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Bill Gross Explains What "Keeps Him Up At Night"

Tyler Durden's picture





 

The choice extracts from Bill Gross' just released latest monthly letter:

What keeps us up at night? Well I can’t speak for the others, having spoken too much already to please PIMCO’s marketing specialists, but I will give you some thoughts about what keeps Mohamed and me up at night. Mohamed, the creator of the “New Normal” characterization of our post-Lehman global economy, now focuses on the possibility of a” T junction” investment future where markets approach a time-uncertain inflection point, and then head either bubbly right or bubble-popping left due to the negative aspects of fiscal and monetary policies in a highly levered world.

 

This year’s April taper talk by the Federal Reserve is perhaps a good example of this forward path of asset returns. Admittedly the reaction in the bond market was rather sudden and it precipitated not only the disillusioning of bond holders, but also an increase in redemptions in retail mutual fund space. But then the Fed recognized the negative aspects of “financial conditions,” postponed the taper, and interest rates came back down. Sort of a reverse “Sisyphus” moment – two steps upward, one step back as it applies to yields.

 

... investors are all playing the same dangerous game that depends on a near perpetual policy of cheap financing and artificially low interest rates in a desperate gamble to promote growth. The Fed, the BOJ (certainly), the ECB and the BOE are setting the example for global markets, basically telling investors that they have no alternative than to invest in riskier assets or to lever high quality assets. “You have no other choice,” their policies insinuate. “Get used to negative real interest rates, move out on the risk spectrum and in the process help heal the real economy,” they seem to command.

In brief: Gross now sees investors as desperate guinea pigs in the Fed's behavioral experiment.

Stock investors, however, were only mildly discouraged and continued their faith-based, capital gain dependent investments despite what should be the obvious conclusion that QE and low interest rates were as critical to their market as they were to bonds. “What other choice do we have?” has become the mantra of stock investors globally, which speaks more to desperation than logical thinking.

The punchline: the moment when the reflexive bubble pops ("we know that they know that we know that they know" courtesy of The Burbs), and the Fed's worst fears come true.

... Deep in the bowels of central banks research staffs must lay the unmodelable fear that zero-bound interest rates supporting Dow 16,000 stock prices will slowly lose momentum after the real economy fails to reach orbit, even with zero-bound yields and QE.

And that is the game over point (although fear lies in bowels?).

And the full letter below:

On the Wings of an Eagle

I’ve always liked Jack Bogle, although I’ve never met him. He’s got heart, but as he’s probably joked a thousand times by now, it’s someone else’s; a 1996 transplant being the LOL explanation. He’s also got a lot of investment common sense, recognizing decades ago that investment managers in composite couldn’t outperform the market; in fact, their alpha would be negative after fees and transaction costs were factored in. His early business model at Vanguard promoting index funds was a mystery to me for at least a few of my beginning years at PIMCO. Why would most investors be content with just average performance, I wondered? The answer is certainly now obvious; an investor should want the highest performance for the least amount of risk, and for almost all measurable asset classes, index funds and many ETFs have done a better job than almost all active managers primarily because of lower fees.

The “almost all” caveat is the reason I can write so freely and with such high praise for Vanguard. I am, after all, supposed to be promoting PIMCO in these Investment Outlooks, and PIMCO is a $2 trillion active manager with lots of long-term consistent alpha. Jack marvels about what he himself labeled in a recent Morningstar interview the “PIMCO effect.” To paraphrase his interview, he spoke to index managers beating almost all active managers, but then “there was the PIMCO effect.” We at PIMCO thank him for that with a “back atcha, Jack!” There’s actually a place for both of our firms and investment philosophies in this age of high finance. If Bogle’s concept of indexing was metaphorically similar to finding a cure for the cancerous devastation of high fees, then perhaps PIMCO’s approach could be similar to mapping the investment genome and using it to produce consistently high alpha. There’s room for each of these investment laboratories. I will admit that there are other active management labs as well that are worthy of not only recognition, but investor confidence and dollars. I have nothing but the highest of praise for Bridgewater’s Ray Dalio and GMO’s Jeremy Grantham and their staffs. Their voluminous thoughts occupy a special corner of my desk library. Each has a distinctly different approach to active management – Dalio’s focusing on a levering/delevering template and Grantham’s on a historical reversion to the mean for most asset classes.

Neither Vanguard, PIMCO, Bridgewater nor GMO, however, has discovered a cure for the common cold. Our performance periodically, and sometimes for frustrating long stretches, stuffs our noses or aches our heads, and makes us wonder why we hadn’t been more careful about washing our hands during flu season. Our firms make mistakes, even if, in Vanguard’s case, it’s the indexed mantra of being fully invested in an overvalued market.

Where might our future mistakes be hiding? What keeps us up at night? Well I can’t speak for the others, having spoken too much already to please PIMCO’s marketing specialists, but I will give you some thoughts about what keeps Mohamed and me up at night. Mohamed, the creator of the “New Normal” characterization of our post-Lehman global economy, now focuses on the possibility of a”  T junction” investment future where markets approach a time-uncertain inflection point, and then head either bubbly right or bubble-popping left due to the negative aspects of fiscal and monetary policies in a highly levered world. We are both in agreement on the perilous future potential of market movements. Mohamed’s T, I believe, was meant to be more descriptive than literal, and is a concept, like the New Normal, that may gain acceptance over the next few months or years. But aside from a financial nuclear bomb à la Lehman Brothers, our actual scenario is likely to play out more gradually as private markets realize that the policy Kings/Queens have no clothes and as investors gradually vacate historical asset classes in recognition of insufficient returns relative to increasing risk. The actual T might in reality be shaped something like this: perhaps a winged eagle signifying something more gradually sloping left or right. This year’s April taper talk by the Federal Reserve is perhaps a good example of this forward path of asset returns. Admittedly the reaction in the bond market was rather sudden and it precipitated not only the disillusioning of bond holders, but also an increase in redemptions in retail mutual fund space. But then the Fed recognized the negative aspects of “financial conditions,” postponed the taper, and interest rates came back down. Sort of a reverse “Sisyphus” moment – two steps upward, one step back as it applies to yields and more of a , than a T. Investors now await nervously for news on the real economy as well as the medicine that Janet Yellen will apply to it.

