Guest Post: The Best Of Times, The Worst….

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From Chindit 13

The Best of Times, the Worst….

It was the best of times, it was the worst of times.

This time is different.

There is nothing new under the sun.

All of us---by “us” I mean human beings---tend to think too much with our egos and not enough with our rational minds.  When we are young, we think we have unique and novel insight into life and the human condition, as if we are the first person to have ever thought certain thoughts.  We all read---at least back when I went to school---the classic literature, the Greek playwrights and Shakespeare, but it is only when we reread these works as adults that we realize that everything has been thought of before.  The best we can do is put a slight sidespin on it.  We are humbled.

We bring this same tendency---a belief in our uniqueness---into the issues that face our time on Earth.

“There has never been a better time to be alive.”

“This is all going to blow up faster than most people think, and it is TEOTWAWKI.”

Somewhere in the middle probably lies the truth.

Many of us---myself included time to time---fear that life as we know it is about to come to an abrupt and painful end.  Others---most visibly those who are wheeled out as guests on CNBC---think things are on a rise as far as the eye can see.  And for some---I am thinking John Paulson and David Tepper---times have never been better.

Who is right?  Maybe nobody.

Things have always been this way…wild optimists and wild pessimists.  If one is objective, one can see a time far worse than our own in the not so distant past.  It helps---me, at least---to try to put things in perspective and bring that perspective to today.

Consider a time that all of our parents or grandparents faced.  The 1930’s brought the Great Depression, soup lines, and 25% unemployment in the US.  Horrible it was, and an extra slap coming in the face of those who had lived through WWI and through the Great Spanish Influenza, or Weimar Germany.  At the same time, there was a Gilded Class who sailed through the 1930’s.  Think of those who bought the 1932 Duesenberg SJ or the 1937 Bugatti Atlantic or Royale, which might be the most ostentatious automotive displays of wealth ever created, Depression or Boom time.

Even darker clouds hung over the planet by 1939.  Japan had already invaded China and had carried out wholesale slaughter at Nanjing, and had “invented” aerial bombing of civilian targets.  Hitler had reached the height of his power, had already entered the Rhineland and was threatening Poland.  Neville Chamberlain, on the other hand, saw “peace in our time”.  Pessimists One, Optimists Zero.

By December 1941 the entire world was at war.  Eighteen year olds in all the developed countries were not worrying about Saturday night dates or what job to take, and certainly not about getting the next permutation of the iPad;  there were worrying about staying alive.  Rationing was widespread.  Jews were being rounded up in Europe for humanity’s latest attempt at genocide, not even three decades after the last attempt in Turkey.  To pay for the war, US budget deficits hit levels never before seen, and not seen since.

If one had thought the entire world was going to come to an end, it would not have been viewed as tin foil thinking.  It looked to be inevitable.

Then it stopped.  The war ended.  Germany and Japan were defeated.  People cleaned up.  Economies began to grow again.  Manufacturing turned toward building consumer goods rather than armaments.  People’s attitudes turned positive.  The world hadn’t ended;  in fact it reached one of the most prosperous times in history.  Of course, by the late 1950’s it wasn’t good enough for the young.  It never is.  Discontent defines the young, and is probably what leads not only to change, but to cycles both good and bad.

One could make quite a successful argument that today’s problem are minor in comparison.  That doesn’t mean that we will have smooth sailing, but in a relative sense perhaps it will seem so, at least to those who lived through the Great Depression and WWII.  Think of the way a cancer survivor might view a subsequent common cold.

For most of the rest of us, it might prove challenging, even upsetting.  Some of us will plan for TEOTWAWKI.  Some of us will believe it is the end for the US, or for Europe, forgetting that collapse is often a lengthy affair (Rome) that encompasses many generations at best, and a medium term event (Japan, 20 years and counting) at worst.  A country as large and significant as the US is unlikely to be Zimbabwe, or even Argentina.  Collapse, if it comes, likely will be an extended affair.

Admittedly US finances are horrible, both public and private.  Corporate finances are not so bad, although since many of their assets are cash and UST’s, they will be subject to some pain if the worst happens.  Their fixed assets, however, represent productive capability and should retain some value even if things turn nasty.  They should survive to the other side, whatever that other side might be.

