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The Trends to Watch in 2013

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith via Peak Prosperity blog,

Rather than attempt to predict the unpredictable – that is, specific events and price levels – let’s look instead for key dynamics that will play out over the next two to three years. Though the specific timelines of crises are inherently unpredictable, it is still useful to understand the eventual consequences of influential trends.

In other words: policies that appear to have been successful for the past four years may continue to appear successful for a year or two longer. But that very success comes at a steep, and as yet unpaid, price in suppressed systemic risk, cost, and consequence.

Trend #1: Central Planning intervention in stock and bond markets will continue, despite diminishing returns on Central State/Bank intervention

Intervention in the stock market may successfully keep the markets in an uptrend or a narrow trading range for 2013, but this would only increase the odds of a dislocation/crash in 2014 or 2015. Temporary success does not imply permanent success or even continued success of intervention. Why is this so?

Virtually all Central Planning intervention—fiscal and monetary stimulus, subsidies and market manipulations—suppresses market pricing of risk and volatility. In a healthy, transparent market, millions of participants openly price risk, volatility, assets, and capital.  This creates low-intensity volatility and resilience. When transparent markets reprice risk, assets, and capital in a panic, the recovery is equally dramatic as participants quickly adjust to the repricing. Confidence is based on transparent pricing by participants, not officially sanctioned manipulation.

The purpose of Central Planning intervention is perception management. Central Planners want to restore confidence; not with transparent repricing, which would hurt holders of assets and banks, but by engineering a steady rise in asset prices and reversing any declines with indirect buying.

This instills confidence via participants’ "Don't fight the Fed" belief that Central Planners will never let the market go down.

History rather unkindly finds that Central Planning elevation of markets and suppression of risk is impermanent: Intervention leads to crashes. Why is this so? Risk cannot be eliminated; it can only be transferred or suppressed. When it is suppressed, it eventually bursts out. The greater the suppression, the greater the eventual dislocation. There are various analogies for this; for instance, the stick-slip hypothesis of seismic faults and earthquakes. While the surface appears stable, pressure invisibly builds far below and is eventually released in an earthquake.

In our financial example, sudden repricing of risk and assets is the equivalent of an earthquake.

Many commentators have observed that the positive effects of the Federal Reserve’s Quantitative Easing programs are diminishing both in duration and market pricing. The market soared for months on end after QE1, but the rally quickly fizzled after QE4.

This reveals the decay factor in intervention: Each intervention must be larger as its efficacy decays.

The policy consequence of this decay is that Central Planners must “double down” their bets to keep the perception-management “recovery” and market on track. As I explained in my book, Why Things Are Falling Apart and What We Can Do About It, the analogy is a gambler who is using borrowed money to make ever-larger bets in a casino. His first few bets are wins, prompting confidence in his skills and in his lenders. Eventually the gambler loses his entire stake in one enormous bet, and the loss is so monumental that it brings down the casino and his lenders.

The markets’ ability to transparently price risk, capital, and assets has been fatally compromised. A systemic increase in brittleness and fragility is the inevitable result when low-intensity volatility and risk are both suppressed by constant intervention.

The widening credibility gap between official pronouncements of recovery and less manipulated metrics also forces Central Planners to double down on their interventions. This is evident globally, as Europe, Japan, and China are all doubling down on interventions that are yielding increasingly marginal returns.

Trend #2:  The omnipotence of the Federal Reserve will suffer a fatal erosion of confidence as recession voids Fed policy and pronouncements of “recovery”

Though the Fed is nominally independent, like every other arm of Central Planning, it swims in a political sea. The initial success of QE1, 2, and 3 and ZIRP (zero-interest rate policy) boosted the political capital of the Fed. Faith in the implied omnipotence of “Don’t fight the Fed” has been rewarded for four years.

The failure of its policies to engineer a durable recovery will erode that faith and the Fed’s political capital, restraining its freedom of movement. We can already discern rising doubt in infinite QE and permanent ZIRP in the Fed’s minutes. Outside the Fed, what can only be characterized as distain of the Fed and its destructive policies is increasingly visible.

The decay factor of its monetary-stimulus policies and the decline of its political capital will increasingly render the Fed impotent. By 2015 we may well be dumbstruck that everyone once hung on the Fed’s every word as if the Fed resided on Mount Olympus.

Trend #3: The Mainstream Media (MSM) will continue to lose credibility as it parrots Central Planners’ perception management

The credibility gap between MSM stories of recovery—higher GDP, auto and home sales, lower unemployment rate, etc.—and what is visible on the ground will widen, eroding MSM credibility.