That medicine, however, will most assuredly include negative real interest rates that at some point will give bond and stock investors pause as to the continued potency of historical total return policies generated primarily by capital gains. Bond investors found that out in May, June and July after 10-year Treasuries had bottomed at 1.65%. Stock investors, however, were only mildly discouraged and continued their faith-based, capital gain dependent investments despite what should be the obvious conclusion that QE and low interest rates were as critical to their market as they were to bonds. “What other choice do we have?” has become the mantra of stock investors globally, which speaks more to desperation than logical thinking.

Well, my point about the gradual as opposed to sudden disillusioning of investors worldwide is just that. The standard “three musketeers” menu for retail investors has always been 1) investment grade and 2) high yield bonds as well as 3) stocks. In recent years, institutional investors have gravitated into 4) alternative assets, 5) hedge funds and 6) unconstrained space, and so for them there appears to be an increasing array of higher return alternatives. All of the above 1-6, however, contain artificially priced assets based on artificially low interest rates. Some are unlevered, like Treasury bonds, but nonetheless priced too high by the Fed in an effort to encourage migration to riskier bonds and/or asset classes. Others, such as many alternative assets, depend on the levering of portfolios themselves, borrowing at 10-50 basis points in overnight repo and investing at higher rates of return despite their artificiality. But investors are all playing the same dangerous game that depends on a near perpetual policy of cheap financing and artificially low interest rates in a desperate gamble to promote growth. The Fed, the BOJ (certainly), the ECB and the BOE are setting the example for global markets, basically telling investors that they have no alternative than to invest in riskier assets or to lever high quality assets. “You have no other choice,” their policies insinuate. “Get used to negative real interest rates, move out on the risk spectrum and in the process help heal the real economy,” they seem to command.

Yet this now near 5-year migration across the global asset plains in search of taller grass and deeper water has had limits, both in price and real growth space. If monetary and fiscal policies cannot produce the real growth that markets are priced for (and they have not), then investors at the margin – astute active investors like PIMCO, Bridgewater and GMO – will begin to prefer the comforts of a less risk-oriented migration. If they cannot smell the distant water or sense a taller strand of Serengeti grass, astute investors might move away from traditional risk such as duration as opposed to towards it. Deep in the bowels of central banks research staffs must lay the unmodelable fear that zero-bound interest rates supporting Dow 16,000 stock prices will slowly lose momentum after the real economy fails to reach orbit, even with zero-bound yields and QE.

In gradually moving away from traditional risk assets, I again refer to my August Investment Outlook called “Bond Wars.” In it, I suggested that bonds and bond portfolios contain a number of inherent “carry” risks and that duration/maturity was but one of them. I suggested that if the Fed and other central banks had artificially lowered yields and elevated bond prices, then a traditional bond fund should underweight duration and perhaps overweight other carry alternatives such as volatility, curve and credit. This we have done, and our relative performance reflects it. The “PIMCO effect,” as Jack Bogle calls it, is alive and well in 2013. Our primary thrust has been to focus on what we are most (although not totally) confident about, that the Fed will hold policy rates stable until 2016 or beyond. While this and its conjoined policy of QE may have only redistributed wealth as opposed to creating it (picking savers’ pockets while recapitalizing banks and the wealthiest 1% of our population), it is a policy that a Janet Yellen Fed seems determined to pursue. The taper will lead to the elimination of QE at some point in 2014, but the 25 basis point policy rate will continue until 6.5% unemployment and 2.0% inflation at a minimum have been achieved. If so, front-end Treasury, corporate and mortgage positions should provide low but attractively defensive returns. We have positioned our bond wars portfolio – heavily front-end maturity loaded along with credit, volatility and curve steepening positions, with the aim of outperforming Vanguard as well as many other active managers.

There is no doubt, however, that this portfolio construct is dependent on the eagle’s wingsas opposed to the junction of a T. Overlevered economies and their financial markets must at some point pay a price, experience a haircut, and flush confident investors from the comfort of this Great Moderation Part II. We at PIMCO will prepare for that day while hopefully consistently beating Vanguard along the way.

Eagle’s Speed Read

1) Be confident in the “PIMCO effect,” as Jack Bogle calls it.

2) Look for constant policy rates until at least 2016. Front-end load portfolios. Don’t fight central banks, but be afraid.
3) Global economies and their artificially priced markets are increasingly at risk, but the unwinding may occur gradually. Think!

William H. Gross
Managing Director

 


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Tue, 12/03/2013 - 09:19 | Link to Comment Longing for the...
Longing for the old America's picture

Is there some actual actionable advice here?

Tue, 12/03/2013 - 09:21 | Link to Comment cossack55
cossack55's picture

RUN!!!

Tue, 12/03/2013 - 09:27 | Link to Comment Occident Mortal
Occident Mortal's picture

The real economy is waiting for the correction before re-investing.

 

Access to credit is no longer holding the economy back, artificially elevated asset prices are.

Tue, 12/03/2013 - 09:30 | Link to Comment GetZeeGold
GetZeeGold's picture

 

 

How can we get a correction in a totally managed economy?

 

OK managed badly.....but still managed.

 

Tue, 12/03/2013 - 09:56 | Link to Comment dryam
dryam's picture

The Fed is simply recapitalizing the banks which are completely insolvent. The Fed doesn't give a shit about growth. They just say they do.

Tue, 12/03/2013 - 10:27 | Link to Comment Honey Badger
Honey Badger's picture

I could not agree more or green arrow enough times.

Tue, 12/03/2013 - 10:46 | Link to Comment CheapBastard
CheapBastard's picture

Bill and Mohammed just need New Memory Foam matresses. The old ones too filled with Dust Mites.

 

Tue, 12/03/2013 - 11:17 | Link to Comment stewie
stewie's picture

The system is based on an exponential growth of total credit.  So the Fed does care about growth in the spirit of perpetuating the ponzi scheme.  They just don't care where the growth comes from.

Tue, 12/03/2013 - 10:03 | Link to Comment Occident Mortal
Occident Mortal's picture

Real corporations are flush with cash, most don’t need credit to grow and have been in this position for at least 2 years.

The Fed should Taper, because a falling stock market =/= a recession. Asset prices need to come back down so that corporations can spend their cash on CAPEX.

