Plus ça change, plus c’est la même chose


 When Donald Rumsfeld, a practical imperialist
if there ever was one, took over the Pentagon,
he commissioned a study of how
ancient empires maintained their hegemony.
Might he more profitably study
how they lost all they had gained?

—Thomas Cahill

Dear Maridel, Dave, Martha and Jack,

America, by my reckoning, is fifteen years past its peak as a global hegemon. The important question is whether or not we will repeat the history of other imperial nations in other eras: The British at the end of the nineteenth century, The Spanish in the seventeenth century, Rome in antiquity, Athens, China, Persia, the Babylonians. You may argue that our nation is not an empire. Tell that to the citizens of  nations whose politics we have “managed” and whose resources we have exploited for the last hundred years.

Now, at our zenith, the comparisons with past hegemonies abound: Hyper-concentrated wealth, power and privilege. Political and corporate governance skewed with policies that magnificently enrich the elites and marginalize the rest. And the Achilles heel of all hegemonies: debt unimaginable. Without exception, our predecessors have ultimately succumbed to the burdens of empire and undergone massive restructuring and downsizing, imposing severe economic hardship on its citizens. I have no doubt that the same will happen here.

The two factors (intertwined) that guide my thinking are politics and inflation/debt:


A friend once told me she ran for student body president when she was in high school. At her dad’s suggestion, she told the students that if she were elected she would see to it that there was free pizza for all on Fridays. I don’t recall whether she won or not, but it is clear that her dad understood politics.

Government programs to improve the life of its citizens are good. They just tend to go on too long or expand too much. Eventually, they become unaffordable. I don’t know when the tipping point will be, but we are long past the day when entitlements, special interest programs and the inevitable “bridge to nowhere” political pizza parties are tolerable. The battle to eliminate these things is now joined. However it is resolved, there will be a lot of pain. Just look at Greece today. That is the direction we should expect to go in.


 Inflation, classically defined, is an extraordinary expansion of debt. The effect is to flood an economy with the wherewithal to buy stuff. This has happened in our time through the actions of our central bank-the Federal Reserve System. The U. S. Treasury issues bonds, the Fed buys them and, with the sole power to print money, pays the Treasury for them with printed dollars (deposits to the Treasury Dept.’s accounts) which then flow into the economy to pay for government expenditures. An expansion of government spending promotes a general expansion in the private economy, including private borrowing to expand businesses. Fine, if the economy is growing enough to produce growth in tax revenues to ultimately pay off the debt.

It has been a very long time since economic growth produced enough revenues to keep the government from operating at a deficit. The combination of growing government spending and growing debt, both government and private, has exploded of late (the charts are downright scary). An over indebted economy is struggling, too. To try to make things better, the Fed has lately bought bonds (mortgages) in the private sector, making deposits into the banks so that there would be liquidity to boost spending in the economy. It’s not working-businesses are too worried to expand, and are contracting instead. The result has been low interest money for speculators to run up the stock market. This is not likely to end well.

Deflation, the collapse of a debt bubble, is like a monster steamroller that flattens everything in its path. It is a fearful thing. That is why the Fed and the central banks of the world are trying so hard to stop its arrival. But, it’s too late. At this stage of the cycle, all their money printing is no more effective than pushing on a string. Deflation is coming, no matter what they do. We need to be aware of this.

What can we do? Not be surprised, for one. Be prepared to be resilient, determined to survive no matter what. The irony is that what we yearn for: certainty, security, abundance, tends to produce narcissism, entitlement and dissatisfaction. Do you know what a billionaire’s worst nightmare is? The guy that moves in next door has two billion.

Well, we don’t have that to worry about, so we should be grateful. I just want us to get through the next few years in good enough shape to leave the legacy of love to your kids.

Passing the Baton

Do you want to improve the world?
I don’t think it can be done

—Lao Tzu

All my love,


Posted in On Markets, Socionomics | Comments Off

Are We There Yet?

Who are you going to believe,
me or your lying eyes?

–Grouch Marx

Dear Maridel, Dave, Martha and Jack,

Do you remember me writing an essay with this title in January, 2003? Chuck might, since he laughed at my use of a whining kid’s car-trip lament. From a top in early 2000, the Dow Jones Industrial Average had fallen 32%, and the question was, had we reached the bottom of a bear market?

I argued no, and turned out to be right, but nothing in my studies prepared me for the notion that neither had we seen the top of the Grand Supercycle bull market. So now, eleven long years later, the question is, did we see the final top on December 29, 2014?

Yes. Maybe. Probably. Most likely (as I’ve said many times these past years, tops are damn hard to call). The Elliott Wave Principal, my most important study, says little about the amplitude of a bull move, or the time involved, forcing the analyst to make educated, probabilistic guesses about tops.