With the Internet providing distribution of alternative metrics, Central Planning and the Mainstream Media will increasingly be revealed as propaganda organs rather than servants of the citizenry.

Trend #4:  The failure of what is effectively the “State religion,” Keynesianism, will leave policy makers in the Central State and Bank bereft of policy alternatives

Now that all Keynesian policies have been pushed to the maximum, there is essentially nothing left to deploy.

This chart of money velocity reflects the endgame of Keynesian stimulus. Money is being printed and dumped into the financial system in size, yet the velocity of that money is trending toward zero.

Trend #5: Economic Stagnation will fuel the rise of Permanent Adolescence

The social consequences of economic stagnation will attract more attention. Japan is the lab experiment for what happens to a nation’s youth when opportunity declines and many young people are unable to earn enough money to buy homes and support families. They withdraw into a state of permanent adolescence, living at home, staying in college for extended periods, delaying marriage and children, working part time, surrendering long-term goals, and in some cases indulging in a lifestyle centered around video-gaming and pop-culture hobbies.

Consequences of Permanent Adolescence include lower birth and marriage rates, depressed rates of household formation, lower auto and home sales, declining tax receipts, and what might be called “social depression,” as expectations and goals stagnate along with opportunity.

Soaring student debt has turned the current generation of university students into debt serfs. This will continue as alternatives to a conventional college education remain on the margins.

Trend #6: Income is the foundation of real economic growth and wealth-distribution stability

Income will continue declining in real terms. Nominally, income appears to have grown 24% since 2000. Adjusted for inflation, it has declined by almost 10%.

Trend #7: Small business—the engine of growth—will continue to decline for structural reasons

Uncertainty, globalization, recession, and higher taxes and regulatory fees have eroded the incentives to risk capital and time in starting or expanding a small business.

Trend #8: Territorial disputes will continue to be invoked to distract domestic audiences from domestic instability and inequality

The Senkaku Islands are one such flashpoint where compromise appears impossible since the domestic populations of Japan and China have been persuaded by nationalistic hyperbole that a "line in the sand" has been drawn.

It is already abundantly clear that trade will be trumped by domestic politics in territorial conflicts. This creates the potential for serious economic dislocations in global trade and capital flows.

Earthquakes are notoriously difficult to predict. So are market dislocations. Risk is inevitably mispriced when unprecedented intervention suppresses risk.

 

 

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Tue, 01/08/2013 - 18:45 | 3134372 Michaelwiseguy
Michaelwiseguy's picture

What's Barack Obama's favorite vegetable?

 

 

Gabby Giffords.

 

The joke about Ronald Reagan's favorite vegetable, Jim Brady, wasn't made a stink about by the Democrat collectivists or anyone else.

Tue, 01/08/2013 - 21:50 | 3134790 ball-and-chain
ball-and-chain's picture

That's kind of sick.

She went from being a sharp lady to having a mind of a 5-year-old.

Why?

Because a paranoid schizophrenic was allowed to play with hand guns.

Thems the breaks, I guess.

Just doesn't seem fair.

http://www.angrysinner.blogspot.kr/2013/01/tuesday.html

Tue, 01/08/2013 - 22:27 | 3134901 kchrisc
kchrisc's picture

I'd say that for a scumbag POS pol sometimes shit comes around too. May not be the same shit you sent going around but it is shit come back to you none the less.

Tue, 01/08/2013 - 18:54 | 3134392 disabledvet
disabledvet's picture

How about simple reality instead. "Never before seen fiscal stimulus discovers zero percent financing." I see no sign of that abating. Real growth could achieve high single digits in my view because of that.

Tue, 01/08/2013 - 19:03 | 3134414 Backspin
Backspin's picture

Perhaps you mean Nominal growth.

Tue, 01/08/2013 - 18:59 | 3134406 pragmatic hobo
pragmatic hobo's picture

only way the USA can right itself is by ridding the government of corruption. When government is righteous the society will follow and with it the economy. Obama can do wonders by nominating Elliot Spitzer to head the justice department.

Tue, 01/08/2013 - 19:19 | 3134448 sitenine
sitenine's picture

Ridding the government of corruption would plunge the world into darkness faster than propping up spending with a $1T tuna. Don't you know that the ponzi system is held up by corruption? Heard of TBTF maybe? Libor riging without jail time? Etc. Yeah...clean out the corruption, and you are left with pretty much nothing.

