China – the biggest paradigm shift in a century?

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

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

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

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

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

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

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

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

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

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

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

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

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

16th-18th
chart
Charles Parton concludes:

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

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

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

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

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

China

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

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

China

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

credit impluse

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

chart
 Source: Bloomberg LLP

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

chart

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

curency

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

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

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

chart

Source: Connectopraphy

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

headline
 Source: Nikkei Asian Review

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

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

– Edited by Clare MacCarthy

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

Steen Jakobsen is chief economist and CIO at Saxo Bank

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Buy Oil With Gold-Backed Currency—Bypassing US Petrodollars

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

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

By Jay Syrmopoulos via The Free Thought Project

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

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

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

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

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

According to a report by OilPrice.com:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

About the Author

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

German Federal Election 2017 Outcome

Germany’s Federal election 2017, is due to be held this Sunday 24th September. It could prove illuminating about the political fortunes of Germany and the EU at large.

Don’t hold your breath however. It looks like more of the same. Even if there is a reduced majority held by the CDU/CSU coalition under Angela Merkel, German stocks should rally off the back of the election result. The rally will be a muted affair however.

EURUSD will also rally in line with our previously published forecast of 1.22-1.23. There is not enough of a biased sentiment to be able to predict an outcome based on the “Law of Contrary Opinion”.

It seems the important game changing news is more to do with the US Federal Reserve decision. They plan to wind down its balance sheet which will have far lasting repercussions.

The Coming Four D’s

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Coming Four D’s

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

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

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.