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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 (Germany, 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.Trump’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.
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.
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.’
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.
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.
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.
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.
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.
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. “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.
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.
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.
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.
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.
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.
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.
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.
The sharing movement is evolving quickly and in many directions. The growth of platform and worker co-ops, increased awareness of the commons, the evolution of coworking, an explosion of tech-enabled sharing services, and more are opening up promising if not challenging frontiers. Funding by VCs will continue to increase, but the rate will slow compared to 2015’s glut of money.
Around the world we will see fascinating innovations in commons-based law that extend the scope of the Bologna Regulation (which reimagines city government as a partner with commons).
Benjamin Hulac looks into the impact of global warming on the economic side.
Climate change is the most severe global economic risk of 2016, the World Economic Forum said yesterday.
The nonprofit economic analysis institution, set to convene next week in Davos, Switzerland, for its yearly meeting, has labeled climate change or related environmental phenomena—extreme weather, major natural catastrophes, mounting greenhouse gas levels, water scarcity, flooding, storms and cyclones—among the top five most likely and significant economic threats the world faced in each of its annual reports since 2011.
The 2016 report, the latest installment of a report the WEF has published since 2007, marks the first time an environmental risk tops the rankings.
“Climate change is exacerbating more risks than ever before in terms of water crises, food shortages, constrained economic growth, weaker societal cohesion and increased security risks,” Cecilia Reyes, the chief risk officer of Zurich Insurance Group Ltd., one of the organizations that worked on the report, said in a statement.
The WEF document does not paint a sanguine picture.
North America’s eastern seaboard, East Asia, Southeast Asia and the South Pacific are particularly exposed to extreme weather patterns and natural catastrophes, according to the report—a survey conducted in the fall of 750 experts, who answered questions about 29 types of global risk, like cyberattacks, government instability and weapons of mass destruction.
Global climate change threatens top producers of wheat, corn, rice and other agricultural commodities, the report notes. Recent years illustrated the “climate vulnerability of G-20 [Group of 20] countries such as India, Russia and the United States—the breadbasket of the world.”
Hot, dry and tense
Climate change is compounding and amplifying other social, economic and humanitarian stresses globally. It is linked to mass and often forced migration; violent conflict between nations and regions; water crises; and, as the world population rises and simultaneously gets hotter, food shortages, the report reads.
“Forced displacement is already at an unprecedented level,” the authors continue, referring to emigration.
In this hotter, water-scarce future, tensions will likely grow between nations.
“Unless current water management practices change significantly, many parts of the world will therefore face growing competition for water between agriculture, energy, industry and cities,” the authors write.
A growing business awareness
Following the worldwide financial meltdown of 2008, the people WEF surveyed listed the collapse of investment prices as the most likely and most grave hazards. Yet that trend shifted.
“Environmental worries have been at the forefront in recent years,” the authors wrote, “reflecting a sense that climate change-related risks have moved from hypothetical to certain because insufficient action has been undertaken to address them.”
Paris ‘a starting point’
Economists, regulators and financial experts have become increasingly vocal about climate risks.
Governor of the Bank of England Mark Carney, in a September speech at Lloyd’s of London headquarters, said the warming climate could “bring potentially profound implications for insurers, financial stability and the economy.”
“It’s a risk that needs to be managed,” Bernhardt said. “The challenge, historically, is that it’s been treated as an uncertainty.”
Former Dallas Federal Reserve Bank economist, Gerald O’Driscoll, writes in WSJ :
Pundits are focused on collapsing oil prices, which reflect the technological revolution in production among nimble private producers, combined with weakening global demand for their product. The result has been layoffs in the energy industry, and there will be more. Weak and highly leveraged energy firms have gone bankrupt and more will. But bankruptcy doesn’t necessarily mean that production will decline.