Tue, 01/08/2013 - 21:16 | 3134698 Tijuana Donkey Show
Tijuana Donkey Show's picture

Uh... wasn't he paying for hookers out of slush funds? He was a hack chasing big cases to try and make a political career, and was removed by some little washed up cum dumpster. Put Elizabeth Warden on the case, and see what happens.

Tue, 01/08/2013 - 22:12 | 3134857 pragmatic hobo
pragmatic hobo's picture

that's what wall-street and their pet-media wants you to think. So he liked having sex without having relationship. That has nothing what-so-ever to do with his ability to make wall-street bankers shit in their pants. Besides if Clinton can get away with fucking interns in oval office Spitzer can surely be pardoned for his indiscretion.

Tue, 01/08/2013 - 22:57 | 3134960 Totentänzerlied
Totentänzerlied's picture

Ridding government of corruption is like ridding a human of his soul.

Wed, 01/09/2013 - 02:13 | 3135408 Clowns on Acid
Clowns on Acid's picture

Spitzer....Justice Dept? Surely this is sarc...

Tue, 01/08/2013 - 19:09 | 3134422 CPL
CPL's picture

#8

People are missing cheap energy in the list.  There is none.  

No cheap energy.  No cheap food.  No cheap labour.

Tue, 01/08/2013 - 19:16 | 3134441 Rainman
Rainman's picture

No wonder they want to take our guns

Tue, 01/08/2013 - 19:25 | 3134455 Antifederalist
Antifederalist's picture

Forgot one Charles.

TREND # 9. Gold and Silver will continue to appreciate in fiat terms.

Perhaps substantially.

Tue, 01/08/2013 - 19:26 | 3134459 delivered
delivered's picture

As for point number 7, I would attest to this trend as I work and support this market every day. But the statement made as to "incentives to risk capital" misses the point as this assumes ample capital is available to support small businesses. This really isn't the case as most small businesses secure capital from savings (hammered over the past five years by either market conditions or having to tap to support personal needs), real estate equity (wiped out in the housing bust), or from FF&CBAs (family, friends, or close business associates). As for the last source, family and friends are dealing with the same issues on savings/real estate whereas CBA's are either still rebuilding their business's financial strenght and/or allocating capital for the next downturn.

So on top of dealing with uncertain business conditions (making sales difficult to manage/drive) and an overbearing regulatory environment (taxes at every level, Obamacare, and added state laws just to name a few), the lack of readily available capital just adds insult to injury for small businesses and reinforces the severity of the structural problems plaguing this segment of the economy.

What is the core problem on the capital front is simple. The capital markets are no longer deploying capital to its most productive use and are without question, broken. Not when you have structural US deficits running at $1 trillion per year (consuming capital in the public sector at the expense of the private sector), not when the largest corporations sit on piles of cash and issue new debt to raise cash at incredibly low costs (even if they really don't need it), not when the banking industry in the country is basically nationalized with almost no incentive to take normal credit risks, and not when you really look at the PE and VC industries and realize that they basically don't even want to look at a deal that's less than $10 million in funding requirements (not when you have a billion dollars to deploy/manage).

Too much capital is concentrated in too few hands chasing too few quality deals. Remember that 4 to 5 years ago, capital and new business formation was almost non-existent during the height of the Great Recession. So companies that would have normally formed during 2008 through 2010, did not, producing much fewer quality businsses looking for growth capital 2 to 4 years later (a normal incubation period for new companies to execute a business plan and grow).

To me, this is even further supported by the velocity of money graph/chart provided in that while the amount of "cash" produced and made available during the past 4 years has basically increased 3x/4x, the velocity is diving at an unprecidented rate. The flow of cash is simply dying as a result of the inner circle of Washington, the Fed, the banks, and the largest corporations simply hoarding the funds as passing back and forth among themselves with no real benefit to the ecomony. Just one big circle jerk that has left Main Street high and dry.

Wed, 01/09/2013 - 10:41 | 3136179 FreeNewEnergy
FreeNewEnergy's picture

delivered, you should have written the article as you point out the most glaring shortfall of government central planning in a badly broken system.

Just to add some food for thought, re: small business/Main Street, don't forget black markets, self-funding, bootstrapping, cooperatives and the general feeling among the micro-entrepreneurial class to say, "screw you" to the government and all regulations.

This is a very small start, but a start at the very bottom, at least. My first-hand experience in small, local markets is almost universal disdain, anger and disrespect for all governmental authority and it's moving up the food chain with rapidity.

