Time to Choose

News & Current Events Public News & Current Events
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[This piece is intended for those who are new to PeakProsperity.com or to our general perspective. Feel free to share with anyone whom you think might benefit from the central question it raises: Which side do you choose?]

Whether you’re aware of it or not, a great battle is being waged around us.

It is a war of two opposing narratives. Regarding the future of our economy and our standard of living.

The dominant story, championed by flotillas of press releases and parading talking heads, tells an inspiring tale of recovery and return to growth.

The other side, less visible but with a full armament of high-caliber data, tells a very different story. One of growing instability, downside risk, and inequality.

As different as they are in substance, they both share one fundamental prediction – and this is why you should care: This battle is about to break. And when it does, one side will turn out to be much more ‘right’ than the other. The time for action has arrived. To position yourself in the direction of the break you think is most likely to happen.

It’s time to choose a side.

The Case for Playing Offense

The past several months have seen a surge in positive stories celebrating the U.S. emergence out of recession and back to solid economic health.
  1. Tapping into shale oil and gas deposits is ushering in a new energy boom. Domestic energy production is on the rise, creating jobs and increasing exports, while reducing our dependency on foreign suppliers:

U.S. close to energy independence by 2030 (UPI)

The United States may be close to self-sufficiency in energy by 2030 because of a "shale revolution" in the country, said BP's chief executive officer.
2) The stock market is thriving, with several indices at record highs. Corporate earnings and investor confidence are booming, and the expectation of a Great Rotation of massive amounts of capital from low-yielding bonds into the stock market is high:

BofA Declares: The Great Rotation Is Here (BusinessInsider)

The big theme of 2013 – according to investment strategists at shops across Wall Street – will be the "Great Rotation," a massive move out of bonds and into stocks.

Economic growth in the U.S. is expected to accelerate, facilitating the shift.


3) The global economy has made it out of the woods and is increasingly robust. In the US, the unemployment rate is down several percent from its recession high. The fiscal cliff was averted. The 2013 deficit has been reduced below $1 trillion for the first time in five years. The crisis in Europe has been successfully managed.

Groupthink in Davos: The Financial Crisis Is Over (BusinessWeek)

There is no official declaration, or even a formal survey. But the chatter at the World Economic Forum in Davos, Switzerland, is about the end of the financial crisis that began in 2008 and dragged on through last summer’s spike in Spanish and Italian government bond yields. “There’s a crystallization of thought that the financial crisis is over,” says Scott Minerd, managing partner and chief investment officer of Guggenheim Partners, a Santa Monica (Calif.) firm with about $160 billion under management.
4) Housing, the engine of consumer wealth, is in recovery. Home prices are on the rise after years of punishing declines. And a rebound in consumer spending is visible across a wide spectrum of home-related services:

Housing Packs Punch for U.S. Growth in 2013 and Beyond (Bloomberg)

The housing rebound is broadening to other parts of the U.S. economy and will likely lend impetus to growth through 2013 and beyond.

Climbing home prices are lifting household wealth and boosting the purchasing power of consumers. Declining mortgage delinquencies and foreclosures are buttressing bank balance sheets, giving them greater leeway to lend. And rising property- tax revenue is fortifying the finances of state and local governments, alleviating pressure on them to cut budgets.

“The housing recovery will kick into a higher gear as the year progresses,” said Mark Zandi, chief economist in West Chester, Pennsylvania, for Moody’s Analytics Inc. “We’re going to get a lot of juice from the channels” through which it affects other parts of the economy.


5) Jobs are being created and consumer income is on the rise. U.S. personal income recently experienced its biggest increase in eight years. Non-farm payrolls have increased every month for the past two years. There are increasing examples of local job markets experiencing a true employment “boom”:

Silicon Valley job growth has reached dot-com boom levels, report says (Mercury News)

“Employment growth in Silicon Valley is impressive, very impressive,” said Russell Hancock, president of Joint Venture Silicon Valley. “Some might even say the job growth is cause for euphoria.”