 

WE ARE ALL WAITING FOR THE REMOVAL OF EMERGENCY MEASURES, SO WE CAN SPEND OUR CAPEX AT SUSTAINABLE PRICE LEVELS.

 

Only the worst CEO would allocate real cash to CAPEX during a time of emergency monetary support. Remove the support already, there is plenty of credit now and we want to invest our cash. FFS.

Tue, 12/03/2013 - 09:36 | Link to Comment negative rates
negative rates's picture

We are in the presense of genius, I bow wow to thee, like the dog you is.

Tue, 12/03/2013 - 09:56 | Link to Comment I am more equal...
I am more equal than others's picture

 

 

This market is the definition of helpless.  There is no 9-1-1, there is no market savior, and this will end bad for everyone.  We are helpless in this condition.  Frustrated because there is no way out other than walking through the bond fire of fiat. 

Tue, 12/03/2013 - 10:14 | Link to Comment Occident Mortal
Occident Mortal's picture

I disagree,

 

What if the Fed were to announce an extremely shallow taper?

e.g. go from $85bn a month to $84bn a month?

 

The bond market will not revolt if the taper is pointlessly shallow. In fact it would rally on the anticlimax. This is what the Fed should have done in September. They should taper in a pointlessly shallow vector in order to remove the anticipation.

 

Sadly they are not intelligent enough to even realise such basic strategies. Instead leaving the market to speculate on the polar options of 'no taper ever' and 'steep taper soon'. Pods.

Tue, 12/03/2013 - 12:15 | Link to Comment Greater Fool
Greater Fool's picture

Sorry, don't agree. The "taper talk" happens not because the Fed intends to taper--they won't for the foreseeable future--but instead to push a little air out of the bubble. The sole purpose of the talk is to induce small corrections. Since no natural market forces could ever cause one (all natural market forces have essentially been abolished), the Fed has to provide this along with the monetary support that keeps the general progress inexorably upward.

Its the central bank version of doing a controlled burn to clear fuel out of a forest, or a controlled release of water down the Grand Canyon to simulate seasonal flooding that no longer happens because of the dams.

Smokey FOMC Trader says: "Only you can prevent asset bubbles!"

Tue, 12/03/2013 - 09:44 | Link to Comment max2205
max2205's picture

The eagle has been shot...now what

Tue, 12/03/2013 - 09:56 | Link to Comment stant
stant's picture

Exactly and it's coming between jan and june

Tue, 12/03/2013 - 09:32 | Link to Comment Rainman
Rainman's picture

yah, those wings ain't eagle wings .... they are clearly swan wings. 

Tue, 12/03/2013 - 09:45 | Link to Comment monkeyboy
monkeyboy's picture

And here I was thinking it was it was viagra.

Is this a metaphor for, "Should have taken the blue pill?"

Tue, 12/03/2013 - 10:04 | Link to Comment Cacete de Ouro
Cacete de Ouro's picture

"but I will give you some thoughts about what keeps Mohamed and me up at night"

Sharing a Twitter account is one thing, but this is starting to sound like pillow talk

Tue, 12/03/2013 - 10:25 | Link to Comment frankTHE COIN
frankTHE COIN's picture

How Gross.

Tue, 12/03/2013 - 12:29 | Link to Comment Colonel Klink
Colonel Klink's picture

You can't spell Bond shILL without BILL!

Tue, 12/03/2013 - 09:22 | Link to Comment Sudden Debt
Sudden Debt's picture

yes, that reading all this is fun but you also need a hobby on the side...

Tue, 12/03/2013 - 09:21 | Link to Comment Winston Churchill
Winston Churchill's picture

OT

Barclays Channel Islands have just announced restrictions on Intnl. wire transactions.

50k pounds per day per recipient.100k per day max overall.

The global bail in is coming soon.

Tue, 12/03/2013 - 09:23 | Link to Comment cossack55
cossack55's picture

How do bail-ins effect trickle-down funds that I am still waiting for.

Tue, 12/03/2013 - 09:24 | Link to Comment Sudden Debt
Sudden Debt's picture

Jeez... explain that to the misses when she goes shopping... 50K limit a day...

Tue, 12/03/2013 - 09:29 | Link to Comment Winston Churchill
Winston Churchill's picture

Just tell her its dollars.

Tue, 12/03/2013 - 09:23 | Link to Comment Seasmoke
Seasmoke's picture

All the exits are locked. That is what keeps me up at night. 

Tue, 12/03/2013 - 09:23 | Link to Comment NoDebt
NoDebt's picture

No new ideas.  Moving on.

Tue, 12/03/2013 - 09:23 | Link to Comment fonzannoon
fonzannoon's picture

no new ideas, and same question remains (below).

Tue, 12/03/2013 - 09:23 | Link to Comment Moe Hamhead
Moe Hamhead's picture

If you are a republican in Utah, we know what keeps you "up" at night !

Tue, 12/03/2013 - 09:22 | Link to Comment LawsofPhysics
LawsofPhysics's picture

People selling PIMPco? I am shocked, just shocked.  Keep talking that book Bill. I hope california taxes the crap out of this insider.

Tue, 12/03/2013 - 09:24 | Link to Comment fonzannoon
fonzannoon's picture

When the fed finally owns all of, or a substantial majority of the bond market, which should not be too far off now...does anyone care to take a crack at how exactly everything will pop? It seems like it is the exact opposite scenario. It seems like they will have so much influence that the possibility of anything popping will go extinct. 

No offense to ZH but it seems more noticeable by the day that it is Stock that truly matters in the end game and not flow. Unless someone can point out to me how the fed buying up the bond market will lead to a collapse of some sort. I am sure there will be some people that will say it will end in a currency crisis for the dollar. But I think that is more wishful thinking than reality at this point.

Also nice of Gross to finally notice that investors are just desperate guinea pigs in the feds behavioral experiment. It only took him 5 years to notice!

Tue, 12/03/2013 - 09:31 | Link to Comment negative rates
negative rates's picture

The Fed might have to farm out it's assets should the day of reckoning reach it's doorsteps, discount their stuff due to accounting fraud. That's when the shtf, could be 2 months, could be 2 years.

