According to trend researchers. the human evolution moves in cycles; some are short, about 10 years, others are a bit longer. about 50 – 60 years. But the most fundamental changes in life on earth comes along about every 500 years or so. These changes are often dramatic and violent. What we are experiencing right now may very well be one of the really big turning points in the history of mankind.
“But, remember, a global paradigm shift implies a significant change in opportunities, and not just risks.”
Mohamed A. El-Erian
Charting the megatrends
One of the most sound characteristics of the global crisis I’ve read in quite some time comes from Mohamad El-Erian, CEO of the worlds largest bond fund, PIMCO. El-Erian faces the reality with no fear, admitting that there is no way of predicting what will happen next and points to four crucial factors that you should be watching if you want to be able to adapt to a rapidly changing world.
“The sense of uncertainty prevailing in the West is palpable, and rightly so. People are worried about their futures, with a record number now fearing that their children may end up worse off than them. Unfortunately, things will become even more unsettling in the months ahead,” El-Erian writes.
Mohamed A. El-Erian is CEO and co-CIO of PIMCO, and author of the book “ When Markets Collide“.
The following commentary was first published as a part of Project Syndicate.
This version appeared at Al Jazeera a few days ago:
The United States is having difficulties returning its economy to the path of high growth and vigorous job creation.
Thousands of people have taken to the streets of US cities, and thousands of others in Europe, to demand a fairer system. In the euro zone, financial crises have forced out two governments, replacing elected representatives with appointed technocrats charged with restoring order.
Concern about the institutional integrity of the euro zone – key to the architecture of modern Europe – continues to mount.
This uncertainty extends beyond countries and regions.
Those looking around the next corner also worry about the stability of an international economic order in which the difficulties faced by the system’s Western core are gradually eroding global public goods.
It is no coincidence that all of this is happening simultaneously.
Each development, and certainly their occurrence in tandem, points to the historic paradigm changes shaping today’s global economy – and to the anxiety that comes with the loss of once-dependable anchors, be they economic and financial or social and political.
Restoring these anchors will take time.
There is no game plan as of now, and historic precedents are only partly illuminating. Yet two things seem clear: Different countries are opting, either by choice or necessity, for different outcomes, and the global system as a whole faces challenges in reconciling them.
Some changes will be evolutionary, taking many years to manifest themselves; others will be sudden and more disruptive.
Yet, as complex as all of this sounds – and, by definition, paradigm changes are complicated affairs that, fortunately, seldom occur – a simple analytical framework may help shed light on what to look for, what to expect and where, and how best to adapt.
The framework relies on an often-used analytical shortcut: identifying a limited set of explanatory variables in what statisticians call “a reduced-form equation”.
The objective is not to account for everything, but rather to pinpoint a small number of variables that can explain key factors, albeit neither perfectly nor fully.
Using this approach, it is possible to argue that the future of many Western economies, and that of the global economy, will be shaped by their ability to navigate four inter-related financial, economic, social, and political dynamics.
De-leveraging
The first relates to balance sheets.
Many Western economies must deal with the nasty legacy of years of excessive borrowing and leveraging; those, like Germany, that do not have this problem are linked to neighbours that do. Faced with this reality, different countries will opt for different de-leveraging options. Indeed, differentiation is already evident.
Some, like Greece, face such a parlous situation that it is difficult to imagine any outcome other than a traumatic default and further economic turmoil; and Greece is unlikely to be the only Western economy forced to restructure its debt. Others, like the United Kingdom, have moved quickly to take firmer control of their destiny, though their austerity drives will inevitably involve considerable sacrifices.
A third group, led by the US, has not yet made an explicit de-leveraging choice. Having more time, they are using the less visible, and much more gradual, path of “financial repression”, under which interest rates are forced down so that creditors, including those on modest fixed incomes, subsidise debtors.
Economic Growth
De-leveraging is closely linked to the second variable – namely, economic growth.
Simply put, the stronger a country’s ability to generate additional national income, the greater its ability to meet debt obligations while maintaining and enhancing citizens’ standards of living.
Many countries, including Italy and Spain, must overcome structural barriers to competitiveness, growth, and job creation through multi-year reforms of labour markets, pensions, housing, and economic governance. Some, like the US, can combine structural reforms with short-term demand stimulus. A few, led by Germany, are reaping the benefits of years of steadfast (and underappreciated) reforms.
But growth, while necessary, is insufficient by itself, given today’s high unemployment and the extent to which income and wealth inequalities have increased. Hence the third dynamic: the West is being challenged to deliver not just growth, but “inclusive growth”, which, most critically, involves greater “social justice”.
Social Justice
Indeed, there is a deep sense that capitalism in the West has become unfair. Certain players, led by big banks, extracted huge profits during the boom, and avoided the deep losses that they deserved during the bust.
