Thursday, July 13, 2017

Our Finite Limits

In the past several hundred years, the Earth's population has exploded to 7 billion persons thanks to the use of debt, cheap raw materials, technology and energy. But the most important is energy as it provides the means to mine the materials and leverages the productivity of humans and technology. But such asymptotic population trends are likely not sustainable and subject to collapse.

To support this growth and to feed all of those people, genetically engineered crops were developed to increase crop yields, oil and gas production has extended into expensive offshore areas and marginal oil sand operations, fish and tree farms were built to compensate for declining fish populations and deforestation, desalination plants have been built in some areas to supply enough clean water. All of these things, and many more, make life more expensive.

Many other factors limit growth. In China, in just 10 years, air quality concerns have reached such critical levels that they can no longer use as much coal, which had fueled their astounding rise. Even clean water is becoming more limited (costly) in China. Their debt levels have also reached levels associated with financial crises in other countries. Now even China is trying to dial-back debt spending and trying not to kill people with smog. Now, we're seeing prices for most commodities dropping in price that are too low for producers. Higher environmental, production, debt and other costs are hurting every country now.

The world, humanity, is reaching the limits of growth -- which may cause adverse debt dynamics and a sudden collapse. 

We've reached the finite limits to growth when the marginal cost of commodities that support growth, like oil, rise so high that consumers can't afford it. That happened in 2008 with $145 oil which triggered a recession and financial crisis. Now, $60 oil might cause the same adverse result since healthcare, food, rent prices have rapidly escalated in the past 8 years. The same thing has happened to nearly every other commodity after 2009 with China's huge debt-fueled growth program.

Also we've reached limits of growth when additional debt, on top of our debt burden, no longer helps the economy grow. I covered this in my blog post "We're Reaching The End of The Road." We are reaching the end of the road.

The beginning of the end became somewhat apparent in the 1970s. In 1974, with the Arab oil embargo, energy costs rose from being very cheap to relatively expensive putting a huge drag on Western growth. In order to maintain previous growth and employment levels, increased debt was used by both governments and individuals to offset higher energy costs. This continues to this day. Higher budget and trade deficits caused by expensive oil imports led to much of our wealth transferred to the oil producers (who turned around and bought US treasury bonds to keep the "scheme" going -- known as "petrodollar recycling.")

In recent years, additional trade deficits with Japan, then China has led to further "leakages" of US domestic wealth. Trump is entirely correct that persistent trade deficits have sucked the life (and jobs) out of our country. The result has been that worker's wages in our country have stagnated which has stagnated the economy.

In addition to increasing debt, consider the easy money created by the Federal Reserve since the 1970s. They have caused increasing financial instability, have inflated rents, housing and nearly every other costs/asset class. They are responsible for rising income inequality by disproportionally helping the wealthy -- the ones who own stocks, bonds and inflation hedges. Easy money has caused spectacular crashes/financial crises too in recent decades (year 2000 and 2008)-- each time followed by even lower economic growth. All this is hurting the non-elite working class the most-- those that still have a job. Stagnating incomes is causing our increasing economic malaise. This describes our downward spiral that we find ourselves. 

To further "work around" our limits to growth, governments have reduced interest rates to near-zero or below zero. With ultra-low interest rates, retirees can't afford to retire, pension funds fail and insurance companies are hurt. A 3rd stock market and bond market bubble have emerged -- really an "everything" bubble. Now rates are rising. Similar to oil prices, too low interest rates hurt some parts of the economy, but higher interest rates hurt a different portion of the economy (the consumer). It seems we need two different interest rates.

Energy production will eventually fall at current prices of $45 to $50 per barrel which are still expensive. The price is too low for producers in many nations and locales and those who rely on oil/gas tax revenue to support it's population (like the Middle East countries). Declining production could easily cause an oil price spike that triggers a recession. Then, a recession would in turn trigger a new oil price collapse. We live in a time of potentially dramatic oscillations in energy prices and economic instability.