Tue, 12/03/2013 - 09:33 | Link to Comment LawsofPhysics
LawsofPhysics's picture

That's the whole problem with letting a select few use "mark to fantasy" accounting, eventually everybody wants to...

and when fraud becomes the status quo, possession is the law.

Tue, 12/03/2013 - 09:40 | Link to Comment negative rates
negative rates's picture

Either way, time is not on the Feds side. You sound like a fantasy man.

Tue, 12/03/2013 - 09:43 | Link to Comment fonzannoon
fonzannoon's picture

I must be in fantasy land because when I look at this...

http://finance.yahoo.com/q/bc?s=SPY+Basic+Chart&t=5y

I see less and less turbulence as it goes. So we can all sit here and say the usual "time is not on the feds side" when it seems like the complete freakin opposite to me.

I just think people can't get it out of their heads that the market and the economy can have absolutely nothing to do with each other.

Tue, 12/03/2013 - 10:21 | Link to Comment NoDebt
NoDebt's picture

It ends with a Japan-like scenario. More and more QE, more and more government debt, deflation in wages, inflation in cost of living. Just look around- it's already happening and has been for the last 5 years.

The Fed will never buy everything because the government will not stop issuing debt in huge amounts. First, because they can never balance the budget in this environment (huge increases in entitlements to rich and poor alike, plus a stagnant economy) and secondly because interest rates are already rising which makes the carry cost of the existing debt that much higher. No, we haven't done a moon-shot, but 2.75 on a 10 year is a lot more than 1.75.

In addition, let's not forget, Treasuries aren't the only junk debt they can buy (half of QE is buying MBSs out of the banks at who knows what kind of "mark to Unicorn" prices).

I know you're looking at the "stock", but respectfully, if that was it, Japan would have gotten there well ahead of us.

Tue, 12/03/2013 - 09:45 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Define "fantasy", the paper promises I have continue to buy real assets...

So long as the Fed wants to keep giving them away, just say thank you and

hedge accordingly.

 

Tue, 12/03/2013 - 09:49 | Link to Comment fonzannoon
fonzannoon's picture

That's what I don't understand about this place. At least take the gift of the market and the paper gold market and buy one and short the shit out of the other and take the gains and fund your purchases.

But then I get guilt tripped on here for mentioning that because somehow it is immoral. I often wonder how many people on here have "beat me hard" tatoo'd on one ass cheek and "born to lose" tatoo'd on the other.

Tue, 12/03/2013 - 09:57 | Link to Comment negative rates
negative rates's picture

I understand it when people are lying to me, they just can't do it to my face in the heat of battle.

Thu, 12/05/2013 - 11:22 | Link to Comment TucoSalamanca
TucoSalamanca's picture

At least take the gift of the market and the paper gold market and buy one and short the shit out of the other and take the gains and fund your purchases.

Fonzannoon - Can you explain ?

Thanks,

Tuco

Tue, 12/03/2013 - 09:51 | Link to Comment new game
new game's picture

why does the fed have to mark anything to its real value? in fed world it don't matter.

neg rates; think as if you could print money today and manipulate the world from your perspective(of control).

point being constantly missed is yesterdays rules do not apply as the tool box is evolving and tools are being created.

like fonz's dam of money story from a friend/acqu9intance. the sluece of money can be deverted or increased or decreased as sea of liquidity sits and sits and really doesn'r fucking matter - whether 3.2 t or 32 t or 132 trillion it just sits.

Tue, 12/03/2013 - 09:57 | Link to Comment new game
new game's picture

all i'm saying is they might just be in control and fonz sees it and i'm starting to understand, that as long as everyone is forced to play their game of money and they make the rules and can constantly change the field to their advantage we must obligue...

Tue, 12/03/2013 - 09:50 | Link to Comment max2205
max2205's picture

Bill..what should keep you up at night is the ugly guy with the beard you are sleeping with....soon to be followed by the ugly midget with gray hair.....keep one eye open

Tue, 12/03/2013 - 09:32 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Bill is doing just fine, he is a Fed insider, has been all along.  A long, long, time ago I use to live a block away from Bill's current home in Corona Del Mar, right next to Dr. Beckman (a true success story).  This time around the world is experiencing a crisis of confidence on a global scale.  All those deflationists out there ignore the 7+ billion (and growing) we they say there is "no demand".  With 7+ billion all competing for a better standard of living (and the calories that make that possible), there is plenty of demand and "deflation" is a myth.  No money?  During the great depression, you could still live off the land, now, not so much.

Tue, 12/03/2013 - 09:37 | Link to Comment fonzannoon
fonzannoon's picture

Laws you are right in that Bill is, and will be just fine. But here is a prediction for you. PIMCO won't be here in a decade. They will be gone within 5-10 years. They are a casualty of the fed and Bill knows it well. He has hemorrhaged a massive amount of assets this year alone.

Tue, 12/03/2013 - 09:43 | Link to Comment LawsofPhysics
LawsofPhysics's picture

His corporate bond funds have done pretty well, sure the government bond market, in fact I 'd say the entire sorvereign bond market is a sham, but many have seen this coming as the entire planet is really insolvent (if we marked things to market).

 

Meh, life is good in my neck of the woods.

Tue, 12/03/2013 - 09:39 | Link to Comment BandGap
BandGap's picture

Bought two acres on a lake last year. Cleared this fall, hopefully ready by spring for planting.

Watch for the big rats leaving the ship, I think it will be weeks, not months.

Tue, 12/03/2013 - 10:31 | Link to Comment Boston
Boston's picture

I think it will be weeks, not months.

 

Careful. I've read similar pronouncements pretty much every week here on ZH for the last four.......years.

Tue, 12/03/2013 - 09:41 | Link to Comment negative rates
negative rates's picture

And all this time I been waitin for him to show up at his Pebble Beach place, I'm boltin out of here pronto.

Tue, 12/03/2013 - 10:04 | Link to Comment FreeNewEnergy
FreeNewEnergy's picture

LawofPhysics, I have to object to your contention that 7+ billion are "competing for a better standard of living (and calories)."

Some of those 7+ (and expanding, correct) billion would just like to maintain their standards of living, i.e., preserve wealth, and that is occurring on a massive scale as the world population ages.

As for the calories, global raw material prices have dropped like stones this year, with PMs (sadly) and grains leading the way. Corn hit a 52-week low a few weeks ago and has since surpassed that to the downside.