Citizens no longer accept the argument that this unfortunate outcome reflects the banks’ special economic role. And why should they, given that record bailouts have not revived growth and employment?
Calls for a fairer system will not go away. If anything, they will spread and grow louder. The West has no choice but to strike a better balance – between capital and labour, between current and future generations, and between the financial sector and the real economy.
This leads to the final variable, the role of politicians and policymakers. It has become fashionable in both the US and Europe to point to a debilitating “lack of leadership”, which underscores the extent to which an inherently complex paradigm change is straining traditional mindsets, processes and governance systems.
Leadership
Unlike emerging economies, Western countries are not well-equipped to deal with structural and secular changes – and understandably so. After all, their histories – and certainly during what was mislabeled as the “Great Moderation” between 1980 and 2008 – have been predominantly cyclical. The longer they fail to adjust, the greater the risks.
Those on the receiving end of these four dynamics – the vast majority of us – need not be paralysed by uncertainty and anxiety. Instead, we can use this simple framework to monitor developments, learn from them, and adapt. Yes, there will still be volatility, unusual strains, and historically odd outcomes.
But, remember, a global paradigm shift implies a significant change in opportunities, and not just risks.
* * *
Well, it is of course important not to lose faith.
However, “De-leveraging,” “economic growth,” “social justice,” and “leadership” – right now the two first are anemic, the two others are more or less absent.
Not cause for the greatest optimism…
Recommended reading: “Endgame: The End of the Debt Supercycle and How It Changes Everything”
Related articles:
- The Anatomy of Global Economic Uncertainty (dinmerican.wordpress.com)
- See the financial crisis as a chess game with 4 pieces (flowingmotion.jojordan.org)
- The great de-leveraging (ftalphaville.ft.com)
- Europe’s Debt Crisis Spirals out of Control Europe is an accident waiting to happen (xkorpion.wordpress.com)
My Generation, Suckers!
Here’s the post that definitively woke me up this morning, accompanied with more news reports of more riots around the world in between the rock music playing on my favorite radio station. Mike Krieger at KAM PL is the author, and the article is published as a guest post at http://www.zerohedge.com. I’ve been posting similar commentaries myself over the last few years, but as usual I tend to get a little ahead of myself as everyone else is shaking their heads, singing the same old song; this time its different. But don’t think for a second that I feel any kind of “I-told-you-so” complacency. In fact my frustrations over politicians, journalists, economists and bankers have only turned into sadness.
“My generation is coming into its own and we don’t buy the bull shit of our parents’ generation. We don’t believe in Democrat or Republican. We don’t believe in the system itself. We will be the ones making the decisions going forward. We will default on the astronomic promises our parents made to themselves. We will create an entirely new monetary and financial system.”
Mike Krieger
“When first I mentioned the food riots in Tunisia and Algeria in my note two weeks ago the former authoritarian leader Zine al-Abidine Ben Ali had yet to flee to Saudi Arabia with much of his nation’s gold. What I find so amazing about this whole situation is why someone in their right mind would take the time to take some shiny little element that is in a bubble and that you can’t eat in the chaos surrounding one’s escape to another nation. Surely he has hidden foreign bank accounts and since gold is just another “fiat” currency according to a Wall Street strategist, why bother?”
Back to the food situation. When I say that we are in Phase Two I am actually not referring to the simple fact that a leader with a 23 year rule under his belt was deposed in weeks seemingly out of nowhere, I am referring to the actions that are being taken and will be taken all over the world in response.
As I have said time and time again, government’s today throughout the world could care less about their citizens. When they show signs of caring it is merely to satiate the people back to sleep so that they can stay in control. The leaders of governments throughout the world today consist of the worst humanity has to offer.
The most egomaniacal, narcissistic specimens on the planet (with some exceptions of course, Ron Paul for one). They care about power and maintaining it. So what does this have to do with food? A lot. I have stated in the past that we are in revolutionary times. The system that has existed for most of our lives (all of my life) is crumbling under its own weight of insanity, immorality and fraud.
The last ditch effort by the global elites has been to flood the world with money and make sure nothing they are invested in ever fails or defaults. This bought them a little time and their hope was that rising asset prices would boost confidence and lead to a recovery that could maybe keep this scam monetary system running for another decade or two.
The problem with this strategy is that we are in the Fourth Turning.
My generation is coming into its own and we don’t buy the bull shit of our parents’ generation. We don’t believe in Democrat or Republican. We don’t believe in the system itself. We will be the ones making the decisions going forward. We will default on the astronomic promises our parents made to themselves. We will create an entirely new monetary and financial system. Real free-market capitalism will flourish, not this socialism for the rich garbage Obama loves so much. We will focus on doing good while doing well. Not because the government forces us to, rather because we are witness to and victims of this sick, twisted creation of our parents generation that celebrates total greed without the slightest concern of the consequences to others.