Last year, the nine-county Bay Area added about 92,000 jobs, according to the study. Of that total, Silicon Valley – defined as Santa Clara and San Mateo counties – accounted for 46 percent, or 42,000 jobs.

“This is prodigious job creation,” Hancock said. “The growth is crazy and it’s getting crazier.”

A Rosy Picture

Taken collectively, it's hard not to feel optimistic – even strongly so – about our future prospects. With these messages constantly being delivered and reinforced, it's little wonder that the status quo is not under attack. That the energy behind the Occupy movement has dissipated. Because a better tomorrow lies ahead, right?

Right?

The Case for Defense

As alluring as the offensive narrative sounds, it contradicts starkly with the preponderance of underlying data. Data that requires some – but not too much – digging beneath the headlines.

In counterpoint to the above narrative, a sampling of this data reveals the following:

1) Expensive oil is here to stay and will handicap economic growth for decades to come. Peak Oil is alive and well, despite the “shale miracle”. The four major global oil producers, including BP, continue to report declining total production numbers despite more than doubling well drilling activity since 2007. Gas prices this February are the highest they’ve been in history:

Consumers Taking Financial Hit From Rising Fuel Prices (CNBC)

Consumers have been spending more on gasoline than they have in nearly three decades.

With pump prices at their highest level on record for this time of year, the stage is set for an even greater climb in gasoline prices and expenditures than in 2012. Retail gasoline prices have surged 17 cents in a week to top $3.50 a gallon on average, posting the highest prices on record for the beginning of February.

Meanwhile, the U.S. Energy Information Administration reported Monday that gasoline expenditures in 2012 for the average U.S. household reached $2,912, or just under 4 percent of income before taxes. This was the highest estimated percentage of household income spent on gasoline in nearly three decades, with the exception of 2008, when the average household spent a similar amount.


2) Financial security valuations are dislocated from the fundamentals of the underlying companies. The trillions of dollars of liquidity pumped into the market by the Fed is, yet again, blowing asset bubbles in stocks and bonds. Respectable veteran investors from Bill Gross, to Jeremy Grantham, to Jim Rogers, to Bob Janjuah, to John Hussman are warning of a coming calamitous correction. Corporate insiders, despite their proclamations of record profitability, are voting with their feet and selling over 9 times more of their company stock than they are buying:

Sucker Alert? Insider Selling Surges After Dow 14,000 (CNBC)

Insiders have been pulling out of stocks just as small investors are getting in.

There have been more than nine insider sales for every one buy over the past week among NYSE stocks, according to Vickers. The last time executives sold their company’s stock this aggressively was in early 2012, just before the S&P 500 went on to correct by 10 percent to its low for the year.

“Insiders know more than the vast majority of market participants,” said Enis Taner, global macro editor for RiskReversal.com. “And they’re usually right over a long period of time.”


3) The economic “recovery” is anemic at best, and skewed heavily to the top few percent. December saw negative GDP growth and last week saw the persistently-high unemployment rate creep back up. December’s reported personal income increases was primarily a one-time event, as companies sought to pay out excess income and dividends in advance of anticipated 2013 income tax increases. Payroll taxes will rise on all employees, but carried interest and capital gains rates (how the wealthy earn their income) remain unchanged at historically low levels. Nearly two-thirds of Americans now expect anemic economic growth to define our “new normal” way of life:

Bad Economy Is New Normal, More Americans Say (Huffington Post)

More Americans believe today than they did two years ago that their country will never fully recover from the Great Recession.

Fifty-six percent of Americans surveyed by the John J. Heldrich Center for Workforce Development at Rutgers University in August 2010 said they believed the Great Recession would permanently change the economy. In a January follow-up survey, 60 percent of respondents agreed with that sentiment.

“Five years of economic misery have profoundly diminished Americans’ confidence in the economy and their outlook for the next generation,” Rutgers professor and survey co-author Carl Van Horn said in a statement.

