment. At the same time they have watched the hubris, greed and failure of politicians to deliver solutions to resolve the various politically made crises. One of the recurring questions that will emerge is the role of government in the lives of people.

By the time politicians’ hubris has completely evaporated, the nature of liberal democratic countries will have changed. We see major risk of political, economic and social upheaval occurring between now and 2028-2033 This phase may extend before social, political and economic stability becomes the norm. As always the pendulum will one day swing again towards increasing government involvement in the lives and affairs of ordinary people.

US Presidential Election Comment

All the elements are in place for a political meltdown with the coming election. The circumstances of this election are very similar to the Brexit vote that caused an earthquake.

Consider:

  • There is a large disenfranchised portion of the US electorate.
  • Establishment seeks to maintain the status quo.
  • Widespread disgust at both presidential candidates.
  • Media is holding a heavily biased standpoint on the outcome of the election result.
  • Financial markets are coiling in preparation for a large move based on the result.
  • Fears of vote rigging, mudslinging by both candidates, the focus is on personalities rather than issues leaving a gridlocked political system.

Most of these points were present in the Brexit vote.

The underlying social mood is one pointing to a political meltdown. If Trump wins, Democrats have rumored to be plotting some sort of nullification of the election result. It is also unacceptable to the establishment that Trump would win as he has threatened to tear down the status quo. If Clinton wins, all the corruption scandals will be brought before the courts and her presidency will be mired by political, legal & criminal scandals.

The social environment is volatile and ripe for serious political disruption as people seek to express the powerful social mood that has been building for several years. We consider the election will serve as the catalyst for the start for a political meltdown lasting many years. Following in quick attendance will be the subsequent loss of economic confidence.

We still predict a spike to the upside following the election – being the last gasp of the stock markets. This will be followed in 2017 by a surge in inflation and a devastating shift in US interest rates.

All of this is characteristic of a major top that is forming in economic, social and political terms. It is akin to the rise and peak of an empire. We are witnessing a major turning point in history and a completion of a long term cycle of human endeavor. This is covered in our main article theme the End of the Long Game 2009 -2018.

72 common things ten years from now not existing today

72 Stunning Future Things 1

How many things do we own, that are common today, that didn’t exist 10 years ago? The list is probably longer than you think.

Prior to the iPhone coming out in 2007, we didn’t have smartphones with mobile apps, decent phone cameras for photos/videos, mobile maps, mobile weather, or even mobile shopping.

None of the mobile apps we use today existed 10 years ago: Twitter, Facebook, Youtube, Instagram, Snapchat, Uber, Facetime, LinkedIn, Lyft, Whatsapp, Netflix, Pandora, or Pokemon Go.

Several major companies didn’t exist a decade ago. Airbnb, Tinder, Fitbit, Spotify, Dropbox, Quora, Tumblr, Kickstarter, Hulu, Pinterest, Buzzfeed, Indigogo, Udacity, or Jet.com just to name a few.

Ten years ago very few people were talking about crowdfunding, the sharing economy, social media marketing, search engine optimization, app developers, cloud storage, data mining, mobile gaming, gesture controls, chatbots, data analytics, virtual reality, 3D printers, or drone delivery.

At the same time we are seeing the decline of many of the things that were in common use 10-20 years ago. Fax machines, wired phones, taxi drivers, newspapers, desktop computers, video cameras, camera film, VCRs, DVD players, record players, typewriters, yellow pages, video rental shops, and printed maps have all seen their industry peak and are facing dwindling markets.

If we leapfrog ahead ten years and take notice of the radically different lives we will be living, we will notice how a few key technologies paved the way for massive new industries.

Here is a glimpse of a stunningly different future that will come into view over the next decade.

All of these items were replaced with smartphones!
All of these items were replaced with smartphones!

3D Printing

Also known as additive manufacturing, 3D printing has already begun to enter our lives in major ways. In the future 3D printers will be even more common than paper printers are today.

1.    3D printed makeup for women. Just insert a person’s face and the machine will be programmed to apply the exact makeup pattern requested by the user.

2.    3D printed replacement teeth, printed inside the mouth.

3.    Swarmbot printing systems will be used to produce large buildings and physical structures, working 24/7 until they’re completed.

