Musings #7 (2/19/11) from oftwominds.com

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Preliminary comment:

One of the unexpected pleasures of writing the weekly Musings is that I feel I am among friends (218 of you). Since much of my "job" as a blogger is put forth ideas which invite readers to critique or disagree, that doesn't mean I expect you to agree; it just means I know you will disagree respectfully and with insights which broaden my own understanding.

Everybody seems to want an audience, but once you reach 200,000 readers or so monthly, then you are inundated with all sorts of unpleasant feedback: rants, snark, mockery, withering criticism, etc. plus hundreds of emails a week. Posting in the public sets one up as a punching bag and target not just for those who disagree but for those seeking a release for their discontent and frustration.

On any day, there are dozens if not hundreds of critical comments and emails posted somewhere or other about oftwominds.com. Most days I accept this as the "price" of having an audience, but it does get wearing. I don't have time to read any feedback beyond emails, but readers send me snarky, raving bits from somewhere or other every once in awhile that make me wonder why I even bother writing in public. Thus the pleasure of these Musings.

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Item #1: Investment cycles

Correspondent Steve R. recently submitted a thumbnail sketch of investment cycles which I found illuminating:

"In my opinion, the way to protect and grow your assets is by taking advantage of wealth cycles. Different assets classes fall into and out of favor over long periods of time. The trick is to buy undervalued assets, wait until they're overvalued, sell before the masses do, and then buy the next undervalued asset.

I know that I talk a lot about gold and silver, but that is because precious metals are currently undervalued and are heading into a bubble - eventually they will be overvalued.

Note that the masses typically do the opposite - they wait until they see everybody else making money on something (e.g. real estate) - they jump on board - but they hang on too long (often by listening to the wrong people, i.e. the mainstream media and financial advisors) - and they lose wealth. That wealth ends up being transferred to the smart investors. Other recent examples include the stock market in the 20s, precious metals in the 70s, stocks in the 80s, internet stocks in the late 90s, real estate in the early-to-mid 2000s, and now precious metals again."

Thank you, Steve. One characteristic I have mentioned in the past of cycles is that the last boom-bust asset class never booms again--it's replaced by another asset class.

I tend to underestimate how long these cycles will last--many last for decades. Arguably, real estate achieved liftoff in the late 1970s and only crashed to Earth in 2007, roughly 30 years later. Stocks began a Bull run in 1982 which has yet to truly expire, though it may be on its last legs. While many analysts believe stocks entered a "secular bear market" in 2000, I an an agnostic about labels. What I look at is participation. When an asset class has truly fallen from favor, like stocks in the late 70s, then people no longer participate in that market.

It takes a while for people to realize the boom is well and truly over, and so we see "bottom fishing" recoveries which soon peter out. I expect more such false dawns in the housing market, with a near-term bottom in 2013-14.

Stocks have not yet been abandoned en masse, so the "real" Bear market is not yet upon us.

Bonds have been in a Bull market since interest rates topped in 1981--a remarkable 30 year run. That cycle is turning, despite the best efforts of the Fed to renounce the credit/business cycle.

Technical analyst Louise Yamada, whom I respect greatly, wrote in 2000 that at the true low, the Dow and gold would be roughly equal--just as they were in the 1930s (gold at $35 and the Dow at 41) and 1981 (Dow at 800, gold at $800).

Though gold has quadrupled from its 2000 low around $300 to about $1,400, this observation suggests that gold has a lot more to rise or the Dow has a gargantuan collapse ahead. If I had to make a bet, I would put money on equilibrium around 4,000--Dow 4,000 and gold at $4,000. This equality might well be a blow-off event that won't last long, or it might drag on.

How markets enter the stage is usually how they exit, so if gold explodes in a parabolic ascent then that's how it will probably exit. If it builds up slowly, then that's how it will descend.

Gold and silver are volatile, though PM fans often discount that (and yes, I am a fan). A 25% drop would not be unusual in a Bull market which appears to have more to run. Obviously, buying in early 2009 when the global financial market was in free-fall would have been a brilliant strategy. Is another such meltdown possible? I would hazard it is likely in the late 2011-2012 timeframe.

Item #2: resilience and vulnerability

The question of meltdown is ultimately a battle between resilience and instability. Those who believe in the "recovery" believe the global economy is resilient; those who see a day of reckoning ahead see it as a bubbling stew of instability--a sandpile (stick-slip) about to suffer avalanches.

Viewed as a system, there are feedbacks which resist the forces of destabilization. The more and stronger these feedbacks, the more resilient the system. If, on the other hand, the only thing propping up the financial Status Quo is Fed, Chinese and EU money printing, then the instability is only being masked: either the global economy is destabilized by rising prices or it's destabilized by the withdrawal of trillions in "free money." It's a double-bind.

Item #3: false choices, false dichotomies

Correspondent Zeus Y. submitted this snippet from Eric Janszen on false choices: the narrowing of alternatives to two options selected to "nudge" choosers into one pre-selected by Elites for their own benefit:

CI: As they did in the case of the health care debate?
EJ: Yes, as they did in the case of the so-called health care so-called 9 ebate. 94 That debate was framed by health insurance companies. The key principle is this: whoever frames the debate wins the debate. The objective for a group of interests is to narrow the debate to two positions, the average of which is a positive outcome for the interested parties. The health care 9 ebate 94 was framed between death panels versus free enterprise. The health care plan we got as a result was a compromise between two absurd extremes. Imagine if the debate was instead about which approach achieves the lowest economic rents and management overhead, helps the most citizens, best promotes sickness prevention, encourages medical technology innovation, and motivates bright young people to enter the medical industry? Instead, in the end the health insurers gave up the immoral privilege of denying coverage to those who most need it, a privilege they should never of had in the first place, in exchange for 40 million new customers at taxpayer expense. Good deal for the health insurers, bad deal for the American people. And it will happen again and again and again as long as the system persists. My friends in Europe and Asia watch slack jawed at the way public policy issues are debated in the US. But most Americans have no idea how broken our media is, yet wonder why nothing gets fixed."

