[Pops]

9 scenarios and all lead to stock plunge

“Is the U.S. Condemned by History to Slow Growth?” asks Bloomberg BusinessWeek. Yes. But for traders and investors, it’s far worse than just bearish slow growth. Plan for no growth or zero growth.

Why? Wall Street, America and the world economy are in the early stages of a long era of “de-growth,” a reversal of economic growth and reduction in market growth as population growth adds new stresses on commodities resources, creates unrest, disasters and wars. Big problems ahead.

It is just a blog and of course traders don't care which way the economy goes, as long as they are on the right side - and - he quotes the econo-geoligists who swear all you need to make oil is money, but...


Is de-growth the future?

[dinopello]

Broad-based, long term growth in the economy and stock market is at an end, yes. For the last many decades you could invest in anything (including index mutual funds) and hold and the growth would beat most other things. Specific markets & stocks will still grow, but you need to pick them. Markets may be product based or location based. Localized in time, there will be ups and downs. As I said elsewhere, I think there is going to be a boom in investments (not necessarily in stocks though) in the near term (next 3 years). There is just too much cash sitting around.

[PrestonSturges]

Also, the baby boom is just starting to retire (1947 + 65 = 2012) In ten years this will peak, and none of these people will be adding stocks to their portfolios anymore. Instead they will be cashing out, possibly in a broad panic.

[Lore]

Broad-based, long term growth in the economy and stock market is at an end, yes. For the last many decades you could invest in anything (including index mutual funds) and hold and the growth would beat most other things. Specific markets & stocks will still grow, but you need to pick them. Markets may be product based or location based. Localized in time, there will be ups and downs. As I said elsewhere, I think there is going to be a boom in investments (not necessarily in stocks though) in the near term (next 3 years). There is just too much cash sitting around.

That's why Wall Street is so interested in privatising health care, social security and the postal service. They need to divert that money to them in what has become a shrinking pie in which eventually only the wealthy trade money back and forth.

The cash sitting around is illusionary. If the market takes a dump in 12 months back down to say 3,000 and inflation kicks in, all those fantasy bucks disappear.

[PrestonSturges]

Broad-based, long term growth in the economy and stock market is at an end, yes. For the last many decades you could invest in anything (including index mutual funds) and hold and the growth would beat most other things. Specific markets & stocks will still grow, but you need to pick them. Markets may be product based or location based. Localized in time, there will be ups and downs. As I said elsewhere, I think there is going to be a boom in investments (not necessarily in stocks though) in the near term (next 3 years). There is just too much cash sitting around.

That's why Wall Street is so interested in privatising health care, social security and the postal service. They need to divert that money to them in what has become a shrinking pie in which eventually only the wealthy trade money back and forth.

The cash sitting around is illusionary. If the market takes a dump in 12 months back down to say 3,000 and inflation kicks in, all those fantasy bucks disappear.

Generally money is not "lost," it merely changes hands and disappears into someone's pockets. That's why it is so important to flip and churn holdings, so that profits can get taken at each step. Sure, some putz gets left holding the bag as 85 or 97% of the value vanishes, but the smart players already took their profit at every step during the run up. Saying the money is "lost" denies that the whole game even exists.

[evilgenius]

I don't think it is the case that, given a war free scenario, there will be zero growth in every sector. Certainly, in areas such as alternative energy, there will be growth. My question would be, how much of the old game will still enter into play? That is the game of musical chairs, of chest thumping pride and consequent evacuating panic. If nobody can hold strong to a position there can't be any real winners. Even now there has been that opportunity, it has supported many people's returns in the form of privately held corporations making steady returns - to the point where they can really cash in by going public. Will anybody be there to make sure that going public means offering the public a legitimate going concern?

[Lore]

Broad-based, long term growth in the economy and stock market is at an end, yes. For the last many decades you could invest in anything (including index mutual funds) and hold and the growth would beat most other things. Specific markets & stocks will still grow, but you need to pick them. Markets may be product based or location based. Localized in time, there will be ups and downs. As I said elsewhere, I think there is going to be a boom in investments (not necessarily in stocks though) in the near term (next 3 years). There is just too much cash sitting around.

