Political Risk 2 – Reflections

We reported (04/06/2017) prior to the UK General Election 2017:

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.

Little did we realize how close to the mark we would be. PM May’s electoral disaster has profound repercussions for the UK. Firstly Brexit becomes a challenge at the negotiation table because of the weakened hand PM May presents to the EU. Secondly, Jeremy Corbyn’s success at the polls will force the Conservatives to move to the centre-left of UK politics to capture Corbyn’s new found friends – the 18-34 year demographic that has recently discovered politics and utopian self-interest.

This is a disaster for the UK and will not end well. May’s leadership will be under constant challenge for the next 5 years. One of her few chances of success depends on being able to negotiate a quick exit from the EU. This is unlikely.

As has happened in Australia in 2016, the UK and with a 9% confidence level in US Congress reflecting the rising distrust voters have for politicians. This is a trend that will continue around the world for the foreseeable future. The unintended consequence of voter distrust however is that political confidence begins to fail and economic confidence collapses soon after.

In the United States the Democratic – Republican flash point continues to escalate. President Trump is beginning to claw back a few points against the “Deep State” influence working inside government. Investigations are building cases on leaks and corruption. Trump is slowly gaining momentum with his agenda despite the continual challenge of the left agenda.

Unfortunately the first directly attributable acts of violence have occurred with a Republican Congressman and two police officers wounded at an annual practice baseball session for Congress politicians. The use of violence in political discourse is inherently evil itself and not in keeping with the liberal-democratic tradition that has benefited humanity. Since 2015 we have witnessed an increasing breakdown of civil discourse – a cornerstone of a free society. This marks the first violence of the civil strife we predict emerging in the US. We anticipate this will continue to escalate over the next few years. It will not end well and directly reflects the internal divisions that continue to rent US civil society.

At the same time we move slowly towards The End of the Long Game, the last gasp of the “Industrial Revolution Cycle” that commenced in 1783. We still view the September 2017 – March 2018 time window as the time for that final top, to be followed by the downward phase of the cycle. As always rebirth follows endings and the advance of humanity continues.

This worsening political discord in the US and other liberal democratic countries merely reflect the changing cycle mentioned previously. Given the magnitude of the cycle involved – one that builds and destroys empires, we can glimpse directly at the political and economic forces shaping events and the changes 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.

US stocks to rally. Wait for It!

Since mid March 2017, US stock indices have been moving sideways in a slow meandering phase. There’s more to go before this phase completes. This sets up a pattern or determinacy that leads to a clear outcome and conclusion.

You can expect the market to continue consolidating and moving sideways burning time. Its frustrating and slow. A balance of forces has emerged on the back of the so called ‘Trump Rally’. Volume and activity will continue to shrink. We don’t expect the DJIA to go below its 20553 lows (18/05/17). At some stage over the next 2 to 8 weeks stock markets will explode on the back of a ‘surprise’ news announcement.

The coming stock advance will be swift and carry the DJIA 750 to 2000 points (S&P500 150 to 400 points) higher on high volume and bullish sentiment. Suitable targets put the DJIA at 21560 to 22800. Once the rally gets underway we might be able to sharpen our targets.

Our patterning also calls for a complete retracement of the rally. Anticipate on completion of the advance, a rapid pullback on the DJIA to at least 20553 (S&P 2352). The thrust and pullback will catch a lot of people by surprise.

The move up should complete the advance sequence from the March 2009 lows. The nature of what follows will determine if this is also The End of the Long Game 2009-2018.

 

 

Contrary Opinion and the French Elections

Going into the final round of the French Presidential election we see heavy media bias for Macron to win over Le Pen. Polls indicate Macron  should win by a comfortable margin. The Law of Contrary Opinion in 2016 had indicated another upset due.

There are mitigating factors at play however. Having correctly picked the Australian, Brexit and US Presidential elections, we point out that the shock results shown in those elections all occurred after lengthy social and political trends had been underway for sometime. We see there is a lower probability that contrary opinion may affect the outcome. We had predicted in 2016 that Le Pen would receive the presidential mandate. We still hold to that view which would have an immediate negative impact on financial markets whichever candidate wins. Markets appear poised for a fast corrective move to the downside before resuming their longer term trends.

Longer term, if Le Pen happened to win, there would be a soft EU awakening and resolution. Macron’s win will have the effect of bringing on a hard EU awakening and resolution.

Australian Housing Affordability

Housing affordability is attracting the attention of politicians as concern rises that a housing bubble has made homes too expensive. So far, none of the discussions have really addressed the problems. Several key points can be made here from a futurist perspective.