When the next crisis comes - probably in February with a partial shutdown of the federal government as the morons in congress stage their "showdown" over the mythical debt limit, all gloves come off. Less and less pretense over violating rules, regulations and civil laws and authority will become the norm. People, especially small business people, are fed up with the static nature of the "post-crisis, continuing crisis" condition under which we are being forced to live.

Since those at the very top can break rules and make new ones at will without legal consequence, it's only a matter of time before the massed small business thinking goes the same way and just says, F-- it.

You want a powderkeg? individual entrepreneurs, from the florist to the baker to the plumber and millions of displaced workers that have been forced to eke out a living whatever way possible are quiet now, but when the government adds the proverbial final straw - be it gun control or government shutdown, federal, state and local governments and those who aid and abet them will be without funding and looking for cover.

America will recover from this horrid chapter in our history, but it won't be without complete rejection of "business as usual." It will come from the bottom up, not from the top down and it will be gruesome, horrifying and eventually terrific when it's finally over.

I believe we're less than six months from the cap being blown right off. A complete reset will be needed to fix everything and that will take a generation at least. If you're young, this is positive. If you're old and frail, look for help from neighbors and friends. Keep your powder dry and your wits about you, because it's finally about to get real.

Tue, 01/08/2013 - 19:32 | 3134474 yogibear
yogibear's picture

And Bernanke and and the Federal Reserve keep on buying US debt with printed money.

It can't stop, it won't stop.

Wed, 01/09/2013 - 10:46 | 3136208 FreeNewEnergy
FreeNewEnergy's picture

The math says it must come to a stop, and math is mercilessly flawless.

Tue, 01/08/2013 - 19:33 | 3134477 ramacers
ramacers's picture

all the trends lead to one thing: loss of freedom. yet precious few can wrap their heads around this fact : they will eventually have to fight and kill the enemies of their freedom and , indeed, be prepared to die at the hands of their enemies.

Tue, 01/08/2013 - 19:45 | 3134493 Antifederalist
Antifederalist's picture

I would rather be a dead man in a grave, than to live as a puppet or a slave.......

The bigger they come, the harder they fall ......one and all

CRIMETHOUGHT, bitchez

Tue, 01/08/2013 - 19:45 | 3134499 Jstanley011
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"Risk is inevitably mispriced when unprecedented intervention suppresses risk." Invariably too, I bet. Especially when it's unprecdented time after time after time.

Tue, 01/08/2013 - 19:45 | 3134502 XitSam
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I'm going to protest 2, 3 and 4.  

2) Erosion of confidence in the Fed. Who's confidence? Us? We had no confidence. Politicians? If they don't go along now it would mean they were wrong to support the Fed in the past. They will double down on support of the Fed. Wall St? Confidence isn't an issue for them, working the system to make an FRN is an issue. General population? "What's the Fed? FedEx?"

3) MSM lose credibility for parroting the Fed. I've heard over and over, 'This is the nail in the coffin for MSM credibility.' If it hasn't happened by now, it won't.

4) Failure of Keyensianism will leave no policy alternatives. Don't be ridiculous. Central planners cannot see failure if it jumped up and bit them. They brains are wired that they cannot fail. They will double down on Keynesian policies.

Tue, 01/08/2013 - 21:18 | 3134700 Tijuana Donkey Show
Tijuana Donkey Show's picture

CON-FED-ence

Wed, 01/09/2013 - 00:19 | 3135128 AGuy
AGuy's picture

"4) Failure of Keyensianism will leave no policy alternatives. Don't be ridiculous. Central planners cannot see failure if it jumped up and bit them. They brains are wired that they cannot fail. They will double down on Keynesian policies."

If you don't succeed, Try harder errh. Print more!

It should be an interesting two years. As long as the Republicans hold the majority it will be tough for Washington to "Get Weimar on Gov't spending". My best guess is that the economy will fall into recession as the Student Bubble pops and the GOP blocks any significant Federal Stimulous. The DNC will of course use this against the GOP come mid-term elections. The GOP will get the boot giving the DNC a super Majority, and they will spend and print the dollar into obivion! It will the party that ends all parties, as the dollar becomes workless forcing states to secede or print their own currencies.

 

Wed, 01/09/2013 - 00:32 | 3135167 XitSam
XitSam's picture

Possible. I'm thinking there are too many people around the world in positions of power that could make a decision, knowing the consequences, that would kick things off.  Or a decision could have unintended consequences and it is off to the races. Or it could be a decision by just A Guy, say one person wants to take silver delivery from the COMEX and they can't deliver, whoosh, boom, splat.  Got bullets, beans, blankets?

Tue, 01/08/2013 - 20:04 | 3134542 devo
devo's picture

Great points on the FED. Their fading is palpable.