4.    Scan and print custom designed clothing at retail clothing stores.

5.    Scan and print custom designed shoes at specialty shoe stores.

6.    Expectant mothers will request 3D printed models of their unborn baby.

7.    Police departments will produce 3D printed “mug shots” and “shapies” generated from a person’s DNA.

8.    Trash that is sorted and cleaned and turned into material that can be 3D printed.

How long before you own the next generation VR headset?
How long before you own the next generation VR headset?

Virtual/Augmented Reality

The VR/AR world is set to explode around us as headsets and glasses drop in price so they’re affordable for most consumers. At the same time, game designers and “experience” producers are racing to create the first “killer apps” in this emerging industry.

9.    Theme park rides that mix physical rides with VR experiences.

10. Live broadcasts of major league sports games (football, soccer, hockey, and more) in Virtual Reality.

11. Full-length VR movies.

12. Physical and psychological therapy done through VR.

13. Physical drone racing done through VR headsets.

14. VR speed dating sites.

15. For education and training, we will see a growing number of modules done in both virtual and augmented reality.

16. VR and AR tours will be commonly used in the sale of future real estate.

Flying/Driving Drones

Drones are quickly transitioning from hobbyist toys to sophisticated business tools very quickly. They will touch our lives in thousands of different ways.

17. Fireworks dropped from drones. Our ability to “ignite and drop” fireworks from the sky will dramatically change both how they’re made and the artistry used to display them.

18. Concert swarms that produce a spatial cacophony of sound coming from 1,000 speaker drones simultaneously.

19. Banner-pulling drones. Old school advertising brought closer to earth.

20. Bird frightening drones for crops like sunflowers where birds can destroy an entire field in a matter of hours.

21. Livestock monitoring drones for tracking cows, sheep, geese, and more.

22. Three-dimensional treasure hunts done with drones.

23. Prankster Drones – Send random stuff to random people and video their reactions.

24. Entertainment drones (with projectors) that fly in and perform unusual forms of live comedy and entertainment.

Our driverless future is coming!
Our driverless future is coming!

Driverless Cars/Transportation

Driverless technology will change transportation more significantly than the invention of the automobile itself.

25. Queuing stations for driverless cars as a replacement for a dwindling number of parking lots.

26. Crash-proof cars. Volvo already says their cars will be crash-proof before 2020.

27. Driverless car hailing apps. Much like signaling Uber and Lyft, only without the drivers.

28. Large fleet ownership of driverless cars (some companies will own millions of driverless cars).

29. Electric cars will routinely win major races like the Daytona 500, Monaco Grand Prix, and the Indy 500.

30. In-car work and entertainment systems to keep people busy and entertained as a driverless car takes them to their destination.

31. In-car advertising. This will be a delicate balance between offsetting the cost of operation and being too annoying for the passengers.

32. Electric car charging in less than 5 minutes.

Internet of Things

The Internet of things is the network of physical devices, vehicles, and buildings embedded with electronics, software, sensors, and actuators designed to communicate with users as well as other devices. We are currently experiencing exponential growth in IoT devices as billions of new ones come online every year.

33. Smart chairs, smart beds, and smart pillows that will self-adjust to minimize pressure points and optimize comfort.

34. Sensor-laced clothing.

35. “Print and Pin” payment systems that uses a biometric mark (fingerprint) plus a pin number.

36. Smart plates, bowls and cups to keep track of what we eat and drink.

37. Smart trashcan that will signal for a trash truck when they’re full.

38. Ownership networks. As we learn to track the location of everything we own, we will also track the changing value of each item to create a complete ownership network.

39. Self-retrieving shoes where you call them by name, through your smartphone, and your shoes will come to you.

40. Smart mailboxes that let you know when mail has arrived and how important it is.

Full-body physical health scanner!
Full-body physical health scanner!

Health Tech

Even though healthcare is a bloated and bureaucratic industry, innovative entrepreneurs are on the verge of disrupting this entire industry.

41. Hyper-personalized precision-based pharmaceuticals produced by 3D pill printers.

42. Ingestible data collectors, filled with sensors, to give a daily internal health scan and report.

43. Prosthetic limbs controlled by AI.

44. Real-time blood scanners.

45. Peer-to-peer health insurance.

46. Facetime-like checkups without needing a doctor’s appointment.

47. Full-body physical health scanners offering instant AI medical diagnosis, located in most pharmacies

48. Intraoral cameras for smartphones for DYI dental checkups.

The future of computers is the mind!
The future of computers is the mind!