Deflation (here we go) increases purchasing power, so, technically, one can improve one's condition with the same amount of money as before (buy more or the same amount of goods for less). The remainder is either savings or investment, which, if my Baby Boomer friends are correct, is now going mostly to savings.

Also, the contention that it's now more difficult to live off the land (apropos if one lives in an apartment complex), the vast majority of single-family homes have back yards large enough to provide 40-50% of a family of four's nutrition (oftentimes more) using sound land management and some basic principles of organic farming.

It's not just perception that drives the economy - individually and in aggregate - but action, and, forced by the Fed and the government to take action against financial and civil repression, the masses, to a large extent, act in their own best interests.

I'm an optimist. A recent drive from upstate NY to the uplands of SC restored my faith in America, especially while driving through the wilds of West Virginia. There's still lots and lots of land available for farming and enjoyment. It's just a matter of price and willingness, now.

The more the government tries to oppress rights, the more the public (or, at least a portion of them) will withdraw and fend for themselves.

Standards of living are mostly perception, as in, "I'll take my 3 1/2 acres of raw land with a cabin over a penthouse suite with modern technical do-dads all day long." My standards are different, as, I'm sure, are yours.

Tue, 12/03/2013 - 10:35 | Link to Comment LawsofPhysics
LawsofPhysics's picture

"Also, the contention that it's now more difficult to live off the land (apropos if one lives in an apartment complex), the vast majority of single-family homes have back yards large enough to provide 40-50% of a family of four's nutrition (oftentimes more) using sound land management and some basic principles of organic farming."

Some very smart people at MIT and CAL Tech have published their findings on exactl what you propose and even if the weather didn't fuck you over (and we farm 35,000+ acres), which it often does, they calculated that the carrying capcity of the earth was 14 billion (so one doubling away), but this was assuming we could still perform the Haber Bosch process to make fertilizer for at least another 50-100 years while making the transition.  I suggest you do a little homework on how much energy this currently requires.  The laws of thermodynamics, physics and Nature are what they are.  I'll bet on them over any ivy league "economic law" bullshit any day.  We have some nice properties in many nice cities with lots of nice electronic do-dads, but those are not the locations I would like to be when the power grid goes down.  I'll be in my private plane flying somewhere else, thank you very much.  Life is dynamic, always has been.  Adapt or die. location, location, location, location, etc.

Tue, 12/03/2013 - 10:53 | Link to Comment Mediocritas
Mediocritas's picture

14 billion? What the hell were they smoking? Maybe if we all turn vegetarian, miraculously acquire the skills of John Jeavons, all share water resources without gouging, or still have access to industrial fertilisers, herbicides and pesticides despite a collapsing world economy.

Like you alluded to, "optimal" calculations are total bullshit because nature is a cold hard bitch. We're already in overshoot as I see it and a dieoff is coming.

Tue, 12/03/2013 - 10:56 | Link to Comment FreeNewEnergy
FreeNewEnergy's picture

OK, LOP, I'll grant you that you have a better understanding of agriculture than do I, but, we largely agree. I want to be on acreage rather than in a city when the power flops. Actually, I prefer the country to the city 98% of the time. we may not be able to feed everyone, so, let's agree to feed ourselves first. The rest of them, well, they'll have to find their own ways, and I pity most of them, because they're lost.

I have a hard time with zoning laws. Why is a McMansion preferable to a farmhouse, or, a mobile home on one or two good acres of arable land. Local governments are sorely misguided and they will be fodder when manure meets propellor.

Tue, 12/03/2013 - 11:42 | Link to Comment LawsofPhysics
LawsofPhysics's picture

"laws", like modern "currencies" are no longer about fair trade and justice, they are all about maintaining power and control over real resources (including the human kind). 

 

Hedge accordingly.

Tue, 12/03/2013 - 10:38 | Link to Comment Eahudimac
Eahudimac's picture

So true. Get out of the city. There is more open land out there than you think. 

Tue, 12/03/2013 - 10:45 | Link to Comment LawsofPhysics
LawsofPhysics's picture

"Open land" is irrelevent, the issue is arable land, with potable, water, good organic matter, minerals, nitrogen in a fixed form, magnesium, etc. etc.

Details matter, and plants require considerable more than just "land".  I mean, Mars has water and tons of sunlight?  That's my point, people just say shit like  "we can all just grow gardens", no one really knows what this actually requires.  Dumbasses.

Tue, 12/03/2013 - 10:51 | Link to Comment CheapBastard
CheapBastard's picture

Laws, Do you know why the fertilizer companies (like MOS) are down so much? Is the demand weak? Prices too  high?...if you care to share your thoughts on those. I never thought they would drop so much but I guess they were overpriced, yes?

Thanks.

Tue, 12/03/2013 - 10:58 | Link to Comment LawsofPhysics
LawsofPhysics's picture

My only insight here is that fertilizer (much like energy and oil) is so important that TPTB know they must maintain control over the entities and corporations that control these commodities.  Remember, these are internationally owned corporations so my guess is they are no longer really functioning in a truly free market (much like paper PMs).  I know a former director at BP.  He was a classmate mine and all the people in these industries are paid very nicely.  Even though the stock hasn't done shit, the people providing these services are seeing big increases in their wages.  That's all I know.  I am encouraging my oldest to pursue engineering in these fields, nothing else.

Tue, 12/03/2013 - 09:32 | Link to Comment fijisailor
fijisailor's picture

If the FED owns the bond market then that means that there is a world wide lack of interest in US assets and I would hazard to guess that is accompanied by a lack of interest in the US dollar as the reserve currency.  IF that happens there will be a big pop.

Tue, 12/03/2013 - 09:40 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Unfortunately, the truth of the matter is that the yuan is being printed much faster than the dollar (the difference is in what the chinese versus the Fed are buying with all those paper promises).  The world's "elite" have been on the same page for 100+ years.  These are the real owners and it's their dream to see a world where no one, but themselves, actually owns anything and everybody works for chinese wages.

Tue, 12/03/2013 - 11:07 | Link to Comment johnmack
johnmack's picture

but i keep asking this question, how will the elite insulate themselves from a failing system, will it be stocks,in foreign currency, we havent seen as real outflows into massive asset classes other than the traditional kind. Listen they still need to buy things right and Prada handbags for the missus arent free and will require money. So how will they protect and preserve the money they have??no one has yet to answer this question,,,they just simply say, the system will pop, the elite will be rich dot dot dot BUY MOAR PMs.