Falling energy prices and production does not bode well for future economic growth since GDP is highly correlated with energy consumption. Already economic growth rates are slowing as sovereign, individual and business debt levels continue rising even faster. This can only go on for so long. It can't go on if interest rates rise. And any massive spending or economic "stimulus" program would likely be snuffed-out by a huge oil price spike if it were truly effective. It's a no-win situation.

The problem is that all the debt taken out to support all the progress and growth to date becomes even more onerous, even disastrous, when the economy stagnates or worse when it shrinks, say in a recession. And, as I've mentioned, a recession could be triggered by a spike in oil prices. Or it could be triggered by a financial crisis in commodity-producing countries (any of the emerging market countries), in China or the EU.

Recovery from the next recession will be very difficult as sovereign debt will be rising dramatically at the same time debt defaults increase. Even governments will reach limits of "rescue" of bad debts and/or banks. Furthermore demographic trends in the world have just turned down and will be a drag on the world economy for decades.

About the only scenario that could reverse the current trend is steady ultra-cheap energy (say $10 oil) or a breakthrough in abundant and cheap Thorium or fusion power reactors. But government involvement in any such nuclear energy development will guarantee that it won't be cheap. While the US has very cheap natural gas energy at $3, it's the entire world that needs very cheap energy to grow out of our debts. And expensive alternatives like large-scale Solar and Wind are not the answer. We need cheaper, not more expensive energy.  Like I said, it's a no-win situation. We're reaching the end of the road due mainly to the debt. 

Perhaps you can pray for a miracle?

Tuesday, July 4, 2017

White Privilege My Ass

The entire Leftist culture, blacks, Big Corporate (corrupt) media and Hollywood tries to minimize the wildly successful history of the white northern Europeans. Mostly White Europeans literally "invented" the social, technological and political foundations for the prosperity, freedoms and happiness that a billion people enjoy today in Europe, Canada, USA, Australia and New Zealand.

There is a 1000 year history of Anglo ideas and philosophies, dating from Pre-Norman times to the Magna Carta and beyond, combined with the work ethic and Judeo-Christian ethic of mostly European immigrants to the US, led to the most successful and vibrant political, economic and social "experiment" ever seen in world history: the USA. Our Constitutional government and our prosperity has been the envy of the world for 230 years now. You could say that it is white people who invented modern civilization. And few nations, except the mostly white nations of the British commonwealth, have successfully emulated the US success.

There's no privilege here -- only hard work and intelligence. It's only E.Asians and N. Europeans who have triple digit median IQs. All the rest don't measure up. Sorry, but it's true.

And white, mostly English-speaking people, were the first people to eliminate slavery that was a scourge of the earth for 5000+ years. By the late 18th century, in Philadelphia, Paris and London, concurrent discussions about eliminating slavery were taking place and soon after, slavery was eliminated in their countries and colonies. In contrast and as an extreme example, slavery was only outlawed in Mauritania in 2007!

On campuses, you hear ignorant, uninformed black and Latino students, most of them unqualified to even be in college but are attending due to the seemingly "free money" of government loans, complain about "white privilege" or even try to reverse-discriminate against whites. I am reading more and more cases where blacks are self-segregating meetings, dorms, lectures and speeches etc to exclude whites. It's because these black students can't compete with whites in reasoning and logic and they know it.

The problem for the Left is that our genius white Founding Fathers had values that are the very definition of Conservative: They founded a culture that champions self-determination, self-sufficiency, personal responsibility, charity that takes care of your own, the primacy of family, community and church, the worship of God, minimal government and minimal regulation.

The Left wants to change all that thinking they have a better way. And they have largely succeeded in upending our conservative heritage. Now we have big government and big corruption that is threatening our financial and social stability. We have excessive regulation, a police and surviellance state and too many idle people living at the expense of others. All this is causing our nation to careen toward complete financial and social collapse mostly due to corruption and unsound policies of a massive and incompetent government, a government that is unable to fix all the problems that IT caused.

