SA2
Generations
and the Dow
I was asked this question and it’s a great
question. Here’s the answer.
“Do you see 9/11 as a Catalyst? Or is it a Spark
that doesn't catch, e.g. the Palmer Raids in the early 1920s? The market dropped
and people freaked - but later went on into one monster blow off. As you know,
we are a few years early for the S&H Winter to hit full-force - they
typically quote 2005-2013."
I do think that 9/11 was much like the palmer raids
and could easily be labeled a spark that didn't catch. I basically think that a
catalyst and a spark that doesn't catch are very similar. Whatever 9/11
is going to be categorized as, I would say that the major impact it had is that the
Millennial generation stopped being born shortly after 9/11. The new Artist
generation, which I label the 9/11 babies, began being born shortly after.
The largest piece of evidence I can offer for this
is the study that was done on the women in and around lower Manhattan that
stated the babies they had, that were conceived after 9/11, are smaller in
weight compared to another sample they used with babies born prior to 9/11. They
think it's because of the debris in the air. Maybe. They don't know.
Furthermore, the shift in the American psyche was
tectonic. This split is usually initiated at the beginning of a Winter crisis.
It seems to have manifested itself about six-months after 9/11. This was due to
the information that circulated on the Internet concerning every 9/11 theory,
whether or not any of it is misinformation or not, it did the job of dividing
the country about the government, and IRAQ solidified the division.
As far as the market drop and the comeback of the
market, I'd just like to pass along the following information. I stand in the Ten-Year
Treasury-Note pit in the Chicago Board of Trade. The name of the room I trade in
is the Financial Room. We trade the commodities that represent most of our national debt.
When the gov., sells debt, the buyers of that debt have to hedge somewhere. They hedge with us.
This room is the center of the universe as far as
our national debt is concerned and it will become increasingly more visible as
the crisis approaches. (If you’ve ever seen CNBC during the day, they cut to
the CBOT floor with a reporter named, Rick Santelli. Behind Rick, you can see a
trading floor; that’s the Financial Floor of the CBOT.)
The point is this; the market (the DOW) is behaving
like the market of the 20s. However, I noticed something recently. When I
advance the chart of the twenties in time, by 14 months, the similarities of
this latest rally we are having (August 2003) are startling. 9/11 may have
escalated the pace of the impending Spark. (The Spark wasn’t expected until
2009) It may have advanced to 2007.
To explain the above paragraph further, line
up the Dow adjusted for inflation, beginning at 9/17/2001 (when the market reopened
after 9/11/2001) and line it up with 12/07/1924. It’s very similar. 12/07/24 was
the beginning of the last leg of the rally that started in 1901, just like the
modern day rally began in 1981. The market characteristics are very similar, and not just
the actual numbers but also in society.
This theory will be confirmed if the DOW keeps advancing over the next few
months. If the DOW breaks below 9000, this theory is
shot.
Remember, the rally from late 1924 up until the
1929 crash was huge. For many other reasons, like invention
cycles and real estate cycles, we are mimicking the 1901-1929 cycle very
closely. This all translates to a huge rally, before the crash. If the rally
continues over the next few months and we break out to 10k-10.5k, we will head
straight up to 18k over the next 20 months. We’ll peak at 35k sometime in mid
to early 2008.
If the above theory fizzles, over the coming months,
we’ll start the last leg of the rally in Nov 2004 and continue to 35k by mid
2008, with the break starting in Oct ‘09.
The DOW will fall to 17k
from Sep ‘09 through 2014. We may even head back to 10k. But that’s it. Then
we begin a very slow rally over the course of the following 9 years.
UPDATE March
13th, 2006
I was going back over the article,
above, today and thought it deserved an update. From March 2006's point of view,
I'm still sticking to DOW 35k. Several things have changed as far as the Spark
though. Since the DOW hasn't started the major ascent, that pushes the Spark
back to the 2009 area.
There's a board I post on at
urbansurvival.com and there's a particular posting here:
http://urbansurvival.com/discus/messages/14/221.html?1090420627
That posting is my buy signal, in
May 2004. Worst case scenario you were in at 10,200. I'm still very confident we
will rally to 35k. My stop price is 8,200, in the DOW. If it hits that, I'm out
and I'll re-think everything.
In the next week or so I'll be
putting out a more detailed update about what I think the future holds but not
much has changed as far as my DOW 35k prediction. We're still headed there.
Take care,
Jim
SA3
Invention Cycles and Generational Theory
I'm
always trying to predict the future. The two best indicators I've found over the
last 20 years have to do with society, not economics.
My
studies have led me to three authors. Two of the authors write together,
Strauss
and Howe. Both are generational theorists. HS Dent is an economic theorist, who
basically says spending waves lead the market.
The
cycles that these three men have written about are undeniable. They happen with quite
regularity. Lets take a look at our current situation, August 2003, and see what
these authors have to say. Strauss
and Howe are predicting a ‘4th
Turning’. A 4th Turning can also be described simply as ‘Winter’ (as opposed to
spring, summer etc.)
Winter
is not good for society. It's crisis time. The kicker is, that their generational
theory names four basic generations that are reborn every 80 years or so. When
the
4 generations line up in a certain age order, all hell brakes loose. Those 4
generations just lined up again, this year.[2003]
About
5 to 6 years after they line up, the spark is lit. That would put us at 2008/09.
This crisis would be the
7th in Anglo-American history beginning with
The War of the Roses (1459-1487). The last crisis was 1929-1945.
HS Dent writes that the peak spending years of the
boomers (archetype is Idealist)
and first wave Gen-Xers peaks in 2008.
(Gen-Xer's archetype is Nomad. Strauss & Howe also call this generation the
13ers)
HS Dent
also writes about invention cycles. He states that we are currently
in a 500-year cycle (printing press) and 80-year cycle (auto). In modern times,
the transistor is the 500 year cycle and the Computer is the 80 year
cycle. What’s important is this; the computer and the Internet reach 90% US
household penetration is 2008. 90% penetration is never a good thing for the
economy. Last major invention to do this was the auto. It reached 90% penetration
in 1928. (Cell phones and broadband also hit 90% in 2008).
