Monday 4 July 2011

Some Loud Thinking On 4th. Of July.

Price action defines news and not the other way around. All the talking heads in the 24 hour television have to say something to fill the time and hence they spin the news good or bad based on the price action in the market. If one has to take an investment decision based on these talking heads, one is doomed forever.

In this constant noise we almost always lose the music. And the music is the continuous sound of the wave on the shore of civilization. Events like the waves come rushing in, make noise and brake up. Then they recede and a new wave / event start. In a way, the history of civilization is very similar. For thousands of years there have been dynasties, kings, civilizations which have ruled supreme in their time. In their time, they have considered themselves as indestructible and forever.  How is the present time any different?

Every civilization flourishes when the income of the state exceeds its expenditure. In a way it is very similar to the household. Then comes a time when the expenditure exceeds what the state can support and the rulers try to find some new methods to carry on. In the time of Roman Empire, the Romans started with debasement of their currency and it reached a point when their currency was useless. Today we see the same drama being played all over the world.

The main culprits in this end game are the Central Bankers of the world with the exception of Germany and Holland in Europe and Singapore in Asia. Fed in USA is not the only one who has created the monster deficit. Japan is the dead man walking with debt over 200% of its GDP. We all know the situation in Greece, Ireland, Portugal, Spain and Italy.  With Trillions of dollars of debt and many times more unfunded liability which are off the book, balance sheet, there is no way this situation can ever be corrected. There comes a time when the debt explodes like a supernova and all the excess is purged of the system. It is time of extreme pain for those countries. The 1st sufferers are the bottom 90% of the population who has to struggle to make ends meet and at some point the social unrest sweeps over the ruling elite. We see it happening before our eyes as it happened in Tunisia, Egypt and other Arab countries and yet we think it will not touch us. We see the Greeks hurling Molotov cocktails and we wonder how long before the 40% unemployed youths in Spain will do the same.

With food stamp at record high in USA and social benefits soaring in other countries, the ruling class is engaged in providing “Bread and Circus” to its population. Two trillions of dollars of Fed intervention has done nothing to solve the structural problem and the next storm will be worse than that of 2008. Watch this YouTube video of David Stockman :  and make your own judgment.

The growth in GDP if any is completely fueled by borrowing. It has reached a point when more debt is not resulting in any increase of GDP. Is this the beginning of a bear market? I am not sure. What I am sure is that we are reaching the end of the debt super cycle. It is going to be a time of tremendous pain as well as opportunities.

I am not trying to be pessimistic. Nor I am a perm bear.  In Hindu religion, there is Lord Shiva, the “ God of Destruction.”  Those people realized and accepted the need for destruction.  When things decay, they need to be destroyed so that new life comes out of the ash. That is law of nature. If we preserve the decay by “extend and pretend”, we only delay the inevitable and increase the pain.

I am very hopeful for the future because the future of our children cannot be bad. Amidst all the greedy and self serving Banksters and Politicians, there will come some courageous people who will change the course of history. I remain the eternal optimist. 

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