The housing problem…..

Sitting on the left wing agenda is the view that negative gearing of investment properties is a necessary step to making housing more affordable. Government is short of cash. You can see this happening in most liberal democratic countries around the world and should merely be seen as another tax grab. For this reason alone politicians will close the negative gearing window.

Cancelling negative gearing will have the long term effect of driving up rents causing a severe shortage of rental properties. That wont affect the politicians however who vote for the negative gearing “reform” as they will have disappeared into retirement.

Pre-2016 election talk suggested a grandfather clause to existing investment property holders. The time between initiating the legislation to when it goes into effect creates a window for people to grab up properties for investment purposes. The short and sharp buying frenzy in conjunction with this kind of policy or news would be typical of a major long term top for Australian property markets. This kind of event is common in financial markets when changes of trend occur at the end of a long term market. Policy or news has caught up too late. It always results in a major reversal. We might anticipate the peak of the Australian property market would last decades.

Other proposed measures include first home owners being allowed to access superannuation to form a deposit. When first home owner grants were introduced in 2000, property prices for new homes jumped by multiples of the $7000 grant. This reflected the increased purchasing power an extra $7000 had on loan to valuation ratios. If super is allowed into the equation we’ll see property prices once again jump higher as builders respond to improved loan ratios.

Part of the affordability solution……..

One issue that never gets discussed is the supply related issues created by government themselves. In many capital cities around the world, including Australia, housing affordability is often the unintended consequence of regulatory bottlenecks where zoning, building regulations and permits choke the flow of new supply and drive up the cost of housing. Clearly this needs to be addressed and would go a long way towards addressing the affordability issue.Another issue under the microscope where investors hold a property seeking only capital gains by leaving the property untenanted. If governments must be seen to be doing something, a tax on properties untenanted for longer than say 3 months would take the heat off buyers as they realize the benefits renting over buying bring in an overheated property market.

Suffice to say the long term direction of Australian property values are coming to a head in conjunction with other Australian and global social, political and economic issues. Housing affordability is just another issue along with many others whose origins lie decades in the past and whose solution cannot be answered by politicians or central planners

 

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.

 

Predictions 2017 – Be Ready

It’s all going to go rather quickly from here. We list our predictions for 2017 and beyond as crisis presents both opportunity and danger.

Political confidence and will eroding in the USA and other liberal democratic countries. In the US, economic confidence will start to fail as the new Trump administration starts rolling out its agenda. That could happen as early as March 2017 but most likely will not be felt until later in 2017. When political confidence fails, economic confidence falls soon after.

2017-18 is all about the coming shocks. Building on Brexit and the US presidential elections in 2016, markets are setting up for surprises. So called ‘black swan events’ always have tell-tale warning signs before they actually happen. A combination of factors are coming together to create the so called ‘perfect storm’.  At the heart is the implosion of global markets that has started and cannot be stopped. While this may be slow at first, it will pick up speed over the next few years.

We see inflationary forces gathering in the US and the potential for this to get out of hand quickly is real. We believe inflation in the US will jump quickly above 4% and has the potential to run up as high as 10%. So in 2017 we have the bursting of this massive interest rate bubble that is the result of a decade of unfettered easy monetary policy. The immediate effects of this should quickly be felt in stock markets, commodities and real estate and in the longer term, the broader economy itself. In effect, with its own particular flavours, our current situation is identical to the ‘Roaring 20’s’. The set up for a last gasp spike in stocks exists before the plunge. If however, the weight of uncertainty continues to build, then that spike could be nipped in the bud leading to the next big downturn.

The US Federal Reserve is always playing catch up to the market. It will not be able to respond quickly enough to the sudden jump in official inflation rates. This will have a disastrous effect on US and global interest rate markets. The Fed will be unable to reign in money supply quickly enough to correct the torrent of money that has flooded the system over the last decade.

The effect is like holding a big ball underwater then letting go. The decade of artificially low interest rates will ‘normalise’; i.e., move toward market value and this has the potential to cause major eruptions in every other asset class.

And then there are the political shocks. The wave of reaction that was Brexit and Trump will continue into 2017 with French and German elections. Rising nationalism and disgust with the political elites will see Merkel gone and the right brought to government in France. The EU will continue to blunder from crisis to crisis and we can expect with certainty other nations to begin their exit process.

In the US, Trump is busy getting his agenda off the ground. Some of his ideas have merit such as deregulation (always a good thing), downsizing US federal government and lowering corporate taxes. Many of his ideas however threaten future economic viability. In particular, the threat of trade sanctions against China, Mexico and Germany risks a global collapse in trade. Bastiat, the 18th century French economist summed it up nicely by saying when ‘goods stop crossing borders, boots start marching’.