Artificial Intelligence (AI)

Much like hot and cold running water, we will soon be able to “pipe-in” artificial intelligence to any existing digital system.

49. Best selling biographies written by artificial intelligence.

50. Legal documents written by artificial intelligence.

51. AI-menu selection, based on diet, for both restaurants and at home.

52. Full body pet scanners with instant AI medical diagnosis.

53. AI selection of movies and television shows based on moods, ratings, and personal preferences.

54. Much like the last item, AI music selection will be based on moods, ratings, and musical tastes.

55. AI sleep-optimizers will control all of the environmental factors – heat, light, sound, oxygen levels, smells, positioning, vibration levels, and more.

56. AI hackers. Sooner or later someone will figure out how to use even our best AI technology for all the wrong purposes.

Unmanned aviation is coming!
Unmanned aviation is coming!

Transportation

Future transportation will come in many forms ranging from locomotion on an individual level to ultra high-speed tube transportation on a far grander scale.

57. Unmanned aviation – personal drone transportation.

58. 360-degree video transportation monitoring cameras at most intersections in major cities throughout the world.

59. Everywhere wireless. With highflying solar powered drones, CubeSats, and Google’s Project Loon, wireless Internet connections will soon be everywhere.

60. Black boxes for drones to record information in the event of an accident.

61. Air-breathing hypersonic propulsion for commercial aircraft. Fast is never fast enough.

62. Robotic follow-behind-you luggage, to make airline travel easier.

63. Robotic dog walkers and robotic people walkers.

64. Ultra high-speed tube transportation. As we look closely at the advances over the past couple decades, it’s easy to see that we are on the precipices of a dramatic breakthrough in ultra high-speed transportation. Businesses are demanding it. People are demanding it. And the only thing lacking is a few people capable of mustering the political will to make it happen.

Miscellaneous

As I began assembling this list, a number of items didn’t fit well in other categories.

65. Bitcoin loans for houses, cars, business equipment and more.

66. Self-filling water bottles with built-in atmospheric water harvesters.

67. Reputation networks. With the proliferation of personal information on websites and in databases throughout the Internet, reputation networks will be designed to monitor, alert, and repair individual reputations.

68. Atmospheric energy harvesters. Our atmosphere is filled with both ambient and concentrated forms of energy ranging from sunlight to lightning bolts that can be both collected and stored.

69. Pet education centers, such as boarding schools for dogs and horses, to improve an animal’s IQ.

70. Robotic bricklayers. With several early prototypes already operational, these will become common over the next decade.

71. Privacy bill of rights. Privacy has become an increasingly complicated topic, but one that is foundational to our existence on planet earth.

72. Hot new buzzword, “Megaprojects.”

72 Stunning Future Things 9
The safer we feel, the more risks we take!

Final Thoughts

There’s a phenomenon called the Peltzman Effect, named after Dr. Sam Peltzman, a renowned professor of economics from the University of Chicago Business School, who studied auto accidents.

He found that when you introduce more safety features like seat belts into cars, the number of fatalities and injuries doesn’t drop. The reason is that people compensate for it. When we have a safety net in place, people will take more risks.

That probably is true with other areas as well.

As life becomes easier, we take risks with our time. As our financial worries are met, we begin thinking about becoming an entrepreneur, inventor, or artist. When life becomes too routine, we search for ways to introduce chaos.

Even though we see reports that billions of jobs will disappear over the coming decades, we will never run out of work.

As humans, we were never meant to live cushy lives of luxury. Without risk and chaos as part of our daily struggle our lives seem unfulfilled. While we work hard to eliminate it, we always manage to find new ways to bring it back.

Yes, we’re working towards a better world ahead, but only marginally better. That’s where we do our best work.

Source: http://www.futuristspeaker.com/business-trends/72-stunning-things-in-the-future-that-will-be-common-ten-years-from-now-that-dont-exist-today/

US Presidential Election Prediction

Its clear we are in a cycle of increasing political chaos and uncertainty. This is continuing to escalate. Its happening in liberal democratic countries. National elections are due in these countries (Germandonald-trumpy, France 2017), UK (2018). We can anticipate major upheavals along with the US. We are seeing the death throes of the liberal democratic tradition. Worsening economic inequality, the self interest of political elites, political coverups, politicians unable to deliver on their promises, vote rigging, dodgy economics, disenfranchised voters, unaccountable rogue police are just some of the issues to be seen in newspapers and television. Democracy, a human system, like all systems before, is failing.

