=

AS YOU GET OLDER,

MONEY LOSES

VALUE

Your hat doesn't look that sexy any more Art!

OOOPS!

"Price " of the Dow Jones Industrial expressed in Gold (without Enron, Citi, GM and the likes!)

ARE YOU

BEING

FOOLED?

See also:

Ever wondered how money is born into existence? Money = Debt!

Yes, I’ve found my old box of color felt pens and drawn how money is created according to the explanations of G. Edgard Griffin in The Creature From Jekyll Island, chapter 10.

Abolish The FED.

Please make sure that you have all reviewed The Crash Course prior to the event; and if you have 40 minutes, you can listen to an interview of Chris Martenson by Jim Puplava at the link listed below.

The full Crash Course can be accessed following the links below:

Crash Course Part 1, The nature of the crisis: 3 Beliefs; The convergence of Energy, Economy & Environment; ExponentialGrowth, Growth vs. Prosperity.

Crash course part 2, Money: What is money? How is it created? The Federal Reserve System & a brief history of US money; the true nature of Inflation.

Crash Course Part 3, The State Of The US Nation (and the world): Calibration for very large numbers. How much debt? A US failure to save. Assets and Demographics. Bubbles. Lies and fuzzy numbers.

Crash Course Part 4, Everything starts, and stops, with energy: Peak Oil; Energy Budgeting; Energy and Economy.

Crash Course part 5, Environmental data: The Shape Of Things To Come, or are we there already? Future Shock. What should I do?

Crash Course Bonus Audio: An Interview with Chris Martenson.

Looking forward to this week’s The Bucky Call special – please be on time.

The recording of this special The Bucky Call will be posted on TheTrimTab.com

A Better World Project - Quinn Michael's Digital Sketch Book

In the early 70s, I was around 10 years old; a school project was to draw the world as we expected it to be in year 2000. Of course, kids expectations are usually more wishes than expectations; kids don’t really know the difference do they? And if they do, they are “just kids”, right? Back then, year 2000 was an eternity away, so who cared, there was plenty of time for things to happen and change; responsible, powerful persons, adults, were in charge… After all, why worry?

Fast forward 35 years, a short decade into the 21st century; energy, economy, pollution, world hunger, immigration, unemployment, education, etc… are problems more present than ever; wars, lies, deceit, corruption, politicians that insist in telling us what to do, personal interests… mass extinctions, depletion of the oceans, deforestation, desertification, top soil erosion… inflation, malaria, refugees, terrorists, recession, clean water, over population and how am I going to pay the rent?

STOP!

Stop. I am not saying that all items in the above list were in my drawing, but certainly my kid’s mind was aware, conscious of them; powerful responsible adults too. We are now 10 years into the 21st century and guess what: Progress? Not at all my dear, not to avail: 35 years have passed, I am now the powerful person and our kid’s expectations, humanity’s future, are on my shoulders – and on yours too.

So what to do? I turn to Bucky Fuller and quote:

“What do I see that needs to be done and that nobody else is attending to? What do I need to learn to be effective in attending to it in a highly efficient and inoffensive-to-others manner?

-R. Buckminster (Bucky) Fuller.

…and TheTrimTab was born; picking up Critical Path where Bucky left it 28 years ago.

Drive is born from dissatisfaction. Are you somewhat dissatisfied Dear Reader? What is it you see that needs to be done? What do you need to learn to be effective in attending to it? The daunting size of the task can be overwhelming, but simple little things count; one is raising your awareness, understanding, knowledge about what is going on around you, and TheTrimTab can help you with that; another way is to just get out there and do something, anything, like creating an artifact that will help others raise their awareness, or creating a point of exchange where people, just like you or me can share their idea, vision of a better world…

This leads me to “A Better World Project”: it is not mine, it is Quinn Michael’s idea – In Quinn’s (yes, Quinn is the first name) own words:

… Then I thought to myself… how can I bring that idea. The idea of people sharing their stories and doing the drawings and then it hit me.

Use all of my programming, graphic, and art skills to build a digital sketchbook site that let’s you share stories and then I can draw some of them.

If you so happen to be curious, here is a link to A Better World Project

Quinn created A Better World Project, it is an interactive website (link above) where you can share your ideas of a better world – not only that, Quinn is an artist; he will, at his discretion, take your idea and make it into a drawing (The illustration above is reproduced from Quinn’s Digital Sketchbook) that will be posted for everyone to see and enjoy. Quinn Michael also created another artifact, he calls it “the dream tree”; I will leave you with a short video of Quinn explaining his dream tree.

