Financial topics

[mannfm11]

Much of the phenomenon being discussed here revolves more around financing and debt expansion than any significant innovation. I skipped reading most of this stuff and am seizing on Mo's statement about productivity and the point of not lamenting the loss of farm and industrial jobs. The real point is this is where the productivity has been achieved, as in paper pushing and stuff like medical business has probably had negative productivity growth. Though I will grant that PC's have expanded office productivity greatly.

It is my contention that this entire game has been engineered by availability of credit in the US and the requirement that the US expand the world money supply or the system collapses. The big business in the US has moved to financial services, which is a recipe for disaster. How do you measure productivity in a race to go broke? The idea that manfacturing credit better than the rest of the world is GDP is absurd and that any measure of productivity in this pursuit is counter productive. The decline of industry has more to do with having the credit to hire someone over seas to do it than any other factor.

The truth of the matter is the US has financed itself into negative productivity. If we are productive, why does the cost of education and medical care grow at an exponential rate that in a few years will encapsulate the entire economy. The truth of the matter is the system promotes inefficiency in these pursuits as the system throws cash at these problems rather than holds them to the same standards that regular consumption is done. If you had to take out a loan to go to the hospital, I think people would shop for a hospital like they shop for a car. Then there is the education system that the worse it works, the more money it gets. Just the fact that education and medical care are taking over the economy implies that productivity is declining, not increasing.

One problem in trying to re-industrialize is that productivity has been so high. If you could get away from measuring productivity with money, I suspect that world manufacturing couldn't employ over 20% of the world. The problem the world faces going forward is that the US is out of credit, which requires some kind of rebalancing with either a drop in consumption, a rebalancing of domestic production to allow for less credit growth or both. This doesn't bode well for the world economy, especially the capital expansion going on in Asia. I believe the deflationary squeeze of consumer credit along with the financial leverage employed by corporations has given a skewed idea of what is productive and what isn't. We are seeing the unwinding of this entire concept as we write here.

[Higgenbotham]

On the subject of technology and the development of complex societies in general, we could look back to the heyday of the Roman empire and I believe that from a technological standpoint the Romans had the beginnings of a basic industrial society coming into form. As I understand it, the Romans had built water wheels that were capable of producing power and had invented a crude steam engine. Some might opine that the Romans were not able to make the transition to an industrial society because they did not have the proper political and social development in place to do so, and the cleansing process of the Dark Ages was required in order to develop the proper political and social framework that allowed the Industrial Revolution to take off about 15 centuries later. And as our society transitions from an industrial to an information society, might a similar cleansing and political and social development process be required? Or what other thoughts might anyone have?

[John]

-- Generational Dynamics predictions

From a web site reader:

> One of my friends responds to one of my Generational Dynamics
> Facebook posts:

> No he's wrong. The market will rally about 20% from here for
> about another 3-6 months, we will hit a deflationary cycle but the
> overall cycle will be high inflation. The bear market will resume
> it's downtrend for probably another 15 yrs or so. During this
> inflation, and it could be double digit, gold will ONLY go up. And
> if the idiot who let the cat out of the bag (berlosconi) is
> correct....he is, there will be a return to Bretton Woods, when/if
> this occurs, and I have every reason to beleive it will as the
> dollar is absolutely worthless and the Chinese/Arabs will demand
> gold in its stead, then a currency, likely the dollar late in the
> game will announce it's re-link to gold and a basket of other
> things, will send gold soaring. I'm afraid John X. does not quite
> understand inflation and how it relates to gold. He's too much of
> an American centered writer to grasp the total picture. He's
> missing things from his analyses....I love his commentary, but
> must disagree on aspects.

It's wonderful that we have these "non-American centered writers" to
predict the future for us. And it's very interesting to learn that
in the center of it all is Italy's Prime Minister Silvio Berlusconi,
who is currently facing massive street demonstrations for slashing
the education budget in order to prevent Italy's economy from
collapsing. But that's OK, these "Italy centered writers" apparently
have it all figured out.

Let me try and explain this again. Generational Dynamics works by
determining long-term trends and extrapolating to forecast the
future, usually in a fairly long window. In the methodology's purist
form, day-to-day events are NOT used to forecast future events;
instead, they're used narrow the window. The forecasts remain the
same, and they depend only on the long-term trends.

