Two Articles on the Economy and Possible Future
 

With the market being down enough to make us all feel the pain, it's natural to wonder whether this is just the beginning of the business cycle turning down, the end of another bubble, or the start of world realignment. Your investment strategy and plans for the future depend on which alternative you think we are encountering.

Until recently I had been of the opinion that this was just he beginning of the business cycle and that we were going to see hard times for the next year or two because world demand for everything is soft and getting softer, and that it's going to be harder times than most people expect, but it's simply the business cycle and not another world-wide panic brought about by a bursting global bubble. And that's what we've seen so far. The markets are down in anticipation of poor corporate earnings and they have a ways to go as companies cut back, earnings decline further, unemployment rises and it takes a while for the business cycle to turn upward again.

More recently I read two articles that have me rethinking my analysis. The first is by David Stockman, briefly of Reagan Administration fame, who is shouting that the Chinese economy is a Ponzi scheme that is going to collapse some time in the near future. I've read enough other articles suggesting the same thing that I stopped to check this one out. I think he's right. But if he is, the collapse of China is not yet factored into the market. The lesson of The Big Short is that bubbles can defy gravity for longer than seems possible. I think China is defying gravity and we should all reevaluate our investments accordingly.

The Great China Ponzi—-An Economic And Financial Trainwreck Which Will Rattle The World | David Stockman's Contra Corner

Frankly, I'm not sure what investment is secure from a Chinese implosion. Gold will probably go down with reduced demand and increased supply as Chinese dump their gold holdings. Maybe Dollars under the mattress is a good investment.

The second article is by Thomas Friedman who isn't really an economist like Stockman, but he's a professional analysts and reporter, and he has good insights. He's not predicting the end of the world as we know it, but he's pointing out some long term trends that could come to pass.

http://www.nytimes.com/2016/01/20/opinion/what-if.html?_r=0

The point is that as you make your investment decisions, you should be open to the possibility that China is a Ponzi scheme about to go bust and that America's special place in the world, indeed the world's post-WWII trajectory toward greater prosperity, is an era about to end. At the very least these are risks to factor into your plans.

I agree with both you, and Stockman. The problem is timing it. I was convinced in 2009 that the bounce off the bottom back to around S&P 1,200 was going to be the new normal. I moved to cash and sat on it for, well....too long. We all saw what happened next. The bubble not only defied gravity, but it drifted into the stratosphere as the S&P went from 680 to 1,200 to 2,100.

The funny (not in a good way) thing is, I still think I (we) are right. And I joke with my friends that I will EVENTUALLY be right, LOL. But by that time, how much will you have lost by sitting on the sidelines waiting for "it" to happen? My friends say that they find it interesting that I am not willing to "gamble" in the biggest casino game in the world (the stock market), and that by somehow sitting on the sidelines feel as if I am NOT gambling, LOL! Very insightful when you really stop and think about these strategies.

JA

Those two articles were concerning for someone who is on the precipice of retirement. About half of my assets are bet on those Ponzi schemes.
I always thought the Chinese manufacturing industry was a kind of "smash and grab" operation, where they took as much as they could and ran before anyone could catch them. Given the number of horror stories I've heard I'm surprised it lasted this long. I have always believed anyone who bet his company on doing business with China was a fool.
As for Stockman's complaint that government control of the economy over the past 40 years is a bad thing and bound to collapse - I don't care as long as it lasts a few more years. ;)

I have been telling you adnauseam since the Fall of 2008 that there is a whole new economic paradigm at work. So with your posting of this Thread it shows that you have not been taking my analysis seriously and thus not listening. Which makes you one stupid fk.

Now the question becomes why haven't you been listening?

^^^^^^^^^^^^^^^^^^^^^^^^
Armageddon cheerleader.

Actually that might be a good name for my new band...

There have been kooks like Tabs predicting the end since cavemen were riding dinosaurs. I'm sure that you could find a screed from 1954 that sounds like it was written by him. Like a broken clock, however, he is temporarily right every ten years or so when the economy adjusts itself.

There are perfectly logical reasons why everything is a Ponzi scheme and all money should be worthless for decades, yet I keep filling my tank and my stomach with it, not to mention going skiing in the Sierra mountains for the second time in 3 weeks tonight. There will be lots of other people on the chairlifts who aren't listening to Tabs.