Other related (hand picked) articles & postings that you may like:

• An Easy To Read List of Bucky Fuller’s Principles For Making The World Work for 100% Of Humanity.
• Opening The Bucky Call To All. Is it reasonable to suspect you are interested in becoming an active part of The Bucky Call?
• The Bucky Call. A study of Critical Path, Bucky’s starting point and road map for a world that works for all.

Crash Course – 11 – How Much Is A Trillion

During the Crash Course, you will often encounter numbers that are expressed in trillions. How much is a trillion?
A trillion is a very, very big number, and I think it would be worth spending a couple of minutes trying to get our arms around the concept. Make no mistake, we should not be lulled into complacency simply because it is too big to really get our minds around.
Keep this lesson in mind as we discuss the total accumulated debts and liabilities of the US, which are many tens of trillions of dollars.

***SPECIAL ADDITION*** Jess Bachman at wallstats.com has a really good artistic representation of a trillion dollars, (and a fascinating video of his work in progress); do not miss it.

Crash Course – 12 – Debt

Now we enter a new chapter of the Crash Course. With the background you’ve received thus far, you are now positioned to understand how the Three “E”s – the Economy, Energy, and the Environment – intersect and seemingly converge on a very narrow window of the future – the Twenty-Teens. The next twenty years are going to be completely unlike the last twenty years.
For you and me, there are only two ways to settle a debt: 1) Pay it off or 2) default on it. If you have a printing press like the government does, a third option exists: 3) Printing money to pay for the debt. So what is debt, really? Debt represents future consumption taken today.
Our entire economic system, and by extension our way of life, is founded on debt, and debt is founded on the assumption that the future will always be bigger than the past. Therefore it is utterly vital that we examine this assumption closely, because if this assumption is false, so are a lot of other critical things that we may be taking for granted.

Crash Course – 13 – A National Failure To Save

If you’ve just seen the previous chapter on debt, then you might be wondering if either our savings or our assets are of sufficient quantity to make those levels of debt perfectly manageable. In this chapter I will present evidence that the United States has failed to save money at virtually every level of society and make the claim that the United States government is insolvent.
A personal failure to save has been reflected by a state and local failure to save, which are mirrored by a corporate failure to save, all dwarfed by a failure to save at the federal government level. And capping it all off is a profound failure to invest. All of these deficits lie before us and lead me to conclude that the next twenty years are going to be completely unlike the last twenty years.

Crash Course – 14 – Assets And Demographics

Our nation has a historic, never-before-seen level of debt and a historic failure to save. Along with debt and savings, one also has to consider assets. After all, does it really matter if you have no savings and a million dollars of debt, if you have assets worth 10 million?
An asset is an item of ownership that is convertible into cash. Assets comprise the total resources of a person or business, including such things as cash, notes, accounts receivable, securities, inventories, goodwill, fixtures, machinery, and/or real estate.
Debts are fixed, while assets are variable. When you take on a debt, there it placidly sits, growing larger until you make payments on it. Assets, on the other hand, are variable, sometimes gaining and sometimes losing value.

Crash Course – 15 – Bubbles

Along the continuum of irrational financial behavior, it can be tricky to tell the difference between a bubble, a mania, and mere touch of exuberance. A bubble is reserved for the height of folly, and history is rich with folly.
So how would we know that we’re in an ‘asset bubble’? What do they look like and what can we expect when one bursts? The Fed famously likes to claim that you can’t spot one until it bursts. But actually you can, and the definition is pretty simple.
Bubbles used to happen once every generation or so, because it took time to forget the pain from the damage. Today we are facing the bursting of a second major asset bubble, housing, spaced less than ten years from the bursting of the dot-com bubble. This is simply astounding and thoroughly unprecedented. It is the largest bubble in all of history and will probably be the most destructive. And it is happening right now.

Crash Course – 16 – Fuzzy Numbers

In this Crash Course video chapter called Fuzzy Numbers, you will learn how our official economic statistics are based on deeply misleading, if not provably false, data. Our economic recession, and possibly depression, can be partially explained by the extent to which we have chosen to provide ourselves with misleading economic data. Certainly if you share my concerns over stocks, bonds, and 401K holdings, or are a serious investor of any sort, you owe it to yourself to listen to this explanation of how wrong our measures of inflation and GDP really are.
In Fuzzy Numbers, we will examine the ways that our measures of inflation and Gross Domestic Product, or GDP, are flawed, using charts of inflation and GDP as well as other easy-to-understand graphics. This chapter will help you understand inflation and GDP and how our national obsession with misrepresenting them to ourselves has led us to the edge of a recession and possibly depression.

