Musings Report #3 01-19-13 How bad can things get?
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How Bad Can Things Get?
Shortly after I published the book "Survival+" in Fall 2009, some readers asked me to include more practical advice in the second edition. In the years since, I have been mulling what sort of practical advice I could offer that was not a regurgitation of common suggestions.
This led me to the often-suboptimal process of how we assess risk and plan to meet unwelcome contingencies.
President Calvin Coolidge famously remarked, "If you see ten troubles coming down the road, you can be sure that nine will run into the ditch before they reach you." While there is certainly much wisdom in this reassurance, that still leaves us the task of preparing for the one that doesn't run harmlessly into the ditch.
There are all sorts of martial processes for assessing which troubles are the most dangerous and hence the ones that we should prioritize as high-risk: threat matrix, etc. Then there are assessment-response-feedback schemes such as the OODA loop developed by USAF Colonel John Boyd: "observe, orient, decide, and act."
These conceptual frameworks have value, of course, but they remain abstract until some extremely unwelcome events don't run into the ditch: a negative health diagnosis, loss of a job, and so on. Once the problem is real, our instinct is denial, seeing only what we want to see to avoid the trauma that results from responding to the problem.
Thus people with throat cancer will wait until they can no longer swallow before admitting to themselves that further denial will cost them their life.
In less life-threatening circumstances, we are prone to all-or-nothing thinking, and we lose sight of the spectrum of threat and response.
One of the most under-appreciated psychiatrists of the 20th century, Karen Horney, wrote extensively about all-or-nothing thinking as an emotional trap, and I think we can discern a bit of this in conventional "prepper" advice, which is all-too often geared to the expectation of complete social breakdown and open warfare in the streets.
While this is certainly one possible outcome, it is by no means the only one or even the most likely, at least in food/energy-rich North America. In focusing on the currently remote outcome, we lose sight of all the less drastic but more likely possibilities, chief of which is a significant reduction in our real income.
On the other side of the all-or-nothing coin, the typical American household has made little to no preparation for anything but the Status Quo: they have essentially no food, cash or energy in reserve, leaving the household extremely vulnerable to the slightest disruptions in income, energy and food delivery.
How bad can things get? I confess to being an anxiety personality (perhaps that comes with being manic-depressive?) and I tend to follow Andy Grove's dictum that "only the paranoid survive." Clearly, a healthy appreciation for risk and the benefits of advance planning offers selective advantages. Even if 9 of 10 problems run into the ditch, it pays to look ahead and think about what responses are likely to be the lowest cost and most successful should any of the 10 reach us.
Once again this is easy when in the abstract, but less easy in real life. I have been developing a three-three matrix as a potentially straightforward tool to aid our planning and response.
One set of three is the classic Plan A, Plan B and Plan C, with Plan A being the easiest, cheapest preparation for low-level disruption, either in our household or the wider economy or both. Plan B is a more comprehensive set of responses to serious disruptions and Plan C is the "Katie bar the door" set of responses to severe disruptions.
On the other axis are the three components of any advanced society/economy: the State, the market and the community. Our responses play out in each of these three. For example, a reduction in State medical entitlements would be met with responses in the market (paying cash for our healthcare needs) and the community (trading time for healthcare service, contributing to the establishment of locally controlled and funded clinics, etc.)
There is more to be said on this basic matrix, of course, and I will be developing it further as I revise "Survival+" this year.
How bad can things get? Nobody knows, but it makes sense to look ahead and plan a response to all 10 problems heading our way rather than bask in the false confidence that 9 will magically vanish before we have to deal with them, and the one that reaches us will require no forethought or planning.
There is a time-cost feature in all this; cancer that is detected and accepted very early has a very high cure rate, and putting aside meaningful amounts of money monthly builds a useful nest egg of capital with relatively little sacrifice in the present. Once we need the nest egg, there will be no time left to accumulate it. As the Chinese saying has it, "When you're thirsty, it's too late to dig a well."
Market Musings
As the S&P 500 hits new 5-year highs, we have to recognize the seasonal positives and the influence of prodigious central bank monetary pumping/intervention.
Will corporate profits justify this bullish trend? That remains an open question, but there are plenty of signs that the global economy is on thin ice in terms of sales, profits and risks.
Like many of you, I read a wide range of analyst commentary and research, and a number of cycles (the SPX tends to rise for 71 days and then retrace for 43 days, for example) are pointing to a possible multi-year high in early February. Some see a dip from there and another rise into May ("sell in May and go away"), while others suspect the February top will be the big one and the April-May uptrend merely a countertrend.
Analog charts must be taken with a large grain of salt, but here is an interesting chart of the 1963-1974 Dow Jones Average, courtesy of Positive Expected Val(you) (http://positiveexpectedvalyou.blogspot.com/)
This chart rather neatly supports the notion that the market will reach a new high in February, fall and retrace in May and then continue down to 1995 lows. It's certainly one possibility among many; we will have to see how things play out as apparent stability "unexpectedly" crumbles into instability.
From Left Field
Inaccuracy in journalism is taken seriously, but film-makers happily play fast and loose with the facts
How Apple sets its prices: (via Maoxian) "Apple’s pricing strategy is a fascinating aspect of the company’s notoriously controlling nature"
"In politics, nothing happens by accident. If it happens, you can bet it was planned that way." Franklin D. Roosevelt
Thanks for reading--
charles
