Winter Is Coming

May 23, 2007

The common people often regard the cycles of history as inexorable events with a feeling of powerlessness. And this bitterness tends to persist after reading "The Fourth Turning" by William Strauss and Neil Howe. The book explains why history unfolds just like the fours season cycles. Spring or High, Summer or Awakening, Autumn or Unraveling and Winter or Crisis. Entertainment is guaranteed: this fast paced read filled with intriguing esoteric meanings. Additionally, the authors' arguments are heavily documented. The occurrence of the four seasons is set in motion by successive generations of voters, with the 4th Turning (Winter) precipitating the collision course between the seniors exiting the voting process and the new first generation whose willingness is to revolutionize the ancient thinking. What characterizes The Autumn season is the realization that hopes have not materialized and are thus abandoned. The most fascinating chapter is without a doubt the fall of the Roman Empire which begun with a 4th Turning.

Following Howe and Strauss' provocative theory, just after the millennium America will enter a new era that will culminate with a crisis comparable to the American Revolution, The Civil War, The Great Depression and World War 2. Although Howe and Strauss seem to argue that Turnings are inescapable, for anyone having studied hidden history breaking down the repetitive cycles resides in the ability to decipher and debamboozle what the educational establishment has forgotten to teach or has distorted. Those teachings involving "security" are ageless incentives. For the sake of security, many are ready to lose their liberties and this has always been the "Achille Heel" of societies. Despite and beyond our obsessive quest for safety nets history cycles have repeated themselves over and over... so where is the catch?

The word "democracy" has been sold throughout history as a theory which essentially works well on paper. But what happens when premises are erroneous? What is democracy worth exactly? This is the tough question we ought to ask ourselves today when reading any article. Because everything is bound to change, Uncertainty is the mother of all theories. Only a reasonable level of skepticism can prevent blind passions and fanaticism. This holds true for everything, in every field. Did you know, in astronomy for instance, that a recent study of massive black holes could make Einstein look like a Neanderthal at any moment? Talking of math, there can't be even the beginning of debate possible when the value of "1" is stretched constantly. Unfortunately stretching and disguising numbers has become a global sport. The problem is that this time the outcome won't be different either. As you read this, America needs to sell $2.5bn of debts daily to pretend that everything is fine. Debt is wealth... how long can it last before the doomsday machine activates what is called the "liquidity trap"?

The death of the economy is the economy of death. Basically societies fight over power, natural resources when racket is less expensive than persuasion and peaceful trade. Let's throw in a wild card... Taking the stance that Americans may wake up eventually is not too far fetched: political turmoil on a systemic level (predicted by Strauss and Howe) is likely if we keep our eyes on the ball. Look at the illegal immigrantion situation for example. The majority of Americans is against it and it is going to get worst before it gets better. Lou Dobbs was accused of being an "agitator" the other day. Since the dotcom debacle, the economy has relied on our ability to borrow as if there was no tomorrows. Abroad it is deja-vu all over again: Japan is on the brink of another consumer loans crisis, debt arranged in Britain and on the Continent advances to record levels... even Dick Cheney’s banker sees world bubble going through an exponential phase which will eventually burst dramatically! More concretely, U.S boomers are going bankrupt at faster rate, those over 55 are squeezed by mortgage debt, higher health care costs. Then we've got companies buying back their own shares at record pace to boots earnings per share, so profit can continue to look healthy; Bank Of England warning of a surge in cheap corporate lending with looser credit standards that have increased the vulnerability of the (global financial) system. If we have the impression that the housing subprime blowout was contained, it is because the mainstream outlets have been hiding the true meaning of the numbers. TV broadcasts were also quick to rumor a government intervention in the form of a multi-billion bailout, which reassured the Wallstreeters. Yes there was no bailout in the end but some of the biggest lenders were forced to put several billion on the table to help homeowners in distress. While there are many ingredients needed to cause a rally, confidence is essential. If the housing sector (considered as the pillar of the economy) remains apparently strong, bullishness evolves in synch. Dow 13,000: thanks to the suckers?. The fear of missng a rally rules the game. Some call this "blind infatuation" with greed:

... Their passion for shares creates a very vulnerable situation…
If bad news emerges, it may trigger unloading of shares initially among a small group of investors, which, if it snowballs into a large-scale exodus, would lead to a collapse in the equity market, Alex Tang Yee-yuk (research director at Core Pacific-Yamaichi International) said.