I
see the catastrophe happening in Oct of 2009. I see two scenarios. First, there
will be a stock break (DJIA) from 35k to 17k. It’ll happen much like 1929.
Back then it happened over a 10-week period, September 10th to mid-November.
The FED will encourage the US Government to devalue the dollar, for a number of
reason’s. [I am not going to go into them here.]
Second
scenario is the Muslim oil countries pull the trigger and switch from the US
Dollar to the Euro, for oil payments. That would bring us down overnight and the
economic crisis would me much more severe than a stock crash.
Please
visit HS Dent at www.hsdent.com and Strauss
and Howe at www.lifecourse.com and www.fourthturning.com
SA6
I
am standing on the edge of an abyss. I am staring out over it and the deep pit
that separates what could be and what is. On one side stands a future that is
orderly and the other, chaos. On one side stands David and one side Goliath.
Many,
such as me, have lived on this edge for quite a long time. Sometimes falling and
barely catching ourselves by the slimmest of edges, then clawing our way back. I
am not on the edge of innovation nor Ekpyrosis (the death of the old order and
the birth of the new).
I
am on the edge that has provided for many others. These others have benefited a
great deal, although immeasurably, from my being on the edge. However, these
others are in for the shock of a lifetime as the past week has proven.
In
this past week, the liquidity in the ten-years and the bonds all but
disappeared.
[2002]
The
professional local is the key to deep liquid markets and the professional local
barely exists anymore. If something is not done to alleviate this problem, the
financial derivatives market will collapse and with it the US economy. The
Mother of all devaluation’s is just sitting there; waiting to rear it’s ugly
head. The slow death of the local trader at the Chicago Board of Trade is the
first step towards the vanishing of liquidity. Take away the liquidity and the
economy will collapse.
The
local trader in the futures market provides a service. They are taking the
opposite side of a trade in exchange for the edge. The local takes the other
side of a customer order and is usually out of that trade in seconds. The local
doesn’t trade long-term; he is flat, in most cases by the closing bell. He or
she accepts the risk of blowing out everyday. They accept the physical
punishment the trading pits dish out. They also accept trading out in the open,
as in open-out-cry. If he or she is attempting to do anything under-handed they
will be reprimanded in any of several ways. Perhaps through the CFTC, the CBOT
or at the hands of their pit-trading colleagues.
By
definition, the local is a professional trader. They do not look for a certain
percentage return on their money. They expect to make a living trading. The
percentage game is left up to the customer trading for hedge funds, etc.
The
current trading system in the CBOT is breaking down. Yet, most people just see
the internal trading volume going up, with little attention being given to the
liquidity. Why isn’t the question being asked, “Who is providing that
liquidity? Can they provide liquidity in a crisis, as they did in 1987?”
Liquidity
is crucial and must remain for the long-term. The trading in the financials this
prior week was just a glimpse into what lies ahead. The market volatility had
nothing to do with active markets or news driven markets. The volatility was
there because the professional local was not
In
the 23-years that I have been on the financial floor and watched the financial
markets, I have never seen this type of market. No one has. This is because the
market has never been structured as it is now.
The
oldest exchange in the United States calls a local by a different name, a
specialist. On that exchange the local does have several different jobs, yet the
theme of an orderly market is the same.
The
Philadelphia Stock Exchange defines a specialist this way. “Specialist:
A participant of the exchange who trades for their firm's or their own account
and is responsible for maintaining a fair and orderly market in whatever issue
has been allocated to them by providing bid and ask markets. They are also
responsible for orders entrusted to them for execution.”
Personally,
I don’t exactly agree with the set-up of the NYSE and the 443 specialists
working for 7 firms, but that’s not the point. The point is the role that they
provide in liquidity and orderly markets.
As
described by the New York Stock Exchange.
“[A]
Specialist's responsibility: Specialists must maintain a fair,
competitive, orderly and efficient market. This means that all customer orders
have an equal opportunity to interact and receive the best price. It also means
that once auction trading begins, a customer should be able to buy or sell a
reasonable amount of stock close to the last sale. Therefore, a specialist works
to avoid large or unreasonable price variations between consecutive sales. The
results: almost 98% of all trades take place at 1/8th point or less from the
last sale. The auction takes place at the specialist's post where the stocks are
traded. This single location -- or point of sale -- combined with rules of
trading, guarantees maximum order exposure, interaction and market liquidity.”
The
CME writes. “Locals: Exchange members who trade for their own account
and/or fill orders for customers and whose activities provide market
liquidity.”
The
CBOT’s definition of a local is: Not available. We do not have a definition in
our glossary. Kinda makes you think.
With
that omission aside, the other exchanges I quoted from are saying the same
thing. The local provides liquidity so the markets stay orderly. I contend that
the bonds and 10-year notes on the financial floor of the CBOT are anything but
orderly and the liquidity is now becoming questionable. The main ingredient is
gone for the first time since 1848.
What
does it cost the firms to have locals in the pits? Why do these firms want the
locals and brokers out of the pits?
We
know that they have screamed about the cost of doing business on the floor. What
are the costs anyways? Are they ruining the likes of Morgan Stanley, Citi, UBS,
etc? A peak at their annual reports says that isn’t the case. Well, then what
is the problem?
If
I worked at one of the brokerage houses I’d be a bit worried. Everything has
worked fine until now. Profits rose and business increased. This has not stopped
them from trying to secure the order flow by any means. This has not stopped
them from taking the business away from the independent traders.
If
I worked at one of the brokerage houses I’d be sounding the fire alarm. I’d
say, “We are all in severe trouble and I think we are the ones creating the
problem.”
Shall
we take a peak into their balance sheets and see what is happening? Are the
independent traders ruining their businesses? No, they are not. They are/where
providing a very valuable service.