Most survey respondents – 73 percent – had either lost their jobs or knew somebody who had. More than half said they have less money than they did before the recession, and 61 percent believe they will never fully recover.


4) The housing market will not return to its former glory. With no real wage growth and further de-leveraging still needed, the consumer is not driving the modest price growth seen in many housing markets; instead, hedge funds are – they are buying up huge tracts of foreclosed homes, renting them out, and securitizing those rental streams. This will not result in the competitive bidding by multiple parties that drove the appreciation pre-bubble collapse. In fact, the entire concept of looking at a house as a financial investment is eschewed by the founder of the Case-Shiller Housing Index:

Shiller Sees No Major Rally in U.S. Housing Market (Bloomberg)

"Housing traditionally is not viewed as a great investment. It takes maintenance, it depreciates, it goes out of style. All of those are problems. And there's technical progress in housing. So, new ones are better."

“So, why was it considered an investment? That was a fad. That was an idea that took hold in the early 2000’s. And I don’t expect it to come back. Not with the same force. So people might just decide, “Yeah, I’ll diversify my portfolio. I’ll live in a rental.” That is a very sensible thing for many people to do.”


5) Our trading partners are as bad off, or worse, than we are. Global markets have rallied in recent months as the news from Europe grew quiet – despite no real resolution to the core problems occurring. And in recent days, fresh concerns about forex rates hurting competitiveness, crushing unemployment, and excessive debt have erupted. Meanwhile, Japan is everyone’s leading candidate for the first developed nation of the 21st century to implode under its debts. And China, whether it is able to avoid a hard landing or not in the short term, is staring at a mid-term food and water crisis that it has no solution to.

Europe's Crisis Not Over Say Bankers, Policymakers (Reuters)

International bankers and finance ministers warned on Saturday that Europe's crisis was not over even though the euro currency is now stabilized, it will take years to overcome economic malaise and mass unemployment in Europe.

After a private meeting of leading commercial bankers, government officials, central bankers and trade union officials, Swedish Finance Minister Anders Borg told Reuters: “There is a clear divide between the financial markets, who think a lot of this is fixed, and the people in the real economy and particularly from our side as the governments.”


6) The risk of external shocks is under-appreciated and unplanned for. Currently financial markets and our just-in-time national distribution systems are geared for clear sailing ahead. Unexpected developments like superstorm Sandy, a Fukushima-like event, or an oil price spike could easily send prices – and availability of goods – swiftly awry. For instance, the global drought continues, engulfing nearly 100% of Kansas, Colorado, Nebraska, and Oklahoma in extremely dry conditions. The UN warns that prices worldwide could easily spike this year, as world grain stocks are near historic lows:

World food prices stable, low stocks pose risk of spikes: U.N. (Reuters)

World food prices stabilized in January after falling in the previous three months, the United Nations food agency said on Thursday, but it warned that adverse crop weather could cause violent price spikes due to tight grains stocks.

Global food prices surged in mid-2012 following the worst U.S. drought in more than half a century and dry weather in other key grains exporters, raising fears of a food crisis similar to the one in 2008.

“The weather could turn negative, and because we are in a tight situation, prices could react violently and rise,” FAO senior economist Abdolreza Abbassian said.

FAO raised its estimate for world cereal use in 2012/13 by 0.6 percent to 2.326 billion metric tons, up nearly 13 million metric tons from the 2011/12 season.

A weaker dollar is boosting demand for dollar-denominated commodities, Abbassian said, and rising oil prices will underpin food prices in coming months, he said. Higher energy prices increase transport costs which farmers pass on to consumers.

Sobering Thoughts

Sadly, this list could stretch longer if I didn't feel the need to end it here to avoid overloading the reader. But suffice it to say that there is certainly enough evidence to at least dispel a material amount of the sanguine outlook of those cheerleading for an offensive stance at this time.

Picking Your Side

Offense

Those taking the optimistic view here argue that our economic engine has been running hard to pull us out of the hole we've been in for the past five years. And now that we're back on level track, the engine's built-up head of steam is going to move us forward quickly.