 

 

Tue, 12/03/2013 - 11:46 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Please.  I know two venture capital guys very well.  They own plantations in Barbados, have their own security teams (former black ops guys) and fly in and out of a private airstrip whenever they want. They control real assets and resources all around the world (which is erally what this is all about, always has been).

I don't think you understand what real wealth, freedom, and power is.

Tue, 12/03/2013 - 12:34 | Link to Comment GCT
GCT's picture

LOP most do not understand what it is all about.  Most just want more fiat.  I myself want more arable land with good aquifers and thetools to work it.  Friends, family, and like minded people to help.  If all you hold is gold I will gladly trade it for food anytime.  I do my best to make fiat to buy more tangible items.  Follow the rich and you will find they are buying land and people to defend it in other countries.

Tue, 12/03/2013 - 09:25 | Link to Comment negative rates
negative rates's picture

For every ending, there is a new beginning.

Tue, 12/03/2013 - 09:28 | Link to Comment Sudden Debt
Sudden Debt's picture

SO EVERY BEGINNING IS ACTUALLY A END?!

WOW! THAT'S GOING TO KEEP ME AWAKE TONIGHT TO!

Tue, 12/03/2013 - 09:33 | Link to Comment negative rates
negative rates's picture

No, it's an end to a means, if the means are not met, that then is another end, which only creates another beginning, depending on current and most recent ending. I don't even juggle for a living.

Tue, 12/03/2013 - 09:25 | Link to Comment Occident Mortal
Occident Mortal's picture

Credit accessability isn't what is holding the economy back.

 

Asset prices are.

Tue, 12/03/2013 - 09:35 | Link to Comment LawsofPhysics
LawsofPhysics's picture

LMFAO!!!!  How does one "price" anything when everyone is using "mark to fantasy" accounting and price discovery is dead.

Thanks for the laugh!

Tue, 12/03/2013 - 10:16 | Link to Comment Occident Mortal
Occident Mortal's picture

Erm, that's my point you gopping moron.

 

Nobody can allocate CAPEX in this environment so instead they horde the cash for when normality resumes.

Tue, 12/03/2013 - 10:28 | Link to Comment youngman
youngman's picture

I don't think normality will resume....at least until a big default happens....or TPTB are removed from power....they will play the game as long as they are in charge...they contol the chips...

Tue, 12/03/2013 - 10:58 | Link to Comment LawsofPhysics
LawsofPhysics's picture

I don't see "hording cash" to be very useful when "cash" is being printed as fast as it is now.

Tue, 12/03/2013 - 11:07 | Link to Comment johnmack
johnmack's picture

maybe cash is the thing that loses the LEAST value. the best loser if you will

Tue, 12/03/2013 - 09:40 | Link to Comment MsCreant
MsCreant's picture

Only for smart investors. There are not enough of them, yet,  to make your statement true. That only holds you back.

 

Tue, 12/03/2013 - 09:41 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Nicely put.  I was going to simply say "priced in what exactly?"

Tue, 12/03/2013 - 10:03 | Link to Comment new game
new game's picture

the price discovered is manipulated to the masters plan. understand that as i lmao...

Tue, 12/03/2013 - 09:29 | Link to Comment Sudden Debt
Sudden Debt's picture

YOU KNOW WHAT KEEPS ME UP AT NIGHT SOMETIMES?!!

well...

do you ever have that feeling...

that you really REALLY really NEED TO go have a PISS...

but you don't want to get out of bed...

and you keep thinking about taking a leak...

damn....

I'VE BEEN AWAKE LIKE THAT FOR HOURS AND HOURS!!!

 

Tue, 12/03/2013 - 09:32 | Link to Comment Disenchanted
Disenchanted's picture

Go piss already, we need that trickle-down out here in the hinterlands...

Tue, 12/03/2013 - 09:30 | Link to Comment MsCreant
MsCreant's picture

I am ignoring it all now. There is nothing else to do but live your life. Japan has been getting away with it for decades. We will try to just keep it floating and do the same as they have (print their "value" away). Printing is fascism. 

It will collapse, slowly, there may be a waterfall moment or two. It will just drift on until the supply chains are overtly affected. Revolution is not in the cards, I wish it was. There are not enough aware and pissed off.

All the thought, energy, and emotion that go into video games, television, sports; if we could actually harness it we could genuinely do something. There is no way. They have us.

Grow a garden. Stock up on some food and extras. Fuck stawks. Help someone. Be happy.

Tue, 12/03/2013 - 09:40 | Link to Comment Shad_ow
Shad_ow's picture

I agree with living but not with ignoring.  We must be informed to be prepared.

Thanks for the good advice and happiness to you and yours too.

Tue, 12/03/2013 - 09:40 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Chance always favors the prepared.

Tue, 12/03/2013 - 10:07 | Link to Comment new game
new game's picture

MsC... now i can log out and continue down the path of lifes' simple prosperity.

Being wealthy is having the freedom to MAXIMIZE one's life EXPERIENCES!

Tue, 12/03/2013 - 10:29 | Link to Comment Mediocritas
Mediocritas's picture

Continued decay yes, but the waterfall moment is coming sooner than you think. Peak hydrocarbons are pegged for ~2020 and given that we have exponential population growth, peak available fossil fuel energy per capita comes sooner and that's the key metric.

Turns out coal reserves were massively overstated. Peak coal means peak China, coming as soon as 2018. As coal peaks out, China's leaders will choose to focus on meeting domestic demand, rather than international, out of necessity (to maintain domestic tranquility, hence power). Prices will therefore rise in Walmart, dropping more of the US middle class into poverty.

Competitive manufacturing will not return to the US to challenge higher Chinese prices because there is a lack of energy to support it, too much infrastructure and skill has been lost to replace quickly, and even with a concerted attempt (government subsidized), it still won't be able to compete with China price-wise without sanctions (that do nothing to help a sinking middle class).

America falls in a hole when China shuns exports due to peak hydrocarbons. Of course the idiot talking heads will get caught up in the politics and spin all manner of complex dialogues and motivations, but it really is simple: energy constraints end the globalisation pipe dream.