- Courtesy Chris Martenson.

The chapters of The Crash Course take over 3 hours to go through and give you an overall understanding; we have broken the learning down into 5 postings. This is the third installment. The first part explained the nature of the crisis, the convergence of an Economic, Energetic and Environmental crisis, and the distinction between growth and prosperity; in part 2, we reviewed the nature of money, money creation, the role of the US FED (Federal Reserve System), and a brief history of US money, and revealed the true nature of inflation. Next, in Part 4, we will move on to energy, peak oil, the role of energy in our society, and the improbable existence of civilization without energy; last, we will measure the impact on the environment, the coming shock, and engage in a discussion about what we can do and who we must be to change this course of events that humanity has unwillingly set for itself.

The other parts of The Crash Course can be accessed following the links below:

Crash Course Part 1, The nature of the crisis: 3 Beliefs; The convergence of Energy, Economy & Environment; ExponentialGrowth, Growth vs. Prosperity.

Crash course part 2, Money: What is money? How is it created? The Federal Reserve System & a brief history of US money; the true nature of Inflation.

Crash Course Part 3, The State Of The US Nation (and the world): Calibration for very large numbers. How much debt? A US failure to save. Assets and Demographics. Bubbles. Lies and fuzzy numbers.

Crash Course Part 4, Everything starts, and stops, with energy: Peak Oil; Energy Budgeting; Energy and Economy.

Crash Course part 5, Environmental data: The Shape Of Things To Come, or are we there already? Future Shock. What should I do?

Crash Course Bonus Audio: An Interview with Chris Martenson.

Crash Course – 6 – What Is Money

Before we begin our tour through the three Es (the Economy, the Environment, and Energy), we need to share a common understanding of this thing called money.
Money is something that we live with so intimately on a daily basis that it probably has escaped our close attention.
Money should possess three characteristics. The first is that it should be a store of value. Historically, gold and silver filled this role perfectly because they were rare, took a lot of human energy to mine, and did not corrode or rust. By contrast, the US dollar pretty much constantly loses value over time – a feature which punishes savers and enforces the need to speculate and/or invest. A second feature is that money needs to be accepted as a medium of exchange, meaning that it is widely accepted within a population as an intermediary within and across all economic transactions. And the third feature is that money needs to be a unit of account, meaning that the money must be divisible and each unit must be equivalent.
It is crucially important that a nation’s money supply is carefully managed, for if it is not, the monetary unit can be destroyed by inflation.

Crash Course – 7 – Money Creation

Here we will explore the process by which money is created. In order to appreciate the implications of our massive levels of debt, you have to understand how the debt came into being.
John Kenneth Galbraith once famously said, “The process by which money is created is so simple that the mind is repelled.” We’re about to discuss that very thing. Money creation is a bizarre thing to ponder. It is actually a very simple process, but it’s really difficult to accept.
Money is loaned into existence. Conversely, when loans are paid back, money ‘disappears.’
There is a federal rule that allows banks to loan out a proportion, a fraction, of the money they have on deposit to others. In theory, banks are allowed to loan out up to 90% of what people have on deposit with them. Because banks retain only a fraction of their deposits in reserve, the term for this process is “fractional reserve banking.”

Crash Course – 8 – The FED – Money Creation

Here’s a quote from a Federal Reserve publication entitled “Putting it Simply”: When you or I write a check, there must be sufficient funds in our account to cover the check, but when the Federal Reserve writes a check there is no bank deposit on which that check is drawn. When the Federal Reserve writes a check, it is creating money.
Wow. That is an extraordinary power. Whereas you or I need to work to obtain money, and place it at risk to have it grow, the Federal Reserve simply prints up as much as it wishes, whenever it wants, and then loans it to us via the US government, with interest.
All dollars are backed by debt. There are two kinds of money out there. At the local bank level, all new money is loaned into existence. At the Federal Reserve level, money is simply manufactured out of thin air and then exchanged for interest-paying government debt. And perpetual expansion is a requirement of modern banking.