Now, I've been incredibly successful with this. If you look at:

** List of major Generational Dynamics predictions
** http://www.generationaldynamics.com/cgi ... redictions

you'll see many predictions that were created with this methodology,
and they've all turned out to be right. There is no journalist,
analyst, politician or web site that has had anything remotely close
to the predictive success of this methodology and this web site.

Now, looking at the world's financial system today, I see two major
long-term trends:

• A secular deflationary spiral;
• A continuing international policy to search for compromises to
  postpone problems, even when it can be shown mathematically that a
  major discontinuity is approaching.

People who criticize me usually point to some ephemeral political
condition, such as Norway wanting to join euroland, or Berlusconi
making some silly announcement. As I said, I do not look at these day
to day events, except where they provide timing information for the
long-term trend predictions.

So I've concluded the following predictions: The dollar will
experience an accelerating deflationary spiral, and therefore will
become more valuable; and the international community will attempt to
postpone problems by "bailing out" the US government when a
discontinuity appears.

Based on the success of the Generational Dynamics methodology so far,
I have little doubt that these predictions will come true. I can't
give you the dates, and I can't give you the details, because those
are not predictable. All I can tell you is the final results.

If you want to challenge these predictions, attacking them with some
ephermeral political event is irrelevant. Instead, you have to look
at look at long-term trends -- over at least 100 years, and
preferably longer -- and show why other trends seem to point in a
different direction. Even then, the above predictions would not be
proven completely false; instead, it would be necessary to blend the
conclusions from the two long-term trends, and come up with a blended
prediction which is consistent with both trends.

Another thing that doesn't work is calling me names. Believe me,
I've been called every name in the book, and I'm quite used to
dealing with them. And dealing with them has never meant changing a
prediction.

Sincerely,

John

[Gordo]

Just the fact that education and medical care are taking over the economy implies that productivity is declining, not increasing.

How do you define "taking over"? For that matter, how do you define "productivity"? I don't think people understand the idea of productivity. Productivity is the ability of a society to produce in abundance. The fact that we have so much "stuff", extremely high standards of living, abundance and variety of foods, medical care unparalleled by any previous generation, etc. is all proof of increasing productivity. Increasing leisure time is also evidence of increasing productivity, not the contrary as many seem to assume.

As for the cost of education - I agree that this is a major problem right now - but I would be willing to bet big money that the costs will decline sharply over the next two decades in real terms. Eventually the cost of an excellent college education could even approach being free. Teaching has HUGE potential for automation. Think about a computer based university, where the best of the best professors digitize their lectures and teaching resources. Questions & answers are all done over the internet, perhaps with employees that are ranked by a feedback system with the best being paid more and the worst being fired - they could live anywhere in the world. Testing would be done in testing centers much like is already being done in other industries (industry certification exams are given in testing centers all over the country) where your ID could be checked and you can be monitored, to eliminate cheating. Note that this industry is already being built out now, my state has several "cyber charter" k-12 online only schools (the students get free laptops and free broadband internet connections and support from certified teachers). Kids that go though such a system will be ready to do the same for college 10 years from now. Of course the social implications of all this will have to be worked out as well, but there are solutions to almost any problem.

Medical care is another issue - the increasing cost is partly because we are living so long, and we have so many cures and treatments now that never existed before. This of course is a GOOD thing. But how to pay for it all is a serious issue. Still there is a lot of room for improvement in controlling costs. Robots are now assisting in surgery with fantastic results, see the da Vinci system which now even allows for remote surgery (doctor can be anywhere in the world). I've always felt like a machine would be much better at diagnosing than a human doctor, this is something yet to be developed, but could replace the vast majority of doc visits at some future point and cut costs dramatically.

One problem in trying to re-industrialize is that productivity has been so high. If you could get away from measuring productivity with money, I suspect that world manufacturing couldn't employ over 20% of the world.

What are you talking about when you say "re-industrialize"?? Would you want more than 20% of humans doing manufacturing work? I'd like to see that number go to 1% or less. Its a waste of time to make people do manufacturing work, terribly inefficient. We are at a point now where anyone can develop a product, create CAD drawings of the parts, upload them via the internet to an automated manufacturing facility, where it can be machined and shipped to you in almost no time at all. Complex circuit boards can even be "printed". The whole thing can be produced and assembled wherever it makes the most economic sense at any given time (with delivery costs and volume factored into the equation). All of this is fantastic, and will continue to push the innovation curve harder and harder. Most assembly can also be automated, and this process will become easier and easier with time. Eventually the only costs will be raw materials and energy, and both of those will also approach zero eventually (we have unlimited free energy from the sun, its just a matter of time before we figure out the best way to harness it).