The
concentration of derivatives among the big banks, according to the Office of the
Comptroller of the Currency, reported that the total value of derivatives held
by U.S. commercial banks rose $5.3 trillion to $61.4 trillion in the first
quarter from the fourth quarter's $56.1 trillion. The OCC noted that in the
first quarter, the seven largest U.S. banks held 96% of outstanding derivatives
contracts by volume.
That’s
in this country.
The
global over-the-counter (OTC) derivatives market has grown to nearly $142
trillion according to the Bank for International Settlements.
Now
what is the cost of hedging in a deep-liquid market? Or, for that matter, the
cost of just outright trading. I’ll site the Mann Study.
“Sources
of Market Making Profits: Man Does Not Live by Spread Alone”. By, Steven
Manaster, Virginia Tech and Steven C. Mann, Texas Christian University February
1999.
“Using
directly observed trade direction we find that customers’ total trading costs
were only $100 million: $38 million in execution costs and $62 million in timing
losses.
Market
Makers are the Informed Traders.
Contrary
to most theoretical predictions, we find that market makers profit both from
timing and execution. This finding is consistent and conclusive across all pits
in our sample and for nearly every individual trader. For the first six months
of 1992 our data show that Chicago Mercantile Exchange market makers’ trading
revenues totaled $130 million. Of the total revenue, only $45 million (34
percent) was due to execution profits. These execution profits occurred within
one minute of trade execution. The remaining $85 million was due to favorable
timing. From this evidence we conclude that market makers have better
information regarding short-term price movements than other market participants.
These
[two] empirical observations demonstrate that futures market floor traders can
have both an execution advantage and a timing advantage relative to other market
participants. The data show that they are willing to reduce, or eliminate, the
execution advantage to exploit the information advantage.”
[End
paper.]
Ya’ll
better read that paper closely. It is stating that the FLOOR local is better
informed. They can and do make money, while providing the MUCH NEEDED LIQUIDITY.
That’s why the locals kept coming to the markets in the 80’s and 90’s.
This
thing we call the Futures Market is really a delicate eco-system that needs
every part of the system to work. Take away one aspect and it all falls apart.
It
is impossible to create a whole new local market by inducting new blood, tossing
them in front of a screen, placing a few commodity books in their hands and
holding weekly strategy meetings and then call them locals. They are not locals,
they are day traders, and day trading does not work.
The
new breed of video trader will not be there when the market is trying to absorb
a bank or a brokerage house’s orders when they are trying to hedge TRILLIONS
of dollars in derivatives. Sure they’ll be there when the markets are
rotating. But where were they last week when everyone suddenly figured out that
the Fed had to sell 120 billion in notes and bonds over the next two quarters?
They ran for the hills and customers could not get orders filled. Ask Harold
Lavender what happened on the close (Thursday) with a spread order in the
Ten-Years. This is just the beginning, if something isn’t done.
The
powers that be, of which I am not one, had best wake up to a coming disaster.
That disaster can be averted if they act now by reinstating the local trader on
the floor of the financial room. If they don’t, there will be no liquidity to
help the 142 trillion dollar derivative market when they need to hedge. And they
will need to hedge, in a big way.
My
question to you is, how are they going to do that? Please do not hand me the
BUND argument. “There’s plenty of liquidity in the BUND, it works fine!”
The bonds and notes that our government sells are not the German bund; they are
US bonds and notes. I’ve got news for you anyways the Germans have serious
problems.
Please
do not give me the S&P argument. “The S&P mini’s are doing
fine!" S&P’s are not bonds and notes. The banks will not be able to
hedge in that market when it is hitting the fan, so to speak.
Think
back to 1987 and read the countless number of reports out there that state how
our market saved the NYSE from a catastrophic melt down. This is just one
example.
Bite
the bullet now before we are in to deep to turn around. Take the bonds and the
notes off of the screen and replace them with a mini contract. This is a start.
There
are many more things that can be done. I will not list them here because most of
them have already been listed on the Member Net board.
Why
is it that everyone always waits for the crisis to come when there are so many
signs telling you to act preventatively? Take advantage of the greatest resource
since the invention of the printing press, start reading for yourself, and stop
the crisis before it happens. At least stop it from being catastrophic.
Lastly,
I did not write this paper to get into debates over details. This paper was
written to alert you of a problem. A problem that can be fixed. I do not wish to
engage in debates over non-relevant issues that simply deter from the coming
crisis. Said in a nutshell, after reading all that I have read over the last 2
years, nothing can convince me that the crisis isn’t coming so don’t waste
your time. Instead, read. Act.
References
“Sources
of Market Making Profits: Man Does Not Live by Spread Alone”.
Steven
Manaster, Virginia Tech and Steven C. Mann, Texas Christian University, February
1999. (Reprinted with permission)
http://www.phlx.com
http://www.nyse.com
http://www.cme.com
http://www.federalreserve.gov/boarddocs/rptcongress/
http://www.federalreserve.gov/boarddocs/RptCongress/annual02/ar02.pdf
SA7
Social
Movements and Secular Crisis
I
offer some insight into the world of social behavior as viewed through the works
of a Yale and Harvard grad., Neil Howe[i]
and William Strauss[ii].
I’ve
used their work for years for everything from marketing to predicting the
markets to assisting in understanding the U.S. from a sociological view.
I
offer this writing in hope that it will give you some peace while chaos swirls
amongst us. At the end of the article you’ll find a smattering of web
sites if you’d like to click around for some more information or perhaps buy
one of Strauss and Howe’s books.
Social
Movements and Secular Crisis
Strauss
and Howe write that there are two types of social movements, ‘Secular
crisis’[iii]
and ‘Spiritual awakenings’ [iv].