But one thing Bob Prechter and his Wave analysts have had dead on is the character of stock market tops and bottoms. And, from 2000 on, even during the crash into 2009, the market never lost the underlying weaknesses they described that get built into a bull market when it becomes an investment mania. This is extremely important because, no matter how high they go, manias are always fully retraced. The present one was initiated in 1974 with the Dow at 574. The market will eventually get below that. So, for the last fourteen years the downside risk has been much greater than the upside potential. Hence my caution.

The final phase in any economic expansion is funded by debt. The end comes when the debt is so excessive that it cannot be paid back. This has been the case for years, now. But who would ever have imagined that the central bankers of the globe would take it into another dimension. The numbers today cannot be stated in anything other than invented language. Wave analysts, along with credible analysts from other useful disciplines, just couldn’t get their arms around the magnitude of the bubble.

I began writing these essays to provide you with a perspective on markets because I’ve felt that the risks were not apparent enough to anyone just reading the news, let alone following the advice from the securities industry (they are uniformly bullish today, no surprise). If this turns out to be the end of the bull market, my purpose will also be coming to an end. I won’t need to be telling you about the disasters that are coming–you’ll see them for yourselves.

At some point, when social mood really sucks, I’ll feel it is time for us to start leaning against the crowd and getting bullish as they are getting bearish. Until then (unless I’m wrong again about the top), I don’t expect to be weighing in with my views as often as in the past.

All my love,


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On Sense and Nonsense

“The shirt is five pesos, right?
Very well. And as you can’t pay for it,
that’s five pesos. And as you remain in
my debt for the five pesos, that’s five
pesos. And as I shall never have the
money from you, that’s five pesos. So
that makes five and five and five and
five. That’s twenty pesos. Agreed?
“Yes, patron, agreed.”
The peon can get the shirt no-
where else when he needs one. He
can get credit nowhere but from his
master, for whom he works and from
whom he can never get away as long
as he owes him a centavo
–B. Traven, The Carreta

It is six am in Bandung and Aditya is up mulling whether to keep the motorbike he uses for the daily commute to his business in downtown Jakarta, or to sell it and get a small car, which will give him transportation for his family when they visit relatives. It is one of a half dozen  spending decisions he will make today, most of the others being smaller.

Two hours later it is six am in Seoul. Woojin us up and at ‘em, checking with his wife to get a shopping list, the first of his dozen or so spending decisions for the day.

Seven hours after that it’s Six am in San Bernardino and Liam is starting the day trying to decide whether to fix the lawn mower or hire a lawn maintenance company. By the time it’s six am in Bandung again seven billion people will have made some fifty billion buying decisions, and the dominant factor on what to buy, how much or little or whether to hold off on buying at all is social mood. If it is on the rise, they’ll think expansively. If it’s upbeat enough, they’ll even borrow to buy.

But after social mood peaks, people will look at their bank balances in a different way. They and their neighbors will gradually tighten up. This flat-to-down trajectory in global business puts pressure on businesses that have debt in their capital structure, resulting in employee layoffs. Layoffs affect social mood negatively and the rollover begins to accelerate, forcing bankruptcies and debt defaults, which ultimately pull healthy businesses into the vortex and depression results.

Trends in social mood show up in the economic data. The speculative stock market peak in 2000, and the real estate top in 2007 saw peaks in spending. The rally in the stock market since then has not had enthusiastic consumption to go along with it. The subtle message is that mood is beginning to trend down.

The recent slump in the price of oil is causing a lot of chatter on the airwaves. Talking heads are spewing theories about why oil is collapsing now. So much nonsense. The price of oil has been going down since the speculative peak in 2008:

crude oil 20 year

The primary driver is an underlying steady decline in consumption:

oil consumption recent

Oil’s trend will continue down as social mood accelerates its downtrend into a bottom between now and the end of the decade. No telling how low it will go, but ten bucks a barrel would not surprise me because not much driving or spending should be happening at a Grand Supercycle bear market bottom.




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2015: A New Era Arrives

It may be that when we no longer know what to do
we have come to our real work,
and that when we no longer know which way to go,
we have begun our real journey.
The mind that is not baffled, is not employed.
The impeded stream is the one that sings.

—Wendell Barry

We will want less in 2015. Making do with what we have will be the Black Swan, N. N. Taleb’s term for an event which nobody predicts beforehand, has enormous impact, and, afterwards, everyone says they saw it coming. The arrival of the Grand Supercycle bear market will usher in a siege of austerity.

 With the new mood, ostentation will be unseemly. We will come to prefer, and even celebrate frugality. We’ll brag about not running out to Best Buy to get a 70 inch flat screen so we can view the Super Bowl from the next room over. We’ll smugly invite our guests to sit closer to the 40 incher we have.