[John]

Gordo - I moved your last posting to the "Defensive Interpretation" topic, where it's more
relevant, and I'll respond to it there later.

http://generationaldynamics.com/forum/v ... p=757#p757

John

[umoguy]

I would first like to say that I really like this site and I think that it makes a very large amount of good points. I am a bit confused on the topic of Mean Reversion in terms of stock market P/E ratios. The site states that

"Here the big problem is ignoring the Law of Mean Reversion.

This means the following: 14 is AVERAGE, not the MINIMUM. If the P/E ratio has been mostly WELL ABOVE average since 1995, then it has to be mostly WELL BELOW average from now on, so that the average for the entire period is 14. "

You can't just say that things must revert to the mean, that is why the mean changes, and there is a new mean after a while. Also couldn't you just say that about any time period, if you made this statement in 1997 you would have been sorely wrong, as the mean has been well above average for so long that it is probably starting to creep towards what people expect it to be these days. The average height for a 12 year old may be 4 feet, but no 12 year old is going to revert to that mean after 20 years, averages change with time. His age changed and the mean of what his height should be changed.

Also it does not take into account unexpected events.

"The “mean-reversion” theory makes pretty good sense—unless a new element has entered into the equation.

Stocks may come down, but not because of some magical need to find an average over time.

For example, suppose the captain of the SS Titanic calculated the average elevation of his vessel for the first several hundred miles of the voyage was at sea level. The Titanic might ride up on some waves that would elevate the ship a few feet above sea level, or the ship might slip into an occasional trough where the elevation was temporarily a few feet below sea level. But under a “mean-reversion” theory, the Captain could normally predict that every time the ship rose above sea level, it would fall back down (revert) to sea level, and every time the ship fell below sea level, it would again rise “revert” back to sea level (the “mean” or average elevation).

But once you introduce an new element—like an iceberg—into the mean-reversion equation, the old data and the old mean become irrelevant. Once you put a hole in the hull and the Titanic sinks 50 feet below the sea level, the former mean-reversion calculations are powerless to push the vessel to “revert” to the “mean” (sea level). "

From http://adask.wordpress.com/2008/07/26/% ... 94or-bust/

[John]

> I would first like to say that I really like this site and I think
> that it makes a very large amount of good points. I am a bit
> confused on the topic of Mean Reversion in terms of stock market
> P/E ratios. The site states that

> "Here the big problem is ignoring the Law of Mean Reversion.

> This means the following: 14 is AVERAGE, not the MINIMUM. If the
> P/E ratio has been mostly WELL ABOVE average since 1995, then it
> has to be mostly WELL BELOW average from now on, so that the
> average for the entire period is 14. "

> You can't just say that things must revert to the mean, that is
> why the mean changes, and there is a new mean after a while. Also
> couldn't you just say that about any time period, if you made this
> statement in 1997 you would have been sorely wrong, as the mean
> has been well above average for so long that it is probably
> starting to creep towards what people expect it to be these days.
> The average height for a 12 year old may be 4 feet, but no 12 year
> old is going to revert to that mean after 20 years, averages
> change with time. His age changed and the mean of what his height
> should be changed.

Here's some more information about the Law of Mean Reversion.

You have to establish a long-term trend, preferably with a century or
more of historical data. It's generally safe to assume that with a
century of data, you can determine a mean (or average).

Then you can compare subsequent data to the mean.

You make a good point that it's only fair to include the latest data
values in the calculation of the mean. However, if you've collected
enough historical data, then the mean will not be affected by the new
data.

In the case of the price/earnings ratio, here are the averages three
different intervals:

P/E1 Average (1871-1995): 13.91
P/E1 Average (1995-2006): 24.26
P/E1 Average (1871-2006): 14.91

As you can see, the data since 1995 have raised the average from
13.91 to 14.91, which is the point you were making. But that doesn't
change the final conclusion, since P/E has been above 14.91 since
1995.