This isn't to say that major re-alignments are not coming or that the articles above are wrong. I personally think that an economic slowdown would be a great thing in several ways, mostly having to do with the environment. The classic model of endless growth is extremely destructive and unsustainable. There needs to be growth only in specific areas. But that's a whole 'nother thread.

I have long thought the Chinese economy was vulnerable. I'm very far from being any kind of expert on these things, but have to rely on common sense & a gut feeling along with what I can learn. Maybe not exactly reliable and no sense of timing to go with it. Any economy going through such an expansion inherently puts itself in a situation for instability. From my viewpoint, you can only herd your workforce around for so long before that strategy weakens because of internal inefficiency and changing conditions from the outside impinging on it to promote instability. The other thing alarming to me is the construction of infrastructure and real estate mega projects standing empty after completion and generating no ROI along with their attempts at expansion on so many fronts. Those things along with internal lack of built in flexibility enabling economic activity to go with the flow, point to major problems some where along the line. Like I say I'm far from knowledgeable, so maybe my perspective is just BS or naivety. But I've been out of the market & into cash since the last US market high. If I can see a real low to get back in, OK. If things are not that bad, and I get back in at the same level, I haven't lost anything. China's economic decline will be temporary, maybe making them learn some things and will ripple through the world economy. Our markets will react even though interaction with China isn't a huge part.

Do you honestly believe that the govt. is going to let the economy get flushed down toilet? They are going to do whatever it takes to keep the corporations from going broke. Keeping the corporations going keeps folks employed so it is in the govt. interest.

Okay so I am an eternal optimist(the opposite of Tabs). If you buy ETF's(exchange traded funds) they say that mutual funds are outperformed by the ETF's most of the time. However I am happy to pay the 2% management fee(we pay higher fees here) so the prof. stock picker can asset allocate as he sees fit. The ETF is invested all the time. Timing the market is near impossible. $ cost averaging is probably the way to go to ride out the ups and downs.

For as long as there was enough global demand for Chinese product to match their production capability China was not a PONZI scheme. It was a growth story. The reason why China has not become a consumer driven society is that they do not have social safety nets as an incentive for poor decision making.

Once global demand fell and China needed to keep expanding their output so that the country would not experience the social/political pressure of civil unrest then one could make the claim of China becoming a PONZI scheme. What China did in 09 was take 500B USD out of their cash reserves and make shovel ready jobs building Ghost Cities in order to keep the wheels turning.

As I have said adnauseam the CONVENTIONAL WISDOM thought that the 08 crash was just another business cycle where the usual remedies of stimulus and provision of liquidity would soon create a return to normal economic activity. As time went on and every trick in the book was applied and found wanting as it didn't do the trick of restoring economic health the HOPE of a strong economy has started to fade. So MRM really isn't so unusual as he is is just one of the sheep in the flock.

In 2011 I told you 1.5 to 2.5 percent growth was going to be it and in early 2012 I told you that growth rate was only matching the rate of population growth. I also told you that the US economic demographic would revert to the mean of 1910. which means a large working poor class, a smallish MC and a very small Robber Baron class. of ultra wealthy. I have kept telling you since 2010 Equities was the only place to be and in September 2012 I told you SP 500 2250 without worry. We did get to SP 500 2137. Also I have said that once the FED stopped juicing the system it would falter...You can go into the archives of this Board and look up everything I have said here.

I have been telling you since 09 the moment GW went on TV there was a paradigm shift as GW spooked the herd. It was a before and an after moment as he told the world all was not well in Mudville (i watched it as it happened)..that was the bursting of the Great US Post World War 2 Prosperity Bubble. What the US government did in response is create a Sovereign Debt Bubble which was fueled by the creation of some 3.5T new USD's. All the while the US economy can not get off the ground because the US consumer is TAPPED OUT and the debt is acting as a ball and chain on the economy.. So the new question becomes when and NOT if this new Sovereign Debt Bubble goes kablewie..what makes it a WMD is the fact that the USD is the Reserve Currency and is universally held. When it goes you will have the economic effect of a nuclear war without the bombs. Meanwhile you can just see and feel the attendant stress that is being put upon the social and political fabric of the world.