Crash Course – 9 – A Brief History Of US Money

The purpose of this section is to show you that the US government has radically shifted the rules during times of emergency and that our monetary system is really a lot younger than you might think.
In 1933, newly-elected President Franklin D. Roosevelt decided to counter the falling money supply in a most drastic manner. To accomplish this he confiscated all privately-held gold and immediately devalued the US dollar. This goes to show how governments, in a period of emergency, can change rules and break their own laws.
Fast forward to 1971, when President Nixon “slammed the gold window,” ending its dollar convertibility. Without a gold backing, there was no hard, physical limit to how many paper dollars could be issued.
What will it be like to live here when our nation is creating a trillion dollars every four weeks? How about every four days?

Crash Course – 10 – Inflation

Most of us think of inflation as rising prices, but that’s not quite right. Inflation is not caused by rising prices. Rising prices are a symptom of inflation. Inflation is caused by the presence of too much money in relation to goods and services. What we experience is things going up in price, but in fact, inflation is really the value of your money going down, simply because there’s too much of it around. Inflation is, everywhere and always, a monetary phenomenon.
From 1665 to 1776 there was absolutely no inflation. For 111 years, a dollar saved was, well, a dollar saved. Can you imagine what it would be like to live in a world where you could earn a thousand dollars, put it in a coffee can in the backyard, and your great- great grandchildren could dig it up and enjoy the same benefits from that thousand dollars as you would have 111 years previously? This was reality in the US at one time.
What does it mean to live in a world where your money loses value exponentially?

– Courtesy Chris Martenson.

The chapters of The Crash Course take over 3 hours to go through and give you an overall understanding; we have broken the learning down into 5 postings. This is the second installment. The first part explained the nature of the crisis, the convergence of an Economic, Energetic and Environmental crisis, and the distinction between growth and prosperity; in part 3, we will move on to energy, peak oil, the role of energy in our society, and the improbable existence of civilization without energy; last, we will measure the impact on the environment, the coming shock, and engage in a discussion about what we can do and who we must be to change this course of events that humanity has unwillingly set for itself.

The other parts of The Crash Course can be accessed following the links below:

Crash Course Part 1, The nature of the crisis: 3 Beliefs; The convergence of Energy, Economy & Environment; ExponentialGrowth, Growth vs. Prosperity.

Crash course part 2, Money: What is money? How is it created? The Federal Reserve System & a brief history of US money; the true nature of Inflation.

Crash Course Part 3, The State Of The US Nation (and the world): Calibration for very large numbers. How much debt? A US failure to save. Assets and Demographics. Bubbles. Lies and fuzzy numbers.

Crash Course Part 4, Everything starts, and stops, with energy: Peak Oil; Energy Budgeting; Energy and Economy.

Crash Course part 5, Environmental data: The Shape Of Things To Come, or are we there already? Future Shock. What should I do?

Crash Course Bonus Audio: An Interview with Chris Martenson.

One of these artifacts, created by Chris Martenson, is “The Crash Course”. It consists of a serie of 20 short movies that are addressing the imminent threats to mankind – bear with me, it is not terrorism, outer space meteorites nor some fancy conspiracy theory, or the possible rise of the oceans – Chris is explaining in a very concise, simple, yet complete and clear manner that humanity is facing a clear and present danger, borne from our ways of living, our very habits and ways of apprehending our future.

As Bucky Fuller wrote in the first line of the introduction to Critical Path in 1981: “Humanity is moving ever deeper into crisis – a crisis without precedent.” With the permission of Chris Martenson, please discover the nature of this crisis.

Crash Course – 1 – Three Beliefs.

It’s very important to distinguish between facts, opinions, and beliefs. So let me be right upfront about this. I hold three beliefs, which I’m going to share with you and then spend the rest of our time showing you how I got to these beliefs.

The first is that the next twenty years are going to be completely unlike the last twenty years. Second, I believe that its possible that the pace and/or scope of change could overwhelm the ability of our key social and support institutions to adapt. Third, I believe we do not lack any technology or understanding necessary to build ourselves a better future.

Crash Course – 2 -  The 3 Es, Economy, Energy, Environment

Massive change is upon us. To understand the nature of this change, we need to understand the three “E”s – the Economy, Energy, and the Environment – which is where we’ll spend the rest of our time in the Crash Course.

The first “E” is the economy, which is the lens through which the Crash Course looks at everything, specifically exponential money, the first-ever collapse of a global credit binge, an aging population, and a national failure to save.

The second “E” is energy. We will explore what Peak Oil implies for an economic system that is based on continual expansion.