We are in a secular crisis now and that is the focus of this paper. Secular crisis
is defined as, “…when society focuses on reordering the outer world of
institutions and public behavior”.[v]
Pertaining to the frequency of social movements, “Social movements do not
arrive at random. For example, a secular crisis and a spiritual awakening never
occur back to back. Nor does half a century ever pass without a social movement
of either type. Instead, social movements arrive on a rather regular
schedule.”[vi]
A
social movement lasts about a decade. They arrive in time intervals roughly
separated by two phases of life (approximately 40 to 45 years), and they
alternate in type between secular and social. [vii]
(For further reading of the timing of social movements in non-traditional
societies like the U.S., read ‘Appendix A’, in “Generations”.)
What
makes 2003 so interesting is that we are coming to the end of the birthing of
the civic-minded Millennials (b.1981-2003) and the beginning of the birth of a
new generation of ‘Adapitives’. The new generation is very similar to the
‘Silent’ generation, b. 1925-1942, the ‘Progressive’ generation, b.
1843-1859, the ‘Compromise’ generation, b. 1767-1791 and the earliest
‘Adaptive’ generation in U.S. history, the ‘Enlightenment’ generation,
b. 1648-1673. [viii]
This
year, 2003, is of massive social transition.
To
understand why, we must first look at the five generational archetypes alive
today and what role they play.
In
2003, there are five generations alive. The Millennials, b. 1982-2003, the 13ers
(Gen-X), b. 1961-1980 [ix],
The Baby Boom, b. 1943-1960, the Silent, b. 1925-1942 the G.I., b. 1901-1924 and
finally the Lost, b. 1883-1900, (there were 68,000 people alive over the age of
100 in the 2000 census). [x]
Let’s
look at the collective ages of the generations alive today.
Millennials
– 0 to 20 (Youth)
Gen-x
– 21 to 42 (Rising)
Boomers
– 43 to 60 (Midlife)
Silent
– 61 to 78 (Elder)
GI
– 79 to 101
Lost
– 102 to eldest living.
Let’s
look at the definitions or the descriptors of the each of the five generations.
These definitions are in very broad terms. They try to define the role each
generation’s plays. Especially in the coming crisis.
Millennials
– Civic, Dominant. Central role is Dependence (growing, learning, accepting,
protection and nurture, avoiding, harm, acquiring, values).
Gen-x
– Reactive, Recessive. Central role is Activity (working, starting families,
and livelihoods, serving institutions, testing values).
Boomers
– Idealist Dominant. Central role is Leadership (parenting, teaching,
directing institutions, using values).
Silent
– Adaptive, Recessive. Central role is Stewardship (supervising, mentoring,
channeling endowments, passing on values.
GI
– Civic, Dominant. (Strauss and Howe do not elaborate on the ages reached
after 87.)
Lost
– Reactive, Recessive. (Strauss and Howe do not elaborate on the ages reached
after 87.)
Now
lets take a look at some other eras in American history that mirror the time we are
in at this moment, in 2003. Strauss and Howe define these eras as generational
constellations. 1924, 1855, 1766 and 1664.[xi]
(For further reading on the Civil War era check the footnote. That era
interrupted an entire generation. [xii])
“At
all four of these moments, Americans perceived their social life to be
fragmenting into centrifugal and uncontrollable wildness.” [xiii]
The
above statement refers to the years, 1924, 1855, 1766,1664 and now, 2003.
That quote was written in 1990. I find it amazingly accurate pertaining to the mood of the
nation at this precise moment in time. Furthermore, “Looking up, 13ers will
sense among the older generation an utter impracticality, an inability to see
the world for what it really is.” [xiv]
As
a 13er, I can state unequivocally, that statement is true. 13er’s love
reality. This is one reason reality shows are so big. There core viewer is the
13er’s (Gen-X). (To read more about Gen-X, see page 313 in Generations. It’s
very accurate)
This
brings us to 2003.
Strauss
and Howe wrote an article about the coming crisis that can be read here, http://www.lcourse.com/media/commentary/011029.html
. It was written about the events of September 11th, 2001. However, I
do not believe that was the crisis that Strauss and Howe were predicting in the
book Generations. In Generations, they state that the crisis should take place
somewhere closer to 2020.
Their
research shows, with great accuracy, that these things can be predicted. I think
this last year has told us that although 9/11 was tragic and changed ten’s of
thousands of people’s lives; it was not similar to the past crisis’ that
occurred at a secular crisis. (Please excuse the callous way this is written. I
mean no disrespect to those directly affected by 9/11.)
If
you read the web page I pasted in above, you will see that things are not
panning out the way ‘society is supposed to behave’ during a secular crisis.
As we were all gung ho to kick the Taliban’s butt after 9-11, the mood has
decisively changed as Iraq entered the picture. We are not coalescing like we
should. This tells me that, unfortunately, 9/11 was not the worst to come.
Moreover,
when I read the newspapers from 1923-24, I see similar things in society that
are taking place today. Issues like immigration (congress practically closed the
borders), and self-help (Carnegie and Peale) were at the forefront of society.
Society demanded we take away civil liberties, like booze. Today we are
taking away those liberties via the ‘Patriot Act’, etc. There were scandals
on Wall Street that took place in 1921-22. Over the last three years we have
also seen our stock market cycle mirror 1920, 21 and 22. The S&P rubber
& tire index fell about 70% and the S&P automobile index fell 70% (their
NASDAQ). General Motors fell 75% (our Microsoft, Cisco and Oracle) . (For more
on these statistics, visit www.hsdent.com )
“As
America moves into the ensuing crisis era, long-deferred secular problems can be
expected to reemerge with fearsome immediacy.” [xv]
Strauss
and Howe are speaking of the beginning of or the dawn of, the crisis era.
That’s now. This era is slated to last until 2025.
“Moving
further ahead, perhaps halfway into the crisis era, history suggests the mood
will calm somewhat.” [xvi]
This
speaks of the coming bull market. As we saw in 1924-1929. Things mellowed and
everything calmed down. Then it hit the fan, didn’t it.
The
point being, nuclear annihilation isn’t in America’s cards. Nor is a mass
germ terrorist attack. Can I state this as absolute? Of course not. I have
trouble predicting where the Bonds are going in the next five minutes. However I
do not stop trying to predict. It is in all of our nature. We are traders and
traders try to predict the future everyday.
