Originally posted on sciy.org by Ron Anastasia on Thu 07 Aug 2008 03:00 AM PDT
SeekingAlpha.com
Moving to a Trans-Industrial Paradigm
Depression..or Collapse of Industrial System?
Why is there an underlying assumption that a market collapse and financial meltdown needs to be a bad thing? Doom and gloom is all the talk, as if the only positive thing is when the markets are going up. Many believe that increasing markets are ‘healthy’ and declining markets need ‘fixing’. Isn’t the idea of pure market capitalism that the markets determine the prices freely, i.e. what market participants are willing to (and can afford) to pay, not what sellers would like prices to be? Is it a question of what is vs. what should be? Every seller would like a higher price, but their dreams about higher prices are only justified by people willing to pay the price.
Short sellers have known for a long time the profits that can be made in declining markets. Catastrophe is opportunity; it is the birth of modern day fortunes such as Rockefellers and Morgans. These noble houses were not crafty geniuses who invented the cure for cancer, they were shrewd, well-informed executives who were at the right place at the right time, and they had the cash to strike.
In fact, it is much easier to profit from calamity than success, because of the predictability and calculability of crises (.pdf warning). Success is more difficult to predict, and you do not have a measure of how successful a company can be. If a company goes IPO at $20 per share, and you expect them to increase, the price could go to $50 or $500 like Google. However, if you expect bankruptcy, you have a ground floor at zero. In addition, the statistics are in your favor, 95% of all businesses in USA fail. Knowing that, it makes sense statistically to bet on failure rather than success.
Stocks have the tendency to swing upwards less on hype than downwards on fear. Example, if there is a rumor that the FDA will approve a new drug for a drug company, it may increase by 5%. However, if the existing business vanishes due to a lawsuit because their latest drug has a terrible side effect, it could drop into oblivion and possibly bankrupt the company.
“You Want to Profit at the Expense of Others?â€
First, short selling a company stock is not profiting at the expense of the company. In fact, if management proves a short seller wrong, a short seller can lose a lot in a short squeeze. Short squeezes account for large upswings in declining shares that otherwise might not exist. If a company is successful and the balance sheets are clean, there is no mechanism for a short seller to profit. Secondly, there are many other opportunities to make money in a collapse than short selling.
Commodities
The commodity boom has been obvious after the fact, but some, like Jim Rogers, were predicting it from the beginning. It is far from over if you can understand the basic fact that in a depression there is scarcity, and with scarcity comes increased demand and increased price. The commodity bubble is not a traditional bubble and commodities are not inflated, they are reverting to real prices based on demand. As global warming affects crops and real demand for hard commodities increases, there will be huge trading opportunities in the commodities markets.
Distressed Equity
Companies hurt by a failing industrial system will turn to anyone with cash to keep the business afloat, and those investors can make hefty demands. There will be a fire sale of businesses and hard assets because they will be essentially worthless, as companies will face hard times to turn those assets into revenue. However, the assets are not worthless, so there will be a value play in purchasing distressed assets in many forms: equity, real estate, debt. Anyone who is financially desperate selling their family heirlooms on eBay understands there is someone getting value for 5 cents on the dollar.
Automated Trading Systems
As a contrast to investing, investors can place money in fully automated trading systems for any market. Elite E Services specializes in FX, but systems’ trading is very popular for futures, stocks, and almost any electronic market. The advantage of trading these systems is that it does not depend on market direction if the system is profitable. Of course, not all systems are good systems, so one must be very careful when evaluating them. However, a good system should perform consistently, and have an account protection to save the account from catastrophic drawdowns. Systems like this do exist, and there are rankings of such systems available on many websites. Short term systems have less risk of getting caught in choppy markets or losing the ability to predict trends over the medium or long term.