Expect better GDP growth, lower unemployment, higher income, high stock prices, higher housing prices, more innovation, and lower energy prices.

If this future comes to pass, you won’t want to be left in the dust as the party roars past. Get on the train – go long, perhaps with some leverage, and bet on America’s grit and ingenuity.

To be frank, this has been the winning side for the past year and a half. Those who have sided with the bulls have been rewarded with sizable stock gains and stabilized (or growing) housing prices.

Defense

But if, on the other hand, you – like me – find enough reason in the data for doubting the optimistic case, you need to determine what your defensive plan should be.

The degree of defense you adopt should be based upon your own exploration of the data. Dig further than the samples I could only cursorily provide above. Come up with your own personal assessment of the probability and severity of the downside risks.

If you find you assess the risks at or above the ‘moderate’ level (which I do), then consider strongly the following guidance:

  • Exchange paper assets for tangible ones. Acquire exposure to the precious metals; we recommend having at least 10% of your net worth in gold and silver (for those new to owning precious metals, you may want to read our buyer's guide). Above that, if possible, invest in productive hard assets. Holdings like farmland, timberland, energy deposits, and mineral/water rights are assets that will produce units that will generate an income for you.
  • Find a sympatico adviser to manage any remaining paper wealth. For many reasons, most of us will still keep a percentage of our wealth in the stock and bond markets (in retirement/pension accounts, 529 plans, etc). If you're in the defensive camp, make sure the adviser managing your money is, too. There are several we endorse, but we're impartial about whether you work with them or not. The important point here is to work with the adviser whose outlook is most closely aligned with yours.
  • Cultivate resiliency. Most Peak Prosperity readers are well-aware of our recommendations here. Start at the individual level to prepare both physically and emotionally so that whatever the future brings, your quality of life is as least impacted as possible.
  • Cultivate community. Whatever your plans, a support network will help you achieve them better, and likely faster, too. Plus, it gives you the added insurance of assistance should your best-laid plans not play out as you expect them to (which happens frequently). Invest in fostering collaborative relationships in your neighborhood, or join existing communities relevant to your location or interests.
  • Defend your income stream(s). Assess your employment situation – how vulnerable is your income? Explore ways to make yourself more valuable to your employer, add additional source(s) of income, and/or create your own business. Steady income makes challenging times much easier to bear by giving you the flexibility to explore different approaches that may work better for the new reality. Without that ability to absorb failure, your options are often much more limited.
If you take the above steps, regardless of what happens, you'll be able to sleep at night knowing that you've acted conscientiously according to your convictions. And in the event the bulls turn out to be 'right', few of these steps will serve you poorly. In a secular bull market, hard assets should still appreciate measurably. And personal and community resiliency is always a net positive, regardless of the economic environment.

But if the bulls turn out to be the ones in error, the value of these actions could be priceless.

So get to it. Do your own personal calculus of the risks. Determine where you need to be positioned. And take the necessary steps to get well-situated where you assess you need to be.

It’s time to choose a side.

~ Adam Taggart

This is a companion discussion topic for the original entry at https://peakprosperity.com/time-to-choose/

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Chris,
I am in the desfensive camp as well, however I am keeping my bets near the middle because the greatest certainty in our New Economy is uncertainty. 

In my balanced portfolio things I did not think would do well have surprised. And things that seemed like a slam dunk have dissapointed,

My investments are 25% Precious Metals, 15% Energy, 10% Short Term Bonds and TIPS, 10% Large Cap Dividend Payers, 5% Utilities, and 35% CASH. 

I have eliminated fees to advisors. Compounded fees to advisors over the life of a portfolio can take a huge chunk out of your net worth.

