charles hugh smith-A Brief History of Cycles and Time, Part 1

Many of you may be familiar with the Foundation series by Issac Asimov. In it, mathematician "Hari Seldon spent his life developing a branch of mathematics known as psychohistor. Using the laws of mass action, it can predict the future, but only on a large scale; it is error-prone on a small scale."

In practice, we can see that this would be theoretically correct: we study history precisely because human nature is relatively the same and the same events recur with the same predictable responses. If history really were chaos--a muddle of events appearing randomly and being resolved in unpredictable ways--there would be no point in studying it.

Using this same method, in “Foundation” Hari Seldon uses his model to predict with great accuracy the unfolding of the human universe hundreds and thousands of years in the future.

Not exactly. Like many sci-fi stories, “Foundation” takes a true premise and extrapolates it into the future. In the 30’s “Buck Rogers” hypothesized the existence of rockets and trips to Mars. Star Trek hypothesized the wide use of lasers--a laboratory curiosity--and phasers, similar to the microwave technology we use every day. Science Fiction by definition thinks ahead to ask “what if?” We know what is possible, but what if we could harness, refine, perfect it? By definition, it must be ahead of its time, or it wouldn’t be “Sci-Fi” but “Contemporary Fiction.”

Foundation originally appeared in Astounding Magazine in 1942. So how are we doing?

As it turns out, pretty good. There is a “Hari” working on exactly this problem: Harry Dent, of demographics research. “Demographics are destiny” he would say. As each generation is born, it demands support in housing and schools, then is productive in their middle years, creating the most wealth right on cue in their 50’s, then retiring and drawing resources until death, and so on through time. It cannot be changed except with mass epidemic or calamity of war. And this is provably true: demographics of the Boomers in the U.S. are measurably slowing the economy as they retire, precisely the way that Japan’s earlier baby boom slowed their economy into a Depression 20 years earlier.

There is Robert Prechter’s “Socionomics” study, which states that markets and governments don’t create human moves, but are instead the consequence of them. That is to say, human emotions and behavior run in cycles of set period. Obviously humankind cannot become infinitely more optimistic forever into the future. In the same way trees don’t grow to the sky, at some point human expectation must reverse and become less optimistic, more conservative and pessimistic until it reaches an opposite extreme.

And this theory has a lot going for it: if governments truly controlled stock markets, economies, nations, then why would they ever decline? No government or market would ever voluntarily get smaller, less powerful, and prosperous. And yet despite everything they can do to prevent them, markets and economies always, always DO reverse. Always. And what’s more, they move in predictable cycles over time, from the 4-year business cycle to the 70-odd year Kondratieff Cycle.

This 70-year cycle of human lifetime is what Strauss and Howe refine in their work The 4th Turning. The idea that there are four generations that proceed in predictable order: Prophet, Hero, Nomad, Artist that occur over and over again in western history since at least the 16th century. Imagine a kitten being born, living half its life in winter, never seeing spring until they are full-grown—how that affects their behavior, their perception of life.

This is the same for the generations, being born in turns in a stable, expanding world or an unstable, contracting one markedly alters the perception and behavior, the demands outlook, and skills of a 20-year generation. This not only meshes with the Kondratieff Cycle but explains the expansions and contractions, breathing in and breathing out, the ebb and flow of optimism and pessimism that are easily so predictable in aggregate, just as Asimov predicted.

There is one additional candidate: market timer Martin Armstrong. Armstrong doesn’t just follow cycles, but like Hari Seldon, has made a complex computer model of all factors, and has made a career predicting precise turns in timing, often to the day, as in the market crash of 1987.

How can he do this? Because people in aggregate do not have as much free will as they believe they do. We as people are not only our own observations and desires, but we exist as an integral part of a larger ecosystem – a social, economic, political, thermodynamic, and mathematical ecosystem that we cannot escape. Just as the kitten above, living in a world that has always been snow leads you to simply BE different than who you might have been only knowing the ease of the summer sun.

What could possibly create human cycles with such predictability in time and frequency? Although everyone from Ecclesiastes to Machiavelli to Munehisa Homma remarks that they exist, no one really knows. But how about something like this?

