On the Inevitability of Change

If something cannot go on forever,
it will stop

–Herb Stein

The U.S. stock market does its death defying dance in the face of underlying weaknesses in the system. Europe is now preoccupied with the technical bankruptcy of its major banks, and we should not be far behind. Calamity hasn’t arrived yet, but entropy-the state of dysfunction and disorder in our social system-should not be ignored.

The political climate stinks for the majority, and the sons of bitches that have the money and the power are implacable in their drive to keep it. There will be no negotiating a better arrangement. Dismemberment is the historic endgame in plutocracies. The editors of The Economist argue in their new book, The Fourth Revolution, that political upheaval of some kind is coming in the free world.  However it proceeds, there is bound to be great difficulty associated with it.

I’ve held that the next economic crisis will be far more severe than anything the country has ever experienced. We do well to look at the harshest environment we can to prepare our mindset for this eventuality.

Kum Do, a particularly brutal martial art from Korea, is a fight to the death with very sharp swords (today it is practiced with bamboo sticks). Student warriors are taught to avoid what are called “The four Poisons of the Mind.” These are Fear, Confusion, Hesitation and Surprise. We should take this to heart.

The latter of these poisons gets my attention right now. We are most likely to be surprised when we think we know what’s going to happen next. I’m in that position. Could I be surprised? It has already happened. The first leg down in the Grand Supercycle Bear Market began in 2000 and didn’t bottom until 2009, taking a lot longer than I expected. The counter trend rally has also taken a lot longer than I expected. Am I wrong about the premise of a bear market of cataclysmic degree?

No. The 2000 top was, by all measures, the most rampantly speculative in 200 years. The secondary top in 2007 was, in many ways, more vulnerable. The present peak not only features great financial weakness, but also an assault on the political underpinnings of our society. The excesses that were generated in this massive, multiyear top still burden the global economy. An equally massive bear market is a requirement to clean them out.

It will be the majority-the very great majority of investors and their advisors that will be surprised and unprepared for the turmoil that is coming.

The unanswerable question is how this plays out. Even if we do have a handle on the risk in the system, we have no idea how this will affect us.

Professional firefighter, Peter Leschack said, “…in emergency operations, you must not merely tolerate uncertainty, you must savor it. Or you won’t last long. The most efficient preparation is a general mental, physical, and professional readiness nurtured over years of training and experience. You live to live. Preparing is itself an activity and action is preparation.”

In short, there won’t be a predetermined game plan. We’ll have to be flexible, suit up every day and come to the game prepared to call an audible.






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