 

3

A great summary Adam. Thank you. I guess if you drew a continuum from, 'Everything is great <-> It's all collapsing', we would all draw a line in a slightly different place?
Can't we do both? 'Hope for the Best, Prepare for the Worst', as the saying goes. I'd hate to lose my nice, comfortable lifestyle however unsustainable it is. Sack cloth and ashes anyone? Perhaps we could correlate our picks with whether we are a 'glass full or glass half empty' type of person…

Perhaps this conversation in a novel by  Lucy Montomery [Anne of Avonlea] says it for me:

"Well, I always like to look on the bright side, Eliza."
"There isn't any bright side."
"Oh, indeed there is," cried Anne, who couldn't endure such heresy in silence." Why, there are ever so many bright sides, Miss Andrews. It's really a beautiful world."
"You won't have such a high opinion of it when you've lived as long in it as I have," retorted Miss Eliza sourly, "and you won't be so enthusiastic about improving it either. How is your mother, Diana? Dear me, but she has failed of late. She looks terrible run down. And how long is it before Marilla expects to be stone blind, Anne?"
"The doctor thinks her eyes will not get any worse if she is very careful," faltered Anne.
Eliza shook her head.
"Doctors always talk like that just to keep people cheered up. I wouldn't have much hope if I was her. It's best to be prepared for the worst."
"But oughtn't we be prepared for the best too?" pleaded Anne.
"It's just as likely to happen as the worst."
"Not in my experience, and I've fifty-seven years to set against your sixteen," retorted Eliza.
 

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This is a great article to use to introduce people to a different way of thinking. I have fowarded it to several people already! Thanks Adam!
Jan

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…every day!, I go through these very checklists. Yes, you could add so many more. If the economy improves then higher interest rates and the Fed is screwed as they have to start pulling cash out of the system. So many more that it is best to stop here.
I am with Hussman and Janjuah and pray Grantham is more correct, and we finally get a real nice clearing.

I like RISK, and the other side of the ledger, Inflation, is protected by Precious Metals and Land, Preparations and Resilience have been tested a few times in the last few years, and I sleep just fine knowing I only have to think about how I manage that moment in time, and NOT worry if my family has food and the essentials. That is really cool.

Chris has always said to be thankful for this added time, and it has been most beneficial. Why? We have had a few close calls, and weather related issues that had me and perhaps us challenge our Preparations and Resilience and the stress never materialized as we were Prepared so bring it on.

Well Folks, you all have a great day, and I must now get to the task of removing about 10 inches of snow from drive-way, walk way and older neighbors (same).

Adam, this was a good essay, and timely. I vote the market is about to correct to the downside before it marches right back up as it did in 2009.

Good Luck Folks

BOB

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I'll take both pills. But that's just me. The red and the blue.

There are exponential curves flying off in all directions.

 

In my estimation there is a non-zero possibility that the singularity may happen, If they make progress in Quantum Computing, be prepared for a very different world. Your thoughts will become amusing, but irrelevant.

After understanding just how the Higgs boson works I realise that we do live in a Quantum reality.

There is also a non-zero chance that Cold Fusion will deliver the goods. Professor Hagelstein is hard at work trying to interpret the empirical evidence. It is my impression that he is near a breakthrough.

There is a strong possibility that endocrine disruptors will make women of us all. Had a soft drink today? The aluminium can is protected by bisphenol a. That coud deflect the population growth curve in a totally unexpected direction.

And what did I do tonight? I learned what I could on anchoring my yacht because I am unable to discern which of the asymptotic curves will prevail. We are faced not with an infinity of choices, but a choice of infinities.

We Do live in interesting times, do we not?

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Are we human beings or investors? If this rapatious, destructive, and violent system could recover, would we want it to?  The planet is dying and there is untold human suffering because we and the planet are one. The current economic calamity does not exist in the ethers of economic theory and statistics but impacts real people living real lives.  Let the talking heads on the bought and sold media outlets try to paper over the underlying tragety, but the crisis is still real and happening.
The failure of this system is a victory for all that is good and true in this world. If such a system could recover that means that crime pays and evil is good. The currnet failures mean that there is meaning beauty and love are built into the world.  It is not an amorphous meaningless mass of random chemical reactions that sentimentral humans project meaning onto. The world is alive and its foundation is love.  Systems based on exploitation, self centered greed and material accumulation, domination and violence cannot endure because the contrary to the very foundation of the world.