The Black Swan will put a serious hurt on the seventy percent of the economy that is consumption. There will still be jobs for sales clerks–at least until robotics advance to the point where the bots can dust and rearrange the merchandise that sits on shelves in empty stores month after month. It will get down to a replacement economy. We won’t go get a new smartphone ’till the one we have is dead. And even then we might pass up the new model for the discounted old.

Newly minted college grads will have to find something to do other than bartend or serve food at Appleby’s. Pot luck dinners with neighbors will take the place of dining out three times a week. It will be a genteel austerity.

None of this is expected, of course. Tenured dismal science (economics) professors and their colleagues on Wall Street are of one mind: the economy will grow at an accelerated rate next year (you could look it up). Their clients–mutual fund managers, and their clients–hapless individual investors, have all their money on the growth horse. They will change their minds after the market has lost half of its value, but, for now, forewarned is better.

Socionomics holds that social mood drives behavior and markets. The period ahead will showcase this hypothesis. Americans have not been big savers over the last fifty years. This is about to change, just as it did in the thirties, which produced  The Greatest Generation,  a parsimonious bunch who would rather put money in the savings-and-loan than go out to eat. The credit card industry will be dead by the end of the decade.

The inflation/deflation cycle is immutable. It rises out of the ashes of the previous collapse, builds cautiously for several decades until shoppers are blithely opening the eleventh credit card account (it’s so easy), and tops when the debt can no longer be paid for. The timing of the top is tricky. I’ve called for it for years. I’m calling for it again.

The thing to do is to be in front of the pack on this new way of thinking. Be the first on your block not to fly to Paris over Spring Vacation. Keep your car a year or two longer than usual and don’t trade it for a Cadillac Escalade. Get a Chevy.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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At Christmas

Dear Family and Friends,

May your Holiday Season be joyful!

May you and your beloved children have food enough to eat, hope enough to thrive, and faith enough to live in the light of God’s love.





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At Yearend 2014

Forgive us now for what we’ve done
It started out as a bit of fun
Here, take these keys before we run away
The keys to the gulag

—Nick Cave and The Bad Seeds

 The market edges to a new high this morning as the BLS reports a blockbuster 320,000 jobs were created last month (Establishment Survey). It’s bullshit, of course. The Household Survey finds 147,283 jobs added, 77,000 of them part-time, while 150,000 full time gigs were eliminated (

Let the believers believe what they want.

So, Philostratus said, Gods perceive future events, mortals present ones, whereas the wise sense those that are imminent. Fine, but the wise guys in my domain have been calling for a market top so long we’re gonna have to redefine imminent.

One thing they have gotten right: the investment environment sucks. Has for a long time-since 2000, actually. And anyone who argues that holding stocks during that time was smart–the S&P 500 gained 35% over those 14 years–should reflect on the facts: dividend income was minimal, and overvaluation exposed the investor to significant risk most of the time. Sort of like walking around with a hand grenade with the pin out, hoping you don’t let the handle fly off so shrapnel can rip your entrails out. Holding cash equivalents at an average of 1.5% over that period yielded a 23.77% return with zero risk (ah, the power of compound interest!).

Next time we hit a low, say 2021 or so, the market will be grossly undervalued, and the dividend yield on the Vanguard S&P 500 Index Fund should be north of 10%, (it was 13.82% in 1932). Worth hanging out in cash to skirt the high risk until we get that kind of opportunity again.

In the meantime, commodities, and oil in particular, are rapidly filling up the Dempsey Dumpster. This is something to worry about right now. If you wondered why junk bond issuance has gone at a torrid pace for the past two years (I did), wonder no more: a huge chunk of it was for oil and gas fracking projects. There had to be a reason: It was an easy sale. You can just see investors, both institutional and mom and pops, salivating at the prospect of investing in America’s new-found self sufficiency in oil.

This is why junk bonds are so toxic. They come to market offering a big yield for an investment that looks great, only to turn out to be a total loss. That deal has nowhere to go but south. If you know anyone with junk bond funds, tell them to read this: . When one part of the junk bond market tanks, the rest follow forthwith.

Stocks in the U.S. are still levitating, and they look awful.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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Gratitude, Always

The Place I Want to Get Back To

—Mary Oliver

The place I want to get back to
is where
in the pinewoods
in the moments between
the darkness
and first light
two deer came walking down the hill
and when they saw me
they said to each other, okay,
this one is okay,
let’s see who she is
and why she is sitting
on the ground like that,
so quiet, as if
asleep, or in a dream,
but, anyway, harmless;
and so they came
on their slender legs
and gazed upon me
not unlike the way
I go out to the dunes and look
and look and look
into the faces of the flowers;
and then one of them leaned forward
and nuzzled my hand, and what can my life
bring to me that would exceed
that brief moment?
for twenty years
I have gone every day to the same woods,
not waiting, exactly, just lingering.
Such gifts, bestowed,
can’t be repeated.
if you want to talk about this
come to visit. I live in the house
near the corner, which I have named

My thanks to Pastor Bob for sharing this gem of a Mary Oliver poem in his sermon this Sunday.

