The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, November 4th, 2008.
In his genius, E.F. Schumaker foresaw the eventual demise of present day central banking long ago, and offers a workable solution that can both co-exit and operate within transition from failing fiat currency based economies flaming out due to accelerating inflation. And make no mistake about it - the global economy is flaming out - with all strata of economies soon to begin the decentralization process. One need only look at the collapse in the Baltic Dry Index (BDI) for confirmation in this regard. The credit crisis, and lack of trust it sponsors between financial institutions both domestic and foreign alike, has crashed international trade markets the likes of which never witnessed in the history of mankind. As growing numbers begin to understand this condition is not temporary, but the future, process will take hold, and economies will increasingly regionalize.
So, one best face the truth and prepare today for the inevitable, a future characterized by a return to a good work ethic, honest money, and a hard earned respect for your fellow man. Of course the present day bourgeois bureaucracy will attempt to maintain their paper empires for as long as possible, plying the mob with bread and circuses. As with all such past instances however, no matter how big the scandal (with those involved thinking themselves untouchable), the perpetrators will go too far, with revolt and change the outcome. And while it could be said that in the end America's demise was a result of rot from within, it's important to realize that with reverse globalization the pivot this time around, marked by foreigners increasingly less willing to accept worthless US currency in exchange for goods and resources anymore, it's likely the painful process of economic / political decentralization will originate from outside, with extremities collapsing back into the center.
Here, despite being rich in natural resources we all need; recently revitalized emerging markets are imploding from collapsing demand, which is a condition that will remain as long as Western economies remain depressed. And Western economies can be expected to remain depressed as long as the credit cycle contraction and deleveraging process continue to depress demand for goods and services, which in turn brings us back to why demand for resources and manufactured goods from emerging markets has collapsed. Of course the shocker for most people will come when in spite of economic malaise the low interest rates America needs to perpetuate the illusion will also be a thing of the past, where emerging markets (most notably China) will be unable to continue investing in Treasuries, which will in turn sever the ties necessary to maintain the Western banking model. It's the deficits you see. The US is insolvent, and at some point the markets will acknowledge this via a collapse in demand for its paper.
As you can see then, the credit and commerce based loops that keeps the globalization model together are failing, where unless bankers can get aging and already fully exploited Western populations to take on more debt, the party is over. The only question at this point is how fast the decentralization process will take place. Will it come quick, with a rapid deleveraging of the system unraveling the very fabric of modern societal living overnight, or will the decay be slow, interrupted by human intervention in the form of wars, burgeoning bureaucracies, and any other excuse the banking community and politicos can come up with to print more currency. Perhaps now you see why these types feel justified in war, because allowing process to take a more natural course would guarantee an economic Depression, the likes of which not witnessed in multi-generations. This is of course why the Fed has become banker to the world.
In terms of measuring pace in this regard then, it appears appropriate to continue turning to the empirical world to provide us with clues and confirmation in our beliefs, as has been the case these past weeks in rigorous fashion. Here, the understanding is that as long as equity markets remain under pressure, the credit bubble will continue to deflate, and the unwinding of the globalization model will continue to accelerate. Of course a great number of market watchers have been out of late calling a bottom in the stock market, right from just about every little guy you care to mention right to the likes of Richard Russell. And even the great Bob Hoye sees the probability of an interim bottom here based on his panic cycle count, a bottom he sees possibly lasting into the first quarter of next year. And hey, in many respects the markets are oversold and select internals have indeed made some kind of a bottom.
Of course with the present sequence being of Grand Super-Cycle Degree minimally, meaning the cycle scale of what is happening right now, with the generational turn in the credit cycle at center, is a big enough consideration not to take anything for granted in my opinion. This is because in the end, even those who have been correct in identifying such turn points in the past are proven wrong in the end, consumed by the out of control monster a hundred years of unfretted credit expansion will create. You see perceptions are literally 'blown away' as a result of all the ballooning experiments in asset markets, where even if one where capable of maintaining an appropriate view of things, the elastic was pulled back so far due to scale the reaction going the other way is both incomprehensible and too painful to contemplate for the vast majority of market participants. This sentiment is expressed well in tech stocks right now, up some six-days in a row and poised for more pain at any time. (See Figure 1)
Figure 1
And as you can see above it's not just my imagination at work when raising caution about all the 'bottom calling' at present, with technicals on the weekly Nasdaq Composite Index (Comp) featured below clearly showing the possibility of lower lows arriving at any time. So, while it's true the bounce in stocks could run further, possibly extending into April of next year if both the 1929 and 1938 patterns were to repeat, again, with so many market participants knowing about this now, and put / call ratios still low, one does need wonder just how it will be before tech stock investors are chased out their speculative long positions by continued deleveraging. (i.e. see Money Flow Indictor [MFI] above.) What's more, and unfortunately for the bulls, things don't improve when we move on to the monthly plot either. (See Figure 2)
Figure 2
By the way, if you are wondering why the damn dollar ($) keeps rising this is your answer, where it's the equity market and deleveraging trends that are driving safe harbor and losing bet related derivatives buying. You see the more US stocks go down, increased forced redemptions from abroad causes foreign fund managers to buy $'s to meet redemption requests, which creates temporary artificial demand.
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