Remember that taking the right pill just brings you in contact with what is real, we must decide together how to move on from there.

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I'll assume Blue is status quo, and Red is something different.  I'm gonna OD on the Red then.  When I look at my five year old son and his friends playing out in the yard, all I can think is that for their sake, this system needs a serious reset.  Gonna suck, but it's the only chance at something better in the long run (to summarize treebeard). 

9

http://simple.wikipedia.org/wiki/Higgs_BosonI read it Arthur, and will again (add infinity).
I just came in from shoveling a whole lot of snow, it is now piled up deep around the edges of my yard, and after reading this I will get dressed again, and go stick my head in it!
Do mosquitoes bite you or leave you alone out of respect? Do love you Arthur.
Arthur, I just came back here to write this: Robots: Less jobs, lower wages, fewer taxes, Social unrest = Not Inflation. Now, I see it as trivial.
Happy Sailing Captain
BOB

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Never met you Aurthur, but I love ya too man.

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I simply have to get a copy of my book into the hands of Bill Gross who seems to be edging ever closer to connecting the myriad economic dysfunctions he is cataloging with the other two E's.
In his latest piece, Credit Supernova, after articulating the strange mechanism of fractional reserve banking, goes on to note the illogical nature of our system that keeps on expanding exponentially:

Minsky’s concept, developed nearly a half century ago shortly after the explosive decoupling of the dollar from gold in 1971, was primarily a cyclically contained model which acknowledged recession and then rejuvenation once the system’s leverage had been reduced. That was then. He perhaps could not have imagined the hyperbolic, as opposed to linear, secular rise in U.S. credit creation that has occurred since[.]

While there has been cyclical delevering, it has always been mild – even during the Volcker era of 1979-81. When Minsky formulated his theory in the early 70s, credit outstanding in the U.S. totaled $3 trillion. Today, at $56 trillion and counting, it is a monster that requires perpetually increasing amounts of fuel, a supernova star that expands and expands, yet, in the process begins to consume itself.

Each additional dollar of credit seems to create less and less heat. In the 1980s, it took four dollars of new credit to generate $1 of real GDP. Over the last decade, it has taken $10, and since 2006, $20 to produce the same result. +

Minsky’s Ponzi finance at the 2013 stage goes more and more to creditors and market speculators and less and less to the real economy.

This “Credit New Normal” is entropic much like the physical universe and the “heat” or real growth that new credit now generates becomes less and less each year: 2% real growth now instead of an historical 3.5% over the past 50 years; likely even less as the future unfolds.

(Source) 

Yes, it is truly a wondrous thing that we can live with steadily decreasing 'bang for the buck' and yet when the Fed triples down on this strategy by creating even more leverage and more debt all you can find in the mainstream press are rah-rah cheerleading articles about recovery and rebound.

Yet for those with an eye for data, the trend is decidedly not your friend and it boggles the mind that so many are raucously cheering any and every effort to reignite that same trend. Where is the caution? Where is the sense that there's something terminally wrong with a system that requires more and more to accomplish less and less?

He continues:

Not only is more and more anemic credit created by lenders as its “sixteen tons” becomes “thirty-two,” then “sixty-four,” but in the process, today’s near zero bound interest rates cripple savers and business models previously constructed on the basis of positive real yields and wider margins for loans.

Net interest margins at banks compress; liabilities at insurance companies threaten their levered equity; and underfunded pension plans require greater contributions from their corporate funders unless regulatory agencies intervene. What has followed has been a gradual erosion of real growth as layoffs, bank branch closings and business consolidations create less of a need for labor and physical plant expansion.

In effect, the initial magic of credit creation turns less magical, in some cases even destructive and begins to consume credit markets at the margin as well as portions of the real economy it has created.