Next US President

Given the increasing political chaos we anticipate Donald Trump will be elected as the 45th US President of the United States of America. Between now and November we should see a marked swing towards Trump. Viewing the US situation through the lens of cycles analysis we step beyond the character and reputation of US Presidential nominees to see the fabric of a society and economy being eroded through self interest.This process has been underway for over 5 decades.TruHillary Clinton imagesmp’s election should be seen as the response to a disenfranchised electorate. That’s both within the parties and without. Its an  increasingly angry social mood. Voters are angry and one of their few options is to respond at the ballot. Electoral horror at the status quo has emerged with a dual society – the haves and have nots, cronyism, hidden interests, corporatism, the endless wars, spurious economics, indebtedness………..

Like Brexit and many of the problems we are witnessing nightly in the news (EU refugee crisis, police and citizen shootings, etc), many crises have been manufactured by governments themselves.

We witness the unfolding political, social and economic drama of the USA and by extension the global stage since the US ascended to become the global hegemon after WWII. Most people acknowledge things have gone terribly wrong over the last 20 years but nobody knows what to do. There is little or no confidence in the political class, or their technocrat advisors, government institutions, the economy and society at large. We anticipate the continuing breakdown of the status quo an Trump’s election to the presidency is merely a reflection of the zeitgeist of our time. Yet this is perfectly understandable when you step back from the noise of daily media and observe the cycles of history evolving before our eyes.

History Repeating

An historical example of a time when a large scale breakdown of society occurred on this scale was during the phase 1740-1792 leading to the French Revolution. This time however, with globalization, it spans over many countries. At that time we saw increasing political instability with its attendant corruption, economic decay and the polarization of the people against the political elites (king and government). It’s happened many times before as any student of history will testify, is happening now and will happen again as humans consistently fail to learn from their past.

Understanding Cyclic History

We are witnessing in our lifetime the completion of large scale cycles of human endeavor and activity with the attendant dislocation and reallocation of social, economic and political activity and resources. An understanding of the broad brush strokes economically, socially and politically may serve to enhance your perspective on what emerges next. The scale of forces at work in liberal and democratic societies and economies is so huge that the current drama is taking decades to unfold.

This is the topping and completion process of an economic cycle that has been going on for around 224 years. By the time this top and the ensuing drama is finished, it may well have spanned generations of people. On a historical note, we are witnessing the completion of the growth phase of the industrial revolution cycle that began around 1783-5.

And so what does Trump have to do with economic cycles?

The current political chaos will continue to intensify and this will give way eventually into economic chaos. The impending signs  for that economic chaos are clearly to be seen and once again it centers on the incapacity of central planners and bureaucrats to perceive the unintended consequences of their mischief. Trump has nothing to do with these economic cycles. He merely reflects the zeitgeist of the times. Like someone surfing a wave, they ride the wave for a period of time then disappear into the footnotes of history. Trump has often appeared at major tops of economic cycles in the last 30 years in US history. Its not surprising then he has reappeared surfing the zeitgeist wave as the US completes the topping phase of this huge cycle of human endeavor.

Trump’s ability to ride the social mood of the time we believe will help him to take the presidency. Whether he will have the power to change the status quo, like Obama who promised major change yet found himself caught in the entrenched self interest of Congress, Wall Street, Big Pharma and the military. Trump may well ride the last vestiges of prosperity in this cycle. Given the growing political and economic storm Trump may well find himself the target of assassination attempts in the next four years. He will be remembered as the President that reigned at the time the US and world peaked in economic activity for many decades to come.

Whether we have a few more months or years of twilight before the downside comes home to roost, suffice to say, from now on we can expect increasingly tough times punctuated by phases of optimism. The current political chaos will continue to intensify and this will give way into economic chaos. The impending signs  for that economic chaos are already clearly seen and once again it the focus centers on the incapacity of central planners and bureaucrats to perceive the unintended consequences of their mischief. Will people in future times learn from our mistakes and mistakes of the past? We think not.

Post Australian Election Commentary

In our Australian election forecast of 28/06/16 and 16/06/2016 we forecast the risk of a ‘hung parliament’ or an outright win to the ALP. This was based on the principle of ‘Contrary Opinion’.

It took two weeks to resolve the final outcome of the national election. It left a Liberal government in power but without a majority in the Senate. The result has continued the ongoing risk element in Australian politics. Should government fail to deliver or introduces any form of controversial legislation, we may expect blocking in the Senate. Not quite the ‘hung parliament’ suggested but a second best – with a kind of severe arm lock if government steps beyond its mandate.