Or other, longer cycles, from the sun, the stars, the weather, the planets? We don’t know. Like gravity or time, we can only see and measure the effects, we cannot yet hypothesize their cause.

Back to charts, many of you may be familiar with this chart by market commentator Karl Denninger, from 2009:

What does this tell us? GDP, the real economy theoretically rises by let’s say 3% a year. However since 1971, debt has risen something more like 9% a year. Any 5th grade student recognizes the law of simple exponents. That GDP, that is, economic “Reality” is falling ever further behind economic fantasy, that is, all the undelivered paper promises represented by “debt.”

This is the mathematical system we live in that also largely represents the thermodynamic reality of the U.S., and critics have been bringing this to public attention since the budget debates of the ‘80’s. The injustice, the irrefutability, and impossibility of avoiding the sudden collapse of the market--indeed the real world of politics, war, death, and human action—back to the lower line. They have been warning the public since before the first crash of 2001 that this MUST happen, and must happen badly.

So why hasn’t it crashed? Why, 14, 24, 34 years later is the economy still limping along, the illusions still firmly in place despite every evidence and warning?

We in the blogosphere have been warning people about impending collapse for over a decade, and for the most part we’ve been right: tech on the Nasdaq crashed from 5000 to 1000, never to recover. Housing crashed never to recover. The Dow fell from 14,000 to 6,600. Every bank nationally and worldwide is insolvent. Most developed nations are also insolvent along with their debt, which is the de facto currency and blood of the very system of human exchange. We predicted this and were correct.

Yet seen another way, nothing has changed. Instead of falling to 7 PE and 4% dividend ratio, the Dow rebounded to 14,700. Instead of over-correcting beyond a 3:1 income ratio, below $126,000, U.S. housing remains levitated at roughly $200,000, far above what the young can afford, stranding 20M houses in vacancy and decay. With market proof, mathematical proof, proof of financial action such as the hundred Trillion in bank bailouts and the political red flag of the Cyprus bail-in, how can this be?

If I’ve learned one thing over the last 12 years from following markets, economics, and geopolitics is this: no man can push the Wheels of History. It unfolds in its own time and no other.

Look at the Generations: at this time, the Boomers are still in undisputed control of the US, economically, socially, and politically. They own a quorum of all wealth.

They have a supermajority in Congress. Economically, attention is largely focused on only this demographic which still has some remaining money—the Viagra and prescription drug ads, the focus on investing and retirement, even the age of the actors in movies, TV, and commercials tells us so. The young, although now larger in numbers, have no effective political power. This will change, but it only changes when it does, on the strict schedule of demographics.

Socially, we saw the markets crash into ’01 and ’08. But like the matching dates of 1921 and 1929 these were sudden extremes in human pessimism which could not be sustained. It matters not at all whether they are “true,” or whether fundamentals support them: human emotion cannot remain at extremes of either optimism or pessimism; it cannot move in one direction all at once. They must and will fluctuate, and the time it takes for the mood of an aggregate population to fluctuate is a predictable quantity, at minimum the 4-year business cycle.

Or as inflation is notoriously difficult to measure, you may prefer the in vs out flows to gold as a money-standard:

Although noisy, note one thing in both these charts: the highs and lows tend to occur with a set frequency. The Dow with a small frequency of 4 years, a larger of 8, then 40, and so on, giving us times of 1929, 1968, and 2008. In Dow:Gold ratio, we have something only slightly more complicated, neatly marked by Greshams-law.com: 14 year Bear markets, followed 20 year Bull markets. There are very few ultra-long historical charts, but here is one:

For context, in 1344 A.D., gunpowder was a new invention, The 100 Years War was beginning, Joan of Arc hadn’t been born, and America wouldn’t be discovered for another 150 years.

Yet note the chart above shows the same similar periods of highs and lows, for both 8 and 40 years. Why?

Hari Seldon’s phychohistory. The waves of human emotion, of optimism and pessimism both long and short term haven’t changed. Short-term it can only persist for 4 years while longer term only for sub-40 years, or exactly one-half one generation. Divide your four 20-year generations in half and you’ll find that same turning.

So why are the markets still going up? Why can’t people respond to warnings of the blogosphere, or warnings of collapsing economies and accounts right before their eyes?

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy
Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).
We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

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