That's why Wall Street is so interested in privatising health care, social security and the postal service. They need to divert that money to them in what has become a shrinking pie in which eventually only the wealthy trade money back and forth.

The cash sitting around is illusionary. If the market takes a dump in 12 months back down to say 3,000 and inflation kicks in, all those fantasy bucks disappear.

Generally money is not "lost," it merely changes hands and disappears into someone's pockets. That's why it is so important to flip and churn holdings, so that profits can get taken at each step. Sure, some putz gets left holding the bag as 85 or 97% of the value vanishes, but the smart players already took their profit at every step during the run up. Saying the money is "lost" denies that the whole game even exists.

Of course money is not lost, it just eventually won't be worth anything. The whole fiat system is a house of cards based on faith. I got some lira laying around here somewhere that makes me a millionaire.

[AgentR11]

Is de-growth the future?

Yep, I think I've been ranting nominal growth coupled with real economic contraction as expressed in an ever expanding absolute quantity of fiat currency, for quite a while now.

de-growth.

Course, its kinda scary to see that idea show up within a reputable business publication/organization. I think I was happier with the party line being, "we just need policy X and action Y and we'll have solid growth again." Even if most knew it wasn't true. To see someone blatantly state a principle of de-growth outside the land of tin foil hats makes me queezy.

I'd really like to keep playing "Leave it to Beaver" for another decade.

So, whoever you are writing terrifying things over there... I COMMAND YOU TO SHUSH!

[Plantagenet]

I don't think it is the case that, given a war free scenario, there will be zero growth in every sector. Certainly, in areas such as alternative energy, there will be growth.

Yes. This is an important point.

Even if there is overall negative economic growth, certain sectors can still grow by cannibalizing money from the rest of the economy.

Take Alternative energy---it has been growing largely due to federal subsidies and tax breaks that disguise the true cost of the alternative energy. Health care has grown to be 16% of the US economy while in other countries it is only ca. 5%---somehow health care in the US is cannibalizing an extra 10% of GDP from other sectors. The tech sector is still growing, largely because people are willing to spend $399 on an iphone when $50 on a Nokia phone was just fine 10 years ago.

AND whose wealth is being cannibalized in the US economy? Its mainly the middle class----the wages and overall wealth of the middle class have been shrinking rapidly, especially during the last four years.

[Ibon]

On a more existential note, "de-growth" also shrinks the obsession with the future.

[Loki]

I suppose “de-growth” is what we doomers call economic collapse, the Great Emergency, contraction, etc.? The article in the OP was pretty darn doomy, though. He offers a prediction of “a long decade of 'less than zero growth,' high-stress chronic unemployment, accelerating global unrest, regional conflicts, higher Pentagon budgets,' because 'much of the excesses and financial leverage built up in past decades, especially in the financial sector globally and among U.S consumers, remain to be worked off.' Whether bull or bear, optimist or pessimist, you better prepare of the coming Age of Austerity.” Yikes.

It's clear that the Great Recession was a deflationary depression caused primarily by excessive private debt and associated financial industry Ponzi schemes. The Federal Reserve and US federal government have pulled every rabbit out of their hats to slow private sector deleveraging, somewhat effectively. Unfortunately this probably sets us up for the second shoe of the deflationary depression to drop, public sector deleveraging (i.e., austerity). This will likely accelerate private sector deleveraging, creating a death spiral. The Greatest Depression. Binge and purge at a decadal scale.

I've found Edward Harrison's views on the origins of the next crisis useful. And I've been obsessed recently with reading/watching everything I can by Australian economist Steve Keen, who offers the best explanation I've found of the Great Recession and the long economic slog we have ahead of us. From Keen's “The Crisis in 1000 words or less”:

The last Depression saw [private] debt levels fall from 240% to 45% of GDP over a 13 year period, and the ensuing period of low debt led to the longest boom in America’s history. [In 2008] we commenced deleveraging from 303% of GDP. After 3 years it is still 10% higher than the peak reached during the Great Depression. On current trends it will take till 2027 to bring the level back to that which applied in the early 1970s, when America had already exited what Minsky described as the “robust financial society” that underpinned the Golden Age that ended in 1966.

