Black Swans

By: Randolph Buss | Mon, Jul 21, 2008
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<the following is an excerpt from our GMR Blog>

Reminder: this little blog is simply my tool to remind myself and any readers of my thoughts and anything else I deem important - more extensive charts and/or analysis takes place in the GMR Newsletter and GMR Flashes. Usually, this blog is updated periodically throughout the day / week.

US Market Events / Highlights:

Jul 21 Leading Indicators Jun - -0.3% 0.1% -
Jul 23 Crude Inventories 07/19 - NA 2952K -
Jul 23 Fed's Beige Book - - - - -
Jul 24 Initial Claims 07/19 - 372K 366K -
Jul 24 Existing Home Sales Jun - 4.97M 4.99M -
Jul 25 Durable Orders Jun - 0.0% 0.0% -
Jul 25 Mich Sentiment-Rev. Jul - NA NA -
Jul 25 New Home Sales Jun - 507K 512K -

My Market Notes:

Black Swans

"An economic storm is brewing - of unimaginable magnitude - but nobody cares." That is a thought which keeps going over and over in my mind. And that is why I advise holding some gold. Something real I can touch. The more the better. People do not understand this concept - only a very few do.

The outlook:

Peter Spencer, Ernst & Young's chief economist, said: "Both on the high street and in the housing market, it will get a great deal worse before it gets better."

He added that the economy will struggle to avoid recession next year, with predicted GDP growth of only 1 per cent. "Our worry is that without the usual medication from the Bank of England, consumers will move from their current state of denial into a state of despair."

But Mr Spencer said this profligacy was no surprise. "As we have consistently warned, both the consumer and the Government have been living beyond their means for the last few years, overborrowing on credit. Households will be lucky to see real disposable income growth of 1 per cent this year. With repayments becoming more onerous, rising inflation and sharp reversals in the housing and equity markets, consumers are under increasing pressure."

Black swans were said not to exist, until one day they were spotted in Australia in the 17th century.

In talking with a few friends - I have received some incredulous, well-meant but still sinister remarks concerning my Blog entry Meltdown with respect to the 3rd part regarding capitulation on part of central banks. The main idea of that entry, was that central banks will have to lower rates again to "re-inflate" the economy (which is not growing), borders on the insane, I am told. (which is equivalent to a Black Swan, in my eyes) - it can't happen.

Now, I admit that it may not happen. Likewise, I remind you, that this is not MY theory, it is the theory put forth by Nicolai Kondratieff - I am simply the messenger of possibly incredulous news. The K-Cycle splits the real economy into 4 periods : Spring, Summer, Autumn and Winter. He himself claimed a Winter Cycle had begun in the period just after World War I or around 1920 and it lasted until somewhere around 1950, with the highlight being the 1929 Depression. Depending on various research, a complete K-Cycle happens in a period of 40 to 60 years.

From 1950 to 2008 is 58 years. But that would imply that the Winter Season part of the cycle is just ending, NOT beginning. How to account for this shift in time ? The answer may lie in the fact that since about 1995 monetary M2 under Greenspan really started to move higher (see graphic of M2 - upper portion - remember, I made this chart 2 years ago). Note: I just checked the M2 figure - it is EXACTLY as I predicted on the chart below taking the given actual curve extrapolated out to mid 2008. This may have caused a "bastardisation" of the economic K-Cycle. By delaying and moving out the "pain" period experienced in the Tech-Bubble-Bursting of 2000, this avoided, short-term, the cleansing of bad investments but only to re-visit us 9 years later. And with it an even larger mal-investment to be cleansed.

We know throughout history that periods of credit-induced expansions are followed by mal-investment, greed and ultimately a bursting of the bubble leading to a credit crunch. This time would appear to be no exception to historical guidelines.

Additionally, as I have already stated also, we must not mix or confuse economic cycles with stock market cycles. We may see a "cleansing" in one or we may see a bear rally in the other. In any case, it is human nature to try and reverse the economic pain by either a re-inflationary policy of lower rates (monetary policy) or via a fiscal policy of a massive internal spending program led by the ruling class a la FDR to re-inflate the economy through massive central-bank led spending programs.

Just today, Blanchflower of the Bank of England's Monetary Policy Committee, has said:

Blanchflower has regularly pressed for more aggressive rate cuts by the MPC, which lowered its key rate three times between December and April to 5%. The MPC has remained on hold since April as inflation pressures mounted.

"I think we are going into recession and we are probably in one right now," Blanchflower told the Guardian newspaper. "It's not too late to stop it but we have to act right now. Monetary policy has been far too tight for too long."


Peter Spencer, Ernst & Young Item Club chief economist : "We have already seen a housing crisis that has morphed from a credit crunch to a general collapse in confidence as prices have tumbled," Spencer said. "Our worry is that without the usual medication from the Bank of England -- which would have nasty inflationary side effects in this environment -- the consumer will follow suit, moving from their current state of denial into a state of despair."

The most frightening Black Swan I can see in this respect is the (insert any Central Bank here) stating that core inflation is only 4%, or whatever, when in fact real inflation may be nearly 10% or more. Hence, the governments inflation lies and scams being told to consumers may be their eventual downfall - by implementing a re-inflationary rate policy to kick-start the economy with 4% baseline inflation does not nearly sound or look so bad as that same policy with a 12% baseline inflation. Hence, by disingeniuously stating inflation to be at a far lower level than reality, they leave the door open for more inflation by likely stating that we can squeak out a bit more growth by lowering rates without risking too much more inflation. That is a plausible spin on things, as stated above by Mr. Blanchflower.

Again, let's summarize and understand : there are currently 2 hypotheses on the table :

Recent history of the last 8 years has shown us that if politicians can lie and cheat and get away with it, while the consumers continue to swallow it all, then why not try the re-inflationary route. It's less painful and can be spun continuously as a good story.

If that's in the pipeline, then get all the commodities you can get your hands on.

Come join us - we have an excellent track record of calling the markets - private and institutional investors in 45+ countries.

Best regards from the GMR,



Randolph Buss

Author: Randolph Buss

Randolph Buss
Berlin, Germany

Randolph Buss, currently works in portfolio & asset management | commodity fund advisory & management | macro investment research as editor and publisher of his newsletter read in over 45 countries.

The full GMR and portfolio entries can be read at the homepage along with the full disclaimer. For those new readers, the Global Macro Roundtable (GMR) is conceived as a "real world" newsletter written by market analysts and not by unknown editors doing research for others. The GMR provides up-to-date analysis and gives the reader a variety of opinions on the investment markets and sectors. We are not here to massage our egos rather we are here to provide our readers with real-world research and investment opportunities. The markets know more than any body - we remain humble but alert.

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