The third “E”, the environment, will be exerting its own unknowable but certainly significant economic burdens due to shrinking resources and other systemic pressures while the other two “E”s are clamoring for your money and attention.

Crash Course – 3 – Exponential Growth

In the Crash Course we will learn a few foundational Key Concepts. None is more important than exponential growth. Understanding this will greatly enhance our chances to form a better future.

Once an exponential function “turns the corner,” even though the percentage rate of growth might remain constant and possibly quite low, the amounts do not. They pile up faster and faster.

Oil consumption, the US money supply, world population, worldwide water use, species extinction, and other critical areas all follow an exponential curve in their growth, and all have turned or will soon turn that critical corner.

Taken one at a time, any one of these areas could command the full attention of every earnest person on the face of the planet, but we need to understand that they are, in fact, all related and connected.

Crash Course – 4 – Compounding Is The problem

In order to understand the urgency I feel about the issues covered in the Crash Course, you need to understand the power of compounding. If something, such as a population, oil demand, a money supply, or anything else steadily increases in size in some proportion to its current size, and you graph it over time, the graph will look like a hockey stick.

Said more simply, if something is increasing over time on a percentage basis, it is growing exponentially. With exponential functions, the action really only heats up in the last few moments. There is simply not a lot of maneuvering room once you hop on the vertical portion of a compound graph.

Crash Course – 5 – Growth vs. Prosperity

Growth is good, right? A growing economy means that we are becoming more prosperous…growth offers opportunities. So many people would say that growth equals prosperity. But is this actually true? And what if it’s not?

For the past few hundred years we have been lulled into linking the two concepts, because there was always sufficient surplus energy that we could have both growth AND prosperity. But what’s going to happen when 100% of our surplus money or energy is being used to simply grow? And what happens if there’s not enough surplus to even fund growth alone?

This, then, is the greatest challenge of our times – properly recognizing where we want our remaining surplus to go and getting that story out. We place a great deal at risk if we allow ourselves to do what is easy – that is, take the path of least resistance and simply grow – instead of doing what is right, which is directing our surplus towards a more prosperous future.

- Courtesy Chris Martenson.

The chapters of The Crash Course take over 3 hours to go through and give you an overall understanding; we have broken the learning down into 5 postings. This is the first installment; next, we will review the nature of money, money creation, the role of the US FED (Federal Reserve System), and a brief history of US money. Following will come inflation, debt, savings, the calibration of a trillion, demographics and bubbles; we will then move on to energy, peak oil, the role of energy in our society, and the improbable existence of civilization without energy; last, we will measure the impact on the environment, the coming shock, and engage in a discussion about what we can do and who we must be to change this course of events that humanity has unwillingly set for itself.

The other parts of The Crash Course can be accessed following the links below:

Crash Course Part 1, The nature of the crisis: 3 Beliefs; The convergence of Energy, Economy & Environment; ExponentialGrowth, Growth vs. Prosperity.

Crash course part 2, Money: What is money? How is it created? The Federal Reserve System & a brief history of US money; the true nature of Inflation.

Crash Course Part 3, The State Of The US Nation (and the world): Calibration for very large numbers. How much debt? A US failure to save. Assets and Demographics. Bubbles. Lies and fuzzy numbers.

Crash Course Part 4, Everything starts, and stops, with energy: Peak Oil; Energy Budgeting; Energy and Economy.

Crash Course part 5, Environmental data: The Shape Of Things To Come, or are we there already? Future Shock. What should I do?

Crash Course Bonus Audio: An Interview with Chris Martenson.

The game is on as to who can spend dollars the fastest before its value goes to zero. China will spend the dollars they have & the US the dollars they don’t… No matter what Richard Duncan thinks, this is going way faster than anyone anticipates – our letter to O’Bama will be a day late and the US a dollar short.

China’s Stimulus Spells Trouble for U.S.

QUOTE:

• This week, Asian markets were initially energized by China’s announcement of a near $600 billion economic stimulus package for its own economy. Although I have never been a fan of government-fueled stimuli, the relative wisdom of the plan hinges on the source of funds the Chinese government decides to utilize. Their best choice would be the country’s nearly $2 trillion in foreign reserves, the largest portion of which is held in U.S. Treasury and agency debt. This pile of dollars, which really amounts to no more than a subsidy for U.S. consumers, does nothing to benefit Chinese citizens.
• If it does decide to employ this ocean of cash, China will become a net seller of U.S Treasuries just as the U.S. Government itself will be pushing up its issuance of new Treasury bonds into record territory. With two huge sellers and few major buyers (just about every major creditor nation having problems of their own), the Federal Reserve will become the only reliable customer. As a result, not only will the Fed monetize our own economic stimulus packages, but will be forced to provide the same service to the Chinese.