Now do you want to start talking about the geopolitical situation and how it relates to the economic stresses being applied?

This is childs play people..

That is why the debt has gone from 10.5T to 19T USD and the FED hs created roughly 3.5T NEW USD's...all to keep the economy going...and yet when they stop the juicing the economy starts to falter and slow down.

This week the CBO said this years deficit is going to go up to 570B USD.. and next year it will even be higher....who is going to be buying all that NEW DEBT?

The Chinese with an imploding economy? LOL

Here is the deal...the era of ECONOMIES OF SCALE is finished. economically since the 70's it was built on DEBT as the US consumer ran out of cash and MC wages stagnated and started to fall. You might say the US economy became a PONZI scheme. Then environmentally it is unsustainable as the world is stripping out finite resources to sustain the rush to consumerism.

From the perspective of being today's consumer in a consumer driven economy you can view it as being Armageddon. As your lifestyle is going to change rather drastically over time. However from tomorrows perspective it will be normal and you will get along. So it is not the end of the world, just the end of what you consider to be todays normal.

Imma gunna guess that it's 'cuz ya call people stupid fks if they don't acknowledge your input.

Also, your input can often be rather cryptic and/or vague and/or hyperbolic.

Or perhaps, MRM just wanted an exec summary of your past input, but didn't want to bow to get it.

[shrug]

Yes, if only we could return to the bad old days of farming and food distribution that would support 1/4 of todays population. :rolleyes:

A book I would highly recommend.


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The best investment you can have, is something that provides for people regardless of economic state. SmileWavy

So, what shall we all do with the $XXXXXX in our IRA/401K/retirement fund that we have so diligently saved in the S&P 500 now that it isn't the place for those funds? And of course we already have a stash of gold, guns, and food. Whither go our (soon to be) worthless dollars?
Jim

Ten bucks says this goes to PARF and another ten bucks says the Mods will let drag out way too long before moving it to PARF. ;)

I'm guessing buying property in a different part of the world would be a good investment as might ownership stake in a bar or liquor store - people love to drink when they're depressed.

will the track fees from chin motorsports go up for cota this year? or is that also a ponzi? inquiring track rats want to know...

I've read a lot about China's economic crisis where their economy only grew by 6.9%. I wish the US economy was in such bad shape.

Tabs I like your theories but you won't be around long if you keep abusing the good folks on this forum coz you will be banned.

Guy

I must be dense. I've been reading all this stuff with no idea what to do

What's the action plan?
My dollar costs me 300 on every thousand...

Inverse ETFs that are shorting the chinese stock market, or that are shorting oil stocks, are making really good returns right now. Fast money, but risky.
For longer term, real estate funds still look good to me, much less volatile than stock market. That is because people pay rent regularly, and property does not sell as quickly as stocks.

First of all find a one armed economist to eliminate this scenario "on one hand this is going to happen but on the other hand....."

From what I see the US$ is going to stay strong as long as the economy is doing fine.
But that is not going to last forever so the next recession in North Amer. will be deep.
I think we are overdue for one as it has been eight years since the last.

They say buy stocks when there is blood in the streets. There is not enough blood here yet but it will come.

The Can. $ I think will increase in value some. As long as you have political stability and a currency that people have faith in then you have a good place to invest.
Diversify. Not too much of anything.

Don't forget in this world of information tech being in North Am we are bombarded with bad news. Getting away from it if you are retired is not a bad thing. Renting or owning property in a third world country where there is political stability is probably a good thing.

For all of those affected in oil country you have my sympathy. I think it will get better in time. Living within your means helps weather the storms. I am an optimist.
People want to raise families, buy homes, appliances etc.

Because you sound like some guy with a tin foil beanie running around yelling that the sky is falling. IOW you aren't as credible as David Stockman and Tom Friedman.
That is why.

That, and they write in English.

^ ^ ^

This is a pretty good explanation of banking & financial institutions.

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Among many realizations I got out of David Stockman's video is that neither political party has a clue as to what to do and who to appoint that's qualified to manage this economy.
Perhaps neither party wants the economy managed...for if it is managed both parties will be limited in their practice of crony capitalism, general corruption, and the actualizing of their idealizations.
The image I have of this economy and the country is of a van full of celebrating folks having a whooping party and the van is screaming toward a cliff.
...and there is no driver.

