Volatility
Volatility is an important sign. When an otherwise peaceful satisfying relationship becomes volatile, separation is not far down the road. When your normally calm US Postal worker becomes antagonistic and starts ranting, it may be best to wear your bullet-proof vest and six-shooter when you drop off your Christmas cards. And when your stocks have tripled or quintupled over the last 3-5 years and your favorite equity index starts fluctuating more than a teenage girl's emotions, you had better watch out because a big change is coming.
Looking over the rubble of today's markets, you would think that the damage has been done and that as it has proven invariably smart over the last 25 years to "buy on the dips", there is a feeling, a sense, a palpable malaise when looking ahead. Things are going pretty well, but...something just doesn't feel right. Of course, to those of us who haven't mortgaged ourselves to the hilt and bought RV's, SUV's and HDV's (High Definition Video) things have not felt right for the last 10 years or so (with some brief interruptions). The terrorists didn't start hating us in 2001. That has been growing for the last 50 years or more most rapidly in the last 25. The French have not disdained us just since Jacques Chirac was in power, but more likely since DeGaulle. Oil has not only been getting more expensive in the last 10 years but for most of the post WWII era as our tin-hat dictators have been toppled one by one. So now we have had to resort to brute force (and somehow we wonder why oil has tripled since the Iraq war began. Anyone interested in a war with Iran? Put your hands down George and Dick!)
But possibly we are just now returning to a more normative period. Where people have to make down payments in order to buy houses. Where responsible world leaders don't start wars without provocation. Where countries who print their currency as if there were a shortage of green paper in the world see it value plummet? Where debtor nations who spend 5, 6, 7 or 8% more than they earn have to start and pay it back. Or else. The cracks have appeared. In the US military. In the US housing market. In the US financial system. In the US Dollar!
So what is this "more normal" world going to look like. It is hard to say, but it will not be as "pretty" (or at least as well made up) as today. Stocks will be lower. Maybe 10% lower, but probably closer to 50% lower. House prices will be lower; maybe 5% lower, but probably 25% lower. The yen will be higher. Maybe 10% higher, but probably 50% higher. Interest rates will be lower; maybe 0.5% lower on the short end and the same amount on the long end, but possibly as much as 1.5% lower on both! The Chinese will be hurt, but they have built enough capacity to work their way out of it (not without going through some serious and possibly deadly changes first). The Japanese will hurt too! But they have been hurting for the last 17 years and have gotten used to it. Besides they are actually loaded and could pay off their debts and start over again and they probably will! Probably in partnership (arms length partners) with China! Russia will hurt if and when the price of oil drops, but it is unlikely that the price of oil is going to drop enough and besides their population likely to drop as fast as the price of oil could for the foreseeable future. So they will have a smaller pie, but will need fewer slices. The Middle East will suffer but they have oil like the Russians and Islam, unlike the Russians. The Africans will be hurt, but nobody cares. But the Americans will have to figure out a way to pay back the TRILLIONS that we owe, not only to ourselves, but to the Chinese, Japanese, Russian, Middle East, etc... The only way that we can pay is: to not pay! Someway, in some form, we are going to default. US mortgage default, US Dollar default, US Treasury default. Oh, it may not be called that. It may be called "exchange controls", "Dollar devaluation", "Treasury reorganization", but it will be a de facto default. And then the US will be just like any of the other nations out there. With a currency built on virtually nothing. With an army stretched to almost nothing. And we will have to decide if we are Americans, or African-Americans, Mexican-Americans, or whatever hyphenated description you like. And we will have to decide if the government is going to give everybody free Lipitor, even if they are not citizens. And we will have to decide if we are going to war without being attacked. But one thing is for sure, wherever we end up and however we get there it won't be pretty and it will be volatile.
So for now, sell stocks, buy bonds, buy Yen.
And later, sell every piece of paper you have that is not backed by a mountain of hard, income-producing assets and buy gold.