Tue, 01/08/2013 - 20:42 | 3134600 alfbell
alfbell's picture

delivered is a smart person. I agree.

I believe the reason that gold and silver are not mentioned as a trend, or don't need to be, is because they are a non-issue. We live in a fiat world. All central banks are in cahoots. And any emerging countries will have to follow the fiat model if they want any chance of growing via being involved in global trade.

I really wonder about you gold bugs.

The US government confiscated and controlled gold back in 1934 or whenever FDR did it. The same will happen again on a more stringent level. What is the point of owning gold or silver if you can't pay your income and property taxes with it, can't buy pure water with it, can't buy groceries with it, can't pay the doctor or dentist with it, can't pay your rent or mortgage with it, can't get your car repaired with it, can't buy gas and oil with it, etc? Wealth is only wealth if you can trade it for something else, right?

The whole international banking/central banking/government/taxing authorities must operate on fiat or paper money always (and are in the process of transferring it all over to electronic money for total efficiency so it, and we and all of our transactions, can be monitored and controlled). These guys are winning big time. What makes you think they are going to be deposed or turned around any time soon? And even if so, by whom?

It's fiat and then electronic digits at least until civilization collapses and a new one is begun (and we can't assume the new one would be based on learning from the previous errors of empires, governments and economies).

Face the fact that it is gonna be paper for a long time, because that is all there will be. Make a lot of it and convert it into water, food, land and income properties and stable businesses that have demand in any economy... because that is wealth. That is all there is that will get you through hard times.

Tue, 01/08/2013 - 20:58 | 3134648 Antifederalist
Antifederalist's picture

That's not how the Chinese see it.

Tue, 01/08/2013 - 20:38 | 3134601 realtick
Tue, 01/08/2013 - 20:44 | 3134611 NoDebt
NoDebt's picture

The phrase "Economic Recovery" is starting to ring about as hollow as the phrase "People's Revolution" in totalitarian states.

Sadly, and despite what I said above, I doubt #3 will happen.  And, therefore, #2 won't happen because you've seen the last officially pronounced recession.  There are only better and worse periods of "recovery" from here out.

 

Tue, 01/08/2013 - 20:49 | 3134622 Hohum
Hohum's picture

Trend #9: GDP/total credit market debt will continue its long descent, no matter what policies are in place.  The rest is just redistribution.

Tue, 01/08/2013 - 23:00 | 3134968 Totentänzerlied
Totentänzerlied's picture

Sorry to prick your narrative bubble, CHS, but Japan's issues began before WWII, what you saw in the last 20-30 years is just a part of a larger process. Kind of like here in the US, and everywhere else. The legacy of the entire 20th century is a phantom haunting the entire world.

Incidentally(?), Lord Keynes was the epitome of the 20th Century Man.

Tue, 01/08/2013 - 23:12 | 3134995 hairball48
hairball48's picture

I see evidence of #5 every day and everywhere.

Young people just "hanging out" as the expression goes. Maybe ok for a 13 year old, but a 28 year old?  Idle mind is the devil's workshop, ya know? Scary shit for an old geezer like me.

The ass backwards hat/baggy butt pants crowd are a troubling group.

Tue, 01/08/2013 - 23:56 | 3135087 neilhorn
neilhorn's picture

Eventually the gambler loses his entire stake in one enormous bet, and the loss is so monumental that it brings down the casino and his lenders.

Every casino I've ever been in has increased its wealth when I lost. The casino's lenders also profited. WTF is the eventuality of the gambler and how does it hurt the casino?

Wed, 01/09/2013 - 00:25 | 3135145 AGuy
AGuy's picture

"Every casino I've ever been in has increased its wealth when I lost. The casino's lenders also profited. WTF is the eventuality of the gambler and how does it hurt the casino?"

The Casino analogy is a poor one. Its not a casino but one giant ponzi scheme, where everyone thought they had wealth, but it was all just a big lie.

Wed, 01/09/2013 - 02:10 | 3135403 Clowns on Acid
Clowns on Acid's picture

neil - well yes, however Bernak, Geithner and the rest will just walk away....just like Corzine..

http://ca.news.yahoo.com/mf-global-judge-nixes-customer-groups-bid-depos...

 

 

Wed, 01/09/2013 - 02:32 | 3135441 Lordflin
Lordflin's picture

You forgot the biggest trend of all... Coming world war...

Wed, 01/09/2013 - 02:48 | 3135466 lmile61
lmile61's picture

Desperado waiting for that moment!!!! magento development

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