Strauss
and Howe predict the coming crisis lasting from 2013 to 2024 in one case and in
another they predict it from 2020 to 2029 saying that in either case, the early
20’s will be tough. [xvii]
There’s
so much I left out. Trying to write a concise, short paper on a book and many
web sites is daunting. However, I think I’ve stated the point/theory. The
catastrophe is far off. Regardless of President Bush, Donald Rumsfeld, Colin
Powell, Osama Bin Laden, Saddam Hussein, Pakistan, India, North Korea or
‘insert-a-name that you feel is a threat’.
Further
Reading
http://www.hsdent.com/
http://www.fourthturning.com/html/about_neil_howe.html
http://www.fourthturning.com
[iii] “Generations-The
History of America’s Future 1584-2069” p.71
[viii] All names and years
referenced, “Generations” p.97 pullout.
[ix] If you’d like to know
why 1961 is the beginning of Gen-X and not 1965, then you must read the book
Generations. It’s to complicated to get into here. I would agree with Strauss
and Howe’s theory that the Baby Boom ended in 1960 and NOT 1964 as so many
have written before. I will say this though, I was born in 1961 and I have nothing in common with the
Boomers.
[xi] “Generations-The History
of America’s Future 1584-2069”, p.380
[xii] ibid., p.97. (pullout)
SA1
The
1920/21 Crash and The 2000/01 Crash; A Comparison
There
are several different reasons for the crash in 1920-21. If you were to look
in-depth into the crash of 1920-21,
you'd find dozens of explanations. All of them interconnect in someway. Most of
them support whatever theory the author is trying to get across.
I
was focusing on the invention cycle. The modern day white papers and books I
read all had one common element. The computer industry cycle and the auto cycle
are very similar. They didn't all agree on the years the cycles began and ended.
Or, they differed on this or that. What I wanted was, what was the main economic
impact that sent us DOW.
What
I found was land.
You
must look past the economic theorists to get to this conclusion also. The first
inkling I got, that it was about land was actually from a book I read, about
ten-years ago, by the John Robbins called “Diet for a New America”. (He’s
the 'Baskin-Robins' heir.
http://www.foodrevolution.org/market/products1.htm).
In
his book he identified what it took to keep the livestock in the US running as
an industry. The startling fact was, over 50% of the farming land is needed to
feed the livestock. I'm not talking about the place were they roam; I'm talking
about the food that needs to be raised to feed them. 50% of all farmland used to
grow agri-product are used to feed the animals. This astounded me.
However,
the fact I hadn’t looked at was the land that was freed up because of
the demise of the Horse. Millions and millions of acres where now open to
produce food. In and around 1920, 8,000,000 horses and mules were eliminated and
25,000,000 acres of land was freed. This is directly due to the auto.
Now,
let’s add that scenario (the demise of horses as transportation) to the severe
export problem the US was having due to the end of WWI and the economy cascaded
into a severe, but short lived crisis.
However,
there were other problems in the US. Many people think the only reason the US
economy hit the skids in 1920 was because WWI ended. What these people are
saying is the economy crashed because of the loss of the export business in the
US. True. Partially.
Demand
at home also dropped in a big way also. Human consumption fell-off here for a
variety of reason’s.
1) A sedimentary lifestyle began to set in, because of:
a. warmer buildings, were now becoming the norm due to advances in heating
b. the frickin Transcendental generation (idealists!!) began there cyclical
preaching about eating better. The consumption of cereal, meat, animal fat, and
other basic staples declined. Vitamin healthy foods were in. Veggies, Fruits and
Dairy. ALL OF THEM TAKE MUCH LESS FARM LAND TO PRODUCE.
c. reclamation projects decimated the farming industry also
d. increased yields were taking off due to biological and technological
advances
e. disease resistant food was increasing yield also
f. improvement in animal breeding
g. automated systems of fertilization and spraying
I
would also add that the invention of the auto had another important effect on
farms. That was the increased production of farm equipment because of the
advances made in the engine building process and actual manufacturing
productivity. (think assembly line)
In
1787, over 95% of the population was involved in producing food supplies for the
country. By 1940, it was less than 25%. Between 1850 and 1940 over 30 million
people were released from the agri business due to the advancement in farming
technology. But it showed it affects severely in 1920-21 because of the advances
made in the auto industry. From the quicker building of the equipment and more
specifically to the faster movement of food because of trucks.
Trucks
were the ‘last mile’ of delivery needed to enhance the productivity of the
food chain. There was now a way to get the food from the trains to the stores in
highly increased speed and efficiency. This overwhelmed the market with product
and agri prices crash, hence land prices crashed.
Here’s
what happened to the price of a few commodities:
-
December
1919, wheat was $2.15 bu.
-
December
1920, wheat was $1.44 bu.
-
Corn
went for $1.25 to .68
-
Cotton
from .36 to .14
Furthermore,
thanks to our wonderful government, many of the farmers were in debt in a big
way. The government encouraged them to buy more and more land from 1914 to 1918.
The only way the farmer could afford to buy the land was to borrow. Land prices
were going up rapidly at that time because Europe was demanding more and more
food, due to WWI. Then, when the US entered the war in 1917, prices went up even
further. More people bought at these ridiculous levels. By 1921, the farmers had
nowhere to sell their food because of the facts I spoke of earlier.
Big
farming businesses came in and bought up huge amounts of foreclosed farms during
this period. This is evident from the size of the average farm in the US during
this period. In 1920, the average size was 138 acres. By 1940 it was 190 and
that was in the south, where there were numerous small cotton farms. If you look
at the grain belt the size went from 190 to 258.
The
number of farm owners fell drastically also. From 1910-1920 there was an
increase of 87,000 farms. 1920-1930 a DECREASE of 159,000 and 1930-1940 another
DECREASE of 192,000.