Creditors who lent to these energy producers will suffer losses on their loans, and they too might become financially impaired. If past is prologue, those lenders will be reluctant to fully realize their losses, and they will continue to view future energy prices through too-rosy glasses. Banks will be reluctant to mark down the value of nonperforming loans and book losses, or even set aside sufficient loan loss reserves. They will instead “extend and pretend”—i.e., extend maturities and pretend they expect the loans to be paid back. Will federal and state banking regulators aid and abet the process? They have in the past, and rumor is that they are already doing so today.
In October Russell Roberts, a research fellow at Stanford University’s Hoover Institution,tweeted that if told an economist’s view on one issue, he could confidently predict his or her position on any number of other questions. Prominent bloggers on economics have since furiously defended the profession, citing cases when economists changed their minds in response to new facts, rather than hewing stubbornly to dogma. Adam Ozimek, an economist at Moody’s Analytics, pointed to Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis from 2009 to 2015, who flipped from hawkishness to dovishness when reality failed to affirm his warnings of a looming surge in inflation. Tyler Cowen, an economist at George Mason, published a list of issues on which his opinion has shifted (he is no longer sure that income from capital is best left untaxed). Paul Krugman, an economist and New York Times columnist, chimed in. He changed his view on the minimum wage after research found that increases up to a certain point reduced employment only marginally (this newspaper had a similar change of heart).
Economists, to be fair, are constrained in ways that many scientists are not. They cannot brew up endless recessions in test tubes to work out what causes what, for instance. Yet the same restriction applies to many hard sciences, too: geologists did not need to recreate the Earth in the lab to get a handle on plate tectonics. The essence of science is agreeing on a shared approach for generating widely accepted knowledge. Science, wrote Paul Romer, an economist, in a paper* published last year, leads to broad consensus. Politics does not.
Nor, it seems, does economics. In a paper on macroeconomics published in 2006, Gregory Mankiw of Harvard University declared: “A new consensus has emerged about the best way to understand economic fluctuations.” But after the financial crisis prompted a wrenching recession, disagreement about the causes and cures raged. “Schlock economics” was how Robert Lucas, a Nobel-prize-winning economist, described Barack Obama’s plan for a big stimulus to revive the American economy. Mr Krugman, another Nobel-winner, reckoned Mr Lucas and his sort were responsible for a “dark age of macroeconomics”.
Moreover, hard sciences are not immune from ideological rigidity. A recent study of academic citations in the life sciences found that the death of a celebrated scientist precipitates a surge in publishing from academics who previously steered clear of the celebrity’s area of study. Tellingly, papers by newcomers are cited far more heavily than new work by the celebrity’s former collaborators. That suggests that shifts of opinion in science occur not through the changing of minds so much as the displacement of one set of dogged ideologues by another.
Agree to Agree
But even if economics is not uniquely ideological, its biases are often more salient than those within chemistry. Economists advise politicians on all manner of important decisions. A reputation for impartiality could improve both perceptions of the field and the quality of economic policy.
Achieving that requires better mechanisms for resolving disputes. Mr Romer’s paper decried the pretend “mathiness” of many economists: the use of meaningless number-crunching to give a veneer of academic credibility to near-useless theories. Sifting out the guff requires transparency, argued John Cochrane of the University of Chicago in another recent blog post. Too many academics keep their data and calculations secret, he reckoned, and too few journals make space for papers that seek to replicate earlier results. Economists can squabble all they like. But the profession is of little use to anyone if it cannot then work out which side has the better of the argument.
GEORGE FRIEDMAN looks at Russia’s strategy going forward and its impact on geopolitics.
Russia is in a geographically vulnerable position; its core is inherently landlocked, and the choke points that its ships would have to traverse to gain access to oceans could be easily cut off. Therefore, Russia can’t be Athens. It must be Sparta, and that means it must be a land power and assume the cultural character of a Spartan nation. Russia must have tough if not sophisticated troops fighting ground wars. It must also be able to produce enough wealth to sustain its military as well as provide a reasonable standard of living for its people—but Russia will not be able to match Europe in this regard.
