Children of the Apocalypse - i.e. The World According to David Stockman

Politics or Selective Quotes from Ron Paul's stump speeches...  I happen to agree with David Stockman, but I don't take any stock in his admission that the GOP is at fault or any party for that matter.  We are hurtling now to a place of which many history books 200 hundred years from now will be focused on explaining with the hindsight of 20/20 vision.  

We are so far into the weeds on this and right in the middle of the weed field it's full impact can in no way be ascertained.  It's like watching a locomotive reach the end of the line at top speed with a thousand screaming passengers or a cruise ship at full steam heading for the passenger terminal.  

It hasn't crashed yet, so the aftermath cannot even be fathomed.  You just know that it is going to end badly and a lot of people are going to get hurt, but because it hasn't happened yet you just sit transfixed by the impending disaster about to happen.  The only thing you can think at this point is that it is going to happen, you just can't envision the aftermath. 

Many of us shared this moment watching the Trade Towers on fire anyone that had visited them or knew them intimately was extremely worried and heartbroken to see them on fire.  However, none could have envisioned that they would have collapsed, and this is kind of where we have been and about to see play out again in our economy. 

We have been vainly fighting  against and at the same time watching our economy burn since 2000, but we refused to give up and fought like hell to get it under control only to see the floor collapse despite our best efforts and watched helplessly as the economy fall into itself in 2007-09.  Well the next part of the collapse is about to happen and it's as I envisioned going to occur at the earliest within the next 3-6 months.  This is when the pig with the lipstick, decides to put us on the menu and gives us the kiss of death.  The aftermath will only start to be visible one - two years from now. 

Personally I don't think you need fiscal discipline when all you have to do is to print more money, and find ways to inject it into the economy.  I mean the amount of wealth that has been accumulated and stored is staggering.  

The funny thing about storing mass sums of money, because there is more where that came from and sitting on it akin to watching a glacier melt.  You can't see it melt but every year there are a few hundred yards less of it.  It's akin to your continent of money being overrun each year by the amount of liquidity oceans of new money brings, so that your continent is now an island country.

In my humble view, it isn't not the printing of the money that is necessarily the issue.  The problem is the how all the money has been distributed and accounted for thus far.  Specifically the point David makes about the speculative and non-value creating ways we are able to make money these days.  The trick here is when maintaining a "Token Economy System" it has to be fair and equitable or people won't want to play anymore and will stop cooperating. 

I like how the article, makes a point that our deficit in 1971 was $425 Billion, but while it does mention "indirectly" that $1Trillion was our GDP it doesn't say that GDP in Q2 of this year was 14.6 Trillion while our debt was $11.8 Billion for the year.  For the most part until the last eight years our debt accumulation has been in lock step with our creation of GDP.  I think we have made a huge mistake eight-ten years ago, by not continuing to focus on paying down our debt.  If you look at the US as a company taking on more debt is a decidely risk gamble of which never really goes well.  But we are now committed.

Job recovery will never happen because technology is quickly outpacing human development and displacing more and more people.  All you have to do is look at the explosion of reality shows like the Bachelorette, Survivor, MTV etc. etc. many Americans have already been displaced but the offset has been the entertainment industry.  It's is still the US's biggest export, movies, music, tv shows...  no one wants to watch a robot just yet, but be prepared, actors are going to be non-existent as well, relegated to people venues where you leave your house to see live entertainment.  

I can't really see class warfare, because everyone in their family has a rich uncle, aunt, cousin, brother / sister no matter how unfortunate they are their own situation.  Class warfare was something that happened prior to standardized testing.  Wealth is not something that is only open to a family it has indiscriminately touched many lives of people from all ethnicity's and cultures, enough to offset a backlash of class fueled ire.

We will though need to undergo some aspect of social upheaval, only because change is now a constant and it is something we shall have to get used to.

Aug. 10, 2010, 12:45 a.m. EDT

Reagan insider: 'GOP destroyed U.S. economy'

Commentary: How: Gold. Tax cuts. Debts. Wars. Fat Cats. Class gap. No fiscal discipline

By Paul B. Farrell, MarketWatch

ARROYO GRANDE, Calif. (MarketWatch) -- "How my G.O.P. destroyed the U.S. economy." Yes, that is exactly what David Stockman

Get it? Not "destroying." The GOP has already "destroyed" the U.S. economy, setting up an "American Apocalypse."

Jobs recovery could take years

In the wake of Friday's disappointing jobs report, Neal Lipschutz and Phil Izzo discuss new predictions that it could be many years before the nation's unemployment rate reaches pre-recession levels.

Yes, Stockman is equally damning of the Democrats' Keynesian policies. But what this indictment by a party insider -- someone so close to the development of the Reaganomics ideology -- says about America, helps all of us better understand how America's toxic partisan-politics "holy war" is destroying not just the economy and capitalism, but the America dream. And unless this war stops soon, both parties will succeed in their collective death wish.
But why focus on Stockman's message? It's already lost in the 24/7 news cycle. Why? We need some introspection. Ask yourself: How did the great nation of America lose its moral compass and drift so far off course, to where our very survival is threatened?
We've arrived at a historic turning point as a nation that no longer needs outside enemies to destroy us, we are committing suicide. Democracy. Capitalism. The American dream. All dying. Why? Because of the economic decisions of the GOP the past 40 years, says this leading Reagan Republican.
Please listen with an open mind, no matter your party affiliation: This makes for a powerful history lesson, because it exposes how both parties are responsible for destroying the U.S. economy. Listen closely:

Reagan Republican: the GOP should file for bankruptcy

Stockman rushes into the ring swinging like a boxer: "If there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. The nation's public debt ... will soon reach $18 trillion." It screams "out for austerity and sacrifice." But instead, the GOP insists "that the nation's wealthiest taxpayers be spared even a three-percentage-point rate increase."
In the past 40 years Republican ideology has gone from solid principles to hype and slogans. Stockman says: "Republicans used to believe that prosperity depended upon the regular balancing of accounts -- in government, in international trade, on the ledgers of central banks and in the financial affairs of private households and businesses too."
No more. Today there's a "new catechism" that's "little more than money printing and deficit finance, vulgar Keynesianism robed in the ideological vestments of the prosperous classes" making a mockery of GOP ideals. Worse, it has resulted in "serial financial bubbles and Wall Street depredations that have crippled our economy." Yes, GOP ideals backfired, crippling our economy.
Stockman's indictment warns that the Republican party's "new policy doctrines have caused four great deformations of the national economy, and modern Republicans have turned a blind eye to each one:"

Stage 1. Nixon irresponsible, dumps gold, U.S starts spending binge

Richard Nixon's gold policies get Stockman's first assault, for defaulting "on American obligations under the 1944 Bretton Woods agreement to balance our accounts with the world." So for the past 40 years, America's been living "beyond our means as a nation" on "borrowed prosperity on an epic scale ... an outcome that Milton Friedman said could never happen when, in 1971, he persuaded President Nixon to unleash on the world paper dollars no longer redeemable in gold or other fixed monetary reserves."
Remember Friedman: "Just let the free market set currency exchange rates, he said, and trade deficits will self-correct." Friedman was wrong by trillions. And unfortunately "once relieved of the discipline of defending a fixed value for their currencies, politicians the world over were free to cheapen their money and disregard their neighbors."
And without discipline America was also encouraging "global monetary chaos as foreign central banks run their own printing presses at ever faster speeds to sop up the tidal wave of dollars coming from the Federal Reserve." Yes, the road to the coming apocalypse began with a Republican president listening to a misguided Nobel economist's advice.