And this is all without ever considering the fact that oil is now permanently expensive relative to historical prices and that limits are being approached in fisheries, soil, fresh water, several key minerals, and innumerable other natural systems and resources. The idea of magically unending credit creation simply does not square up with a world of limits.

So what does the bond king, the main architect of one of the largest single piles of investment money in the world think about how one should assess the risks of a system whose very growth begins to feed upon itself?

If so then the legitimate question is: how much time does money/credit have left and what are the investment consequences between now and then?

Well, first I will admit that my supernova metaphor is more instructive than literal. The end of the global monetary system is not nigh. But the entropic characterization is most illustrative.

Credit is now funneled increasingly into market speculation as opposed to productive innovation. Asset price appreciation as opposed to simple yield or “carry” is now critical to maintain the system’s momentum and longevity. Investment banking, which only a decade ago promoted small business development and transition to public markets, now is dominated by leveraged speculation and the Ponzi finance Minsky once warned against.

So our credit-based financial markets and the economy it supports are levered, fragile and increasingly entropic – it is running out of energy and time. When does money run out of time?

The countdown begins when investable assets pose too much risk for too little return; when lenders desert credit markets for other alternatives such as cash or real assets.

REPEAT: THE COUNTDOWN BEGINS WHEN INVESTABLE ASSETS POSE TOO MUCH RISK FOR TOO LITTLE RETURN.

Visible first signs for creditors would logically be 1) long-term bond yields too low relative to duration risk, 2) credit spreads too tight relative to default risk and 3) PE ratios too high relative to growth risks.

++++++++++++++

Please re-read that main conclusion as many times as necessary until it really sinks in. Here it is again:

THE COUNTDOWN BEGINS WHEN INVESTABLE ASSETS POSE TOO MUCH RISK FOR TOO LITTLE RETURN.

Looking at his three indicators I would assess them like this:

  1. Check

  2. Check

  3. Check

So, is it smiley face time or head for the shelter time? I know where I stand.

Also note that the endgame is marked when lenders desert the credit markets in favor of cash and/or real assets.  So much of the mainstream press seems desigend to lure the masses into a bad deal even as the truly smart investors are positioning their thinking and exit strategies around the idea of real assets.

It wouldn't be the first time. 

12

Adam,
Very timely article. I have long since chucked all blue pills into the trash as you well know! And there is no fence even remotely in sight anymore much less something to sit on.

I have often heard the saying that the the best defence is a good offense.  I'm not sure where that came from but it was probably a football coach.

Taking the defensive bullet points you mention and agressively pursuing them is in my opinion the only viable strategy.  Our dependency on the earths fossil fuel resource base has colored everything we look at with a hue of blue.  As that wears off (like a huge hangover) the human race will be truly seeing red!!!

Chris,

I continue to be amazed that liquid fuels are easily available at any price. In the design and construction business it takes huge quantities to create, move, store and install all of the components that go into creating even a very energy efficient building. Having long since downed the red pill I continually squint at the depleting resource trend and ask myself, when will the gas lines return to our way of life? How long do we have of available energy at any price to build the infrastructure, shelters, transportation and so forth that can carry us forward in some sort of sustainable fashion.

And I am grateful to have this time to continue to pursue those bullet points above! Cheers!

Coop

 

13

( love you too Man as a lot of love today is being shared).
Gregor as you know wrote quite the essay, and the response from everyone was as it should have been with the Robots impact, and what it would/could mean. My question then: We have 150,000 employment numbers (+/-) every month now for some time. A growing economy should bring these numbers up, and we understand this. However, if we are to assume more and more Robots, displacing 5 laborers for every 1 Robot then what are the numbers of Robots anticipated per month going forward? A guest estimate would be reveling for sure.

I have looked all over the map for any numbers that would shed light on this. I don't know if the Robots being activated/planned for are taking the place of jobs that were lost or jobs now in the system. Can you shed anymore light on this?

My inclination is to think that management already has cut to the bone, and are looking for any advantage they can get, certainly as first movers of this technology would give them a huge advantage over their competitors. Labor would suffer, wages across the board would suffer, and tax collection too.