From a Keynesian standpoint those debts had a tremendous effect until now and that many people view them as necessary to propel an economy, is quite puzzling in itself though. On the other hand there is a lot of speculation in the credit market especially in the CDS (credit-default swaps) which can be explained to the neophytes very briefly as: A agrees to pay a series of premium to B; who agrees to compensate A if bonds default. But so far so good, huh? Market gamblers seem to enjoy the relatively new financial instruments to insure themselves against losses, alternatively, to speculate that a default will occur. Rationally a question pops in mind though. If the ability to service debts is limited to one's ability to repay eventually, why are those CDS reaching more than **nine times** the global GPD or approximately 400 trillion? Yep, nine times, you read well! While being super-mega insured makes everything look risk-free, inflated prices become a direct consequence. So yes, it too can make junk look priceless! If there is an insurance out there protecting the market from crises, what the heck... The sky is the limit dogma has prevailed until now. Even if many have rang the alarm bell on a regular basis... who cares?! In 2004 Warren Buffett provoked the beginning of a panic when calling the derivatives schemes: weapons of mass destruction.


There is more, the 'Yen Carry Trade' plot, for example, illustrates how unlimited speculation is taken for granted. Widely popular. Long story short, the carry traders acquire the yen at a near zero interest rate set by BoJ then go shop around. Buy low, sell high always determines the bets. Business as usual. Alas as history has shown that since the birth of the stock market the majority never succeeds to sell before it is too late. While China and America are accusing each other of being currency manipulators once in a while, Japan should be allowed to join the Club. It is actually worth to notice that Japan's living standards, which are often pictured as ones of the best of the planet, are now threatened with an abrupt end. After all it is **cheap money** that has kept afloat the Rising Sun since the Asian meltdown in the 90's. Ironically the national price tag of the intervention alone at the end of 2005 was more than 1 trillion dollars - for the taxpayers. Did you say 'demented policiy makers'? This is truly ironic: while the yen is being depreciated on purpose, the country is one of the most expensive spots on the planet. All this for the sake of profits.


Another chilling tale is that of "naked short selling". A broad manipulation that consists in selling stocks that don't exist. As this Bloomberg video reports, 6 billion dollars in shares cannot be cleared daily. In other words, more or less 7 million phantom transactions. Just imagine such news aired on a show like that of Lou Dobbs. This would provoke the stampede to the exits of the century. As to wonder what the S.E.C has been doing all this time. The scale of that very fraud is growing exponentially since no law enforcement agencies are doing a thing. Was the Spitzer anti-fraud unit a joke? We no longer should ask ourselves where the Wall Street bonuses are also coming from.


The 'yen carry trade', the 'derivatives' and the 'phantom shares' are most likely among the biggest frauds ever perpetrated by men (with high education degree) enjoying impunity because if their deeds were exposed, an immediate world economic collapse would ensue. The most terrifying is how those high ranked cliques and their close cheerleaders have skewed people's opinions about success and wealth. To make the matter worse, the legacies of Bubble-Man (Greenspan) and Helicopter-Money-Theorist-(Bernanke) have led us to a breaking point. Many experts watch the market carefully and issue a warning from time to time to no avail. Too much bearishness equates to a self-fulfilling prophecy. Shall we swallow more blue pills to ignore that last week the US House Of Representatives held what was billed as a tripartite hearing of three subcommittees on 'Currency Manipulation and Its Effects on US Businesses Workers'? An hearing where they have discussed the monstrous imbalances of the world economy instiguated by a few at the switch of the printing press? Stephen Roach who attended the event concluded that the US Congress has now gone past the point of no return.


At the risky end of profits:

The point that this essay is trying to make is that profits are not and never sinless since they are regulated by knowledge and collusion. Cartels of all sorts have governed earth since the beginning of ages. Look at the OPEC, which was created after the crisis in the 80's to stabilize the oil price. It didn't prevent the oil price from skyrocketing and becoming the center of dangerous geopolitical chess game. Which stabilization? Never sinless because economics shapes power and power itself cannot be sustained if there is a full disclosure of all unethical deeds constantly. By essence, Truth is not profitable and ever will be. . In this regard, the quest for profits is a fallacy allowing the sustainability of an illusion. Just like altruism can be implemented to profit from misery, capitalism can lay down the premises of a society where people come before profits. Both capitalism and altruism are no dangers to societies as long as we do not fall in the trap of 'stretchable money'.

We live in times of extreme financial terrorism. Because Nature gives us everything for free, unlimited speculation cannot serve Mankind but serfdom. To get this formula right, it all depends on our own will to adopt new definitions and turn our back to a mirage that will never translate into reality. Sound too realistic? With the world financial demise in sight, I think not. Winter is coming... History is on its way to repeat itself again.

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