> For example, suppose the captain of the SS Titanic calculated the
> average elevation of his vessel for the first several hundred
> miles of the voyage was at sea level. The Titanic might ride up on
> some waves that would elevate the ship a few feet above sea level,
> or the ship might slip into an occasional trough where the
> elevation was temporarily a few feet below sea level. But under a
> “mean-reversion” theory, the Captain could normally predict that
> every time the ship rose above sea level, it would fall back down
> (revert) to sea level, and every time the ship fell below sea
> level, it would again rise “revert” back to sea level (the “mean”
> or average elevation).

This is not a valid application of the Law of Mean Reversion, since
you don't have enough historical data.

Also, you can't apply these laws to individual cases. They apply
only to large aggregates. I'm always saying that the Generational
Dynamics methodology applies to large masses of people, entire
generations of people. Any individual person has completely free
will to do what he wants, but when you're talking about a large mass
of people, their behavior is quite predictable.

Sincerely,

John

[gtate]

John,

Please respond to recent Schiff article...your recent post regarding GD being a trend forecaster over longer time lines.. not an effecient predictor of short to intermediate events... can one look at 'Schiff's ' position as one which is based in Global economics and reflects the potential effects of policy actions around the world to see what will unfold in the short to intermediate time lines..?

GTate


October 31, 2008

The Tales Get Taller


When inexplicable events perplexed our early forbears, village wise men concocted elaborate and colorful explanations to soothe the populace. Earthquakes, hailstorms, and solar eclipses were all ascribed to root causes that made sense to the villagers and increased the esteem of the story tellers. The recent, unexpected surge of the U.S. dollar has led many Wall Street witch doctors to conjure a series of logic-defying tales to give reason to what is surely the random scramble of a confused herd. Wall Street spun similar yarns during the dot.com and real estate bubbles as investors groped for reasons to justify sky high prices.

The recent surge, which has pushed the dollar up more than 30% against some currencies in recent months, is purely a short-term technical phenomenon. The move is caused by global investment deleveraging, in which major financial players are reversing (unwinding) risky trades and piling into what is erroneously perceived as the safest haven they can find. Increasingly, foreign assets, many of which had appreciated more than American assets, have been sold, and the proceeds stashed into U.S. Treasury bonds, which these investors believe to be the Fort Knox of finance. The cascade has caused momentum trades, margin calls, redemptions, and other factors having nothing to do with the underlying fundamentals of the dollar or the U.S. economy. In fact, all that has happened to the U.S. economy, and all that the government has done, and is likely to do, in their misguided attempts to contain the damage, is extremely bearish for the U.S. dollar.

Mesmerized by technical moves and oblivious as always to the fundamentals, the Wall Street brain trust has offered flimsy explanations. One popular rationale is that as bad as things are in the United States, they are even worse every place else. Still another is that since the U.S. was the first country into the crisis that we will be the first nation to come out. Still another is that since our government is acting more boldly than most to tackle the problems, our economy will not suffer as badly as others where governments have been slower to react and more timid in their responses. In addition, many still perceive the United States as the citadel of stability in a world of second-rate economies.

However, if we look beyond these “explanations,” the fundamentals loom simple and irrefutable: American borrowers of all stripes cannot afford to repay the trillions of dollars we owe. Over the past decade, the vast majority of lending has come from abroad, and as Americans don’t pay, the losses show up on foreign balance sheets. Since we blew most of the money we borrowed on consumption, we simply lack the industrial capacity to repay our debts without resorting to a printing press.

In bankruptcy, both the debtor and creditors are affected. However, while creditors take a financial hit, ramifications for debtors are typically more severe. Creditors are generally better prepared to absorb their losses. However, for bankrupt debtors usually much more substantial changes ensue.

Since America is the world’s biggest debtor, with our IOU’s broadly held by every creditor nation, the effects of our bankruptcy are being felt worldwide. However, while our creditors are suffering now, their pain will be temporary and relatively mild compared to what awaits Americans.

So while it may appear to some that things are worse abroad, that is only because the full extent of our problems has yet to be reckoned with. The main lesson our creditors will learn from this crisis is not to lend American consumers any more money. Once the lending stops, our “cart before the horse” borrow to spend economy will crumble. While the rest of the world absorbs their losses and moves on, we will be digging our way out of the rubble for years to come.

Earthquakes are caused by the fundamental shifts of tectonic plates beneath the Earth’s surface. A similar move is underway in the global economy. Describing either event without a basic understanding of either geology or economics will simply result in a tale being told by an idiot.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.”