Stage 2. Crushing debts from domestic excesses, war mongering

Stockman says "the second unhappy change in the American economy has been the extraordinary growth of our public debt. In 1970 it was just 40% of gross domestic product, or about $425 billion. When it reaches $18 trillion, it will be 40 times greater than in 1970." Who's to blame? Not big-spending Dems, says Stockman, but "from the Republican Party's embrace, about three decades ago, of the insidious doctrine that deficits don't matter if they result from tax cuts."
Back "in 1981, traditional Republicans supported tax cuts," but Stockman makes clear, they had to be "matched by spending cuts, to offset the way inflation was pushing many taxpayers into higher brackets and to spur investment. The Reagan administration's hastily prepared fiscal blueprint, however, was no match for the primordial forces -- the welfare state and the warfare state -- that drive the federal spending machine."
OK, stop a minute. As you absorb Stockman's indictment of how his Republican party has "destroyed the U.S. economy," you're probably asking yourself why anyone should believe a traitor to the Reagan legacy. I believe party affiliation is irrelevant here. This is a crucial subject that must be explored because it further exposes a dangerous historical trend where politics is so partisan it's having huge negative consequences.
Yes, the GOP does have a welfare-warfare state: Stockman says "the neocons were pushing the military budget skyward. And the Republicans on Capitol Hill who were supposed to cut spending, exempted from the knife most of the domestic budget -- entitlements, farm subsidies, education, water projects. But in the end it was a new cadre of ideological tax-cutters who killed the Republicans' fiscal religion."
When Fed chief Paul Volcker "crushed inflation" in the '80s we got a "solid economic rebound." But then "the new tax-cutters not only claimed victory for their supply-side strategy but hooked Republicans for good on the delusion that the economy will outgrow the deficit if plied with enough tax cuts." By 2009, they "reduced federal revenues to 15% of gross domestic product," lowest since the 1940s. Still today they're irrationally demanding an extension of those "unaffordable Bush tax cuts [that] would amount to a bankruptcy filing."
Recently Bush made matters far worse by "rarely vetoing a budget bill and engaging in two unfinanced foreign military adventures." Bush also gave in "on domestic spending cuts, signing into law $420 billion in nondefense appropriations, a 65% percent gain from the $260 billion he had inherited eight years earlier. Republicans thus joined the Democrats in a shameless embrace of a free-lunch fiscal policy." Takes two to tango.

Stage 3. Wall Street's deadly 'vast, unproductive expansion'

Stockman continues pounding away: "The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector." He warns that "Republicans have been oblivious to the grave danger of flooding financial markets with freely printed money and, at the same time, removing traditional restrictions on leverage and speculation." Wrong, not oblivious. Self-interested Republican loyalists like Paulson, Bernanke and Geithner knew exactly what they were doing.
They wanted the economy, markets and the government to be under the absolute control of Wall Street's too-greedy-to-fail banks. They conned Congress and the Fed into bailing out an estimated $23.7 trillion debt. Worse, they have since destroyed meaningful financial reforms. So Wall Street is now back to business as usual blowing another bigger bubble/bust cycle that will culminate in the coming "American Apocalypse."
Stockman refers to Wall Street's surviving banks as "wards of the state." Wrong, the opposite is true. Wall Street now controls Washington, and its "unproductive" trading is "extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives." Wall Street banks like Goldman were virtually bankrupt, would have never survived without government-guaranteed deposits and "virtually free money from the Fed's discount window to cover their bad bets."

Stage 4. New American Revolution class-warfare coming soon

Finally, thanks to Republican policies that let us "live beyond our means for decades by borrowing heavily from abroad, we have steadily sent jobs and production offshore," while at home "high-value jobs in goods production ... trade, transportation, information technology and the professions shrunk by 12% to 68 million from 77 million."
As the apocalypse draws near, Stockman sees a class-rebellion, a new revolution, a war against greed and the wealthy. Soon. The trigger will be the growing gap between economic classes: No wonder "that during the last bubble (from 2002 to 2006) the top 1% of Americans -- paid mainly from the Wall Street casino -- received two-thirds of the gain in national income, while the bottom 90% -- mainly dependent on Main Street's shrinking economy -- got only 12%. This growing wealth gap is not the market's fault. It's the decaying fruit of bad economic policy."
Get it? The decaying fruit of the GOP's bad economic policies is destroying our economy.

Warning: this black swan won't be pretty, will shock, soon

His bottom line: "The day of national reckoning has arrived. We will not have a conventional business recovery now, but rather a long hangover of debt liquidation and downsizing ... it's a pity that the modern Republican party offers the American people an irrelevant platform of recycled Keynesianism when the old approach -- balanced budgets, sound money and financial discipline -- is needed more than ever."
Wrong: There are far bigger things to "pity."
First, that most Americans, 300 million, are helpless, will do nothing, sit in the bleachers passively watching this deadly partisan game like it's just another TV reality show.
Second, that, unfortunately, politicians are so deep-in-the-pockets of the Wall Street conspiracy that controls Washington they are helpless and blind.
And third, there's a depressing sense that Stockman will be dismissed as a traitor, his message lost in the 24/7 news cycle ... until the final apocalyptic event, an unpredictable black swan triggers another, bigger global meltdown, followed by a long Great Depression II and a historic class war.
So be prepared, it will hit soon, when you least expect.

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Japan should take a page from our book!