The
crisis was not immediately evident after WWI. Europe still imported large
amounts of food. This can be seen in the export figures from 1914-1920. They are
pretty evenly spread throughout the years: Meat, $143mm to $353mm; Wheat, $88mm
to $298mm and Cotton, $537mm to $767mm.
Europe
needed these products to rebuild immediately after the war. There was a scarcity
of these products in Europe, hence prices went up further after the war
concluded. The increase in prices paid for food translated into the farmers in
the US getting more money for their product. No one thought it would end. You
can almost here them trying to rationalize paying higher and higher prices for
land back in the US. “The war ended and Europe is still buying! It wasn’t
the war that made the grain prices go up! This will continue forever!”
But
the advancements in technology, particularly due to the auto industry set
everything in motion. The market for grain products crashed. Land prices with
it. But, how did we recover?
The
farming industry had three distinct phases in the US.
1) 1830-1860 advancements in machinery although the power was horse and
mule.
2) 1860-1914 More mechanical advances in machinery as far as how much
farming could be done in one pass of the field. The adoption of horses alone,
pulling the some of the machinery also.
3) 1914 saw the power machinery enter the industry.
By
1922, with the massive decline in internal buying of farm products and exports
of agri products a new outlet was needed for the agri products and it was found.
This is one factor for the recover, the other being the rise of the auto from
50% US household penetration in 1921 to 90% by 1928.
The
new industry that agri products found was the chemical industry. Cereal grain
found its way to the textile industry for sizing and finishing. Corn found
starch, alcohol, glucose, and wallboard. Soybeans found the auto industry in
huge amounts. Also, soybeans went to adhesives, plastics, paint, and varnish.
From animal carcass came leather, glue and gelatin, soap, greases, glycerin and
fertilizers. Skim milk became a hot item for preparation of wallpaper, paints,
glue, and karolith was used in making combs, brushes, and buttons.
Flax
found its way to carpets and cotton into the exploding clothing industry. Cotton
also began being used in the making of cordage, auto tires, explosives, bags,
paper, and stuffing. There’s more, but I think you get the point.
In
conclusion, it is obvious that if we look into the 1920-21 crash in-depth a
pattern emerges that shows the auto as the main cause of crisis.
SA9
Debt
Written 3/2005; Updated 8/2006 & May 2007
The financial problems I foresee in the future have
everything to do with debt.
Many people hear or read about financial disaster
predictions and think that it can’t affect them because they don’t invest. This
is a very big mistake if you have any debt. Debt is an investment. My theory of
the coming crash is based on debt.
The problem people don’t recognize is that they
will not have the ability to pay off their debt when a crisis of magnitude hits.
One reason people don’t realize this fact, is that they’ve never experienced a
financial crisis in their lifetime. That’s exactly the problem with these types
of crisis’; they only come every 85 years or so. That time frame is basically a
lifetime, so everyone only experiences it once and they are at all different age
locations. There are a few who experience it twice. Once in childhood and once
in elderhood. By the time a person reaches elderhood they can’t possibly fathom
that it’s going to happen again. “Everything’s different now,” they state. But,
everything isn’t different as research surely shows. In today’s society those
people are the Silent Generation, b1925-1943.
Another factor about debt that never comes to mind
is that debt is precisely the reason the depression deepened after the 1929
crash. Many people think it was the stock market crash that caused the great
depression. It wasn’t the spark that ignited the depression it was a
catalyst.
The reason the economy slipped into depression
was bank failures. The first failure didn’t happen until December of 1930 and
the economy really wasn’t that bad up until December 1930. However, when the
Brooklyn, New York, Bank of the United States failed, in December of 1930, it
started an unprecedented cascade of failures.
In 1929, there were 24,970 commercial banks. In
1933, there were only 14,207. The number of banks in the Federal Reserve System
fell from 8,707, in 1929 to 5,606, in 1933.
That’s a 27.5 percent failure rate. However, the
non-member banks were the hardest hit. There were 16,263, in 1929 and 8,601, by
1933. That’s a 45 percent failure rate.
Between 1929 and 1933 there were 9,765 bank
failures. Most occurring after December 1930. But why did they fail?
The answer is simple. People couldn’t pay their
mortgages because they were either laid-off or their wages were cut. They
couldn’t keep up the mortgage payments and they were soon evicted, as the banks
took ownership of the homes. However, the banks couldn’t sell the properties
because there were no buyers. The bank failures caused the depression.
The history books tell you that the brokerage
houses were the cause because they were letting people borrow money to trade the
market. These people would only have to put up 10 cents on the dollar. Then when
the market crashed and the brokerage houses asked for the loans to be paid, no
one could pay so the brokerage houses liquidated their positions. And that’s
what the history books say caused the depression. Not!
What the books don’t say is that from 1919 to 1929
there was an unprecedented amount of lending going on that had nothing to do
with the stock market. Specifically, people were buying all the new
inventions that were created in the 20s, on time-payments.
Electricity enabled a zillion new products to hit
the market including radio, refrigerators, ovens, dryers, washers, fans, etc.
Many industries copied Henry Ford’s ‘borrow on time’ finance scheme. That scheme
was a major contributing factor to the depression, along with the mortgages not
borrowing to buy stocks. The numbers aren’t even comparable.
Any person today would say, “Things are different
now. They have mechanisms in place that won’t allow the 1930s to repeat”.
Well, I’m here to tell you thats simply wrong and
if you believe it you’re misinformed. What the average person doesn’t see,
written in the press, is that this country is over 50 trillion in debt. The
average person reads that we are 7 trillion in debt, which is the National
Debt. Yes, that figure is accurate. But, what about mortgage debt, credit
card debt, state debt, under funded pensions, under funded social security,
under funded Medicare, corporate debt, GSE debt, and the US Governments ‘off the
books’ debt?