Just looking at the arithmetic, under the “new normal” it'll take us well into the 2020s to get back to the old normal in terms of employment if the US continues job growth at recent anemic rates. That's pretty much the best case scenario, a slow grind back uphill taking another decade or so (a “lost decade” or two). But I have a real hard time believing that the depression in Europe won't spread to us, creating another crisis point.

And all of these problems have been created independently of energy resources, they are almost entirely financial and political in nature. Throw energy constraints into the picture and we have an interesting scenario indeed. Peak oil I think will act as a brake on any long-term return to the debt-based asset-inflation/speculation growth model we enjoyed in the past. There will be ups and downs in the economy of course, but the long-term future trendline is looking a bit downward dog to me.

Might be a good time to figure out another economic model. Perhaps “collapse now and avoid the rush”?

[SeaGypsy]

Who first? How about we have the blasted RE & Stock crash we would have had in 2008 if not for QE1, 2 & 3? Aren't these instruments basically just nominal asset value protection for the ownership classes (Baby boomers mostly) anyway? How can we get on with implementing new-urbanism while most folks are either paying down a totally unrealistic mortgage or renting someone else's? Whatever way you want to look at it, we are in for a world of hurt. Much of this pain will be felt by the establishment classes. There is no way of stopping this process, merely stalling the inevitable. 3rd worldisation come on down!

[Newfie]

Is de-growth the future?

Surely, impossible to be otherwise.

Perhaps for Wall Street and Main Street contraction is a new idea. But it should be main stream here.

BUT.............the interesting and actionable items come about from examining HOW we contract.

What is interesting is that it is being discussed in a more main stream format. That should serve as a warning for all here that the herd is growing nervous. Perhaps.

[Timo]

Who first? How about we have the blasted RE & Stock crash we would have had in 2008 if not for QE1, 2 & 3? Aren't these instruments basically just nominal asset value protection for the ownership classes (Baby boomers mostly) anyway? How can we get on with implementing new-urbanism while most folks are either paying down a totally unrealistic mortgage or renting someone else's? Whatever way you want to look at it, we are in for a world of hurt. Much of this pain will be felt by the establishment classes. There is no way of stopping this process, merely stalling the inevitable. 3rd worldisation come on down!

De-growth will be universal. However, the volumes of de-growth will vary depending on the abilities of cities and states (more local than national) to anticipate and prepare for the inevitable impending austerity. Some places will survive much better than others. That's not to say that there won't be universal pain, but some places will simply have a scratch to their economy, while others will suffer complete amputations. Some places will simply die of economic starvation. We'll quickly become a world of Haves and Have Nots, and with that an unprecendented rate of migration of those Have Nots trying to enter the places where their needs can be better accomodated. This may very well end up creating localized military defenses as the Haves try to ensure their own survival by keeping the Have Nots out. There are only so many resources to go around, and those who develop systems to survive the periods of doing more with less will have to defend themselves against those who weren't able to figure those systems out and plan accordingly. The future will most certainly not be anything like the world we see around us today. Choose your safe haven very carefully.

[AgentR11]

Unfortunately this probably sets us up for the second shoe of the deflationary depression to drop, public sector deleveraging (i.e., austerity). This will likely accelerate private sector deleveraging, creating a death spiral. The Greatest Depression. Binge and purge at a decadal scale.

I'm just not seeing how we get a classic deflationary situation where $1 buys more tomorrow than it does today, when it is very clear that the Feds will continue to print money like crazy. If one honestly believed in a deflation cycle incoming, you should just sit on dollars like they were the most valuable thing ever.

I personally do not believe $1 will buy more food/stuff in ten years (or ever) than it does today.

Rather, I think the dollar will (continue to) be devalued at a rate higher than the rate of contraction in the real economy. This causes a 95 widget sized economy priced at (95 * $20) to become a 93 widget sized economy priced at (93 * $30). ie, nominally, we have GDP growth, as long as you understate official inflation, this will work like a champ to keep the whole finance thing going until it becomes physically impossible to grow enough food and put it on the table. All the while the real economy shrinks, at first shrinking slower than population rise, thus positive real growth and negative per capita growth, but eventually the rate of contraction will exceed the population's demand expansion, to yield negative real growth expressed in a larger number of US Dollars.