Trump and Russia is another political flash point. We anticipate that Trump will use that relationship to build trade, especially around oil while strengthening domestic oil production and weakening reliance on middle eastern oil.

Fortunately we don’t have to worry too much about major wars in the immediate future. War risk will only emerge after a prolonged economic downturn (at least 13-50 years away). The risk over the next 10-15 years in the US is civil disruption and violence. Trump’s presidency will have finished long before but the consequences will still be being played out a generation or two later.

One fact worth observing is that most liberal democratic governments are broke. Politicians have squandered the seed capital of their nations. We will see two things occurring. Firstly, the grab for cash by governments will continue to escalate. And the erasure of cash as a payment medium will accelerate. Secondly, governments will move to sell off any available assets to maintain the status quo. If the economy holds on for another year or two, watch the asset sales.

For now, the status quo will remain unchanged even though a new era of uncertainty and political chaos lies before us. Real, lasting meaningful change will not happen until after 2028 or 2032. Around then an important political 50 year cycle low will occur and then the US will emerge with a new destiny and a renewed sense of self.

In 2017 however, liberal democratic nations will see increasing segmentation of the left – right spectrum into smaller segments and more diverse viewpoints. The polarization occurring in liberal democratic countries will continue to deepen in 2017 before any easing occurs. In the US, Trump serves as the perfect focal point for this polarization and civil unrest and disturbances may very well break out this year. In the US we see the accumulation of decades of bad policy and a deteriorating social mood is threatening the very fabric of the US. For 2017 we do not see individual states seceding but civil disturbances that turn violent and later we will see risk civil war.

Since the 1930’s we have witnessed the growth of US Presidential Executive Orders. Since Ronald Regan Executive Orders have been used more extensively. Anticipate Trump to exceed that of Obama (275 orders) by heavily relying on Executive Orders over the life of his presidency. This is important as it further breaks down the separation of powers of government and moves government towards an imperial style of governance by Trump who is already isolated, like an emperor.

Along with the demise of cash as one of the last privacy barriers to fall, liberal democratic principles continue to crumble. Another aspect of liberal democratic government being eroded slowly and surely is the separation of powers of government. Politicians’ need to be seen to be doing something, namely creating legislation. The separation of powers between the executive, legislature and judiciary has become increasingly imbalanced against the judiciary. Soon that imbalance will extend to the legislature as the role of executive order escalates.

Depth of prevailing social mood is already at cross purposes. A soaring stock market in 2017 along with a surging economy and disenfranchised people on both sides of the political spectrum is a perfect set up for the down phase of what we call the ‘Industrial Revolution Cycle’. This is part of the topping process of a cycle of human endeavour that began in 1783. That downward phase we expect to last some 38 to 62 years. At this stage our view is leaning more towards the 38 year time span. It will be steep and deep. This is based on technical considerations before the next cycle of growth gets underway. The key point is the setup has already been underway for a long time now and we are merely on the receiving end of this progression. Despite the hubris of politicians and bureaucrats who believe they control nations and economies, the cycles of endeavour continue to unfold bringing eternal change.

Ultimately there will need to be some sort of release of pressure before any normalization of political environments. Expect upsets is the modus operandi. If the violent moves predicted, starting in 2017-2018 occur in markets this would align well with our forecasts. Typical events that might bring about such political and economic shifts include Presidential declarations involving other countries (trade wars, trade treaties, embargoes), political assassinations, new alliances EU breakdown.

All of this takes place in an environment of failing political and then economic confidence. Behind that, the social mood of the people of great nations will turn dark and inwards. An end of an era is taking place. This will translate into stock market tops as they finish their last upward phases.

Here are some of the market predictions we make for 2017:

US Stock Markets

As early as March 2017 we will see the final tops in US stock markets. This completes a long term trend and cycle top that started in 1783. The roll over process has been underway fro some time now and could still however take months to years to complete. This is typical of major tops and is often accompanied by a lot of confusing cross current activity. We discuss this long term trend in our lead article The End of the Long Game 2009 – 2018 

They are rallying on expectation that Trump will lead the economy to new levels of prosperity. Supporting this idea we see forecasts of Dow Jones at 25,000, 33,000 and even 55,000 reflecting the emerging bullish mood for US economic prospects. These kind of calls only ever occur when sentiment is skewed and it never ends well.