Thank you, Zeus. We see this same false choice again and again in the ideological/political sphere--"austerity" VS "stimulus", as if those were the only choices. As Zeus pointed out in an essay posted on oftwominds.com this month, the choice of those words already defines the "debate".

We see these propaganda-type "choices" everywhere--in debates on "energy policy," education, healthcare, etc.

Item #4: urban resilience and vulnerability

I've engaged in a lively exchange of emails with correspondents James P. and R.S.D. about the vulnerability of cities--a discussion prompted by last week's musings. Here is R.S.D.:

"I'm a Hannibal, Missouri, boy and was looking at the old town from the Google perspective (frankly a little saddening to think of all the years that have passed and the era that will never be again). At any rate, I was shaken to find that the current population of this old river town is 17,500. 17,500 - that's nothing. But they are right on the Mighty Miss and that may be their future again. Ditto Rock Island, Illinois; Davenport, Iowa; etc. Their current malls will be as useful as tits on a boar hog (a Southernism) but the old, crumbly downtown - down by the river - might just get patched up and reused. And, around those towns are some very fertile fields. A World Made By Hand. (novel by Jim Kunstler) He got that right.

Basically, large is doomed. Medium is maybe. And, small will depend upon the utility of the site, e.g. location for commerce, water, food production, protection and population makeup. Bowling Green, Missouri, a small town at the junction of a couple of highways is likely to become a small farming community again since traffic on those now-busy roads just won't sustain services that now exist. But, it is surrounded by good farmland and (currently) good roads to the Mississippi. "

From James P:

"I noticed some comments in the Joint Forces Command report dated Feb 18/10 about large cities (page 57)

"The world 92s cities, with their teeming populations and slums, will be places of immense confusion and complexity, physically as well as culturally. They will also provide prime locations for diseases and the population density for pandemics to spread."

There is no modern precedent for major cities collapsing, even in the Eighteenth and Nineteenth Centuries,

when the first such cities appeared. Cities under enormous stress, such as Beirut in the 1980s and

Sarajevo in the 1990s, nevertheless managed to survive with only brief interruptions of food imports

and basic services. As in World War II, unless contested by an organized enemy, urban areas are always

easier to control than the countryside. In part, that is because cities offer a pre-existing administrative

infrastructure through which forces can manage secured areas while conducting stability operations in

contested locations. The effectiveness of that pre-existing infrastructure may be tested as never before

under the stress of massive immigration, energy demand, and food and water shortages in the urban

sprawl that is likely to emerge. More than ever before, it will demand the cultural and political knowledge to

utilize that infrastructure."

(bolding by James)

Thank you, RSD and James. A book I often recommend, Planet of Slums, reveals the marginal resilience of the rapidly expanding mega-cities. I am thinking that perhaps there is a matrix or spectrum of urban resilience, with size, severity of weather, proximity to water transport, energy and agriculture, age and durability of infrastructure, etc. being inputs.

As I have often noted, cities can grow 20% of their own food, and "Scientific American" published an article last year (as I recall) on how cities could conceivably become nearly self-sufficient in food production.

http://www.scientificamerican.com/article.cfm?id g rowing-vertical-skyscraper-farming

http://www.scientificamerican.com/article.cfm?id buil ding-more-sustainable-cities

I would also note that cities built after the dominance of the car are far less resilient than cities established hundreds of years ago. Number one, they are more livable and desirable (see Musings #6 last week) because their streets are narrower, and they were established for some resource reason: proximity to a harbor, river, etc. Number two, they are walkable, and amenable to public transport/bicycling. Number three, being desirable, then they attract wealth and smart people seeking a piece of that wealth.

Though we tend to think of them as large, unwieldy systems, cities operate in some ways on the small scale of a block. A few people can actually accomplish something on that scale:

http://changeobserver.designobserver.com/entry.html?entry 24548

Thank you, G.F.B. for this link.)

Since some 80% of the population lives in cities, we really need to "get urbanism right". As my wife Cindy observed, cities of 5,000 or 20,000 are just as vulnerable as large cities if they're dependent on distant food and energy supplies.< /DIV>

Item #5: renting as the new paradigm of "ownership"

Thanks to G.F.B., here is an interesting link from "Wired" magazine on renting in the networked age.

http://www.wired.co.uk/news/archive/2011-02/04/rentalship-is -the-new-ownership

Item #6: Rural slums and the landscape of colonialism

While I don't agree with the typically neat ideological conclusions drawn in this piece, I found the description of rural California to match my own experiences:

http://www.nationalreview.com/articles/255320/tw o-californias-victor-davis-hanson?page 1

Most of us naturally pull away from reading accounts which challenge our own viewpoints and conceptions of how the world works or "should work," that is, what would solve the problem. This may be such a piece. If I scrape away the left/right false dichotomies and authorial biases, I am left with the unsettling conclusion that rural, agricultural California in many respects mirrors Post-Colonial landscapes: a landscape controlled for the sole benefit of a distant corporate or colonial power that leaves its residents impoverished or beholden to colonial powers.

This aligns with my "Survival+" critique that global corporations returned to the U.S. in the post-colonial era to "colonize" it with concentrations of financial power that destroyed small-scale enterprises and roped the middle class into a credit/mortgage-based debt-serfdom. Partnered with the Central State (a key feature of colonialism), these cartels have diverted much of the national income stream into their own coffers: another key feature of colonialism.

Thanks for reading--
charles hugh smith

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