Paul Mylchreest, author of the Thunder Road, releases his much anticipated latest report, and it's a doozy: "2012: Dear Portfolio Manager, you are leaving the capitalist sector and heading into a full-spectrum crisis." He continues: "You were to hear a report on the world crisis. That is what you are going to hear. For twelve years you have been asking: Who is John Galt? This is John Galt speaking….Now it’s getting serious. 2012 will be a year to remember as the globalist agenda comes into focus amidst economic and geo-political crises: The titles of the last two Thunder Road Reports were prefaced with “Helter Skelter” - “The Illusion of Market Stability” followed by “Gentlemen Start Your Engines”. Sadly, the Helter Skelter I was writing about – the second part of the Great Financial Crisis is in progress and I’m expecting it to come to a head next year (2013 if we’re very lucky). The only question is WHAT brings it to a head? We’re not short of possible causes – a bank failure, sovereign default, Eurozone tipping into recession or the Middle East. Despite all the evidence to the contrary, like overwhelming debt levels and insolvent banks/sovereigns, the consensus seems convinced that we can “muddle through”. Dow Theory veteran, Richard Russell, explained it best: “In the coming two or three years we will be going through unprecedented situations beyond the understanding of most analysts.”"
From the report:
- The turbocharged, debt-driven over-consumption of past decades must be undone. The strong medicine could and should have been taken years ago. As the primary architect, Greenspan shoulders much blame, but shrugs it off. The financial system is already past the point of no return (“In my mind and in my car, we can’t rewind we’ve gone too far”) – and we are on the brink of a TSUNAMI of new money/credit creation to delay its failure. This will be the final run to the summit of the Ponzi scheme. All Ponzi schemes end and there will have to be a system reboot. This is a “Crisis of the Ages”;
- To maintain credibility in the face of insane monetary/fiscal policies, a scapegoat for the coming surge in inflation would be helpful to TPTB, perhaps even necessary. The conflict in the Middle East and North Africa is almost certain to escalate, threatening to disrupt world oil supply. A surging oil price could be blamed as an “unexpected” external shock for the “unexpected” surge in inflation, which central bankers have repeatedly assured us (falsely) is not on the horizon. Since the creation of the Federal Reserve in 1913, the purchasing power of the US dollar has already declined by 98% (using the Fed’s own data). With a track record like that, the last 2% is not going to be difficult. Substantial declines in the purchasing power of the Euro, Yen and Sterling are likely to precede the dollar, especially if the oil price surges (importing nations will need to hold more dollars);
- BBWestern nations are at increased risk of false flag events as part of a “Strategy of tension” – be prepared then you won’t be surprised. Wikipedia: “The strategy of tension is a theory that describes how to divide, manipulate, and control public opinion using fear, propaganda, disinformation, psychological warfare, agents provocateurs, and false flag t------st actions. The theory began with allegations that the United States government and the Greek military junta of 1967–1974 supported farright t------st groups in Italy and Turkey, where communism was growing in popularity, to spread panic among the population who would in turn demand stronger and more dictatorial governments.” TPTB might prefer a distracted, pliant and fearful public; and
- The majority of people probably won’t agree (yet) with much of this paragraph, but we are in a chain of events where the direction of travel is: INFLATIONISM - INTERVENTIONISM - SOCIALISM - REDUCED LIVING STANDARDS - TOTALITARIANISM. Elements of all of them are already present to a greater or lesser extent, as I’ll discuss. Of course, the earlier ones, inflationism and interventionism (which Ludwig Von Mises described as “socialism by installments”), are the most obvious. What we are experiencing was prophesied in fictional form by Ayn Rand in her masterpiece “Atlas Shrugged” when it was published in 1957. I’m reading it and it’s amazing.
This process raises interesting questions regarding asset allocation and while not all of them are very palatable, we are where we are. Let me outline my analytical framework for the big picture (rather than individual stocks) then highlight the key lessons from this report which, it turned out, fit into the framework:
Kondratieff Cycles: back to the dawn (almost) of the Industrial Revolution in 1788 - nominal GDP, real GDP growth, inflation, debt, interest rates and the performance of the key asset classes – stocks, bonds, commodities, gold and real estate. I only know of one other person (Ian Gordon) on the planet who has modelled this in detail, although there may be others. Joseph Schumpeter, who never did say which two of his three goals in life he achieved (to be the greatest economist in the world, the best horseman in Austria and the greatest lover in all of Vienna), had this to say:
“The Kondratieff Wave is the single most important tool in economic forecasting.”
Unfortunately my model of the Kondratieff Cycle is SCREAMING depression and reduction in living standards.