Reminds me of the climate change dialogue, all pointless hot air at the end of the day because peak hydrocarbons sets the date for peak emissions and the value for net emissions. Policy drives nothing, physics drives the pretence of controlled policy.

Same again for all the talk about matters monetary and economic; sure it's fun to rant about central banks and speculate about actions, but in the end it's all pointless as the future is obvious. Peak hydrocarbons means peak global economy, peak standard of living and peak peace (already passed). Leaders will print on the downside to maintain an illusion of normalcy and they will only exacerbate the slide. Playing markets is a suckers game here. Buy land. Farm it. Period.

Because globalisation utterly eliminates national self sufficiency, resulting in nations that specialise in only a few economic activities, disruption to supply lines will be far more devastating than many realise, and it will happen shockingly fast.

If people haven't already joined a country community, made friends, established interdependencies and made good progress towards mastery of living off the land (with the means to defend their community), then they're likely fucked. These things take TIME and there's less than 10 years before the shit really hits the fan.

Most peons can't even afford to sell up and move to the country. They don't have enough of a buffer to fund the ramp up. Technology did a fine job of distracting and pacifying us all while we became poorer and poorer (measured by land ownership). Both parents working full time, putting the kids in child care and barely interacting with them, struggling to pay off a jumbo mortgage on a house built on a pissy little block of polluted land. Strip the iGadgets away and we're less wealthy than the peasants of old. We traded self sufficiency for comfort which is a terrible trade when the external providers turn away.

Tue, 12/03/2013 - 11:22 | Link to Comment MsCreant
MsCreant's picture

I agree with much of this. I was on to peak oil in late 2004. It is the reason I became interested in the economy. It is the reason I pulled out of the stock market in late 2006 (I missed the 40% haircut everyone else got). When I got it, it changed everything, I was never the same, I was embarassed I had been so blind. It was ZH that put me on to HFT and just how corrupt the relationship between the Fed and the Treasury was. 

I spent a long time waiting for the crash. I'm still waiting for it. How I wait, the attitude I have, has mellowed. 

It has always been this precarious. Those in charge have always been this crooked. I was asleep to what was true was the only difference. I am not inured, I just can't stay in disaster mode forever. 

We are perched on a precipice. When you live there, being anxious is more dangerous than just calming down and accepting it and dealing with what is, I think that is what I was trying to say.

Tue, 12/03/2013 - 12:15 | Link to Comment Bryan
Bryan's picture

" I am not inured, I just can't stay in disaster mode forever.  We are perched on a precipice. When you live there, being anxious is more dangerous than just calming down and accepting it and dealing with what is"

 

Very insightful.  Thank you.

Wed, 12/04/2013 - 04:22 | Link to Comment Mediocritas
Mediocritas's picture

I had my freakout moment in 1998 after reading Campbell and Laherrere: http://jayhanson.us/page140.htm

Got heavily into researching what would later become known as peak oil and was active in several communities (theoildrum, EnergyResources, RunningOnEmpty) then ran around preaching salvation to everyone who'd listen, even running my own "blog" as they'd later be known. THAT was a lesson in itself...

Thought I had a pretty good read on the world (geopolitically educated, scientist / engineer / high frequency trader with a fair understanding of the monetary system, central banking and robotrading). Certainly, major events were happening like clockwork as cued by energy status. Then 2007/8 happened, gold and oil tanked big time and I realized there was a massive black hole in my knowledge. Spent a few years remedying that (shadow banking, exotic derivatives, modern HFT, conspiracy facts), and found ZH absolutely indispensable. Again, I think I have a good read on things...until some new unforeseen event shocks me out of my arrogant confidence.

Like you I eventually wised up, calmed down and stopped bothering. I realise now just how corrupted our manmade systems are but there's little point hyperventilating about it. "You can lead a horse to water but you cannot make it drink", is so true, nobody listens, they just have to figure it out themselves. All we can really do is try to take care of ourselves, get out of the rat race, enjoy the show, leave a trail of breadcrumbs and hope that a few people we care about will follow them and join us.

A lot of people active in the late 90s "peaker / doomer" communities ended up on the same path. Quietly retired from the game, pursuing interests that enrich their souls while watching it all tanking on cue with a detached regret. Some, like Chris Martenson and Nicole Foss are still active and present very pragmatic solutions for individuals alongside the usual status reports. ZH hasn't made the progression in general but that's what makes it great: it still has a FIRE raging.

Whatever happens, the earth, and life on it, will survive our nonsense. See ya on the downside.

Tue, 12/03/2013 - 18:59 | Link to Comment Notarocketscientist
Notarocketscientist's picture

Found this free course on organic farming - it's excellent http://mediasite.online.ncsu.edu/online/Catalog/Full/1ec0688b568a4a47a8c...

 

As for Peak Oil:

 

Scientists Wary of Shale Oil and Gas as U.S. Energy Salvation

Hughes sums up: "Tight oil is an important contributor to the U.S. energy supply, but its long-term sustainability is questionable. It should be not be viewed as a panacea for business as usual in future U.S. energy security planning."

http://www.sciencedaily.com/releases/2013/10/131028141516.htm

 

 

U.S. Shale-Oil Boom May Not Last as Fracking Wells Lack Staying Power

“I look at shale as more of a retirement party than a revolution,” says Art Berman, a petroleum geologist who spent 20 years with what was then Amoco and now runs his own firm, Labyrinth Consulting Services, in Sugar Land, Tex. “It’s the last gasp.”

http://www.businessweek.com/articles/2013-10-10/u-dot-s-dot-shale-oil-boom-may-not-last-as-fracking-wells-lack-staying-power

 

THE FRACKING PONZI SCHEME

Robert Ayres, a scientist and professor at the Paris-based INSEAD business school, wrote recently that a "mini-bubble" is being inflated by shale gas enthusiasts. “Drilling for oil in the U.S. in 2012 was at the rate of 25,000 new wells per year, just to keep output at the same level as it was in the year 2000, when only 5,000 wells were drilled."  http://www.forbes.com/sites/insead/2013/05/08/shale-oil-and-gas-the-contrarian-view/

 

Why America's Shale Oil Boom Could End Sooner Than You Think

http://www.forbes.com/sites/christopherhelman/2013/06/13/why-americas-shale-oil-boom-could-end-sooner-than-you-think/

 

Wed, 12/04/2013 - 04:49 | Link to Comment Mediocritas
Mediocritas's picture

Will check it thanks. Myself, I'm a subscriber to the "soil makers" way of doing things (http://www.johnjeavons.info).