So it isn’t prosperity that binds the country together, but a shared idealized vision of and loyalty toward Mother Russia. And in this sense, there is a deep chasm between both Europe and the United States (which use prosperity as a justification for loyalty) and Russia (for whom loyalty derives from the power of the state and the inherent definition of being Russian). This support for the Russian nation remains powerful, despite the existence of diverse ethnic groups throughout the country.
As a land power, Russia is inherently vulnerable. It sits on the European plain with few natural barriers to stop an enemy coming from the west. East of the Carpathian Mountains, the plain pivots southward, and the door to Russia opens. In addition, Russia has few rivers, which makes internal transport difficult and further reduces economic efficiency. What agricultural output there is must be transported to markets, and that means the transport system must function well. And with so much of its economic activity located close to the border, and so few natural barriers, Russia is at risk.
It should be no surprise then that Russia’s national strategy is to move its frontier as far west as possible. The first tier of countries on the European Peninsula’s eastern edge—the Baltics, Belarus, and Ukraine—provide depth from which Russia can protect itself, and also provide additional economic opportunities.
With regard to the current battle over Ukraine, the Russians have to assume that the Euro-American interest in creating a pro-Western regime has a purpose beyond Ukraine. From the Russian point of view, not only have they lost a critical buffer zone, but Ukrainian forces hostile to Russia have moved toward the Russian border. It should be noted that the area that the Russians defend most heavily is the area just west of the Russian border, buying as much space as they can.
The fact that this scenario leaves Russia in a precarious position means that the Russians are unlikely to leave the Ukrainian question where it is. Russia does not have the option of assuming that the West’s interest in the region comes from good intentions. At the same time, the West cannot assume that Russia—if it reclaims Ukraine—will stop there. Therefore, we are in the classic case where two forces assume the worst about each other. But Russia occupies the weaker position, having lost the first tier of the European Peninsula. It is struggling to maintain the physical integrity of the Motherland.
Russia does not have the ability to project significant force because its naval force is bottled up and because you cannot support major forces from the air alone. Although it became involved in the Syrian conflict to demonstrate its military capabilities and gain leverage with the West, this operation is peripheral to Russia’s main interests. The primary issue is the western frontier and Ukraine. In the south, the focus is on the Caucasus.
It is clear that Russia’s economy, based as it is on energy exports, is in serious trouble given the plummeting price of oil in the past year and a half. But Russia has always been in serious economic trouble. Its economy was catastrophic prior to World War II, but it won the war anyway… at a cost that few other countries could bear. Russia may be a landlocked and poor country, but it can nonetheless raise an army of loyal Spartans. Europe is wealthy and sophisticated, but its soldiers have complex souls. As for the Americans, they are far away and may choose not to get involved. This gives the Russians an opportunity. However bad their economy is at the moment, the simplicity of their geographic position in all respects gives them capabilities that can surprise their opponents and perhaps even make the Russians more dangerous.
Our investors, some of whom are large investment and commercial banks, are making a major investment in Digital Asset to help us develop solutions that will address reducing risk, reducing cost, improving transparency and offering new sources of revenue…
Rregulators were understandably initially concerned about the potential for blockchain applications to bypass certain controls, their thinking has evolved…
They are learning that distributed-ledger technology brings many benefits and efficiencies to wholesale financial markets, including reduced cost, reduced counter-party risk, reduced latency, enhanced security, increased transparency, ease of reporting, and reduced errors. These are all important to regulators.
This technology is offering regulators a bird’s-eye view into activity in certain markets that they never had before. As such, distributed-ledger technology is actually an enhancement to transparency, rather than a mechanism for bypassing it.
Bitcoin operates on an extremely dangerous platform for those seeking anonymity.
From Uncommon Knowledge, host Peter Robinson questions Professor Sowell about the relationship of culture and wealth explained in his new book, “Wealth, Poverty and Politics, An International Perspective.” http://www.LibertyPen.com
Elevated production levels, decelerating demand, and record high inventories will suppress oil prices to an average of $50/bbl in 2016, the National Commercial Bank (NCB) said in its latest monthly “Views on Saudi Economic and Developments”.