The voters got what they wanted. Through the mysterious spontaneous ordering process, the electoral process has communicated the deep level of cynicism Australians have towards politicians. It also reflects that no politician really has any clear solution or way forward for society and economy. And so voters have ensured that politicians can’t get away with too much. Little has been said by politicians that offers any resonance with voters.

Economic, social  and political restructuring is needed to set Australia on course for its next phase. The electorate is exhausted by the constant personality bicker of politicians and their inability to tackle the big issues. Politicians have delivered a consistent message for over a decade that political self interest is more important than the people. Accordingly, many believe the economic and social decline experienced by Australians is set to continue.

Unfortunately, without a clear vision from government and a high risk of being blocked by the Senate, Australia remains in an entropic state with a continuing risk of stagnation. This trend may start to accelerate as capital outflows intensify over late 2016/2017 into US dollars. We anticipate inflation in the USA will climb rapidly over the next 1-2 years. Capital will be sucked from the EU and periphery including Australia. This will indeed be the last gasp of the ‘end of the long game.’

Australian Political Elections 2016

It seems Australian voters want another “hung parliament”. The main parties are both doing their best to lose winning government. Little they say offers any resonance with voters.

The Australian electorate is deeply cynical of its politicians and none of the contenders for the 2016 federal election are offering anything offering a way forward. Economic, social  and political reform is needed to set Australia on course for the next phase of its 100 year odd history. Its clear that the electorate is exhausted by the constant personality bicker of politicians and their inability to tackle the big issues. The consistent message for over a decade is that political self interest is more important than the Australian people. Accordingly many believe the economic and social decline experienced by many Australians is set to continue.

Confirming this, we see a lethargic economy and a growing sense of unease many Australians feel about their prospects. This reflects a deteriorating social mood. It won’t be long before this translates into a declining economy. Indeed, capital flows into and out of Australia indicate the tide is definitely running out and despite the best attempts of the RBA, we may soon see the downside of the business cycle in full flight. A good barometer highlighting this is the Australian stock market which remains stalled around the 5300 level ( ASX/SP 200) whilst US stock markets hover relatively near their all time highs.

 

The Structure of Collapse: 2016-2019

Charles Hugh Smith writing on his blog Of Two Minds:

The end-state of unsustainable systems is collapse. Though collapse may appear to be sudden and chaotic, we can discern key structures that guide the processes of collapse.

Though the subject is complex enough to justify an entire shelf of books, these six dynamics are sufficient to illuminate the inevitable collapse of the status quo.

1. Doing more of what has failed spectacularly. The leaders of the status quo inevitably keep doing more of what worked in the past, even when it no longer works. Indeed, the failure only increases the leadership’s push to new extremes of what has failed spectacularly. At some point, this single-minded pursuit of failed policies speeds the system’s collapse.

2. Emergency measures become permanent policies. The status quo’s leaders expect the system to right itself once emergency measures stabilize a crisis. But broken systems cannot right themselves, and so the leadership is forced to make temporary emergency measures (such as lowering interest rates to zero) permanent policy. This increases the fragility of the system, as any attempt to end the emergency measures triggers a system-threatening crisis.

3. Diminishing returns on status quo solutions. Back when the economic tree was loaded with low-hanging fruit, solutions such as lowering interest rates had a large multiplier effect. But as the tree is stripped of fruit, the returns on these solutions diminish to zero.

4. Declining social mobility. As the economic pie shrinks, the privileged maintain or increase their share, and the slice left to the disenfranchised shrinks. As the privileged take care of their own class, there are fewer slots open for talented outsiders. The status quo is slowly starved of talent and the ranks of those opposed to the status quo swell with those denied access to the top rungs of the social mobility ladder.

5. The social order loses cohesion and shared purpose as the social-economic classes pull apart. The top of the wealth/power pyramid no longer serves in the armed forces, and withdraws from contact with the lower classes. Lacking a unifying social purpose, each class pursues its self-interests to the detriment of the nation and society as a whole.

6. Strapped for cash as tax revenues decline, the state borrows more money and devalues its currency as a means of maintaining the illusion that it can fulfill all its promises. As the purchasing power of the currency declines, people lose faith in the state’s currency. Once faith is lost, the value of the currency declines rapidly and the state’s insolvency is revealed.

