Musings Report #35 8-25-12 The Exponential Rise of Crisis
You are receiving this email because you are one of the 494 subscribers/major contributors to www.oftwominds.com.
For those who are new to the Musings reports: they are basically a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights, and thank you for supporting the site.
A Brief Note on Subscription Cancellations
Those of you with PayPal subscriptions to oftwominds.com may not be aware that Paypal cancels subscriptions automatically once the credit card associated with the subscriber's account expires. PayPal does not appear to explain the reason for the cancellation, it simply notifies the subscriber (and me) that the account has been cancelled. I have finally figured this out, and it explains the vast majority of unintended cancellations.
The Exponential Rise of Crisis
In pondering the slow-moving financial crises in the U.S., Europe and Asia, I have been studying the possibility that financial crises (and the resulting political crises) follow an exponential curve in which the crisis accelerates toward collapse after a long period of apparent systemic stability.
Here is a chart that illustrates the concept. Note how the level of crisis is very modest in the first phase of reluctant recognition and simulacra reforms.
In the second phase, the period of time equals the first phase, and the level of crisis rises substantially as official reassurances and half-measures buy time for the Status Quo. In the third phase, the level of crisis rises exponentially to collapse levels over a much shorter period of time.
This is how I believe the European debt crisis will unfold. The first phase ran from approximately mid-2008 to May 2010, and the second more acute phase (also roughly 2 years) seems to be completing here in the summer of 2012. The third phase of fast-rising crisis that no longer responds to official reassurances that "everything is under control" could start as early as September or might be delayed by a few months to late 2012/early 2013.
What is not in doubt is that capital flows from Spain are so enormous that a "bailout" of that nation's crippled banking system is essentially hopeless, and that also dooms the bailout of its sovereign debt.
To get a sense of the half-measures that are passing for "radical reform," look at this chart of eurozone budgets. The cuts appear minimal in the context of their growth over the past decade.
The same can be said of the simulacra reforms to sclerotic social, political and financial structures.
Although I haven't examined the data, and it is bound to be "soft" (subjective) in terms of measuring the level of crisis, I suspect that crises such as the "Asian contagion" that began in Thailand in 1997 very likely followed just such an exponential curve.
Some Thoughts on Housing
For some years now I regularly receive inquiries from readers along the lines of, "I have been saving money and am wondering if now is a good time to invest in a house." Although I always decline to offer any concrete investment advice, I do try to provide some context for the question.
Given the data out of Europe, China, Japan and elsewhere, it seems likely that the global recession will deepen considerably in the next 12 months, and so we have to ask: what impact will a global recession have on North American housing? Will it increase the pool of buyers, or hasten the selling of shadow inventory? How could the influence be positive?
Since interest rates are already near-zero, there’s no gain to be had from lowering rates, and all the Federal subsidies/guarantees are running aground as FHA loan defaults soar, etc. In other words, all the gimmicks and tricks to boost the housing market have been in full effect for 4 years and if anything, they will be restricted as money tightens and defaults rise.
I conclude that there is little harm in waiting a year to see how the global recession plays out, but much to be lost by jumping in too early. If prices and rates have bottomed, they are unlikely to rise much in a deep global recession, but if they fall, the real bottom is still ahead.
The one caveat I would add to this is that much of the stupendous capital flowing out of China and Europe seeking safe haven is looking for a home in North America, and real estate in favored cities (Vancouver B.C., New York, Los Angeles, San Francisco, Miami, etc.) may be buoyed by the purchases of non-U.S./non-Canadian investors. This flow could turn into a flood if crises of confidence and legitimacy arise in Europe and China.
There is very likely a highly bifurcated market in the U.S. in which locales that are favored by overseas investors might not decline at all in global recession, while less favored areas dependent on domestic buyers might languish as the "fiscal cliff" and deleveraging exact their tolls on cash and credit.
Longer term, we have to ask how a generation with few full-time workers and poor wages can afford to buy still-overpriced houses, and what sort of emotions might be aroused as overseas money snaps up thousands of pricey homes for cash.
Market Musings
I have long suggested Ben Bernanke and the Federal Reserve do not have the political leeway to launch an aggressive QE campaign, and that the Fed's next QE, regardless of the timing or size, will fizzle for the simple reason that buying another $1 trillion Treasury bonds will not 1) eliminate the $12 trillion writedown in phantom assets that await recognition and 2) convince retail investors to put their money back into the stock market casino.
The stock market will be left to high-frequency trading machines, manipulative buying by the Fed and speculators hoping to gain from Ben's next QE announcement. If anyone thinks these are the foundations of a stable, bullish market, please look at the wild gyrations in recent global markets and the tight correlation of everything: gold, international equities, U.S. equities, copper, you name it: the "risk-on" contains everything but the U.S. dollar, which is the only item on the other side of the global risk-on trade.
Does a highly correlated market prone to wild swings and increasingly dependent on constant injections of QE strike you as healthy?
From Left Field
The Beatles play the Cavern Club 1962, the Beatles’ oldest video recording: young folks might wonder what the fuss was about; we have to recall the tame level of popular music at this time to appreciate the raw energy the Lads exuded.
China's 'Leftover Ladies' Are Anything But: "One hurdle in finding a spouse is China’s long-standing tradition of hypergamy--or women marrying up, in terms of income and status." Ambitious, educated women no longer need a second income to support themselves; this has multiple social and individual ramifications globally.
"People crushed by law have no hopes but from power. If laws are their enemies, they will be enemies to laws; and those who have much to hope and nothing to lose, will always be dangerous.” Edmund Burke (via U. Doran)
Thanks for reading--
charles