.

Most economists feel that China will maintain the status quo by borrowing or printing the funds for their own stimulus while continuing to hoard its trillions of existing U.S. dollars. Most also believe that the Chinese will substantially increase their dollar holdings in order to finance America’s never-ending string of bailouts and its ballooning Federal deficit, which is soon to pass $1 trillion annually. These optimists are in for a rude awakening.

The Chinese cannot follow such a course without unleashing intolerable inflation at home. Selling down their vast reserves of U.S. debt and using the proceeds for domestic infrastructure projects (or anything else for that matter) is a vastly superior stimulus mechanism than “lending” to Americans so we keep “buying” their products. When Chinese authorities finally figure this out the United States will suffer the consequences.

On the first Bucky “Cycle Week” Matt and Wayne got right to the point and wanted to talk about the printing of money that is going on and how it affects the cycles.  I promised we would come back to this topic, so to honor that I will show the chart of how much currency is being created per year and my cycle interpretation.

The Bucky Call - Annual US Money Supply Growth - SGS M3 Continuation

The M3 number is the broadest measure of “how much money is being printed” and also includes some U.S. dollars that are in bank accounts outside the United States (where M1 and M2 do not).  Notice how it was increasing at over 17% in 2008.  I have this information back to 1970 and this is the highest number in there (in 1971 it was 16.42%-right before the incredible inflation that sent oil, gold and silver through the roof).  Most of the time M3 is in the single digits.  So this period is very unique.

The US government quit publishing M3 in 2006 so the blue portion of the line is done by a private agency: John Williams at Shadow Government Statistics does a fantastic job keeping track of the money supply, inflation and other essential statistics (a must read)

So all this currency is being created and the U.S. economy is still sputtering along?  What gives?

From a cycle perspective it makes sense.  The U.S. central bank (Fed) is trying to hold off a winter by making more money available for people to spend…..and it is was keeping people employed but not causing the kind of economic growth that it would have caused if this financial “rain” had happened during an economic spring.

And now for the downside,  after the money printing there is a gestational lag then price inflation.

We have been feeling the price inflation in terms of the price of oil, gold, silver, wheat etc.  So either way the masses suffer:

• Either they have lower wages during a defaltionary depression and can’t afford stuff (like the great depression)- or-
• Stuff gets too expensive to buy (high-inflation).  It’s winter either way and the same investments do well.

How will this war of the natural deflation cycle vs. central banks turn out?  No one knows for sure but last I heard Mike Maloney is expecting several wild gyrations of both as the fed wins one round, the natural cycle wins the next etc. with the whole event ending in a currency hyper-inflation followed by a massive deflation.  If it does play out like this, the winter cycle would have, once again, won.

This might sound like doom and gloom but as Matt pointed out the other week “It always just becomes something else.”

The different seasons just require different tactics and each can be a fun and rewarding time.

Again, thank you for letting me share my truth.

Brent Harmes

There are many things we could look at (political cycles, war cycles etc) but I think the psychological cycle that every bull market goes through is probably a good one to end on and very appropriate for the Bucky call since it deals with gestational lag.

Q:  So how do we make sure that we aren’t just buying into some fairy tale about an “economic winter”?

A:  By looking at other cycles to see if they are confirming or denying what the Kondratiev cycle is predicting with its seasons.

The Dow Priced in Gold

Here is the Dow Jones Industrial Average priced in gold.  It takes the fluctuating dollar out of the equation.  Notice how this cycle goes back beyond 1900.  What we see is that if we price the stock market in terms of gold a very regular pattern of stock market outrperformance then underperformance happens.   When the line is going up stocks are outperforming gold and when the line is going down gold is outperforming stocks.  It has not failed yet, not even close.  Notice that once the Dow/Gold ratio starts to correct back to the bottom of the chart it has never stopped half way, the cycle has always completed.

After the historic stock run up from 1980 to 2000 the ratio changed directions and entered the phase where gold is expected to outperform stocks.   If these trends continue (and I see no reason why they won’t) then gold should outperform the Dow from 13 to 26 times from here before 2016-2020.

So what does this mean to me as an investor??

When it takes 1 oz or less of gold to buy the dow (dow at 3,000 and gold at $3,000/oz or dow at 12,000 and gold at $12,000/oz etc.)  then sell all your gold and silver and go back into stocks and houses.