With this as a backdrop, the leaders of all nations are scrambling to somehow survive in their positions through this time period. What is happening across the emerging world now is countries that had increased prices for food and energy are reversing policy. Countries such as Saudi Arabia are bidding for world grain supplies.
Think about this for a minute: What this means is that what is being employed around the world at a time of global crop failures is essentially price controls. What happens when you have price controls? No elasticity of demand. What does that lead to? Even worse supply/demand imbalances and ultimately food shortages and everything goes to the black market and farmers stop planting as much.
This will also affect oil prices and they should move substantially higher. While people still quote WTI as the oil price and claim it is down, this is total and complete nonsense. Nobody pays WTI prices. Brent is $98/b and Asia Tapis is $101.50/b. Anyone that is telling you oil prices are moving lower are either lying or don’t know what they are talking about.
For example while WTI is down 7% from recent highs, gasoline is down only 4% and heating oil is at the highs. Do you pay WTI or do you buy gasoline?
There is also this idea that OPEC is going to come out and save the world by boosting production. Good luck with that.
First of all, OPEC’s true spare capacity number is highly debatable and I am in the camp of those that thinks they do not have control over the market at this point. Banana Ben Bernanke does.
Secondly and most importantly these Arab nations are short food and we are in a food crisis. They are also amongst the most vulnerable governments to overthrow. You think for a second that they will crash oil as food prices are soaring? Oil is their currency. For what it is worth I think many of these regimes will be history within a year. Then the Western governments will fall one by one.
This is the Fourth Turning. There is no point trying to stop it, the only thing you can do is prepare. There is precious little time left for that.
US Treasury Bond Holders Will Never Be Paid
Remember the old saying, “if you don’t know who the sucker is in the market, you are the sucker.” Well ladies and gentlemen if you own U.S. treasury bond you are the sucker.
There is one way these things will be paid back. With completely worthless pieces of paper, OR not paid back at all. The one thing linearly thinking investors are not appreciating right now is that there is a gigantic awakening occurring in the United States that will develop into a successful and peaceful revolution.
The new leaders that will emerge will consider this debt illegitimate as I do personally. It will not be paid. Think it can’t happen? Watch.
Meanwhile, looking at the chart of long-term treasury yields what we see is a coiled pattern where rates have been in a tight range ever since breaking to the upside in early December. I think these rates are about to break hard in one direction and I think that direction is higher.
When I looked at the commentary from the Fed yesterday and I saw this line “expectations have remained stable, and measures of underlying inflation have been trending downward,” all I could think was if I was a bond investor I would just say “alright I have had ENOUGH.” I think that some of the biggest moves ever in the history of financial markets could be coming within the next 1-2 months. I would focus on treasuries and precious metals.
Silver Disobedience
While the 20th century was a brutal and violent one, some amazing things happened. Two prophets, Martin Luther King Jr. and Mohandas Gandhi we able to usher in a period of tremendous social justice for their respective causes through non-violent means.
We are now entering a time where the people (completely and totally sold out by their leaders and masters at the banks) must exercise civil disobedience and non compliance with an evil system. Fortunately for us, the most effective and powerful means of this I can think of is completley legal and consists of buying physical silver and taking possession.
Although the comex paper silver price is showing a drop, this is not reflected in the physical market which is tight as a drum.
Many major dealers are sold out of product all over the world and the U.S. Mint recently stated that they sold 4.7 million silver eagles in January alone, a new record and the month isn’t even over.
If you do not like the way the banks and politicians are robbing you blind in broad daylight buy physical silver and take delivery. I think it is abundantly clear that the raid on the comex silver market is a desperate attempt to shake out some supplies since the actually physical market is being depleted rapidly.
The Fed funds rate is 0-25 basis points. The two-year treasury yields 0.60%. If the Fed raised rates even to 0.50% with the two-year note at 0.60% total and complete chaos would ensue and the government wouldn’t be able to deal with the rising costs of debt service. It is just not going to happen. They will print and print until the whole corrupt house of cards crumbles to dust.
V for Victory
We are in revolutionary times. The new generation will not accept the Federal Reserve. We will not accept feudalism by an oligarchy of banking criminals. We will not forget the Constitution. We will not accept SDRs or any global fiat currency. We will not accept global government or “governance” (sounds so much better doesn’t it).
As I went to grab dinner last night, I noticed V for victory posters plastered all around downtown .
Go Boulder we are winning the infowar!
Turn off the tv and think for yourself.
By Mike Krieger
KAM PL
(h/t: www.zerohedge.com)
Well, if there’s gonna be another revolution, I hope it will be a green one.
(All graphics in the post are available for sale at www.urbanmist.com)
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