Each of these dynamics is easily visible in the global status quo.

As an example of doing more of what has failed spectacularly, consider how financialization inevitably inflates speculative bubbles, which eventually crash with devastating consequences. But since the status quo is dependent on financialization for its income, the only possible response is to increase debt and speculation—the causes of the bubble and its collapse—to inflate another bubble. In other words, do more of what failed spectacularly.

This process of doing more of what failed spectacularly appears sustainable for a time, but this superficial success masks the underlying dynamic of diminishing returns: each reflation of the failed system requires greater commitments of capital and debt. Financialization is pushed to new unprecedented extremes, as nothing less will generate the desired bubble.

 Rising costs narrow the maneuvering room left to system managers. The central bank’s suppression of interest rates is an example. As the economy falters, central banks lower interest rates and increase the credit available to the financial system.

This stimulus works well in the first downturn, but less well in the second and not at all in the third, for the simple reason that interest rates have been dropped to zero and credit has been increased to near-infinite.

The last desperate push to do more of what failed spectacularly is for central banks to lower interest rates to below-zero: it costs depositors money to leave their cash in the bank. This last-ditch policy is now firmly entrenched in Europe, and many expect it to spread around the world as central banks have exhausted less extreme policies.

The status quo’s primary imperative is self-preservation, and this imperative drives the falsification of data to sell the public on the idea that prosperity is still rising and the elites are doing an excellent job of managing the economy.

Since real reform would threaten those at the top of the wealth/power pyramid, fake reforms and fake economic data become the order of the day.

Leaders face a no-win dilemma: any change of course will crash the system, but maintaining the current course will also crash the system.

Welcome to 2016-2019.

Source: http://www.oftwominds.com/blogjune16/collapse6-16.html

Why Globalization Reaches Limits

Gail Tverberg writes:

We have been living in a world of rapid globalization, but this is not a condition that we can expect to continue indefinitely.

Figure 1. Ratio of Imported Goods and Services to GDP. Based in FRED data for IMPGS.

Figure 1. Ratio of Imported Goods and Services to GDP. Based in FRED data for IMPGS.

Each time imported goods and services start to surge as a percentage of GDP, these imports seem to be cut back, generally in a recession. The rising cost of the imports seems to have an adverse impact on the economy. (The imports I am showing are gross imports, rather than imports net of exports. I am using gross imports, because US exports tend to be of a different nature than US imports. US imports include many labor-intensive products, while exports tend to be goods such as agricultural goods and movie films that do not require much US labor.)

Recently, US imports seem to be down. Part of this reflects the impact of surging US oil production, and because of this, a declining need for oil imports. Figure 2 shows the impact of removing oil imports from the amounts shown on Figure 1.

Figure 2. Total US Imports of Goods and Services, and this total excluding crude oil imports, both as a ratio to GDP. Crude oil imports from https://www.census.gov/foreign-trade/statistics/historical/petr.pdf

Figure 2. Total US Imports of Goods and Services, and this total excluding crude oil imports, both as a ratio to GDP. Crude oil imports from https://www.census.gov/foreign-trade/statistics/historical/petr.pdf

If we look at the years from 2008 to the present, there was clearly a big dip in imports at the time of the Great Recession. Apart from that dip, US imports have barely kept up with GDP growth since 2008.

Let’s think about the situation from the point of view of developing nations, wanting to increase the amount of goods they sell to the US. As long as US imports were growing rapidly, then the demand for the goods and services these developing nations were trying to sell would be growing rapidly. But once US imports flattened out as a percentage of GDP, then it became much harder for developing nations to “grow” their exports to the US.

I have not done an extensive analysis outside the US, but based on the recent slow economic growth patterns for Japan and Europe, I would expect that import growth for these areas to be slowing as well. If fact, data from the World Trade Organization for Japan, France, Italy, Sweden, Spain, and the United Kingdom seem to show a recent slowdown in imported goods for these countries as well.

If this lack of demand growth by a number of industrialized countries continues, it will tend to seriously slow export growth for developing countries.

Where Does Demand For Imports Come From?

Many of the goods and services we import have an adverse impact on US wages. For example, if we import clothing, toys, and furniture, these imports directly remove US jobs making similar goods here. Similarly, programming jobs and call center jobs outsourced to lower cost nations reduce the number of jobs available in the US. When US oil prices rose in the 1970s, we started importing compact cars from Japan. Substituting Japanese-made cars for American-made cars also led to a loss of US jobs.