Unfortunately, for these lost sons they don't have a widely in demand entertainment structure like the US to soak up all this excess talent.  We have this problem too, but with the Bachlerette, America's Got Talent and American Idol and a million sports we manage to keep our youth engaged and productive;-)

Japan's Economic Stagnation Is Creating a Nation of Lost Youths

By CHARLES HUGH SMITH Posted 7:00 AM 08/06/10 Economy, Careers

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What happens to a generation of young people when:

• They are told to work hard and go to college, yet after graduating they find few permanent job opportunities?
• Many of jobs that are available are part-time, temporary or contract labor?
• These insecure jobs pay one-third of what their fathers earned?
• The low pay makes living at home the only viable option?
• Poor economic conditions persist for 10, 15 and 20 years in a row?

For an answer, turn to Japan. The world's second-largest economy has stagnated in just this fashion for almost 20 years, and the consequences for the "lost generations" that have come of age in the "lost decades" have been dire. In many ways, Japan's social conventions are fraying under the relentless pressure of an economy in
seemingly permanent decline.

While the world sees Japan as the home of consumer technology juggernauts such as Sony and Toshiba and high-tech "bullet trains" (shinkansen), beneath the bright lights of Tokyo and the evident wealth generated by decades of hard work and Japan Inc.'s massive global export machine lies a different reality: increasing poverty and decreasing opportunity for the nation's youth.

Suddenly, It's Haves and Have Nots

The gap between extremes of income at the top and bottom of society -- measured by the Gini coefficient -- has been growing in Japan for years. To the surprise of many outsiders, once-egalitarian Japan is becoming a nation of haves and have-nots.

The media in Japan have popularized the phrase "kakusa shakai," literally meaning "gap society." As the elite slice prospers and younger workers are increasingly marginalized, the media has focused on the shrinking middle class. For example, a best-selling book offers tips on how to get by on an annual income of less than 3 million yen ($34,800). Two million yen ($23,000) has become the de-facto poverty line for millions of Japanese, especially outside high-cost Tokyo.

More than one-third of the workforce is part-time as companies have shed the famed Japanese lifetime employment system, nudged along by government legislation that abolished restrictions on flexible hiring a few years ago. Temp agencies have expanded to fill the need for contract jobs as permanent job opportunities have dwindled.

Many fear that as the generation of salaried baby boomers dies out, the country's economic slide might accelerate. Japan's share of the global economy has fallen below 10% from a peak of 18% in 1994. Were this decline to continue, income disparities would widen and threaten to pull this once-stable society apart.

Downsized Expectations, Opting Out

The Japanese term ''freeter'' is a hybrid word that originated in the late 1980s, just as Japan's property and stock market bubbles reached their zenith. It combines the English ''free'' and the German ''arbeiter,'' or worker, and describes a lifestyle that's radically different from the buttoned-down rigidity of the permanent-employment economy: freedom to move between jobs. This absence of loyalty to a company is totally alien to previous generations of driven Japanese "salarymen'' who were expected to uncomplainingly turn in 70-hour work weeks at the same company for decades, all in exchange for lifetime employment.

Many young people have come to mistrust big corporations, having seen their fathers or uncles eased out of ''lifetime'' jobs in the relentless downsizing of the past 20 years. From the point of view of the younger generations, the loyalty their parents unstintingly gave to companies was wasted.

The freeters have also come to see diminishing value in the grueling study and tortuous examinations required to compete for the elite jobs in academia, industry and government. With opportunities fading, long years of study are perceived as pointless. In contrast, the freeter lifestyle is one of hopping between short-term jobs and devoting energy and time to foreign travel, hobbies or other interests.

As long ago as 2001, Japan's Ministry of Health, Labor and Welfare estimated that 50% of high school graduates and 30% of college graduates quit their jobs within three years of leaving school. The downside is permanently shrunken income and prospects. These trends have led to an ironic moniker for the freeter lifestyle: dame-ren (no good people). The dame-ren get by on odd jobs, low-cost living and drastically diminished expectations.

Changed Men

The decline of permanent employment has also led to the unraveling of social mores and conventions. The young men who reject their fathers' macho work ethic are derisively called "herbivores" or "grass-eaters" because they're uncompetitive and uncommitted to work.

Take the bestselling book The Herbivorous Ladylike Men Who Are Changing Japan, by Megumi Ushikubo, president of Infinity, a Tokyo marketing firm. Ushikubo claims that about two-thirds of all Japanese men aged 20-34 are now partial or total "grass-eaters." "People who grew up in the bubble era [of the 1980s] really feel like they were let down. They worked so hard and it all came to nothing," says Ushikubo. "So the men who came after them have changed."

This has spawned a disconnect between genders so pervasive that Japan is experiencing a "social recession" in marriage, births and even sex, all of which are declining.

With a wealth and income divide widening along generational lines, many young Japanese are attaching themselves to their parents. Surveys indicate that roughly two-thirds of freeters live at home. Freeters ''who have no children, no dreams, hope or job skills could become a major burden on society, as they contribute to the decline in the birthrate and in social insurance contributions,'' Masahiro Yamada, a sociology professor wrote in a magazine essay titled, ''Parasite Singles Feed on Family System.''

Take My Son, Please

"Parasite singles" is yet another harsh term for some Japanese youths. It refers to those who never leave home, sparking an almost tragicomical countertrend of Japanese parents who actively seek mates to marry off their "parasite single" offspring as the only way to get them out of the house.

Even more extreme is hikikomori, or "acute social withdrawal," a condition in which the young live-at-home person nearly walls himself off from the world by never leaving his room. Though acute social withdrawal in Japan affect both genders, impossibly high expectations for males from middle- and upper-middle-class families has led many sons, typically the eldest, to refuse to leave home. The trigger for this complete withdrawal from social interaction is often one or more traumatic episodes of social or academic failure. That is, the inability to meet standards of conduct and success that can no longer be met in diminished-opportunity Japan.

The unraveling of Japan's social fabric as a result of eroding economic conditions for young people offers Americans a troubling glimpse of the high costs of long-term economic stagnation.

Tagged: acute social withdrawal, freeters, grass-eaters, hikikomori, income inequality, Japan, japanese economy, Japanese salarymen, Japanese youth, Japans economy, parasite single, social recession

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Japan leading the pack in rising debt at 200% debt to GDP...

This article ties in with my recent article on the obsolescence of human capital... remember Japan has the jump on nearly the whole world when it comes to automation and the the impact on their economy as their workforce transitions from 70+ hours of hard salaryman labor to 40+ hours a week of leisure time.  Hey if you aren't working and you aren't saving, you must be spending. 

Japan's Cheap Debt Could Cost the World Dearly

By CHARLES HUGH SMITH Posted 5:30 PM 08/04/10 Economy, Investing

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Japan has been piling up debt for years. Over two decades, the government of the world's second-largest economy has borrowed staggering sums of money to fund domestic stimulus spending. Much of the spending has produced public goods of questionable value, the Japanese equivalents of "bridges to nowhere."

This profligate borrowing has left the island nation with ratio of debt to gross domestic product (GDP) nearing 200%, almost double that of troubled Greece (113%).

Japan's government debt has more than tripled since 1992, and that doesn't include local government borrowing, the equivalent of state and county municipal bonds in the U.S.

How has Japan been able to sustain a debt load that would have crushed other economies long ago?

Saving -- and Retiring

The answer lies in a dynamic few nations share: a populace which saved an extraordinarily large percentage of its income, and then invested those savings in its own government's debt. More than 90% of Japan's government bonds are owned by its people.

In effect, Japan's soaring debt was self-funded. As long as the Japanese people saved trillions of yen and handed them to their government for 1% interest, then the government had a cheap and seemingly limitless supply of low-cost money to tap.

But demographics are finally putting the squeeze on this arrangement. As Japan's population ages, the nation's savings rate is plummeting. A recent report from the McKinsey Global Institute summed the situation up succinctly: Japan: The World's Savers Retire.

The consequences are visible in this chart, which shows that Japan's savings rate is slowly dropping to zero.



Why is the savings rate falling so dramatically? As workers retire, they stop saving as their income declines in retirement. They need cash to live and cover the costs of aging -- additional health care, home care, etc. -- so they sell their investments (often Japanese government bonds) to raise cash. This puts double pressure on bonds: buying dries up and selling accelerates.

Japan Faces a New Reality

The net result of this demographic trend toward lower savings means Japan's government must soon start competing on the world market for capital. In other words, it must start selling its bonds to international investors since its own savings will no longer be substantial enough to fund its enormous debt.

For two decades, Japan's fiscal policy has operated on the assumption that the government can always borrow money at very low interest rates. But as domestic demand for government bonds declines, the government will have to raise interest rates to attract buyers.

Currently, Japanese ten-year Treasuries currently yield 1.3%, compared to U.S. bonds yielding 3.5% or German bonds offering 3%. Facing international competition for capital, Japan will have little choice but to double or even triple the interest rate paid on its bonds. This jump in servicing costs will place impossible pressures on the nation's budget, as roughly 40% of all tax revenues have long gone to paying interest on Japan's ballooning debt.

Global Implications

The consequences of Japan's declining savings rate and the necessity of paying higher interest rates will not stay bottled up in Japan. As the second-largest holder of U.S. government debt behind China, Japan may decide to start selling some of its hundreds of billions of dollars in U.S. Treasuries. That would put pressure on the U.S. Treasury, which already must sell $1.5 trillion in new bonds every year, in addition to rolling over hundreds of billions in bonds which mature.

As Japan's need to sell bonds on the global market increases, the world may see an increasingly desperate competition for global capital arise, as all nations seeking to fund their sovereign debt must raise the yield (the interest rate) they pay on their bonds. That would dramatically raise the interest costs each government pays annually, further pressuring their other spending priorities.

If Japan's cheap debt balloon finally does pop, the consequences will reverberate throughout the global economy.

Tagged: bond yields, debt to GDP ratio, declining savings rate, demographics, Japan, Japan national debt, Japanese bonds, Japanese debt, McKinsey Global Institute, sovereign debt

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Paulson, finally got the memo or did he?

Time to hunker down and batten own the hatches for the wind is building steadily and the waves it is a pushing are 2-4 feet and building.  I expected better from Paulson, specifically to have taken the first bump from the bottom last in March 09, and gotten off somewhere around the top of this year.  Apparently he missed the exit at the "TOP"  and he paid the price.  Remember this kids Sell All Rallies And You'll Be Happy! 

Paulson & Co takes a bearish turn

By Sam Jones and Henny Sender in New York
Published: August 4 2010 20:33 | Last updated: August 5 2010 01:35

Paulson & Co, a leading hedge fund manager, is scaling back its bullish positions on the US economy.
After a vicious second quarter that saw its funds hit hard by a rise in market volatility, Paulson has cut its net long bets across almost all of its funds.

“A consequence of our portfolio positioning is higher short-term market correlation and volatility,” John Paulson, the company’s founder, said in a letter to investors describing his funds’ performance in the second quarter.

The move reflects increasing uncertainty over the sustainability of the US recovery.
Paulson’s Recovery funds have been among the casualties of the second quarter downdraft. The funds were down 12.6 per cent, according to the second quarter letter sent to investors.

The $3bn Paulson & Co Recovery fund, which was launched in late 2008 to take advantage of a rebound in the US housing market and economy, has decreased its net exposure from 140 per cent to 107 per cent in recent weeks, according to Mr Paulson’s letter.

Net exposure is a measure used by hedge fund managers as a gauge of their directional bias, and is calculated by subtracting total short positions from total long positions, with leverage taken into account. A net exposure of zero would imply a market-neutral portfolio with equal long and short positions.

John Paulson’s flagship Advantage fund, which manages $9bn of client money and was down 6.6 per cent for the period, has shrunk its net long exposure from 72.4 per cent to 67.3 per cent. The more specialist $4.3bn merger arbitrage funds, which make money by trading corporate names engaged in takeover talks, have scaled back from 58 per cent to 50 per cent.

“We are now at the point where further upside in the enterprise is less in the credit but rather in the equities of companies which have or will undergo restructuring, recapitalisation and bankruptcy reorganisation,” Mr Paulson told investors in his letter.

The average hedge fund lost 2.5 per cent in the second quarter, according to Hedge Fund Research.
Many managers have significantly derisked their books over the past few weeks in response to the volatility.
According to Hedge Fund Research, equity long short and event driven funds lost $32.5bn in the three months to the beginning of July.

Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.

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Further on the Left Tail Risk....

In addition, to the as yet to be realized jobs being supplanted by technology and the real estate issue.  Remember the baby boomers are going to need nursing homes not vacation and primary homes, can you say glut.  Add a nice top in gold to go along with the previous two and we've got lot's of opportunities for a left tail risk event.... 

Gold Top?
As most people  know, gold has been in a raging bull market for more than 10 years rallying from about $250 per ounce to more than$1,250 per ounce. Many people are now wondering if the world's currencies have any value at all and are flocking to gold as the only hard asset that historically has always had value.
Gold coin purchases are at an all time high. There are people walking up and down city streets and in shopping mall, holding signs saying "We Buy Gold." There are even vending machines where  people can purchase gold bars. Of course, there are the ubiquitous commercials on TV about gold.
Does a contrarian look at all these factors and take the other side? Possibly, but the problem is most of these factors have been present for more than two years and gold has rallied more than $400. Why would gold be any different now?
I believe the psychology of the gold market is in a dangerous place, but manias can go on longer than people think. This happened in the real estate market in 2005 when everyone rushed in. Real estate TV commercials ran nonstop, many were buying second homes as an investment with no down payment, bankers were giving loans to anyone.
It took about three years for it to finally come apart. The gold and real estate markets are not related, but the mass psychology is eerily similar.
Are we finally at that tipping point? I believe we are.
Until two weeks ago, gold had been in a steady uptrend since February.  It was going up because of inflation or deflation; it was going up because Euro weakness or Euro strength or it was going up because of stock market strength or stock market weakness. People on CNBC have even said gold will never go down.
But close inspection of the gold market at this time show many technical difficulties that may bring it down. Below is a candlestick weekly chart of the gold market.

Source: Barcharts.com
Gold set the all time high of $1,264.80 per ounce during the week of 6/21/10, but that week also formed a candle stick called a "hang man". This is when a market breaks off the highs but then runs all the way back up to the previous daily or weekly close. The next bar is critical because it must run back down and close under that previous low.  As you can see, this is exactly what happened.
The chart below also shows some import reversal patterns. This is a daily candlestick of gold. On June 21, gold made an all time high but closed below the previous day's low. This previous day was the all time high. This can bea very bearish sign. Also notice it happened againjust five days later.

Source: Barcharts.com
There have also been some major divergences recently. The Gold Bugs Index bug index (HUI), a basket of un-hedged gold stocks, topped out in March  2008 just as gold did. From there, both markets had severe sell-offs. Since then, gold has come back to make new highs in November 2009, and then another rally to an all-time new high again in June.As you can see, HUI has not confirmed this high, not just once but three times. This triple divergence is also very dangerous.

Source: Barcharts.com

Source: Barcharts.com
The last component I analyze closely is the Commitment of Traders Report (COT).  The rally in gold this year has gone to new highs but buying from managed futures traders (the purple line) has not had the buying enthusiasm that accompanies these type of rallies. The large spec (the green line) also has been a reluctant buyer. The commercial trader (the red line) set an all-time record on the short side in March. This type of selling from commercials does not pinpoint tops, but it does put you on alert for possible market failures.

Source: Barcharts.com
Calling tops in a raging bull market can be very difficult and painful,but with so many yellow flags, there seems to be a great trade from the short side. If gold closes below $1,170 per ounce I think the gold market is in for a large fall.
Bruce Gwyn
Managing Partner
Level III Trading

web: http://www.level3trading.com
email: bgwyn@level3trading.com

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Are jobs the left tail risk?

Left tail risk in my view is likely the rapid displacement of jobs, this will gain momentum remember this is the gift that keeps on giving and the faster technology develops the faster people will be displaced.  Another left tail risk is definitely real estate, real estate appears to moving forward and holding it's own the real test will be the spring of next year to see if it sticks. Guest Article: Left Tail Risk by Duncan Frearson, Smith Street Capital , July 22, 2010 Seemingly small initial events have cascaded many times into far from normal outcomes. These can both act in a positive way, such as birth of the Web browser or the discovery of oil, or in a negative way, such as the 1929 panic, by damaging economic conditions severely. Popularized as “Black Swans” these three sigma events tend to occur slowly at first and then rapidly escalate. In 1929 a bankruptcy of a large conglomerate is said to have begun the great unwinding that led to the initial stock market crash and then the subsequent Great Depression. In early 1997 funding problems at major Thai finance companies and the consequent decision to float the Baht began a run on Asian currencies. In 2007 some initial defaults in the U.S. subprime mortgage market escalated into a nationwide housing collapse and financial panic. Why does this happen? Collapses generally involve high degrees of leverage. Large scale leverage can be gained by very loose lending or by the use of derivatives with incredibly low collateral requirements. Leverage in and of itself is not such a bad thing as it can be used to finance a house, or a car or a new factory for production, but when it becomes concentrated into certain end markets in a large enough way it can have devastating consequences. If this lender or borrower is also connected in some way to another institution that also faces the same type of concentrated exposure, then the pain has been multiplied. Two becomes four which becomes eight which becomes 16, etc. This happens rapidly. Once a critical mass is reached, the problem becomes somewhat unstoppable under normal conditions. However, if this rapid escalation gets muted by hitting a well capitalized diversified number of lenders only one or two institutions would then be the ultimate victims. One way to mitigate this risk within a closely knit system is to require concentration limits to various borrowers and categories. In the U.S. banking system individual loan limits have been in place for awhile, but no hard limits for lending to entire categories have been put into effect. In our latest bust we saw a chain reaction occur due to a huge build up in exposure to housing both in construction and development lending and in mortgage lending. Once this trend began to come undone banks found they were all connected in a fairly concentrated way to one another. To make matters worse, a certain segment of their borrowers were the same people involved in constructing the houses. Source: SNL The cascade across Asia in 1997 had the same fundamental issues. Concentrated lending in real estate and infrastructure development caused one failure to cascade through the regional lending system, multiplying the initial problem across many players. In all these instances the banking system itself was unable to stem the cascade and the only solution was large scale involvement from both the central bank and the government. In the case of large foreign debtors the IMF was also called in to provide dollar funding. Is there a way to reduce this tail risk to the system? It would seem that imposing limits on concentration not just to individuals but also to categories would provide the ideal roadblocks to this type of dangerous cascade. The question of whether this was tackled in our latest financial reform is certainly a good one. In 1933 Glass-Steagall approached the problem by limiting the activity of the deposit banks. Investment banks were left to run stock lending activity but margin requirements were put in effect to keep the down payments high. If some stock market players began to default depositors would not be impacted because the investment banks that tended to borrow widely from the capital markets would spread the pain around. There was a cut-off in place that isolated the risk. This was eventually overcome by investment bankers using securitization markets to get into the bank lending business through finance companies which caused a boom in lending in housing related markets at the deposit banks. The two players became connected again and once the investment banks began to get into trouble, the concentration that had built up at the deposit banks in the same market began to cause problems. All this was accentuated by the build up of credit insurance written against that same lending that was now facing claims and by the off balance sheet lending that created far greater leverage than was immediately apparent. In today’s environment there has been talk of another cascade from the build up of sovereign debt at some of the less stable nations of the world. Sovereign debt has been used to provide a bridge to allow private market participants to restructure their own finances. We might look to budget deficits as a far from normal condition but this is a different state of affairs as governments will only default when they have foreign debt exposure that can’t be paid back by raising domestic currency. In the case of Europe the banks have access to dollar swap lines from the Federal Reserve and access to domestic currency has been assured by the ECB. This means that despite challenges in certain European nations there is virtually zero risk of a cascade as principal payments are essentially assured. There is also talk of another cascade to be set into effect from a further decline in U.S. house prices. I think one of the fundamental changes at present however is that the concentration risk in the U.S. system has been reduced and housing collateral values have been reset at far lower levels. There has also been a build of protective capital at the large and regional banks capable of preventing the type of cascade we have recently seen. This new capital buffer would require a very large decline in what is arguably a less concentrated book of business in order to cause the same sort of chain reaction we saw in 2008. Government involvement in the housing market provided an initial boost but as they wind down these programs a subsequent drop off in activity is almost inevitable. This uncertainty can cause tremendous volatility.and we must be careful about any premature extrapolations. For example, when the “cash for clunkers” program approached its roll-off date, auto sales rose to over 14 million annualized units and then dropped to around 9 million a month later. Auto sales now stand at 11.3 million units, according to industry data. The housing market may well see the same sort of volatility in sales activity. It should also be noted that the sensitivity of consumer discretionary income to declines in interest rates, given the 15% or so of disposable income that is taken up by debt service is especially pronounced and the rise in refinancing activity will not only facilitate the large rollover burden, but will also help keep those teetering on the edge from losing their homes. There is an increase in the margin of safety in both buying or deciding to remain in one’s home because of the decline in interest rates. The build-up of monetary stock in the economy and the Fed’s communication of an “extended period of low rates” will continue to keep both short and long term interest rates low for the foreseeable future. Ultimately, the question is how does a manager price this tail risk and is the pricing for this protection reasonable. We believe the risk of another negative cascade is low. If this is the case, the premium required for portfolio protection in the next 12 months is not such a great deal. Another option is to hold cash as a protection of principal, but at a 0.32% yield for 12 months, it becomes economically expensive considering the higher yields available in owning high quality equities. If you believe, like we do, the tail risk is low, then holding high quality equities with stable earnings in a zero growth environment will provide you with a far better yield than holding cash. If the economy eventually grows then this will be icing on the cake.

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More on the G8 Deepression!

So, here we go, this just adds more ammunition to the obsolescence of human capital.  For those keeping score at home, 25% unemployment is depression level...

The Jobless Effect: Is the Real Unemployment Rate 16.5%, 22%, or. . .?

By PALLAVI GOGOI Posted 12:00 PM 07/16/10 Economy, Careers

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Raghavan Mayur, president at TechnoMetrica Market Intelligence, follows unemployment data closely. So, when his survey for May revealed that 28% of the 1,000-odd households surveyed reported that at least one member was looking for a full-time job, he was flummoxed.

"Our numbers are always very accurate, so I was surprised at the discrepancy with the government's numbers," says Mayur, whose firm owns the TIPP polling unit, a polling partner for Investors' Business Daily and Christian Science Monitor. After all, the headline number shows the U.S. unemployment rate today is 9.5%, with a total of 14.6 million jobless people.

However, Mayur's polls continued to find much worse figures. The June poll turned up 27.8% of households with at least one member who's unemployed and looking for a job, while the latest poll conducted in the second week of July showed 28.6% in that situation. That translates to an unemployment rate of over 22%, says Mayur, who has started questioning the accuracy of the Labor Department's jobless numbers.

Even Austan Goolsbee Has Been Skeptical

Mayur isn't alone in harboring such doubts, nor is he the first to wonder about inaccuracies. For years, many economists have pointed to evidence that the government data undercounts the unemployed. Economist Helen Ginsburg, co-founder of advocacy group National Jobs For All Coalition, and John Williams of the newsletter Shadow Government Statistics have been questioning these numbers for years.

In fact, Austan Goolsbee, who is now part of the White House Council of Economic Advisers, wrote in a 2003 New York Times piece titled "The Unemployment Myth," that the government had "cooked the books" by not correctly counting all the people it should, thereby keeping the unemployment rate artificially low. At the time, Goolsbee was a professor at the University of Chicago. When asked whether Goolsbee still believes the government undercounts unemployment, a White House spokeswoman said Goolsbee wasn't available to comment.

Such undercounting of unemployment can be an enormously dangerous exercise today. It could lead to some lawmakers underestimate the gravity of the labor market's problems and base their policymaking on a far-less-grim picture than actually exists. Economically, and socially, that would make a bad situation much worse for America.

"The implications of such undercounting is that policymakers aren't going to be thinking as big as they should be," says Ginsburg, also a professor emeritus of economics at Brooklyn College. "It also means that [consumer] demand is not going to be there, because the income from people who are employed isn't going to be there."

Indeed, it will add additional stress to an already strained economy. Businesses that might start ramping up after seeing the jobless number drop could set themselves up for disappointment when customers don't appear or orders don't flow in.

College Grads Serving Fries

Plus, having a job today is quite different from what it was just a few years ago: Many Americans have had their hours cut and are working for less pay. A Pew Research survey found more than half of all adults in the labor force had either lost a job or suffered a reduction in income because of the recession.

Ginsburg says the biggest source of undercounting comes from people who can't find a full-time job that they're qualified to do, for instance recent college graduates who take part-time jobs at fast-food joints or retail stores. Today, the Labor Department estimates that 8.6 million people are in this category.

The federal government counts such people as employed. However, polls show that these folks actually consider themselves "unemployed" and "looking for a job," and probably accounted for a large chunk of TechnoMetrica's respondents.

Jobless Workers Who Disappear

Another major source of undercounting is the unemployed who've given up looking for jobs. The Bureau of Labor Statistics headline number counts as unemployed only people who have actively looked for a job in the previous four weeks. About 2.6 million people had pursued jobs in the past 12 months but, discouraged by the lack of opportunity, had stopped looking altogether.

"Isn't it interesting that if you stopped looking for a job, you evaporate as a jobless person and are just not counted," says Gerald Celente, director of Trends Research Institute in Kingston, N.Y. Celente believes this kind of undercounting has suited the government politically. "It's what government does: Downplay disasters and amplify success."

According to the Pew Research Center, a large number of people are out of jobs for a longer period during this economic downturn. The typical unemployed worker today has been out of work for nearly six months. That's almost double the previous post-World War II peak for this measure, which was 12.3 weeks in 1982-83.

Indeed, if all of the truly unemployed were counted, the rate would be significantly higher. The BLS, in a data point titled "U-6," says it counted the total unemployment rate in June at 16.5%.

Misreading Americans' Anxiety

However, John Williams, founder of Shadow Government Statistics, says when accounting for the long-term unemployed, the jobless rate runs up to as much as 22% currently. Williams's newsletter, which analyzes flaws in government economic data, points out that such a rate isn't that far from the 25% it hit during the Great Depression.

Both Celente and Ginsburg believe lawmakers' not-dire-enough view of unemployment is one reason why they didn't extend federal unemployment benefits. Of course, party politics is another deterrent. Ginsburg says the Administration's decision to tackle the health care reform over unemployment reflects its lack of priority.

By taking his eye off one of the most fundamental issues affecting the country, President Obama has seen his popularity sink. The most recent Public Policy Polling survey says 45% of voters approve of the job he's doing, while 52% disapprove -- the first time Obama's disapproval ratings have exceeded 50% in this survey.

It's obvious that Americans view unemployment more urgently than either lawmakers or the president. And if pollsters like Mayur or economists like Ginsburg and Williams are right, it will take longer to fix this hole because it's already bigger than Washington thinks.

Tagged: Austan Goolsbee, bureau of labor statistics, employment, jobless recovery, joblessness, jobs, Labor Department, real jobless rate, unemployment, unemployment benefits, unemployment benefits extension, unemployment rate

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Goodbye Human Capital You Are Obsolete

Summary

Joblessness has been a stubborn stain on the fabric of the world economy. No matter how hard you rub it just keeps reappearing. Now the fabric is so stressed it's in danger of tearing. Let's face it a patch on this garment, is well... a patch, much like the "Toughskin" jeans budget conscious Moms with ruffian boys that wore out knees in two days flat bought. Heck it took about a month before you could even bend those pants at the knee, and the only thing left of the jeans after full use was the patch. OK... well I digress.

 

Joblessness is pervasive and it's not going to get better, and we better figure out a better way to deal with it or, it will undo the us humans. When you think about the reasons it is so prevalent I always hear the symptoms, but the public debate on the disease is non-existent. We've heard over and over again everyone lament the arrival of the personal computer in the mid 80's and how it was going to make humans obsolete. Then when the 90's came it was wow they are actually creating more jobs. It's the new economy, things are going to be grand our future's so bright we have to wear shades. Well Sunshine the last ten years in case you haven't noticed technology has been hard at work making jobs, or human capital obsolete, and in this next decade I predict that we are going to lose even more.

 

Introduction

Several years ago perhaps even a decade ago I took a very personal interest into learning about Japan. It's customs, history, the present and it's likely future. It is still a subject and a country and people I admire and follow with great interest. Many things struck me about the Japanese culture and the prophecies about its future, which ten years ago were relatively dire. One in particular caught my eye. If you know anything about the culture, know this they have 120 Million people in a country roughly the size of California, of which less than 1% can be described as resident immigrants.

 

Japan has also been in a state of zero to negative population growth, for at least 15 years perhaps even more. With a rapidly aging population and a dwindling younger work force, Japan was heading for a reef in a gale. An article I read at that time posited, with grave concern, that at some point the Japanese would have to open up their borders more and allow more immigrants into it very insular society in order to keep their economic engine going. I was intrigued as this represented a huge opportunity in seeing a culture assimilate diversity, something it really didn't have to do even with the arrival of "The Black Ship" as it is referred to in their history. Although, outside looking in it might have well been the "good ship lollipop". This was no doubt the makings of a grandiose anthropological social study of sorts. Although five years ago I after waiting for this impending disaster I began to see a different outcome. It has been ten years, since I read that doom and gloom on the Japanese and I'm still waiting, but I know now that it will not happen.

 

The reason why you ask was strangely prophecied in the Styx song Mr. Roboto, and the phrase Hello Arigato Mr. Roboto. This song was popular in the eighties, and strangely the lyrics fit so well to our current situation and Japan. 

http://www.answers.com/topic/mr-roboto

 

Non human automation is permeating our world.

When I call on a new company or companies I am amazed that 85% of the time (anecdotally of course) I don't get a real person I get an auto-attendant. Before I even get to a real person I have to go through an auto-attendant. I'm not complaining, I can't really, because my home phone system has one too available with either a French, Spanish, British, English or Japanese language menu and voice to choose from. I paid $400 for mine and I don't need a receptionist. The idea of a secretary today is obsolete, now it is best to describe a personal assistant as an executive assistant and they are required to do a lot of things and one of them isn't short hand. A great deal actually requires that they spend a lot of time looking and gathering readily available stuff on the internet and synthesizing it so that I can consume it quickly and easily, without having to do it myself. However, once it was done I had to make up stuff to justify the salary I was paying. When business got slow I found I had more to keep up and could get along without the help. It was a luxury not a necessity.

 

I don't have to go through the thousands of examples but technology and yes robots are building cars, fixing and dispatching people, i.e. wars (drones), oil drilling, exploring, mapping, trading, manufacturing, acting and mining. We have probably already retired the last human fighter ace as unless a big war breaks out the next generation fighters will be pilotless. The pace of change and impact to our world is accelerating and is already moving faster than are political and financial systems can react.

 

Are we beyond paving the cow path?

In my view 90's, particularly from 1988-2000 was more or less paving the cow path, and the decade since was straightening the meandering path and making it into a two lane road in either direction. We can expect the next decade to be eight lanes in either direction, i.e. the proverbial technical super highway. By way of cow path's, we had these great pastures of green fields, i.e. mainframes, pc's and the introduction of the early internet from which we had to rely on a cow path of human and technologically less convenient ways to connect and reach each other through communications and commerce. With the advancement and "ubiquity" of the internet and robust adoption and lower cost of entry we have made great strides at eliminating the inefficiency in the cow path and we have paved an eight-lane super highway.

 

In many respects we could probably do better to recognize this advancement for what it is worth, a great potential for social upheaval and re-invention. Case in point, at another critical time in our financial history, e.g. the Depression of the 1930's we were embarking on a similar trajectory the beginnings of the industrial revolution. Its promise was sold during the roaring twenties, but with it came a huge displacement of worker resources the likes we haven't seen until now. It took nearly a decade and a half for the newly available human resources to be soaked up, but it also relied on the heavy intervention of Uncle Sam and a major world war.

 

The promise of the technological age and the fears of the computer displacing jobs as was predicted in the mid- 1980's and roaring nineties is now upon us, and the pace of technological impact is increasing in velocity and breadth. We are well past the point of having paved the cow path. For the last ten years road crews have been straightening and widening the path to carry commerce and services to new places. Remember that with every new highway, built or augmented for higher speeds and more traffic a town or cottage is threatened while new ones rise to become the new stop to commerce.

 

Back to Japan

Of course the pundits had it wrong, they commented on Japan without really understanding its culture. Japan will at all cost avoid the scenario of having to open its borders to more immigrants, they have staved this off to some degree by moving manufacturing offshore to other countries to find cheap and plentiful labor, however at the same time they poured amazing amounts of energy and resources into robots. Robots are Japan's answer to their cultural zero-negative population growth, and it's beginning to show. Toyota, recently announced plans to reduce the cost of their cars by 30% in the next three years. Their admitted strategy was to eliminate this cost by redesigning 165 components that can be shared across platforms. However, reading between the lines the bigger advantage is looking for common components that can assembled easily and reliably by robots. Believe that this is an effort to completely eliminate the need for human assembly. They recognize this and rather than come out and say it they are likening it to single sourcing components.

 

We are a victim of our own success...

I marvel at the ability of anyone with an idea for a product or services to start a cottage industry, be it blogging, or an online store like www.thriftyscrimper.com which sells new money saving ideas like making your own commercially viable cigarettes or home use soda for one tenth of what you would pay at the grocery store. Making cigarettes for $.80 a pack certainly has it's cachet, especially when the recent tax increase made a pack of smokes $11 in NYS( not the city). Soda another targeted health hazard in NYS for taxes can be had for .10 a glass, once again. These two ideas alone if you drink two glasses of soda a day per family member and smoke a pack a day can easily save a typical American family a substantial amount of money equivalent to a luxury car payment a month.

 

I know I appear to be meandering here but what I wish to point out is that the companies selling these products are on the internet and they are not mom and pop stores, they are one person shows. The video production and editing featuring the products on this site may not be standard commercial quality, but if you looked to do the same task ten years ago it was very much a commercial endeavor most likely requiring a budget in the tens of thousands. It can all be accomplished now in an afternoon with a small investment of just a few hundred dollars. A whole studio of equipment for recording, the how to create rich and informative content and the conduit for distribution to your target audience can be had for free, via you tube and your free web store with PayPal.

 

A published brochure as slick as any company can put together can be accomplished with the barest literacy skills and technical know how. We are in the age of commoditization. Nothing is now sacred everything can be mass produced and done with a particular target market segment in mind. Even down to the individual. We were striving for cookie cutter, which we accomplished. The next challenge was making my cookie with sprinkles and Susie's with chocolate chips, that day is here. What used to take ten people to accomplish 25 years ago now takes one.

 

 

So now that we are here now what.

Well this is indeed a conundrum. We are now faced with jobs the most highly skilled and coveted jobs are being targeted and annihilated at a radical breakneck pace, and its going faster. Our local hospital just announced its new addition to the surgical team, a robot. Making simple to even complex surgeries cookie cutter, repetitive, unremarkably consistent and cost effective. Look at this video of the Da Vinci surgical system from 2007, I dare you to tell me that three years later that we aren't even further along.

 

What would likely take two or three doctors working together and a bevy of support personnel now takes 1/3 the resources and with very consistent outcomes and extremely positive and quick recovery scenarios.

 

 

What is next?

Clearly we are at an inflection point in human history where humans are rapidly approaching a point in time where we have more leisure hours than work hours, all the drudgery of work is being replaced, by the skillful application of technology. That was the end result of the last ten years, which resulted in the displacement of the support staff surrounding high skilled and trained resources. The next seven years the focus is on replacing highly skilled jobs the jobs with the higher wages and costs. This is clearly the cartoon of the ladder burning up to the top rung, before the character teeters onto the ash of what was once a sturdy structure. Corporate profits have been surging as technology has trimmed the costs dramatically in all aspects of productions and services. CEO's have taken the credit with a few as being in the right time and place have been compensated quite well. Even shareholders have benefited as dividends has been robust save for that scary period of 2008.

 

But now the dawn of realization is upon us. We have created a huge issue not just for ourselves, but for even countries like China with rich resources of human capital which are on the verge of being made obsolete. This is a huge issue for China as they are already struggling to transition from a rural feudalistic mindset to that of an industrial powerhouse. Goods no longer can be produced cheaply and reliably with high quality with human labor as cheaply as a robot. So do they themselves invest in robots or do they continue to keep throwing people into the mix. The trend of the manufacturing assets being located in third world countries is past. The manufacturing assets coming on line in the last five years require mature and robust infrastructure. This is great news for the US. With a more reliable infrastructure and access to highly technical industrial complexes, than most up and coming emerging markets the manufacturing will likely start to drift back to western shores. Unfortunately it doesn't help the jobless, but it does help the economy.

 

Razors edge…

The balancing act required now centers on what to do with a persistent and chronic idle workforce. Twittering, You Tubing and Facebooking are keeping them engaged now, but how long will this last. The new industries (green energy, education and healthcare) as part of Obama's vision will take at least five to seven more years to make a meaningful commercial impact, the natives are restless now.

 

What is left but to expand social programs to fill the gap, but where does the money come from. We have a deficit of which didn't exist in the last Depression. This is increasingly looking like some really hard decisions will be coming down the pipe. For instance, think about how in the Depression, that era called for the outlawing of private citizens owning and exporting meaningful quantities of Gold. Could this even happen today? If the government were to attempt to do this we would have a civil war.

 

Today, the US has the largest gold reserves of any one country in the world, this is quintessentially a direct result of a seemingly dictatorial, authoritative and socialistic move made by FDR. We are much better off for having done this and secured the nation's future as a bedrock of financial stability.

 

The alternative that we will tax the companies more and close loopholes and fund these expanded government programs to provide for the idle working class, this is a really bitter pill one that could also result in a pretty unsavory outcome.

Perhaps this is the medicine we must now take to get better.

Another alternative is to stay the course. This sounds draconian but I'm betting as it seems the US government is too, that infrastructure is the trump card, as is a stable political system and a robust means with which to defend itself and the interests of its citizens (companies included). We have that, and no one else in the world has what we have. The robots and high technology need this or they are useless. We have the edge and will continue to expand this edge, but it's not the companies role to do this, it is the governments role.

 

Another alternative is to shrink government drastically and declare everyman for himself. Which will be translated to take to the streets and let's fight it out. Either solution has it's hair on it, either side is an extreme, and middle ground is a razors edge. This is evident in the debate permeating our financial and political commentary. No one side is happy, as there are now good alternatives, more socialism or more unbridled capitalism. This is an inflection point, there is no good room with a view. We must remember that united we stand divided we fall is a concept that made us impervious to ruin and right now we are divided. What we need is for everyone to pitch in and do their part to make this a collective effort.

 

What are the hard choices now. We can't go on spending, we can't increase taxes and we can't decrease spending. We are what is commonly described in sailing vernacular as being stuck in "irons" heading into the wind waiting for the wind to make the decision for us as to which direction to go. We need to pick a direction with which to move forward and stick with it for more than "ten minutes" and if we are wrong we can double back at least we will have eliminated what we shouldn't do.

 

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