Add them up and sums to over 50 trillion which is
5-times the 2005 Gross Domestic Product (GDP). The interest payments alone are
estimated at 2.5 trillion dollars a year. That’s 25% of the GDP. If the GDP goes
down by the same amount it did in the 1930s, 29%, the debt service will become
35% of GDP. That amount doesn’t include the new debt issued between now (2005)
and 2010. If you add that new debt into our equation then we are talking about
45% of the GDP, going to pay debt service. That’s economically impossible to
sustain.
If this scenario pans out the government would
have no choice but to devalue the debt via the US dollar. The result would mean
millions of people out of work and I guarantee the rest of the world would make
a run on the Euro and Swiss currency. If that happens, the 1930s are going to
look like a picnic.
Worse, the US Dollar is a fiat currency backed by
nothing. If you think your bank account is safe because of the FDIC you’re
sorely mistaken. The FDIC money comes from the member banks of the Federal
Reserve, not the government. The Fed just acts as an agent to collect the money
from the banks to pay-off the people who lost money from a bank failure. When
those bank members fail who is going to pay you? Not the government. They’ll be
dealing with two major problems concerning debt; the national debt and the
biggest reason we’ll all be up a creek, the so called ‘Government Sponsored
Agencies’ who issue mortgages. Both debts are 14 trillion combined.
Did you know that the average person put down 18%
on a new mortgage in 1983? Today it’s less than 3% because of these
government-sponsored agencies (GSE). And, they’re creating new derivatives every
day to make it easier to borrow. A few of these agencies are in the news lately,
under the names Fannie Mae and Freddie Mac. Why are they in the
news? They’ve been lying about their earnings. And, these two entities make
Enron look like a five-and-dime. No one is being held accountable and the
failure of these entities alone would cause a depression.
Now, what happens if we have a crisis and people
can’t pay their mortgages? Those agencies will fail and no one has the money to
bail them out. There are no contingency plans in place. Think about it, you’re
dealing with the US government and in their 229-year history they’ve always
waited for a crisis to happen before acting.
Take care,
jim goulding
www.jamesgoulding.com
SA10
Concerning the US Dollar
The precipitation of the Crisis era will probably be the
US Dollar. I wrote about this in my book Winter is Coming. But, the writing was
mainly geared towards the Euro, not the US Dollar. Since writing that book, in
2003, I’ve learned a few things.
· One of the big reasons the US economy keeps chugging
along is because of petrodollars. If you want oil, you need to pay in US
Dollars. That’s one of the sweet deals we cut at the end of WWII because…
well…because we could. We were the superpower.
· To find the countries that are on the axis of evil, you
need not listen to Bush, just watch for who is threatening to change their
current way of paying for oil. They want to switch from dollars to euros. North
Korea, Iraq, Iran.
North Korea already switched a percentage, Iran is
opening a Euro denominated Oil Bourse, and Iraq committed the ultimate error,
they completely switched to Euros for oil…. just prior to the US invading them.
Mmmm.
Want to know when Hugo Chevas really in trouble with the
US? Listen for his banter about switching to the Euro. It’s the only time he
gets a response out of our government.
So, let’s try and put this together. I think the crisis,
this Winter era, will be economic.
The US Dollar holds the key. For instance, no
civilization in the history of mankind has kept a currency much longer when that
currency hits 1% of its original value. Most civilizations begin borrowing
against their currency heavily when it hits 10% of its original value.
The US Dollar hit 10% of its original value in 1984.
Precisely when we started escalating borrowing. The US Dollar is pegged to hit
1% of its original value in 2008/09.
It’s worth 4.3 % today.
Then there’s the debt. It’s been mathematically proven
that we can never pay off the US debt. So, there’s only one solution, abandon
the US Dollar. That way, the US is free and clear; sans the ramifications.
What to-do, what to do? Mmmmmmmmm.
I’ve put a lot of thought and research into this subject
and am slowly reaching some conclusions. I’m not sold on them yet, but am
formulating some ideas.
My early thoughts are foreign currencies. Mainly the
Swiss franc and the Euro. I guess what’s mystifying me in these early stages, is
the movement of the Swiss Franc in the 20s and the 30s. While going back and
studying the currency I was surprised to see that it barely budged in late 1929.
Just after the first crash it closed at 0.1933, on 10/18/1929 and closed at
0.1937 at the end of 10/1929.
It closed on 12/27/1929 at 0.1945.
For that matter, the following year, it barely budged.
Well, it must have moved in January 1931! (I thought).
The first real big bank collapse came 12/30/1930. Not! It closed on 12/30/1930
at 0.1951. By the end of January 1931 it was 0.1951. What’s up with that? It
didn’t move!
By the end of 1931? It was trading 0.1950.
zzzzzzzzzzzzzzz.
Confusing. I’d have expected it to do the opposite.
Thankfully, we have Strauss and Howe. One of the points they've hammered home
about the sparks that begin 4Ts, is that the majority of the public never really
thinks of them as sparks. This makes sense. At the time of a crisis everyone
believes they're invincible.
So, when did the currency turn around? Thankfully it
turned around at my second choice for a rally; the bottom of the US Financial
Crisis, 1933.
Sounds strange, but it makes sense. Here’s why:
I trade markets for a living. Namely US Treasuries.
Currencies and commodity indexes too. The markets always do exactly what people
least expect. The evidence is endless. Having stood in the Bond Pit at the
Chicago Board of Trade from 1980-1995 and then again from 2001-2003, I’ve seen
and heard most of the evidence. Thankfully I’ve learned. That’s why it drives
people nuts that I’m calling for Dow 35,000. It drives them crazy!
Anyways, here’s what happened to the Swiss Franc currency
in 1933.
01/1933 it was at 0.1925
By April, the financial crisis in the US really heated up
and the currency took-off to the upside. It closed 04/28/1933 at 0.2145. That’s
a big rally. By December it was 0.3030.
By September 1936 it was at 0.3246. Then it appears it
took a very large dive in October to 0.2306. I’m wondering if there was a
devaluation of some kind? I’ll have to look it up.
The markets closed down for the war beginning 06/13/1941
and the Swissy was at 0.2320 It started trading again in February 1946.