Even if a job isn’t directly lost, the competition with low wage nations tends to hold down wages. Over time, US wages have tended to fall as a percentage of GDP.

Figure 3. Ratio of US Wages and Salaries to GDP, based on information of the US Bureau of Economic Analysis.

Figure 3. Ratio of US Wages and Salaries to GDP, based on information of the US Bureau of Economic Analysis.

Another phenomenon that has tended to occur is greater disparity of wages. Partly this disparity represents wage pressure on individuals doing jobs that could easily be outsourced to a lower-wage country. Also, executive salaries tend to rise, as companies become more international in scope. As a result, earnings for the top 10% have tended to increase since 1981, while wages for the bottom 90% have stagnated.

Figure 4. Chart by economist Emmanuel Saez based on an analysis IRS data, published in Forbes.

Figure 4. Chart by economist Emmanuel Saez based on an analysis IRS data, published in Forbes. “Real income” is inflation-adjusted income.

If wages of most workers are lagging behind, how is it possible to afford increased imports? I would argue that what has happened in practice is greater and greater use of debt. If wages of American workers had been rising rapidly, perhaps these higher wages could have enabled workers to afford the increased quantity of imported goods. With wages lagging behind, growing debt has been used as a way of affording imported goods and services.

Inasmuch as the US dollar was the world’s reserve currency, this increase in debt did not have a seriously adverse impact on the economy. In fact, back when oil prices were higher than they are today, petrodollar recycling helped maintain demand for US Treasuries as the US borrowed increasing amounts of money to purchase oil and other goods. This process helped keep borrowing costs low for the US.

Figure 5. US Increase in Debt as Ratio to GDP and US imports as Ratio to GDP. Both from FRED data: TSMDO and IMPGS.

Figure 5. US Increase in Debt as Ratio to GDP and US imports as Ratio to GDP. Both from FRED data: TSMDO and IMPGS.

The problem, however, is that at some point it becomes impossible to raise the debt level further. The ratio of debt to GDP becomes unmanageable. Consumers, because their wages have been held down by competition with wages around the world, cannot afford to keep adding more debt. Businesses find that slow wage growth in the US holds down demand. Because of this slow growth in the demand, businesses don’t need much additional debt to expand their businesses either.

Commodity Prices Are Extremely Sensitive to Lack of Demand

Commodities, by their nature, are things we use a lot of. It is usually difficult to store very much of these commodities. As a result, it is easy for supply and demand to get out of balance. Because of this, prices swing widely.

Demand is really a measure of affordability. If wages are lagging behind, then an increase in debt (for example, to buy a new house or a new car) can substitute for a lack of savings from wages. Unfortunately, such increases in debt have not been happening recently. We saw in Figure 5, above, that recent growth in US debt is lagging behind. If very many countries find themselves with wages rising slowly, and debt is not rising much either, then it is easy for commodity demand to fall behind supply. In such a case, prices of commodities will tend to fall behind the cost of production–exactly the problem the world has been experiencing recently. The problem started as early as 2012, but has been especially bad in the past year.

The way the governments of several countries have tried to fix stagnating economic growth is through a program called Quantitative Easing (QE). This program produces very low interest rates. Unfortunately, QE doesn’t really work as intended for commodities. QE tends to increase the supply of commodities, but it does not increase the demand for commodities.

The reason QE increases the supply of commodities is because yield-starved investors are willing to pour large amounts of capital into projects, in the hope that commodity prices will rise high enough that investments will be profitable–in other words, that investments in shares of stock will be profitable and also that debt can be repaid with interest. A major example of this push for production after QE started in 2008 is the rapid growth in US “liquids” production, thanks in large part to extraction from shale formations.

Figure 6. US oil and other liquids production, based on EIA data. Available data is through November, but amount shown is estimate of full year.

Figure 6. US oil and other liquids production, based on EIA data. Available data is through November, but amount shown is estimate of full year.

As we saw in Figure 5, the ultra-low interest rates have not been successful in encouraging new debt in general. These low rates also haven’t been successful in increasing US capital expenditures (Figure 7). In fact, even with all of the recent shale investment, capital investment remains low relative to what we would expect based on past investment patterns.

Figure 7. US Fixed Investment (Factories, Equipment, Schools, Roads) Excluding Consumer Durables as Ratio to GDP, based in US Bureau of Economic Analysis data.