On fracking. Agree. A lot of people are going to be unpleasantly surprised. Unconventional oil simply cannot take up the space vacated by declining conventional oil.

I think you'll like this one from Hughes, it covers a lot of ground: http://www.resilience.org/stories/2013-11-04/the-energy-sustainability-d...

Tue, 12/03/2013 - 16:54 | Link to Comment Raging Debate
Raging Debate's picture

Well stated Mscreant. If we continue having free speech then awareness over time will sink in and things will improve. Generational dynamics are at work and the leadership in this crop in the US is quite distasteful. Make some money and use all those legal tax write-offs and loopholes. 30 hours a week is fine with me, I have learned to live more simply and enjoying the free time, I use some to learn how to better defend against the robbers.

Blue Jays and Cardinals. What can these two birds tell us about cycles of biology? Look it up :)

Tue, 12/03/2013 - 09:37 | Link to Comment BandGap
BandGap's picture

Ditto, except this world won't let you go.

ObamaCare has yet to hit the shores with all it's impact. Jobs are eroding, and although many (like me) are trying to "retool" to a different lifestyle it isn't easy in this environment. It still takes money to exit and then re-enter.

I disagree that the end game will be gradual. The ticking time bomb is the breaking point where the FSA gets cut off from all that free shit. I don't care what is going on at that point, those people will take short duration actions because they feel entitiled, and they certainly were never going to get prepared. There is a reason FEMA has geared up.

Tue, 12/03/2013 - 09:50 | Link to Comment Bryan
Bryan's picture

How did we get such idiots in charge that want no pain and no risk for investors and banks?  I don't get it.  Where does it say in their bibles that there IS a free lunch??

Tue, 12/03/2013 - 09:57 | Link to Comment fonzannoon
fonzannoon's picture

Here is your answer Bryan.

http://www.youtube.com/watch?v=mPSIKEAaEtk

Tue, 12/03/2013 - 10:35 | Link to Comment Bryan
Bryan's picture

Yup!  Very good explanation ... GIGO.

Tue, 12/03/2013 - 10:03 | Link to Comment TrumpXVI
TrumpXVI's picture

I agree with Bill G. that the Central banks are trying to force anyone and everyone who has any wealth to either purchase risky investments or borrow against the hard assets they possess, "there is no other choice".

I say fuck them all.  I do have a choice, and I am neither "investing" in risk assets nor borrowing against the little wealth I possess.

I can just keep working and keep right on buying gold.

They haven't stopped me yet.

THIS IS WAR!

Tue, 12/03/2013 - 10:05 | Link to Comment kenezen
kenezen's picture

Bill, why not setup a modest Fund to begin that counters the possble equity losses because of market price reductions? Not Gold funds or others. A Synthetic Volatility Trading fund that can be weighed in either direction and serve as a massive hedge for PIMCO and serve the public as well. Utilizing multiple markets of Futures markets, Cash and Future Options and Cash markets. Weighting it more for anticipated direction but, be covered if it goes the other way. It losses only if the is no sufficient future volatility?      

Tue, 12/03/2013 - 10:05 | Link to Comment Yen Cross
Yen Cross's picture

  What is this "real money"you speak of Mr. Crypt Keeper? Bill (scream) Gross fails to realize that it's all funny money propping up these markets.

Tue, 12/03/2013 - 10:24 | Link to Comment all-priced-in
all-priced-in's picture

I think what Bill is trying to say is the market outlook is

Extreme constipation followed by explosive diarrhea.

  

 

Tue, 12/03/2013 - 10:25 | Link to Comment SheepDog-One
SheepDog-One's picture

It's funny to me seeing all the major 'investors' advising that the only option is 'borrow from the cashier window, and let it all ride on black'....degenerate gambling is all this has become, I don't care who made their suit.

Tue, 12/03/2013 - 10:27 | Link to Comment DOGGONE
Tue, 12/03/2013 - 10:43 | Link to Comment jmcadg
jmcadg's picture

"Mohamed, the creator of the “New Normal” characterization of our post-Lehman global economy"

Does he want a medal for coining a phrase. Fuck off.

Tue, 12/03/2013 - 11:36 | Link to Comment YHC-FTSE
YHC-FTSE's picture

Interesting stuff. Other than the parts that seem like a maturbatory celebration of management-speak, with plenty of cheesy back slapping for those backroom boys of other managers, ("Hey, couldnta done it without cha!" I can almost see the cheesy grin, wink, and pistol finger), there's some sage advice here, albeit about two months late.

I don't have a clue what the fuck he and his friend are trying to say about "bond wars", and Pimco's strategy - vaguely waiting for the stock asset crash to benefit the traditional safe haven of bonds is my guess - but he could have saved himself the trouble of mentioning Jack Bogle about index funds and quoted one of my posts more than  a month ago.

Then I posted what we all know now, that if you had the balls and the inclination to go into the heavily manipulated markets bolstered by QE, you shouldn't bother with the risk of picking individual stocks, but take a punt on the rising indexes instead. (I mentioned index linked CFDs). Disclosure: It will all end in tears anyway,  I haven't and will not participate in the farce or give credence to any vehicle that legitimises the delusion of those who control the fiat money supply. 

http://www.zerohedge.com/news/2013-10-26/4-out-5-valuation-methodologies...

http://www.zerohedge.com/news/2013-10-22/panic-buying-continues#comment-...

Tue, 12/03/2013 - 12:05 | Link to Comment moneybots
moneybots's picture

"3) Global economies and their artificially priced markets are increasingly at risk, but the unwinding may occur gradually."

 

I don't take much comfort in that idea.  Especially when the market is a bubble.

Tue, 12/03/2013 - 13:22 | Link to Comment FearedDevil
FearedDevil's picture

7th month of outflows keeps him up at night.... 

Tue, 12/03/2013 - 13:22 | Link to Comment FearedDevil
FearedDevil's picture

7th month of outflows keeps him up at night.... 

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