To conclude, if we are to choose one pill over the other then employment, wages, and tax collection would be necessary tools to make a better choice.

Note: Adam, I hate like hell asking questions that are just a data search from getting the answers but I am stumped a little on these numbers.

Thank you

BOB

14

I totally agree with this conclusion, but the question for me is what real assets I can invest in at the lower end of the financial spectrum.  I have what I consider sufficient PMs, but where do I go from there?  Real estate is a loser in my neck of the woods.  I've stocked up on things I may need to live reasonably   comfortably as energy becomes more expensive.  One asset I've been stocking up on is lumber that I buy green and stack and sticker so that it will be very usable in the near future.

Generally, my thoughts wander toward other kinds of tree products, including furniture grade wood, maple products and species that are dying off for one pestiferous reason or another.  But, what kind of investment products would capitalize on wood and wood products?  I have limited space, aside from my wood shed for firewood and small barn, to store physical wood.  Always looking for ideas.

Doug

15

TPTB have kept this boat afloat for four years.  They have more tools now than they did four years ago.  If the sovereign states and central banks don't blink do you think the pension funds and private equity will?  Ever increasing proportions of the populations in developed economies are depending on some measure of wealth transfer and quantitative easing. Do you think this general populace is going to "abandon" the system?  While I am all in for being prepared I think a whorthwhile discussion could be had over what the collapsing progression will look like.  Where might the tremors first appear and on what fault line?  Will it be an acute fall or a gradual fall? 
Most of us have been shocked by the ability of TPTB to kick the can down the road.  We are shocked because we have been conditioned in our lives to operate within rule sets.  Our approach to investing has been similarly conditioned.  But the sovereign states and central banks are not beholden to any rules in their policy decisions and actions.  SO I say again, if you are going to talk about the collapse and the adjustments of allocations accordingly, what will it look like?  What series of actions will be taken by what parties? We are in a period of secular changes.  These take time to develop and as such give us time to anticipate.  I have my own ideas but I want to hear others first.

16

Thanks Adam for a well-reasoned and timely anlysis.  I add to your fundamental analysis, the technical side that clearly shows we have been in a secular bear market since the 2000 top when the Shiller P/E exceeded 44 and is yet to reach attractive values of 7-10 as prior bear markets provided at their bottoms. Current Shiller P/E is over 22, higly overpriced relative to the average value of ~ 16 and certainly overpriced relative to prior bottoms at ~7. Prior secular bear markets took 16-18 years to reach bottom from the top. This suggests we may have a few years left, but given the excessive valuations we saw leading to 2000 and the current global financial problems , I'm very defensive right here and right now!! As you point out any external shock can broing it down quickly. My portfolio comprises of cash, PM's and real assets(such as farmland).

17

BofA Declares: The Great Rotation Is Here (BusinessInsider)

The big theme of 2013 – according to investment strategists at shops across Wall Street – will be the "Great Rotation," a massive move out of bonds and into stocks.

Economic growth in the U.S. is expected to accelerate, facilitating the shift.

How can this not lead to some sort of debt crisis  when interest rates rise as people sell bonds?  Where will they go with their money then?
18

Professor Hussman, he's of high character, and a great source of truly wonderful analysis.http://www.hussmanfunds.com/wmc/wmc130128.htm
Respectfully Given
BOB

19

What's that sound?  Oh, just a friendly neighborhood drone!
  Adam…great article but all should remember…when the going gets tough…TPTB change the rules.

  First to go:  the concept of legal protection for all (almost daily examples of this -  drones, banksters shenanigans, etc)

  Without that protection?  We are woefully weak in our defensive positions…

 

 

20

You should just start a hedge fund, short Treasuries and the Dollar on your first and only trade.  Once the system craters, you will have the type of psuedo credentials that world respects and THEN he may read the book.  All we have to do is time the market. . .I'll send in the first $50K because sometimes I think you are the only guy (other than Kyle Bass) that gets it.
Rector