The mechanics of the four great price waves during the last millenium: Medieval, the “Price Revolution” of the 16th to the first half of the 17th centuries, 18th century-early 19th century and the (rather important) current one;
Geopolitics: Mackinder’s Heartland theory, Brzezinksi’s “The Grand Chessboard”, Paul Kennedy’s “The Rise and Fall of Great Powers”, Project for the New American Century, and numerous works on the decline of the Roman Empire due to the startling parallels with the US (as documented in Thunder Road Report 23);
Demographics: like Harry S. Dent’s work on the predictable nature of consumer spending based on family formation pattern. The US birth rate peaked in 1961 (UK was similar) and peak earnings/spending of the average citizen is 48.5 years of age - as they say in America “you do the math”. The baby boomers’ kids will be coming out of college…!
Market interventions by the authorities: the Gold Cartel (the Gold Anti-Trust Action Committee - GATA - deserves immense recognition here), silver (Ted Butler likewise), equities via the President’s Working Group on Financial Markets and let’s not forget the Counterparty Risk Management Policy Group and the US Treasury Secretary’s gigantic slush fund, the Exchange Stabilization Fund. By the way, Bill Murphy’s Midas column on the Le Metropole Café website is the first thing I have read every day for six years and not just for gold.
Exter’s pyramid: a central banker who believed in sound money and his theory of capital flows in a major crisis is playing out right now. Speculative capital moves down through the credit instruments as, one by one, each credit instrument loses its “moneyness” – the last one being the US dollar/Treasury complex. The final destination is the only asset which doesn’t pay a yield – it doesn’t need to – it’s the ONLY one without counterparty risk in the biggest debt crisis in history.
The nature and history of money: I’m tempted to cite Francisco d’Anconia’s speech about money in Atlas Shrugged and Roy Jastram’s “The Golden Constant” - a key empirical study of how gold outperformed in both inflationary AND deflationary periods since the 16th century (although it neglects today’s Gold Cartel and that alogorithm which only allows gold to rise on “risk on” days);
The globalist agenda: NWO, CFR, Rhodes, Trilateral Commission, Bilderberg, Club of Rome, etc. Few people in the markets incorporate its impact despite: i) it is heavily documented; and ii) it provides the context for so many world events - which suddenly lose their apparent “randomness”;
“Austrian” economic theory: especially Ludwig Von Mises’ work in relation to credit bubbles and free market capitalism; and
Studying financial history mixed with pattern recognition with the above.
Without a framework with which you can see beyond the short term, it’s getting more and more like being a spectator at a tennis match. Look at the equity market recently, or gold and silver, where the prices have fallen as the banking system disintegrates. Markets are all over the place, as more and more holes in the dyke burst open.
The main lessons I learnt from this report are about SOCIALISM and its impact on financial markets. For example:
- How far we’ve departed from the ideal of free-market capitalism and how far the Socialist takeover has advanced;
- How the style of the Socialist takeover has elements of both the extreme left and the extreme right (“national”) on the political spectrum – not only making it harder to categorise, but also harder to see; and
- What I think that this means for asset allocation.
Let’s take the last point and consider some of the key themes:
- Socialism from the Left: government taking a greater share of GDP, lower living standards and debasement of currencies;
- Socialism from the Right: government largesse and corruption with certain large corporate interests which serve the purposes of the state, military adventurism and a much more controlled society.
If it looks like a duck and quacks like a duck…
The source of this whole chain of events is inflationism and the debasement of currencies. As it unfolds, gold and silver increasingly become the critical assets to hold in order to safeguard capital. Currently, prices are being held down to hide the wreckage of the financial system and enable TPTB to load up. Market prices and demand for physical metal are temporarily disconnected. Going forward, essential items, like food and energy (especially crude oil) will account for a larger share of the “economic pie” as living standards decline and inflation increases. In contrast, items like luxury goods and diamonds (not a store of wealth) will suffer. I’m not planning on being short oil in 2012 as it strikes me as incredibly dangerous. The oil sector, along with defence, should benefit from the crossover of socialism from both the “left” and the “right” (military adventurism and the potential for conflict in the Middle East). Defence contractors are big beneficiaries of government contracts and lasting cuts to military spending rarely feature in declining empires. But of all the sectors which are “in bed” with governments, none come close to the major banks. However, I don’t care what happens to their share prices, EVERYTHING I have learnt as an analyst tells me not to touch them as investments. The accounting principles used for both the balance sheets and P&L accounts render them almost meaningless and that’s before taking account of OTC derivatives exposure and counterparty risk which can scarcely be imagined. You can’t even get close to analysing them properly and it’s legitimate to question whether professional investors managing money for pension funds, for example, should hold any major bank stocks at all?
Full report (pdf):