White persons are under attack in this country by ignorant minorities and the Leftists who dominate our schools and universities. The ridiculous complaint of "White Privilege" shows how intellectually bereft blacks and the so-called social justice warriors are. There is so much ignorance in our country-- and nearly all of it is found in the ranks of Blacks and Democrats.

Monday, July 3, 2017

Stock Valuations Worse Than They Appear

The US stock market (S&P 500) is trading at a price to earning ratio of 23 based on trailing 12 month "as-reported" earnings.  Historical average is 16.7, so it doesn't it seem so over-valued. See the chart below.  It's only about 30 to 35% above "average."

But it's corporate earnings themselves that are very elevated compared to historical averages-- almost 100% above average.  The problem is that corporate profits reliably reverse or "mean-revert" to the low end of historical averages.

In fact, it is said that corporate profits are the "most mean-reverting" series in all finance. Refer to the chart above. You can see that corporate profits collapsed to the bottom of the historical range (+/- 1 Standard Deviation) in both 2000 and in 2009, so it does mean-revert very significantly! By this measure, you could expect stocks to drop 60% during the next recession.

My point is that that stock market PEs are much more elevated than it seems because the "Earnings" part of the equation is extremely high relative to history -- which reduces reported PE to something that appears less obscene (earnings are in the denominator of P/E). In reality, stocks are very overvalued and in the 95% percentile of historic valuations, when looking at a variety of valuation measures.

That is why GMO is calling for negative stock and bond returns for the next 7 years. The way that these things work out is that stock prices decline by 50 or 60% at some point in that 7 year time period, then recover somewhat. You might have to wait a long time for the full price recovery. Are you ready for that?

GMO's Estimate of Market Returns for Various Assets Q2 2017

Sunday, July 2, 2017

Cuba: A Country Hijacked By a Family Who Imposed Totalitarian Communism

After 58 years of their “glorious revolution” thousands of people every year are still trying to leave Cuba and risking their death in doing so. Many are still dying.

Cuba has virtually the identical situation that all the Communist East European countries had while they were still under the heavy yoke of Soviet communism. The predominant mood for the people there was hopelessness and so many had dreams of escaping. Why else did the Commies have to build the Berlin Wall? To keep the victims inside! And for what? For a absurd ideology that is and always will be a total failure.

Cuba is another country hijacked by a family like North Korea and Azerbaijan. In these situations, only a few at the top and those “connected” to the Castro family have any money. For example, Forbes has estimated that the Castro brothers have $Billions, probably in Swiss bank accounts. This is the norm in Socialist and Communist countries. It’s an evil situation because it can’t or won’t change and if you complain, you go to prison or a mental hospital for your opinions. The elites maintain their status quo using the thugs and guns of Stasi-like “security” agents. They are agents of repression.

Meanwhile most people make about $30 a month and the most qualified doctors recently received a raise and earn about $65 a month. This is what happens when you "solve" the so-called problem of income inequality: it becomes poverty for all.  This widespread poverty remains true even after every country in the world allows unfettered tourism to Cuba.

The people don't benefit because virtually all of the tourist dollars flow right to the top. There has been some slightly improved "freedoms,"ie., some local citizens can provide tourists alternative accommodations to the government-owned (ie., Castro family owned) resorts. But I wouldn’t be surprised if those people are shaken-down by the regime thugs — especially if they are very successful! If anyone is too successful, their business will be seized and given to someone else since you don’t have any property or any other rights or protections. This is an evil place.

This is why I hold Obama in such contempt for giving Castro Inc a lifeline.  Every Leftist leader will make everyone worse off. This includes Jeremy Corbin, Bernie Sanders, Barack Obama and many others.

There was an article the other day saying that a Cuban man interrupted the most recent May Day parade by running along the parade route waving an American flag. He was beaten badly by all the plain clothes police for such an affront.

Later I read that he was put in a mental hospital because he kept talking about God and he professed his belief in Jesus. This happened millions of times in the USSR too. If you dared say that you didn’t like Communism, you were considered crazy not to love their wonderful system. But, in the plainest truth,  it was their “system” that was crazy.