By the way: 1980-2000?  Remember that was the Autumn period. A stock run up and increasing debt is exactly what we would expect (with a bust after-words).  So far so good:   this cycle confirms the seasons.

The Bucky Call - investor Psychology Cycle

The Price to Earnings Ratio for the Dow

Next let’s talk about the stock market in terms how much people are willing to pay for a companies earnings.  One appropriate way to measure the price of a stock is the Price to Earnings Ratio.  For example if a company made $10 per share last year and the price people are willing to pay for that share is $100 then the Price divided by the Earnings would be 10.  Or we would say is has a P/E ration of 10.  If we look at this overall number for the Dow then this number is just telling you if the stock market is getting expensive or is cheap at its current prices.  When people are excited about stocks they pay a lot for a dollar of earnings (in 2000 it was 44 for the Dow).  When they are scared of the stock market, they won’t pay as much and stocks get undervalued (under 7 is considered undervalued).  These “over valued, undervalued” periods also run in cycles.  Here is an artist rendition of how they work.  Remember, you want to buy when this ratio is low and sell when it is high (or overvalued).

Here they are in real life back to 1900.  This is yet a different way of confirming the seasons.  And it totally does.   Notice again we are coming off the biggest stock bubble in the history of our country and this down wave is expected until around 2017.  (Still on track).

So what does this mean to me?

When the P/E ratio gets below 7 and turns up sell all your gold and silver and go back into stocks and real estate.

If we look at another completely different sector  (housing) we get yet a different view of the economy.  We can price housing in terms of gold (like we did earlier with stocks).   Although I can’t include the chart here it looks very similar to the above P/E chart with the same cycle.  Again, confirming the seasons and a 2016-2020 downwave.

So all these “rhythms” and patterns are predicting more “winter” ahead.

Even a brief glance at the debt, deficits and demographics makes me not just believe that continued winter is ahead but that even the occupants of the insulated chicken coop will begin to “sensorally  comprehend” that it is indeed getting cold.

Notes:

By the way when we price things in terms of gold we could use other commodities (wheat, pork, steel) and get a similar chart.  Since gold is also money it is commonly used for this calculation.

Also, past commodity cycles have shown that gold and silver have outperformed all other commodities during the cycle.

I didn’t just pick the above cycles because they back up the seasons cycle.  I would be happy to disprove it also.  If anyone has anything else that is contrary please let me know.  The “China Factor” is one possibility.  However, I am concerned that they will not carry us forever.  The current set-up is requiring that they loan us huge amounts to keep the imbalance going.  I just don’t see how that can go on forever.  I will be curious to get Fred’s input on that.

Also, I have been pretty hard on the real estate sector on past calls and still think it has a long way to go down in terms of value.  I would be curious to get Wayne’s input on the note business during long down periods.

The Psychology of Cycles (for 7-3-08)

Once we enter into a new season the rules for investing (and conducting ones life) do indeed change.  However, people want to keep thinking that the old season is still in effect.   There is a gestational lag before people wake up.  And they all seem to wake up at one time (right at the end of that investment boom).  Here is a newsletter I wrote about this

The Three Phases of a Bull Market
by Brent Harmes

Have you ever stood on the sidelines of an investment market (Stocks, Bonds, Precious Metals, or Real Estate) with sweaty palms not sure of what to do? You wait and you wait while your friends brag about their returns year after year- but it just doesn’t feel right. The market is so volatile and possibly near a top. Finally, as this market progresses it seems like the whole world is making money in this market, except you. You wait and wait but then decide to go for it. Finally it must be safe. So you make the plunge and enjoy several months of stellar returns but then the bottom drops out and you discover some time later that you bought near the peak of the market and it is now well on the way down?

If this has happened to you then congratulations, you took the first step and became involved in the trial and error process of investor education. Now with the second step let’s see how these bull markets act as they progress and see if we can get in front of the market to be in control next time.

Bull markets typically have 3 distinct phases. With a little understanding of how a bull market “feels” and behaves as it progresses through its phases you will be able to follow along as it progresses. It will give you much more control over the timing of your investments.

The Bucky Call - 3 phases of a bull market

In any bull market there tend to be 3 phases.