It closed at 0.2336.
Well, that’s all for now. Gotta go do some more research.
BTW, the best book I’ve read on surviving the crash is by Robert Prechter,
“Conquer the Crash”.
Take Care,
Jim Goulding
www.jamesgoulding.com
Originally written: 06/22/2006
Updated: 05/06/2007
SA11
Social Security and the IOUs
This paper was written in response to a person, who posted
on a bulletin web board, that we didn’t have to worry about the Social Security
bonds that have been issued against money that was supposed to be put into an
untouchable account by our politicians, in Washington. The ‘poster’ believes the
bonds are as good as gold. They’re not.
09/02/2004
Rick,
I would disagree
with this comment. There are IOU’s in the trust fund that are backed by US
Government bonds. Those bonds are backed by the ‘full faith and credit’ of the
US Gov. Full faith and credit is the taxing power of the Government.
If we are hit with
an economic crisis in that matches or comes close to a crisis such as 1929 era,
then those IOU’s are devalued. How much? No one knows but an educated guess
would be 75%. (I’ve been trading bonds since 1984).
With the US
currency worth 5.3 cents of it’s original value, we would have no choice, in the
next economic crisis, but to abandon the US Dollar. There will be calls for a
devaluation of the currency, but I don’t think that’ll float with the new Euro
being so new and so strong.
There’s a lot of
‘ifs’ in that scenario. Maybe we don’t have an economic crisis? What then? Will
the IOU’s still be worth what they are today or say close to today’s value? Yes
they would be. The caveat is that since the government borrowed our trust fund
and lent it out, they must pay interest on that debt and that debt service is
growing daily just like the national debt. They will have to continue to sell
more bonds to pay for the debt service and the Ponzi scheme starts all over.
Similar to what they are doing now with the national debt. On an aside, it
amazes me that no one mentions that the 50 states are collectively in debt more
than the feds. (About 8 trillion). And, those states are picking up the pace in
borrowing. I know, I trade their debt.
One little fact
that I can’t put aside is that never in the history of mankind has there been a
currency that has not been abandon when its original value hits about 1 cent.
The US Dollar is projected to do just that about 2009.
It sure would get
the government and the states off the hook with all those bonds. By abandoning
the currency attempting to devalue it in any way it reduces it’s debt owed very
quickly. Most of the debt owed would disappear including our trust fund. Not to
mention the economic havoc it would cause the seven biggest US banks. They own
96% if the 142 trillion debt outstanding in the world right now. Yikes.
The moral is, ‘the
easiest way for a government to reduce its debt is to devalue their currency. ‘
I’ll leave you
with this quote by Rep. Mark Sanford
"Foresight is something folks in
Washington could use right about now. At the beginning of April, the Social
Security trustees told Americans that the nation's retirement system would go
bankrupt about 24 months later than we had expected. According to their
calculations, the wolf will not be at the door until early next century.
"In 1998, Social Security ran a
$100 billion surplus. Washington spent $30 billion, and the remaining $70
billion paid down existing federal debt. Not a penny was used to pay for Social
Security reform."
Take care,
jim goulding
www.jamesgoulding.com
09/02/2004
SA12
The 1929 Crash and a Debt Society
This article covers the 1929 Stock Market Crash and the consequences that
followed from being a debt society. A very similar senario exists today
(9/2005).
The crash itself took 13 weeks to manifest. It really began in September and
truly ended on November 10th. But from our point of view (which comes from the
history books) there was only one big crash, which took place in October 1933.
From the viewpoint of the people alive at the time, they knew something happened
but really stayed in denial up until the first bank failure in December of 1930,
a full year after the crash. Even as bank after bank failed into early 1931,
they still thought it would be ok. The administration spews out bullshit press
release after release trying to calm the fears of the people. Many buy it,
because to acknowledge the problem would be too overwhelming. Prices are kept
artificially high by trying to keep wages the same as they were before the
crash. But, no one is buying merchandise like they were before the crash.
Inventories keep growing until something has to give.
The layoffs begin slowly. This is where the problem begins. Real estate taxes
are assessed ever 3 years. It takes time for the actual prices of homes to
decline and be openly acknowledged by everyone. But you still have to pay your
RE taxes as if your home was worth its value before the crash. And you are out
of a job. Your mortgage still exists. You look and look for a job. You begin to
get behind in your payments. One month, two months. Then, multiply this by a few
million and you are taking massive amounts of money out if the system,
exponentially. If you understand how the banking system works you begin to
understand that if the cash flow becomes interrupted from the customers, passed
a certain percentage of overall loans, then the system teeters. This is the evil
of a Central Banking System (fiat money) which we are part of.
Example: In a fiat system when a bank receives a deposit of $5,000, that deposit
increases money supply by about $33,000 (depending on the reserve requirements
at the time). It works the opposite way also. When people can’t pay their
mortgages it stops the deposits at the bank which in-turn stops lending, which
stops growth and crushes small business, which is the biggest employer. Vicious
cycle. And, it happens very slowly.
This whole time, people are trying to stay optimistic. People are in denial.
Time slows down. Things get worse because the debt machine that generated so
much cash flow is now breaking down.
The banks will not ask for a small monthly payment from people because they will
also be in denial. They will act as banks act and demand you pay or they will
seize the property. Once they realize that a catastrophe is upon us it will be
too late. That’s because the process of collapse takes much longer than people
think.
Someone wrote me after the November 2004 elections and put forth a scenario. It
was in response to an article I’d written on the housing debt cycle and the
supposed housing bubble. I’d said that the bubble would burst but we’d only see
some signs of it in early 2007. Otherwise, there was no such bubble and housing
prices would continue to climb. Most people would be in denial after those signs
showed up and the real bubble wouldn’t burst until the stock market bubbble
burst (which I didn’t see happening until late 2009 when it was at about 35,000;
I still believe that). I’d also told them to pay off any debt they had before
the crash happened in 2009.
Here’s there question:
