Monday, March 24, 2014

The Next Phase of the Economic Collapse Has Begun, Be Prepared: I’m Short the Market, Here Is Why

Since I know there are a few regular readers on this site that have been here from the beginning, before moving on to this years work on mathematics, I wanted to put out a summary piece on the economy.

I believe we are about to witness the next phase of the so-called economic ‘crisis’ kick in, so here is my perspective. Below, in point form and using my big brush, here is where I come from and what I see.



I. Introduction


When I first began this project economics was one of the main themes. In 2007 I started compiling data and sharing my perspective of what I saw: a calamity, the coming economic collapse.

From what I understand and what I have been told, those of you that took some of what I wrote to heart were able to protect yourselves and your loved ones from the 2008 economic meltdown. Thank you for your comments and emails, it put a huge smile on my face knowing that what I put my heart and soul into was put to good use.

For those who know not what I am referring to, you will find some of the more in-depth pieces that I wrote about the economy on the Table of Contents from the previous site. Some of the highlights being:


Some of the information from those pages is out of date, some of it was off the mark, most of it was bang on, and some of the events have yet to unfold. The general premise, however, was consistent and is unchanged. The crisis that manifested itself in 2008 has not ended, far from it.

In 2014, the bubbles are larger, the corruption systemic, the veil has mostly been lifted, and the pretence is over. It should be obvious even to the most obtuse that crony capitalism governs every aspect of our society.

As Chris Hedges has pointed out, the system that best describes the ideology of our governments is inverted totalitarianism. It is a system in which economics trumps politics: where short-term corporate profits supersede human rights, environmental protection, and the law. It is a system that creates sacrifice zones, spreading misery across the globe.

Chris Hedges on the 'inverted totalitarian' corporate state



The stimulus that was and continues to be pumped into the markets is a stopgap measure only meant to buy time for those invested in the system to prepare for the inevitable. With interest rates on the rise and the beginning of ‘tapering’, the game has played out (for more on this, see below, “Interest Rates and the Nortel Effect”).

I believe that we are about to enter the next phase of our economic transformation: our growth depended, scarcity based, bubble economy is about to burst, again, so be prepared. Some of the more recent articles regarding our current predicament can be found in the Table of Contents on the left-hand column of this site under ‘economics’. Highlights include:


I will expand on what is being presented here in the future, however, since my main focus for the next few months will be mathematics, I wanted to make sure that I made it clear where I stand regarding the economy. I don’t have a specific timeline on when or how fast these bubbles will be popping, or slowly deflating, but since the downturn may begin before I have a chance to share further information, I thought it was important to clarify my position.


II. Disclaimer


Please note that this is not financial advice, it is simply my perspective and analysis on what I believe to be happening with our civilization, do with it as you please. For me, I’m 100% short the market, Puts to be exact. I will not expand on this further, just thought I’d share.


III. Five Economic Principles


Five of the main principles that I adhere to are presented below: first, our scarcity based economic system, which is depended on constant growth, has a limit; second, for corporations to maintain this facade of constant growth they require to consolidate their power through mergers and acquisitions; third, disruptive innovation is the driving force of the collapse and rise of industry; fourth, at some point all debt must be reset; and fifth, the military–industrial complex long ago hijacked the U.S. government, thriving with the expansion of war (more on our war based economy below at, “The Business of War”). The following five videos expand on these five principles, respectively.

Limit to Growth: The Most IMPORTANT Video You'll Ever See (part 1 of 8)
Continued at Playlist or available as a Full Lecture.

Mergers and Acquisitions: Accumulation Through Crisis: Global Stagflation & the New Wars -- by Jonathan Nitzan
The core principle behind this economic theory is Differential Accumulation. Further information on this train of thought at “Differential Accumulation” by Shimshon Bichler and Jonathan Nitzan.

Disruptive Innovation: Clayton Christensen on disruptive innovation - Clarendon Lectures 10th June 2013
The following two lectures continue and expand on his train of thought: “Clayton Christensen on management” and “Clayton Christensen about the process of research”.

Resetting Debt: Authors@Google: David Graeber, DEBT: The First 5,000 Years


Eisenhower warns us of the Military Industrial Complex

Further discussion on our war based economy below.


IV. The Business of War


As I wrote in a piece in 2009, the game at play is the business of war.

In 2008, despite a recession that knocked down global arms sales, “the United States expanded its role as the world’s leading weapons supplier, increasing its share to more than two-thirds of all foreign armaments deals:”
“The United States signed weapons agreements valued at $37.8 billion in 2008, or 68.4 percent of all business in the global arms bazaar, up significantly from American sales of $25.4 billion the year before.”
That was in 2008, during one of the world’s greatest recessions. “Weapons sales by the United States tripled in 2011 to a record high”, totalling $66.3 billion, “more than three-quarters of the global arms market”, almost 14 times greater than their closest rival, Russia at $4.8 billion.

The United States is in the business of war, and the military–industrial complex does not just influence U.S. foreign policy, it sets it. Anyone who thinks otherwise is stupid.

Tax Dollars At War



To maintain the status quo, our corporate governments will “do anything they can to try to whip up support for the policies they pursue”:
“Governments are power systems. They follow the interests of the concentration of domestic power to which they’re committed.”
One of the primary methods in which governments maintain control is by allocating tax revenues to projects that expand their power. In most cases, the projects that have been deemed worthy of financing guarantee the prosperity of the ruling class.

For the United States of America, its allegiances can easily be determined by examining the total federal receipts relative to the total federal outlays - where the government gets its money and where it spends it.

Obama administration's 2012 budget “contained $2.627 trillion in revenues and $3.729 trillion in outlays (expenditures) .” “The military budget of the United States during FY 2012” totalled approximately $651 billion and $822 billion if all in, between 18% to 22% of total expenditures.

“If we separate the mandatory spending and look only at the discretionary spending component appropriated by Congress on an annual basis and for which all the federal programs compete”, then military spending, depending on the year, accounts for approximately 55%-58% of total expenditures.

source

And that’s what’s on the books, just imagine what’s not on the books.
Sadly, that is the story of our foreign policy,… We have attacked at least five countries since 9/11. We have launched drones against many more. We have deposed several dictators and destroyed several foreign armies. But, looking around at what has been achieved, it is clear: It is all irrelevant.”
I’m betting, hoping maybe, that the citizens of the United States will put an end to this business, preferably before their country is economically decimated by this all consuming machine, the war racket:
“WAR is a racket. It always has been. It is possibly the oldest, easily the most profitable, surely the most vicious. It is the only one international in scope. It is the only one in which the profits are reckoned in dollars and the losses in lives.”
Scott Ritter - Iraq Confidential



V. Interest Rates and the Nortel Effect


From 1999 to early 2000, the Federal Reserve had increased interest rates six times, raising the Fed Funds Rate from 4.75% to 6.5%, an increase of over 35%. This meant the end of cheap money for investors, venture capitalists, and technology companies whose lifespan was measured by their burn rate. In essence, the Federal Reserve brought an end to Greenspan’s irrational exuberance, or more accurately stated, the end to expansion of wealth - a self-induced prophecy many have argued.

One of the largest casualties of the tightening of monetary policy was Canada’s Nortel Networks. A company which at its height “accounted for more than a third of the total valuation of all the companies listed on the Toronto Stock Exchange, employing 94,500 worldwide.”

Through accounting magic, Nortel had extended credit to all of its major clients. When interest rates rose, those companies defaulted, and Nortel took the hit:
“Nortel's market capitalization fell from C$398 billion in September 2000 to less than C$5 billion in August 2002, as Nortel's stock price plunged from C$124 to C$0.47. When Nortel's stock crashed, it took with it a wide swath of Canadian investors and pension funds and left 60,000 Nortel employees unemployed.”
This is what I refer to as the Nortel effect, and this is what we are about to witness again in the markets.

The end to stimulus is coming, tapering has already begun, and interest rates will be rising, they have already done so in certain parts of the world. Be prepared.


VI. Trading Revenue Drops


Trading-revenue is dropping across-the-board:
“Citigroup Inc. and JPMorgan Chase & Co. are bracing investors for a fourth straight drop in first-quarter trading, a period of the year when the largest investment banks typically earn the most from that business.

“Citigroup finance chief John Gerspach said yesterday his firm expects trading revenue to drop by a ‘high mid-teens’ percentage, less than a week after JPMorgan Chief Executive Officer Jamie Dimon said revenue from equities and fixed income was down about 15 percent. If trading at the nine largest firms slumps that much, it would extend the slide from 2010’s first quarter to 36 percent.”
Banks in Canada are now in a bidding war to try and drum up business:
“Following RBC’s mid-January announcement that all DIY investors would now pay only a flat commission of $9.95 per equity trade through RBC Direct Investing online and mobile channels. Now TD Direct Investing has responded in kind.”
There are multiple reasons why this is occurring, but all of that is irrelevant. What’s important is that trading revenue is down, indicating a more systemic problem.

60 MINUTES - "The market is rigged."




VII. Margin Debt Hits Record High


During the peak of the NASDAQ bubble, margin debt was at an all time high. Investors and speculators were borrowing against their holdings to be able to purchase additional stocks. When the correction occurred, the value of their securities dropped, which meant that they were required to deposit funds or securities into margin accounts to maintain margin requirements set by their brokers. This in turn created a chain reaction. To cover margin calls, stocks were sold, reducing their value since there were more sellers than buyers, which in turn reduced the value of securities in margin accounts, which in turn resulted in additional margin calls which caused more selling. This was one of the main reasons for the rapid decline in stocks in the year 2000.

In 2007, this was one of the main fears of what was happening to the markets. The amount of margin debt hit a record $285.6 billion in January of that year on the New York Stock Exchange “raising concerns on Wall Street about what might happen if a major correction occurs.” Those concerns raised in 2007 proved to have been valid. Bank writedowns from subprime mortgages resulted in margin calls, which at the beginning of 2008 were predicted to cost mortgage lenders $325 billion - an extremely low estimate as we soon found out.

As of March 2014, Margin Debt has hit a record high of $451 billion:
“Investors are still partying like it’s 1999 — or maybe 2007 — but if you believe in technical indicators the charts might be showing signs of vulnerability. And remember, when the trend really turns, you won’t see it until 6 weeks later.”
source


VIII. U.S. Tech Companies in Trouble


I’ve written extensively on how NSA’s activities have compromised online security and how that in turn is seriously hurting U.S. technology companies so I won’t bother rehashing the same material and just direct you to the relevant articles:



IX. Final Thoughts


There are numerous other reasons why I’m short the market: from fake government data to peak resources, from rise in human migration due to extreme climate to rising mistrust of the public in the markets and the banking institutions, from the war on information to market technicals to the expanding wars, but I won’t bother getting into those and other reasons at this time. I just thought it prudent to officially state my position.

The present economic crisis that is enveloping the world is brilliant and frightening. A rapidly changing spectacular play unfolding in real time so encompassing that it will affect every species on this planet. Unfortunately, many still continue to believe that our centralized governments will be able to prevent a global economic meltdown; I don’t think they will, and I don’t think we should allow them to, since under their stewardship we are guaranteed misery.

12 comments:

  1. Great article. I agree with what you're saying. I do have a question though. You said that you're short (specifically puts) --- this is basically a wager. You think it's going down and someone else thinks its going up. So you agree that if it goes down to a certain price that they will pay (and vice versa if it goes up). Some economists I'm reading are predicting an 80-90% drop in the market. If that actually happens, how are you going to get paid? Sure, they may owe you $200,000,000 but if the currency collapses how do you actually collect?

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    1. Good question. My puts are basically my insurance. I'm assuming the system will remain functional and that even though we will see a downturn, I think it will take time for the full collapse to occur, hence lots of time to 'cash out'.

      Also, I'm in Canada and even though the banks here are just as corrupt as those in the U.S., it's very unlikely that they will be closing their doors, so the bets/wagers will be paid out.

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    2. Where will you deposit the funds? And when you "cash out", will you buy property?

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    3. You can move funds around between different entities quite easily. As for buying property, I have issues with property ownership, and i think there is a serious bubble at the moment as well, in farming, housing and retail. So no property is planned right now.

      I personally think that the best one can do with "cash" is to:

      1) get out of debt, i.e., buy your freedom if you are in debt;

      2) invest in your health and education (not necessarily institutions);

      3) start/invest in projects - this is probably the most important in regards to investing capital and helping in bringing about social change. We are in a renaissance right now and the economic 'crisis' that we see has a lot more to do with 'disruptive innovation' and the problems associated in growth with 'old school' industry (see videos above). It's a great time to begin/invest in something new.

      Just my 2 cents.

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    4. ps. Just to clarify my comment about property bubbles, there are pockets that have been beaten down already, i.e., I've heard southern Spain is a great buy :)

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    5. I should've clarified... by "property" I meant anyTHING, not just land or housing.
      Health and education are hard to spend a lump sum on. I guess the amount is crucial.
      A list of things I can imagine:
      - $10k a family vacation
      - $100k make a film
      - what would you do with $1mil???

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    6. So, keep in mind my disclaimer, this is not financial advice, the main reason being, everyone's needs are different. And investing in anything has, at its core, a time factor.

      That said, if I was looking at long term, i.e, you won't need the cash tomorrow or a year or 5 years from now to live your life, here are a few places that I would put extra cash after I had put aside enough money for my projects:

      1) Human artifacts, i.e., art. Example: one of the best places that anyone could have invested money in the last $40 years was in comic books.

      2) Certain amount in precious metals (gold, silver)

      3) A very small amount in digital currencies once the bubble has fully burst. (see the two article I have on this site on Bitcoin - see "economics").

      4) This one takes a little effort, but find projects in your community that you plan on staying for a while, and buy shares in them, i.e, become a player in your community.

      5) Education. This is one thing that I am doing right now. Our current education system has collapsed and there is amazing opportunity to create something powerful and profitable. That’s why Bill Gates and Murdock and some other major players have entered the market.

      6) As for other “material” things, I would have to gather my notes and think about this further. I do plan on laying out some of this in the economics section of Math in Real Life, but that’s at least two years away, sorry.


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  2. VIX Jumps 19% as Losses Worsen Below Surface of S&P 500: Options - "While two weeks of selling look like a blip on a chart of the Standard & Poor’s 500 Index (SPX), for the average investor it’s been a lot more painful.

    "Amazon.com Inc. (AMZN), Whole Foods Market Inc. and Transocean Ltd. are among 43 companies that have lost more than 20 percent from their 52-week high, data compiled by Bloomberg show. The average stock is down 9 percent from its most recent peak, according to Bespoke Investment Group LLC. Concern that the drop will worsen pushed the VIX (VIX) to its biggest gain in three weeks. "

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