Figure 7. US Fixed Investment (Factories, Equipment, Schools, Roads) Excluding Consumer Durables as Ratio to GDP, based in US Bureau of Economic Analysis data.

Instead, the low wages that result from globalization, without huge increases in debt, make it difficult to keep commodity prices up high enough. Workers, with low wages, delay starting their own households, so have no need for a separate apartment or house. They may also be able to share a vehicle with other family members. Because of the mismatch between supply and demand, commodity prices of many kinds have been falling. Oil prices, shown on Figure 9, have been down, but prices for coal, natural gas, and LNG are also down. Oil supply is up a little on a world basis, but not by an amount that would have been difficult to absorb in the 1960s and 1970s, when prices were much lower.

Figure 9. World oil production and price. Production is based on BP, plus author's estimate for 2016. Historical oil prices are calculated based on a higher than usual recent inflation rate, assuming Shadowstats' view of inflation is correct.

Figure 9. World oil production and price. Production is based on BP, plus author’s estimate for 2016. Historical oil prices are calculated based on a higher than usual recent inflation rate, assuming Shadowstats’ view of inflation is correct.

Developing Countries are Often Commodity Exporters 

Developing countries can be greatly affected if commodity prices are low, because they are often commodity exporters. One problem is obviously the cutback in wages, if it becomes necessary to reduce commodity production.  A second problem relates to the tax revenue that these exports generate. Without this revenue, it is often necessary to cut back funding for programs such as building roads and schools. This leads to even more job loss elsewhere in the economy. The combination of wage loss and tax loss may make it difficult to repay loans.

Obviously, if low commodity prices persist, this is another limit to globalization.

Conclusion

We have identified two different limits to globalization. One of them has to do with limits on the amount of goods and services that developed countries can absorb before those imports unduly disrupt local economies, either through job loss, or through more need for debt than the developed economies can handle. The other occurs because of the sensitivity of many developing nations have to low commodity prices, because they are exporters of these commodities.

Of course, there are other issues as well. China has discovered that if its coal is burned in great quantity, it is very polluting and a problem for this reason. China has begun to reduce its coal consumption, partly because of pollution issues.

Figure 10. China's energy consumption by fuel, based on data of BP Statistical Review of World Energy 2015.

Figure 10. China’s energy consumption by fuel, based on data of BP Statistical Review of World Energy 2015.

There are many other limiting factors. Fresh water is a major problem, throughout much of the developing world. Adding more people and more industry makes the situation worse.

One problem with globalization is a long-term tendency to move manufacturing production to countries with ever-lower standards in many ways: ever-lower pollution controls, ever-lower safety standards for workers, and ever-lower wages and benefits for workers. This means that the world becomes an ever-worse place to work and live, and the workers in the system become less and less able to afford the output of the system. The lack of buyers for the output of the system makes it increasingly difficult to keep prices of commodities high enough to support their continued production.

The logical end point, even beyond globalization, is for automation and robots to perform nearly all production. Of course, if that happens, there will be no one to buy the output of the system. Won’t that be a problem?

Adequate wages are critical to making any system work. As the system has tended increasingly toward globalization, politicians have tended to focus more and more on the needs of businesses and governments, and less on the needs of workers. At some point, the lack of buyers for the output of the system will tend to bring the whole system down.

Thus, at some point, the trend toward globalization and automation must stop. We need buyers for the output from the system, and this is precisely the opposite of the direction in which the system is trending. If a way is not found to fix the system, it will ultimately collapse. At a minimum, the trend toward increasing imports will end–if it hasn’t already.

Source:  https://ourfiniteworld.com/2016/03/01/why-globalization-reaches-limits/

Crude Oil Lows?

We are still waiting confirmation that crude oil prices have completed their forecast lows. Notwithstanding one more low, potentially down to our target of US$12 per barrel, we anticipate the recovery of the oil market.

We expect oil prices to recover slowly, reaching as high as US$80 – $95 per barrel before entering a stagnating, equilibrium phase lasting many years and keeping oil prices in a long term trading range between US$30 per barrel and US$60 per barrel. Long term over supply will continue to keep this market under pressure despite the potential for geopolitical shocks occurring from time to time.

The coming oil price movement is typical of a commodity market that has been through a major boom and bust phase. Once we have confirmed the lows are in, we can more accurately define the next phase of the crude oil market.