Sometimes our mindset leads us to overestimate things.  One example I recently discovered, much to my surprise, was that today’s money printing, at least in the two common aggregates, is considerably slower than during the commodities’ bubble of 1980.  Most of us today bemoan the pace of money creation, but how correct are we to think we are in uncharted territory?  Using as an end point two silver market highs (1980 and now), in the two years prior to those highs, M1 growth in 1980 matches M1 growth today, averaging .65% per month in 1980 and .64% per month today.  M2 shows marked differences, however, growing three times faster in the period before March 1980, .75% per month vs. .25% per month today.  Surprise.  Where today’s money printing shows up is in the monetary base, or MB, which includes excess bank reserves.  That is the Sword of Damocles hanging over the market, and the future is dependent on how that is resolved.  (On a side note, I am suddenly far more concerned about the deficit than money printing, though both are worrisome.)

Some will say this post is too optimistic.  I might say the same thing myself, tending as I do toward being a Cassandra.  Being a Cassandra at heart makes me hedge, so it has merit.  Being a student of history, however, prevents me from going “all-in” in the TEOTWAWKI trade.

Three years ago, before the printing and the bailouts, I never would have expected that the S&P would be above 1300 today.  I wouldn’t have expected the RE bubbles to continue in China, Hong Kong, Singapore, Australia and many other countries.  I’m not sure what I expected the dollar to be, but being in a mid range of its recent performance against the euro probably was not what I thought, though overall it is not far from earlier lows.  Gold does not surprise me, though silver does.  Silver has spent its recent history jumping back and forth between being the Poor Man’s Gold and the Rich Man’s Copper, never quite making up its mind what it wants to be.  I’m not sure it ever will, and its schizophrenic behavior will provide many trading opportunities.

My worst fears did not materialize.  Some of you might be thinking “yet”.  Maybe you are right.  It is very difficult to figure how we can escape this fiscal mess, the over capacity mess, the general public and private debt messes, the EU mess, the natural resource shortage, Japan’s mess, and the assumed future collapse of the various bubbles around the world.  I don’t how it can happen.  I am modest enough to admit that just because I cannot think of a way does not mean it cannot happen.  I suspect that if I was eighteen in mid 1942 and on a boat toward the South Pacific, I would not have been able to see how the world could possibly escape complete collapse.  Yet it did. 

I think most of us develop mindsets that become our comfort zone, our steady state.  For some that is optimism, for others pessimism.  If we drift from that comfort zone, we find a way to push ourselves back into it, even if it is bad.  Some people like to be miserable, because it is something familiar and human’s have an odd tendency to resist change, even in the face of emotional misery.  Others always try to see the bright side, and seem to be able to find a way back there whenever they drift away.  Personally, I think I try to find a middle ground, which I might call the world of cynicism, where I can see things that can and should upset me, but I try to make fun of them and find some humor in them.  (My own definition of cynic is a hopeless romantic in a suit of armor.)  Something that is truly difficult is moving oneself from one mindset to another and trying to stake out that new ground.  Consider this:  how many find themselves gravitating toward the bleakest articles here and find themselves in a kind of joyous agreement with the most pessimistic and negative comments (“this is all going to blow up faster than most people think”)?  How many have the opinion that they can hardly wait for everything to blow up, even though few have had any first hand experience in a Mad Max type of world?  Would people regret it if they get what they wish for?  I suspect almost all would.

Most people know where their sentiments stand.  Just for fun, here’s a test.  Suppose the following links to articles appear on a financial website.  In what order would you read them, if at all?

1)  SNAP Recipients Reach All-Time High
2)  Major Economist Sees Long End of the Yield Curve Collapsing
3)  Signs of Recovery in Spending, Hiring Figures

I’m guessing 1-2-3 and 3-2-1, pessimists and optimists in those orders.  The second fictitious article is a trick, as it probably generates a lot of cognitive dissonance.  A major economist?  What the heck does an economist know?  On the other hand, it sounds negative, so maybe it’s worth taking a look. 

Personally, I’m going with cynicism and history, and hedging my bets.  If I am wrong I may be swept away by events.  If it turns out as bad as many people are predicting, however, I am not sure survival is the more attractive alternative.

Some say hope for the best but plan for the worst.  I prefer hope for the best but plan for the worst one is willing to accept.