And in listening to Friedman and Stockman is part of the reason why you remain ignorant.

The real problem is that you Boyz just can't keep up.

That is why I think Donald trump is the most qualified to manage this country, because he is not in the van so to speak. He is not bought by any corporation, and actually knows how businesses run. And the polls say the same.

A very big problem I see in the US political system is the role private corporations are allowed to play into it, via lobbying. This results in completely screwing up the people, and destroying the middle class. Tax loopholes result in mega corporations like Google or Apple paying no income tax, by sheltering all their gains offshore. Even worse, some corporations were bailed out with taxpayers money, and when given a sweet deal of only 5% income tax to bring back foreign funds and create jobs in the US, first thing they do is lay off people and buy back shares to make their own stock go up and fill up the pockets of the executives. This revolting situation will continue as long as the political class is bought by them, while things could be much improved if their fair share of taxes could be collected.

Both parties look no further than the next election. Meanwhile, the economy will take far longer than four years to fix, and it will be difficult during the fixing. Try to fix it for real, and the populace will throw you out at the next election, as the populace doesn't even look four years ahead.

Kinda like a long road construction project. Very inconvenient for the drivers during construction, and the short sighted cannot see past the orange cones and bumpy gravel to the nice, wide, smooth pavement in their future.

The typical voter will want to toss the construction crew off the job instead of letting them finish. Typical voter will also get rid of anyone in office who makes the tough decisions to slash spending, bumping tax rates up to eliminate the deficit.
That's just for starters.......

When you find yourself on the deck of the Titanic with all the life boats away, there is nothing to do.

The FED has no more tricks in the bag, nor plays as they have come to the end of the book. The US political process nor American people have the will to ameliorate the "landing." So the hole grows deeper and the economy slips beneath the waves into recession. Thats reality.

Ohhh and with sub 2% growth there has been no REAL RECOVERY in that the growth rate mirrors population growth. The provision of pumping liquidity has kept this economy afloat. Without it everybody would have EBT cards.

In 2014 the FED had to see if the economy could stay afloat without the provision of liquidity. So they TAPERED and the results have not been very good in 15. Right now the FED is very worried.

Herr Tab's is not just an Oracle, he is this board's Oracle. As such, he is entitled to dispense his wisdom as he sees fit in language he feels is appropriate to the situation, even if it is not entirely the English language that he is communicating in. Excuse the preposition. We all appreciate his wisdom when he shares it with us.

As to Stockman, he is a truth teller, but you always have to remember that he has a bit of a chip on his shoulder too. No one else is quite as accomplished of an economist, as capable or as perceptive as he. This doesn't mean he's wrong, it just means that when he belittles government officials, he has his own agenda - showing that he's smarter and more capable than them. It's probably fair to say that his generic analysis of the economy is objective, but when he critiques government performance, he will never admit that anyone did their job as well as he would have in the same situation.

Anyway, the two articles discuss different issues that may be facing the US (and world) at the same time, but are unrelated. First is the China bubble. We in the US have heard about the Chinese stock market falling, but that represents a tiny part of their economy and is really irrelevant to us because US and European investors have little exposure to the Chinese stock market. They have no accounting standards and the strong indication is that the generally accepted accounting principles for publicly traded Chinese companies would make a Greek bookkeeper blush. Therefore, almost no Western money is in the Chinese stock market. It could collapse without impact on the US.

The issue with China is that about 20-25% of the US economy depends on trade with China. This includes a significant amount of sales to China. The Multinationals based in the US and Europe now sell into four large markets that they depend on for revenue: North America (the US), which remains the largest single market; the EU, South America (especially Brazil) and APAC, meaning China. If China turns out to be a huge Ponzi scheme, US international companies, and all companies that support that market, will see a reduction in demand of at least 20-25%, similar to the Asian Contagion of the 1990s. This can be partly offset by increased efforts in the other three pillars of international commerce, but the loss of sales and profitability will be a significant drag on corporate earnings, which means a loss of revenue, tax base and jobs.