And when we come out the other side of this mess and you still have something intact to call your own, get down on your knees and thank God for his mercy and give a helping hand to your brother.
Until then, bar the door and make sure that you have plenty of ammunition!
Looking over the rubble of today's markets, you would think that the damage has been done and that as it has proven invariably smart over the last 25 years to "buy on the dips", there is a feeling, a sense, a palpable malaise when looking ahead. Things are going pretty well, but...something just doesn't feel right. Of course, to those of us who haven't mortgaged ourselves to the hilt and bought RV's, SUV's and HDV's (High Definition Video) things have not felt right for the last 10 years or so (with some brief interruptions). The terrorists didn't start hating us in 2001. That has been growing for the last 50 years or more most rapidly in the last 25. The French have not disdained us just since Jacques Chirac was in power, but more likely since DeGaulle. Oil has not only been getting more expensive in the last 10 years but for most of the post WWII era as our tin-hat dictators have been toppled one by one. So now we have had to resort to brute force (and somehow we wonder why oil has tripled since the Iraq war began. Anyone interested in a war with Iran? Put your hands down George and Dick!)
But possibly we are just now returning to a more normative period. Where people have to make down payments in order to buy houses. Where responsible world leaders don't start wars without provocation. Where countries who print their currency as if there were a shortage of green paper in the world see it value plummet? Where debtor nations who spend 5, 6, 7 or 8% more than they earn have to start and pay it back. Or else. The cracks have appeared. In the US military. In the US housing market. In the US financial system. In the US Dollar!
So what is this "more normal" world going to look like. It is hard to say, but it will not be as "pretty" (or at least as well made up) as today. Stocks will be lower. Maybe 10% lower, but probably closer to 50% lower. House prices will be lower; maybe 5% lower, but probably 25% lower. The yen will be higher. Maybe 10% higher, but probably 50% higher. Interest rates will be lower; maybe 0.5% lower on the short end and the same amount on the long end, but possibly as much as 1.5% lower on both! The Chinese will be hurt, but they have built enough capacity to work their way out of it (not without going through some serious and possibly deadly changes first). The Japanese will hurt too! But they have been hurting for the last 17 years and have gotten used to it. Besides they are actually loaded and could pay off their debts and start over again and they probably will! Probably in partnership (arms length partners) with China! Russia will hurt if and when the price of oil drops, but it is unlikely that the price of oil is going to drop enough and besides their population likely to drop as fast as the price of oil could for the foreseeable future. So they will have a smaller pie, but will need fewer slices. The Middle East will suffer but they have oil like the Russians and Islam, unlike the Russians. The Africans will be hurt, but nobody cares. But the Americans will have to figure out a way to pay back the TRILLIONS that we owe, not only to ourselves, but to the Chinese, Japanese, Russian, Middle East, etc... The only way that we can pay is: to not pay! Someway, in some form, we are going to default. US mortgage default, US Dollar default, US Treasury default. Oh, it may not be called that. It may be called "exchange controls", "Dollar devaluation", "Treasury reorganization", but it will be a de facto default. And then the US will be just like any of the other nations out there. With a currency built on virtually nothing. With an army stretched to almost nothing. And we will have to decide if we are Americans, or African-Americans, Mexican-Americans, or whatever hyphenated description you like. And we will have to decide if the government is going to give everybody free Lipitor, even if they are not citizens. And we will have to decide if we are going to war without being attacked. But one thing is for sure, wherever we end up and however we get there it won't be pretty and it will be volatile.
So for now, sell stocks, buy bonds, buy Yen.
And later, sell every piece of paper you have that is not backed by a mountain of hard, income-producing assets and buy gold.
And when we come out the other side of this mess and you still have something intact to call your own, get down on your knees and thank God for his mercy and give a helping hand to your brother.
Until then, bar the door and make sure that you have plenty of ammunition!
posted by Matt Butler at 6:54 PM
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