As to getting back to a normal? It will never happen. This is a one way slope into the abyss, the financiers only care about being the last down the slope. In their minds, hopefully everyone else's corpses will fill the trench and they won't die. This isn't some post war anomaly or just some financial magic; this is real capped resources, real capped food production, real capped water availability meeting uncapped human population. You think we were well off when we(NAcans) were the world's primary oil exporter... wait till CanAmerica decides who gets to starve to death and who gets to fill their vehicle fuel tanks with ethanol. (oh wait.... we're already there...)

[Ibon]

De growth is exactly what one should expect in a global economy heading toward a steady state due to energy costs rising in the face of resource constraints.

I find it funny that when this is framed as a theoretical idea where we should be heading it is embraced as some novel and enlightened sustainable economic goal but when the evidence is out there that it is actually happening then we perceive it as some economic disaster.

De Growth means the resilience of the consumption engine is stuttering.

The metaphorical bulldozer plundering the planet is slowing down.

Good.

[Newfie]

Yup, good insight.

[Loki]

I'm just not seeing how we get a classic deflationary situation where $1 buys more tomorrow than it does today, when it is very clear that the Feds will continue to print money like crazy. If one honestly believed in a deflation cycle incoming, you should just sit on dollars like they were the most valuable thing ever.

I personally do not believe $1 will buy more food/stuff in ten years (or ever) than it does today.

The extreme levels of private debt have triggered a deleveraging process, resulting in the current deflationary depression in the US and Europe. Quantitative easing, zero interest rates, and massive public debt are all designed to mitigate deflation (i.e., private sector deleveraging). But these strategies can't defeat the exponential function, the levels of public debt are clearly unsustainable. Once it's time for the public sector to deleverage, we get European-style deflationary depression, only worse.

Oil and food are the notable exceptions to deflation, due primarily, I think we'll agree, to biophysical constraints. But the root of our current economic problems are largely financial. That US dollar you're talking about will likely buy more of just about anything ten years from now, except food and gasoline.

I suggest reading Steve Keen on money creation and the role of banks vs. the government. Banks are in charge of the circulation of money, not government. The Fed can print to its heart's content, but this money isn't entering circulation, it's dormant on the big banks' balance sheets. Money printing won't be enough to defeat deflation, unless, as Keen advocates, we have a “modern debt jubilee” or QE for the public, in which every adult in America is given $100k or so of freshly printed greenbacks. Now that would be a recipe for inflation. But it ain't gonna happen.



Something needs to happen to all this private debt. It's going to be resolved either by printing money that actually enters circulation (inflation, possibly slipping into hyperinflation) or, far more likely, through defaulting, devaluing, and otherwise deflating. Welcome back to the 1930s.

[AgentR11]

But these strategies can't defeat the exponential function, the levels of public debt are clearly unsustainable.

Unfortunately, or fortunately, depending on your point of view, this is the fallacy in your argument. Printing *CAN* defeat the exponential function. To make the point dreadfully clear, I'll just note that there is absolutely nothing preventing the Fed from purchasing every single treasury bill ever issued with printed money. Every. Last. One. 1 billion, 1 trillion, 1 quadrillion. Just bits on a chip to them. And at this point in time, they have only one concern, and that is to prevent nominal deflation. They have one desire, and the perfect tool to achieve that desire.

You can not base an argument on a "can't" when the "can't" isn't true.

[AgentR11]

Something needs to happen to all this private debt. It's going to be resolved either by printing money that actually enters circulation (inflation, possibly slipping into hyperinflation) or, far more likely, through defaulting, devaluing, and otherwise deflating. Welcome back to the 1930s.

Nope. They've already demonstrated what is to happen with that private debt. The Fed is already buying it with printed money. When someone defaults against a bank held doodad, money is destroyed. When someone defaults on that same doodad that was already moved to the Fed's balance sheet and printed money issued against it; the property is just eventually auctioned and no circulating currency was destroyed.

The Fed can and will BUY IT ALL.

Inflation is fine. Hyperinflation is fine (but impossible in a physically contracting economy with strongly enforced tax law). Deflation would destroy the balance sheets of just about every single industrial / retain company in existence. It will not be permitted.