None of this future risk has been factored into the market yet. As long as the world's businesses can still sell into other markets to partially make up for the loss of China, we will see recessionary times rather than 2007-2009 style end of time when we can't see the bottom and we don't know how far we can fall. If there is a bottom. Current stock market losses are based simply on the fact that global demand is falling, and with it, earnings. As earnings fall, so does the value of companies. If China ceases to be a viable market, the current market weakness would be accelerated. As bad as it's likely to get, it will be bad times rather than the end of time. Inside China it will be the end of times. It will be a Chinese Great Depression that might result in great social unrest.

China has been growing as supposedly double digit gains, but as Stockman points out, GDP numbers include debt. Increasing national debt increases GDP, but at some point even the central bank runs out of money and the debt comes due. When the Chinese debt comes due you'll see huge unemployment in China, vast devaluation of the RMB, and massive internal deflation.

The article by Friedman is completely separate but complementary. The US's position in the world is based on the current world order. There are good reasons to think that the old world order is ending. Friedman asks what happens to us when our firmly held assumptions are no longer true.

I am not yet sure what this means for an investment strategy for North American and European investors and where is the safe harbor for the coming storm. I am still thinking on that and will report when I have a more complete evaluation. As of now, my thoughts are dollars under the mattress and European index funds. The dollar is very strong against the Euro and European markets are depressed. As they rebound the Euro will increase in value, giving an American investor a double whammy.

Tabs is correct.

The problem is there has been no real economic recovery since 2008.

We've basically treaded water by using constant "stimulus" zero percent interest rates and tons and tons of debt (soon to be an unfathomable $20 trillion).

We've therefore paid a lot (which will come back to roost), for very little in return. No real economic growth, labor participation at a decades low, average american makes less than $30K/yr (decades low).

With a worldwide recession in the works, we have few "tricks" left. Can't put interest below zero, and there's little "stimulus" left. It's all been borrowed against

That is phony baloney growth though, not unlike "the recovery" the US has undergone in the last half dozen years. I do expect it to be pretty bad when that house of cards blows over. They will just bury a lot of their problems though, or throw them down a well.

Ted is not so much a cheerleader of the armageddon as painfully honest and surprisingly erudite when it comes to guns and macroeconomics. He is a realist, not a pessimist. He just comes across as depressing because it is fixing to get ugly up in here because he is an Oracle of Truth, rather than a purveyor of happy and shiny.

If you think about it, or even if you don't, he is pretty insightful for a guy with 947 pairs of shoes and a penchant for treating the English language like Jack Bauer would treat a guy with a copy of "IED Manufacturing for Dummies" in his back pocket.

The monkeys running the circus are on 2, 4 or 6 year schedules, not all that consistent with the long term planning you need to run an economy. That is but one piece in the puzzle. People are accustomed to the crackrock that cheap, easy money is. There are a lot of addicts, and it will be a rough trip when the crack runs out. China going teats up is going to create an economic tsunami that it will be tough to weather, no matter how well and diversely you arrange your assets.


It won't be long until the Illuminati pull the trigger and 90% of us are soylent green anyway, or that is how it looks to be shaping up at least.

The US Dollar has been the go to currency for the last 70 years and should continue for the next 70 years. The Euro has tried to take the title, but no dice. Ever since capitalist societies have gone away from the gold standard (Sold off all of their Gold), the USD is King. If the USD fails to be the go to currency (virtually impossible IMHO) there will be BIG Trouble. Printing Money is a bad idea though.

https://www.washingtonpost.com/news/wonk/wp/2015/03/24/how-china-used-more-cement-in-3-years-than-the-u-s-did-in-the-entire-20th-century/
-Could be a major population shift from rural to urban.
-Could also be a sign of internal political upheaval.

Europe is dealing with immigrants and their threat to established unions and lifestyle.
-Could also be trouble for them there.

One huge reason China is modernising so rapidly is that they have successfully controlled their population growth with their one-child policy. This facilitates 2 parents working and compliments their industrialisation. It also means there are fewer people to share the increasing wealth between, so families become more prosperous.

This is an amazing turn around in 1or 2 generations. This new prosperity is containing political upheaval in China as people find themselves moving upwards.

The opposite is happening in Europe and US - unprecedented people smuggling into the wealthy countries from the 3rd world is putting pressure on the established population and will lead to political 'changes' in the first world - before this happens in China.