Phase 1. The “Denial Phase”- The first stage of a bull market begins just as its last bear market is ending. In fact after a true multi-year bone-jarring bear market very few people are even interested in or even watching for a bottom. As an example consider the stock market in the early 1980’s, for the more than 16 years this market had gone nowhere. In 1966 the Dow Jones industrial Average hit 1,000 and in late 1982 the Dow was again at 1,000. It had zigged and zagged for these 16 years but ended up roughly where it started. For the “buy and hold” investor this period was a bust. Most had given up on this sector and were instead paying a lot of attention to the hot sectors of the day, bonds and precious metals. Since asset classes trend up and down in long cycles with many smaller “counter-cycles” in them people who have been trying to “time the bottom” have been caught time and time again buying into the “counter-cycle” rallies. They were thinking that they had finally found the bottom of the market- only to have the bottom drop out of the market, once again, burning the investor. So, once a true bottom has formed many participants remained highly skeptical that it really was a true bottom and stayed away from the market even as the market continued higher and higher.

Phase 2. The “Wall of Worry Phase”- This middle stage is where the general public becomes aware that this new market is moving higher. It is also typically the longest of the three phases. The financial and stock reporters on TV start to cover this new sector and interview the experts. To make it “fair” they find someone from each of the bull and bear camps. Each expert has a compelling argument as to why the other “expert” is wrong and why the price of this new market should go in the direction that they think it should. The investing public usually finds it difficult to take action at this point because there is so much uncertainty. They have just recently become aware that this market is moving higher, but in the back of their minds they keep remembering that not too long ago this market was going down year after year and they keep thinking of the “arguments” as to why investing in this market is risky. An Example of this phase would be the stock market from 1991 to 1998. Most of the public was aware that the stock market was making gains but were slow to aggressively invest in it because the pain of the past bear market was still fresh in their minds.

The term “wall of worry” refers to the saying that “A bull market has to climb a wall of worry but a bear market slides down the slope of hope”. This is an important concept to understand. We will discuss the bull market side of this saying first and then discuss the bear market side later in this article. As a bull market is advancing it doesn’t feel good to the investors during this phase. The naysayers are everywhere publicly explaining away the recent advances in this market and explaining why this investment class will soon drop away. An investor that chooses to invest anyway has to decide for themselves that this is where they want to be, invest, and hang-on. Only after several years of consistent gains do the naysayers start to lighten up on their negativity and allow the participants to start feeling good about the investment they have made. When the media combines this new upbeat attitude with a chart of the gains that have happened so far then the mood shifts for the better and we enter the next stage.

Phase 3. “The Euphoria Phase”. Finally it feels good. Most of the experts that were decidedly bearish during Phase 2 have now changed their minds and are spouting the virtues of this investment class. As the media gets on board with this new idea and starts to believe in it themselves they tend to interview the few remaining “kill-joy” analysts that still think this investment is a bad idea less and less often giving the public an even more biased view that this investment is “it”. Finally after all these years of searching- mankind has found the perfect investment vehicle. This is now the “must have” investment and how people get rich.

The public invests in this vehicle en masse bidding up the prices higher and higher accelerating the gains making the investment that much more exciting for everyone else that has not fully invested yet. However, when the majority of investors have joined the party then a problem starts to occur. There aren’t enough new investors bidding up the price of this asset to keep the price rising as quickly-so it starts to slow down. Sometimes bull markets end with a bang sometimes they carve a long arc on the chart as they top out and start to head down. This is where the “Bear slides down the slope of hope”. Keep in mind that in phase 3 most everyone is completely convinced that this investment is almost infallible. Even as the market starts down people are sure that it is just a temporary setback and stay invested, often times adding to their positions. An example of this mentality is at the end of the Dot-com bubble in March of 2000. Both individual investors and also the large investment houses were so convinced that we had indeed entered a “new paradigm” that they just could not admit to themselves that the party was over. They kept “hoping” it would come back. Many of them rode the market down, wiping out much of their wealth.   We have also seen this recently in real estate.

Once the market peaks it then enters the “bear market” phase which goes through its process until there are no more sellers left. Only then, when he is long forgotten, does the bull pull himself out of the ashes to once again repeat the “bull market” phases many years later.

Does this sound a little too simple? Don’t believe me. Think back to every bull-market you have ever experienced. Was there a phase 1, a phase 2, and a phase 3?

If you were asked to put each of the major investments in a current category what phase do you think we are currently in for real estate? How about precious metals? The stock market?

If you really want to let this lesson soak in think about these three markets during different decades. What happened in the 1970’s, 80’s, 90’s and so far since 2000? Do you see a pattern?