Small cycles driving the 8 year stock market are due to make a top in March 2017 and has had an excellent history going back over the last 50 years. Cycles have their own rhythm however and they do go out of sync from time to time. Another scenario calls for several months of consolidation (Feb – May)  in US stocks before moving up in a surge not dissimilar to the 1929 stock market peak. Obviously this would extend the stock market top and evidence of inflation and Trump’s policies having a positive effect would enable this path. We rate this path with a higher probability at this time. A smart strategy might be if you saw DJIA 21000, 22000, 23000 it might be prudent to take the money off the table.

We anticipate the next 8 years starting in 2017 to be a down phase for all asset classes including shares.

US Dollar

Accompanying stock we will also see a top in the US dollar. At time of writing we estimate a 25% probability of the US$ having already peaked. There is often a ‘right fit’ to a market and one more major spike on the US$ would complete that ‘right fit’. If we get this spike then we could see EurUSD to 1.00 – 1.03, GbpUSD to 1.10 – 1.00, AudUSD to 0.50 – 0.60 and Yen move to 125 – 140. If however, then anticipate the EurUSD moving to1.60, Yen to 80, GBP to 1.60 and AUD to above 1.10 as the next major long term trend gets underway.

Gold

Gold is still completing a major consolidation phase. We see gold hovering between US$1180 – $1300 for several months before moving up to around the US$1500 – $1535. Following that comes a solid move down to below US$800. Typical targets include US$770 and $450 before the next long term uptrend begins.

Australian Stock Market

The ASX SP200 will begin its long slide to below 3000 this year. Note this could come as a divergent action to US stock markets as Australian economic risk to weighted more to Asia.

Longer Term

We will not see oil prices rise above US$140 per bbl before 2065. A new era is dawning where cheap, abundant, low polluting energy is available.

Over the next 25 years we will see people die of starvation because of crop failure caused by a cooling climate. In that same time frame we will see climate change as an issue in the minds of the public disappear.

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.

Political Prediction Results 2016

We called the US Presidential election (27/07/2016 & 29/10/2016) saying Trump would win. We called the Australian federal election and while we didn’t quite get what we thought would happen, we got second best with the Australian people being the winners (16/06/2016, 28/06/2016 & 24/07/2016).

Expect further political upsets in 2017 with elections falling due in France and Germany.

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.

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.’

Contrary Opinion and Australian Elections

As political risk increases in all liberal democratic countries we can expect to see the contrary opinion factor playing a greater role in evaluating risk in elections and other important events.

One example is of course Brexit, while a close call, consensus opinion was that the UK would remain. Similarly, the Australian election consensus has continuously been that the Liberal Party of Australia would prevail. However, as previously posted (16/06/16), the Australian electorate is deeply cynical of its politicians and none of the contenders for the 2016 federal election are 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 people. Accordingly many believe the economic and social decline experienced by many Australians is set to continue.

Little has been said by politicians that offers any resonance with voters. So with this dissonance there is room for the Law of Contrary Opinion to operate. The law suggests “if everybody thinks one thing then bet the other way.” This law works well at times of extremity. For example, consensus thinking at elections, stock market highs and lows, etc, etc. Traders of financial markets use this tool when market sentiment is strongly biased.

Based on contrary opinion then, expect an upset on July 2nd with either a hung parliament or an outright win to the Australian Labor Party.

Brexit Impact 2016

Should the “leave” vote win the coming UK referendum you can expect the impact to have global consequences. It will challenge the survivability of the EU. At the same time it will create massive flights of capital around the world as investors seek refuge for their money. Anticipate the USD being strongly bid. This will have a huge impact on US stock markets at the expense of peripheral markets and their currencies. The nature of global economics has been apparent for some time, though not obvious.  Brexit will cause this to accelerate.

What is clear is the counter-intuitive nature of the Brexit situation. The narrative being promoted by the “in” vote is not what it seems. Democratic processes to do with EU politics have earned a reputation for not being so straight forward with several countries having the “will of the people” overturned in the last decade or so.

Should the UK decide to remain in the EU, we anticipate this will only serve to delay the inevitably. Namely the demise of the EU itself. A reading of history itself should remind that all political systems fail and a political system built on faulty premises to begin with, fail sooner. Thus, human nature expresses itself in a cyclical manner again and again.

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

Mapping Russia’s Strategy

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.

Why Big Banks are So Interested in the Blockchain Technolgy

It turns out that the blockchain technology (which drives Bitcoin) creates an environment that is easy for government to track transactions.

Blythe Masters, former major player at JPMorgan, left the bank to start the blockchain firm Digital Asset Holdings.

Masters during an interview with The Australian Financial Review explained bankster interest in the technology (my bold):

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.

Source: EconomicPolicyJournal.com