Happy Thanksgiving,


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Meditation For The Season

Everything an Indian does is in a
circle, and that is because the power of
the world always works in circles, and
everything tries to be round. In the
old days when we were a strong and
happy people, all our power came to
us from the sacred hoop of the
nation…. Even the seasons form a
great circle in their changing, and
always come back again to where they
were. The life of man is a circle from
childhood to childhood and so it is in
everything where power moves.

—Black Elk

There is a school of thought that holds that if something outta happen it will. The happening I have in mind is a market that offers a widows’ and orphans’ investment, defined as a place where investors with no particular expertise can put their money and leave it. They will receive a reasonable income initially, and enjoy regular increases in income without making any changes. Such an investment is not available now, but will be when the capital markets come full circle back down to fair value again.

John Hussmann, one of a hand full of market practitioners who know what they’re talking about, argues in a recent interview ( that the S&P 500 is valued more than 100% over what it should be. “I actually think the case is a little bit harsher than that; in fact, quite a bit harsher than that,” he said. Hussmann’s analysis, then, parallel’s Bob Prechter’s forecast using the Elliott Wave Principle.

The Standard & Poor’s 500 Index fund is an excellent investment, but it has to be bought right. Today, the fund yields about 1%, and faces the prospect of being cut in half or worse as it goes through a bear market, and with the accompanying economic depression, there is likely to be a reduction in the dividends paid by the portfolio companies. The right thing to do, in my view, is to hold off investing until the bottom of the bear phase is past.

At the lows in 1974, the annual dividend yield on the S&P 500 Index was a reasonable 5.43%. Dividends rose in all but one year between then and 2013. Had you put your money in at that time, the annual yield on your original investment would have risen to 52.91% without you having to make any changes at all. If you had invested $100, 000, you would have gotten $5,430 in dividends the first year, and today you are getting about $53,000 annually. That’s a widows’ and orphans’ investment, writ large.

Holding cash at near zero percent return while waiting for the market to come down is tough, especially since it is probably going to be several years before it’s right to buy, but that is a better option by far than having the exposure to extreme loss we have today.

There are about three hundred men and women in my little village licensed to give investment advice to investors. Most of them are employed by banks and brokers. Every single one them has their clients fully invested with stocks and bonds today. Goddamn criminal.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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A Thanksgiving E-card

This lovely palindrome, written by Jonathan Reed, was broadcast on the media screen at church this past Sunday. Cindy and I loved it. We hope you do, too.

 Happy Thanksgiving,


Posted in Human Condition: Variations | Comments Off

Logic Defied

Do not think it worthwhile to proceed by concealing evidence,
for the evidence is sure to come to light

—Bertrand Russell

The conversation, five years ago,  went like this:
Dave: “So, you’re saying we can fly to Paris for fifty bucks?”
Rod: “Yes, but you have to have fifty bucks.”

I had, for some years, argued that the inflation hawks had it wrong. Fed action doesn’t drive inflation, expanding social mood does , and the outlook for social mood was negative, implying deflation, not the opposite.

Now, thirty-five years after inflation peaked, conventional wisdom is coming to terms with reality:

Why the Fed should worry about deflation

  • Fortune Magazine
  • October 30, 2013, 9:00 AM EDT

Fortune is right to be worried. Deflation and unemployment go hand in hand:

inflation rate 1979 to present

Note that inflation went negative in ’09. It is sure to go negative and stay that way as social mood continues its trajectory back towards the levels reached in 1932.

The price of oil is free falling:

oil now

You will think, yea! I can fill up for less now! But falling gas prices is like going to Paris for fifty bucks, folks have to have the money to fill up, which looks increasingly problematic. A medical technician friend says he’s getting into home repairs. Not that he wants to, but he is seeing the signs. “I’ve been there longest and I’m the highest paid tech. They can easily get rid of me for a younger guy at an entry level salary.”

Or worse. He could be replaced by a robot:

robots for retail

This is OSHBot, Lowes newest employee, a frickin’ robot that, when you encounter it, will have scanned every item in the store and will tell you where to find it and how to use it if you need or suggest a better option!

Another friend works for Home Depot. He is a college graduate,and when he applied for the job the HR person said, “Why are you applying for this job?” “Because I need the work,” he replied. The real question is how long will Home Depot need him?

How, you will ask, can the market hold up in the face of an economy that won’t pay enough for college grads to get gas to get to their barista jobs at Starbuck?

Markets can remain irrational longer  than you can remain solvent


Matter of time.




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