It's Started

I'm not sure where this will all end, but today we saw a Dow Theory sell signal.

If you look closely at the chart below (courtesy Bigcharts.com) you will see that volumes have been creeping up since the 1000 point fall the week before last. When prices fall on rising volume that is evidence of selling pressure.

"Theory" says we should see a technical bounce and if we do see that then it's probably sensible to sell out of everything except special situations.

A "special situation" is a business that you expect will do well (make strong profits) regardless of what's happening on the stock market. Those businesses will be satisfying "real" needs.

Of course, I can't prove it, but my view is that we are heading for an era of deflation. The governments of the world tried stimulating their respective economies and this unraveling of the stock markets is evidencing that their attempts have failed. In any event, their behaviour did not pass the common sense test. There's no point in going into the theory of it. The subject has been discussed ad nauseam. What we need to focus on is that if the experiment in stimulation failed, there's not much purpose to be served in trying to stimulate a second time. Further, if the governments of the world all try to do this then the entire planet will experience hyperinflation. No one can hide from that. Not even if you own gold. The gold price will need to rise to tens of thousands of dollars an ounce to compensate and it will be impractical to do business by exchanging a fraction of a gram of gold for a loaf of bread, for example.

Why won't the price of bread and the price of gold rise in tandem? i.e. Why won't the current "exchange rate" of gold and bread stay the same?

The short answer is that this is a theoretical outcome. The reality is that the average person will have difficulty in responding to the fact that their governments don't have canned solutions to the problems we are facing. The pace of economic activity will slow. Demand will fall. When demand falls, the inflation adjusted price of "things" falls relative to currencies. If gold is the ultimate currency then the price of "things" will fall relative to gold. The amount of gold required to purchase a loaf of bread will fall. Of course, if you own gold under this scenario you will be better off than if you don't, but your standard of living will not rise unless you reduce the capital stock of your gold.

To my way of thinking, if we are going to survive what's coming down the turnpike, we need to swallow hard and face up to the realities of life. We need to grit our teeth, band together to share the burdens and stop listening to political bullshit. Our political leaders need to stop talking in a manner which is calculated to win votes.

Step 1 for the average person will be to downsize; to sell assets to pay down debts and to get your monthly living expenses under control. Contrary to the belief of many financially successful people, the average person is not stupid. What is happening in the USA, for example, is that an increasing proportion of people who have mortgages are finding that their mortgages exceed the value of their homes. In this light, they see no purpose to be served in continuing to pay the monthly mortgage. An increasing proportion of these people are now reneging on their monthly mortgages. This is deflationary. It is also destabilizing of organized society as a whole. The entire banking system will come under threat.

What can we do about this? The short answer is that we cannot solve a unique problem with a "canned" solution. There are no canned solutions. There are no silver bullets. If society is to survive what's coming down the turnpike, then society has to reinvent itself. This "attitude" of selfishness has got to be jettisoned. Having said this, it does not follow that the answer is "communism" or "socialism" or any other "ism". The answer does not lie in any "system" of government. Democracy and capitalism are logically sound systems which have spiraled out of control. Yes, we need to bring these latter systems back under control. But the answer, in my view, lies in a generalized attitude of people caring for one another as opposed to leeching off one another.

That last statement would have been judged to be impractical, naïve and hopelessly romantic in an era where greed was deemed to be good and where, in an environment of dog eat dog, the best way to survive was to become top dog. The fact is that the statement does not flow from a romantic disposition. It flows from recognition of "truth".

Another insight will flow from people doing what they are good at doing because they can, not because they aspire to maximize their rewards. This is known in the psychology textbooks as "self actualization". For example, Warren Buffet will be the first to acknowledge (I actually saw him do this in an interview) that he does what he does because he enjoys it. He still lives in his same old house and drives an ordinary motor car. He does not do what he does because it will make him rich. He is not being driven by his ego. He does what he does because it gives him a sense of satisfaction.

The lesson? Find what you enjoy doing and do that, and adjust your lifestyle to the income that that activity will generate. Stop worrying about that "contrived" argument of the wealthy: "If he's so smart, why ain't he rich?" How many rich people do you personally know who are content and happy inside themselves? Stop worrying about what others think about you. Start living the life you were born to live but in the context of caring about others. You will be amazed at how little you actually need and how comfortable inside your own skin you will become. You will be amazed to discover that "material possessions" are a poor substitute for inner comfort; that you don't actually need that third pair of sneakers.

Step 2. When you are comfortable inside your own skin and you are no longer driven by ego, the words "I'm sorry" come easily. And when you utter these words, the person hearing them feels better and has a warmer predisposition towards you. Conflicts are much easier to resolve when ego is not the driving force behind behaviour.

So, you still think this is impractical waffle?

Okay, then let's agree on a reality check:

The chart below, of the Shanghai Stock Market Index, is up to date to May 20th, 2010. (courtesy http://au.finance.yahoo.com/q/bc?s=000001.SS&t=my&l=on&z=l&q=l&c )

If your way is correct and a selfish, materialistic approach is in fact the most effective way for humans to inter-react with one another, then the chart above will bounce up from the rising dashed trend line. It will do this because you were correct all along - and that the centre of gravity of the world economy has in fact shifted to China and China will grow to drive the world economy in the same manner that the USA did and the UK did before that.

On the other hand, if the index falls below the rising dashed trend line, this will signal that the Chinese economy is also about to contract and it will later be revealed that the so-called "economic miracle" was not a miracle after all. Like Western Society, which is showing signs of decay, the Chinese economy was built on a foundation of self centered greed and there is just as much corruption (if not more) in that country as we have been witnessing elsewhere.

It is true that "greed" was probably the driving force behind the Industrial Revolution. In this light, greed was indeed good. But greed has served its purpose. It has now become counterproductive. It has passed its "use-by" date. It has become a cancer in society. And, by way of analogy, as any builder will tell you, one cannot fix concrete cancer by plastering over the cracks and then adding a coat of paint. The re-bar has to be replaced or the building will eventually collapse.

Our problems are structural and the structure is decaying. To address that we need to change the way we conduct our lives. If you read Beyond Neanderthal, you might get an insight as to how this might be possible. (Look past the detail and focus on the principles.) If you have already read it, then read it a second time. You will find that what you previously thought was impractical suddenly seems a whole lot more practical. I did not write Beyond Neanderthal because of what I could get out of it. I wrote it because I could.