[Higgenbotham]

John,

Please respond to recent Schiff article...your recent post regarding GD being a trend forecaster over longer time lines.. not an effecient predictor of short to intermediate events... can one look at 'Schiff's ' position as one which is based in Global economics and reflects the potential effects of policy actions around the world to see what will unfold in the short to intermediate time lines..?

GTate


October 31, 2008

The Tales Get Taller


When inexplicable events perplexed our early forbears, village wise men concocted elaborate and colorful explanations to soothe the populace. Earthquakes, hailstorms, and solar eclipses were all ascribed to root causes that made sense to the villagers and increased the esteem of the story tellers. The recent, unexpected surge of the U.S. dollar has led many Wall Street witch doctors to conjure a series of logic-defying tales to give reason to what is surely the random scramble of a confused herd. Wall Street spun similar yarns during the dot.com and real estate bubbles as investors groped for reasons to justify sky high prices.

The recent surge, which has pushed the dollar up more than 30% against some currencies in recent months, is purely a short-term technical phenomenon. The move is caused by global investment deleveraging, in which major financial players are reversing (unwinding) risky trades and piling into what is erroneously perceived as the safest haven they can find. Increasingly, foreign assets, many of which had appreciated more than American assets, have been sold, and the proceeds stashed into U.S. Treasury bonds, which these investors believe to be the Fort Knox of finance....”

This article by Peter Schiff sounds like it was written by the same person who wrote the response to mosullivan in the other thread about Defensive Response to Generational Dynamics. At least, the ideas are similar.

Here again, it is mentioned that there has been a movement into US Treasury bonds. This is not true. The price of US Treasury bonds has been generally falling for 4 weeks or so, or more or less through the worst of the financial crisis (so far). In addition, US Treasury bonds have been fluctuating up and down for the past year. Money has been moving into US Treasury bills. Treasury bills are not the same thing as Treasury bonds. As I mentioned in the other thread, these concepts are basic, like what is the definition of currency. If commentators don't know these things, then they should stop commentating and pick up a few books on economics at the library and start reading a few publications to get a feel for how the theory relates to the real world. But see, they can't do that because they have books and other products to sell and they have TV appearances to make.

Here is a chart of US Treasury bonds for the past 12 months:

http://quotes.ino.com/chart/?s=CBOT_US.Z08&v=d12

I'm not John and can't speak for him, but when I read something like this: "the proceeds stashed into U.S. Treasury bonds, which these investors believe to be the Fort Knox of finance" it's just bizarre. It isn't happening. And how does he know what anybody believes or why they are doing something?

[John]

> Please respond to recent Schiff article...your recent post
> regarding GD being a trend forecaster over longer time lines.. not
> an effecient predictor of short to intermediate events... can one
> look at 'Schiff's ' position as one which is based in Global
> economics and reflects the potential effects of policy actions
> around the world to see what will unfold in the short to
> intermediate time lines..?

I'm not aware of any methodology except for generational theory and
Generational Dynamics that provides for accurate predictions.

Anyone can go back and say, "What's happening now is similar to what
happened in Upper Slobovia in 1684, and so whatever happened then is
going to happen now," and that's basically what Schiff is doing.

Schiff has made some predictions about hyperinflation, and things are
going in the opposite direction -- the dollar has been deflating
recently.

So Schiff is in a lot of trouble. His book looks silly, and all the
people who made investments based on his advice are getting angry.
His entire logical train boils down to one sentence: "The US is a
debtor nation, and so there will be hyperinflation." This connection
cannot be proved, and now he's looking for excuses. He says:

> Earthquakes are caused by the fundamental shifts of tectonic
> plates beneath the Earth’s surface. A similar move is underway in
> the global economy. Describing either event without a basic
> understanding of either geology or economics will simply result in
> a tale being told by an idiot.

This is an amusing paragraph, since he doesn't understand economics,
and I doubt that he understands geology, but I could be wrong about
the last part.

> If commentators don't know these things, then they should stop
> commentating and pick up a few books on economics at the library
> and start reading a few publications to get a feel for how the
> theory relates to the real world. But see, they can't do that
> because they have books and other products to sell and they have
> TV appearances to make. ...

> I'm not John and can't speak for him, but when I read something
> like this: "the proceeds stashed into U.S. Treasury bonds, which
> these investors believe to be the Fort Knox of finance" it's just
> bizarre. It isn't happening. And how does he know what anybody
> believes or why they are doing something?

Exactly.

Sincerely,

John