It said growth dynamics pertaining to emerging markets, in particular China, and production factors relating to OPEC have underpinned the bearish view.
The lack of compliance among OPEC members that produced above the 30MMBD quota for the 18th month in a row will be an important drag, especially that the group lacks a unified front.
Saudi Arabia, Iraq and Iran are adamant in producing as much as they can. The Kingdom’s production peaked at 10.6 MMBD in June, while Iraq has increased output over the year by around 0.7 MMBD, reaching 4.2 MMBD in November. Additionally, lifting the sanctions imposed in July 2012 on Iran is expected to bring an additional 500 thousand barrels a day during 1H2016, which will keep OPEC’s production above the 32 MMBD mark. Even though non-OPEC members and high-cost producers will continue to be pressured this year, the anticipated decline in their production will not offset OPEC’s over quota strategy. The IEA, EIA and OPEC have forecasted a decline in non-OPEC supply between 400-600,000 barrels a day, the first annual decrease since 2008, largely due to the steeper decline in US shale production.
The EIA predicted in its latest report that companies operating in US shale formations will reduce production by a record 570,000 barrels a day, which underscores the challenging environment even after slashing capital spending, laying off workers and focusing on the most productive areas.
On the demand side, China is expected to have the weakest economic performance since 1990, with growth falling below 7% for 2015 and 2016 despite the myriad attempts to reduce interest rates, reserve requirements and devalue the yuan in order to spur business activity.
Furthermore, emerging markets are expected to expand at 4%, the slowest pace since 2010 and well below their 10-year average of 7%. Generally, the three eminent organizations are forecasting oil demand to rise between 1.2 and 1.4 MMBD in 2016, much slower than last year that saw demand grow by as much as 1.8 MMBD, a five-year high.
The record US and global crude oil inventories will also continue to weigh on oil markets. The end of year US crude oil inventory at 487.4 MMbbls is 27% more than the level recorded in 2014, which was 388 MMbbls, and is also at an 80-year high for this time of year.
Additionally, the OECD’s commercial total oil inventories rose to around 2.971 billion barrels, near a record level that is equivalent to 60 days of consumption and above the five-year average. Given these aforementioned dynamics, NCB forecast the market to remain unbalanced in 2016.
According to The Economist, the trend is just one more step toward the goal of unbiased, non-ideological economic science:
But even if economics is not uniquely ideological, its biases are often more salient than those within chemistry. Economists advise politicians on all manner of important decisions. A reputation for impartiality could improve both perceptions of the field and the quality of economic policy.
Economics is also a science, but the subject matter for economics is categorically different. Humans can choose. This very fact actually serves as the basis for the entire structure of economic theory. Recognizing this point is critical for selecting and preserving an appropriate method for economics.
The Place for Data in Economics
Laboratory experiments and real-world observation cannot somehow refute economic theory because economics deals in counterfactuals, which are never realized and cannot be observed in the real world.
This is not to say that good economists should ignore data. In fact, a good economist would revisit theory in the face of curious data that doesn’t seem to go along with theory. Also, economic history relies on the skillful use of data and theory to help explain events of the past.
Economic Ignorance, not Enlightenment
So, this new trend among prominent economists, far from defending economics as a science and a profession, actually reveals the unscientific and ideological proclivities of mainstream economics.
Readily dropping standard results in economics because the newest econometric trick revealed something strange with the newest data from the Bureau of Labor Statistics shows economic ignorance, not enlightenment. It shows that many economists don’t understand the fundamentals of economics and the logic of action.
When data conflicts with theory, the scholarly thing to do would be to find the source of the disconnect. This could be an error in the way the data were measured or an error in the application of the data to a specific economic theory. Of course, the theory itself could be wrong, too. Either way, some explanation is in order. An ideologue would discard one or the other without any reason except to maintain their own ideology or to switch ideological camps.