In a complex market environment, only an intelligent trading system can make dynamic decisions in seconds. As the markets become more volatile and complex, as indicated by a trend in the VIX,
A Return to Value
What has intrinsic value? Artwork, no matter how creative, has no intrinsic value. Designer jeans, no matter how fashionable, have value the same as Levi 501 in terms of their use-value. In an inflated economy when money is pouring out of consumers wallets, they may pay any price for something with no value at all, such as a $1,000 pizza; but that does not make a pizza worth more than the ingredients and labor.
A re-pricing of assets has begun, and a revaluation of money itself. A safe bet is to invest in anything that has intrinsic value. A power generator, no matter how ugly, can create energy and life. A vase from the Ming dynasty, no matter how beautiful, will not help freezing homeowners in the Northeast.
How Bad is the Collapse?
Walking around America, you may not notice much different, you may not notice a depression. Kids playing in parks, teens gathered around movie theaters, restaurants filled on a Friday night. Robert Waltenspiel has a different view. He recently won a rent-free year in a nice new house in an expensive subdivision not far from the HQ of Wal-Mart Stores, Inc. (WMT). The Journal article continues:
Daily life in these developments seems a bit post-cataclysmic. Children play on elaborate but empty playgrounds. They walk their dogs past rows of shiny houses that have never been lived in. Voices echo up and down the block. Unfinished houses and vacant lots strewn with construction debris clutter the horizon. The hot tub at the community center doesn't work. The communal fountains are dry. Mr. Waltenspiel's kids have no one in the subdivision to play with, so he has to take them to a nearby park for social interaction. His 4-year-old "will walk up to strange girls in the park and say, 'Hey, will you be my friend?' " he says. "A, it's adorable. B, it's sad." The people who bought into these subdivisions encounter all sorts of other unexpected problems, including burglars looking to steal toilets, appliances and copper wiring. And blight. Krista Anderson, an administrative assistant, lives in a subdivision outside Phoenix where the developer suddenly halted construction last fall, leaving behind not just unfinished houses but also scaffolding, piles of cement and construction material that "is turning yellow and looks bad."Many residents aren't sure exactly who is in charge of mowing the weeds, maintaining the street lights, cleaning up when someone uses open space as a dump."
James Howard Kunstler said years ago that suburbia would be the slums of the future. His predictions were based on peak oil theory and it is doubtful that he expected this to happen so quickly.
The media would have us believe that we are nearing a bottom, the joke being that it’s a new bottom every week. But they aren’t painting even a small part of the true picture, and it’s not totally their fault. Government and other statistics that used to be reliable indications of the economy are now being ‘revised’. Similar to the corporate shuffle of junk to ‘level 3’ assets, now hard economic facts are being fiddled with. An economist John Williams has been tracking them for 25 years at his website.
Consumer spending is 70% of GDP and retail is hurting big:
Ann Taylor closing 117 stores nationwide. Eddie Bauer to close more stores after closing 27 stores in the first quarter. Cache, a women’s retailer is closing 20 to 23 stores this year. Lane Bryant, Fashion Bug, Catherines closing 150 stores nationwide. Talbots, J. Jill closing stores. Talbots will close all 78 of its kids and men's stores plus another 22 underperforming stores. The 22 stores will be a mix of Talbots women's and J. Jill. Gap Inc. closing 85 stores. Foot Locker to close 140 stores. Wickes Furniture is going out of business and closing all of its stores. The 37-year-old retailer that targets middle-income customers, filed for bankruptcy protection last month. Levitz - the furniture retailer, announced it was going out of business and closing all 76 of its stores in December. The retailer dates back to 1910. Zales, Piercing Pagoda plans to close 82 stores by July 31 followed by closing another 23 underperforming stores. Disney Store owner has the right to close 98 stores. CompUSA (CLOSED). Macy's - 9 stores closed. Movie Gallery – video rental company plans to close 400 of 3,500 Movie Gallery and Hollywood Video stores in addition to the 520 locations the video rental chain closed last fall as part of bankruptcy. Pacific Sunwear - 153 Demo stores closing. Pep Boys - 33 stores of auto parts supplier closing. Sprint Nextel - 125 retail locations to close with 4,000 employees following 5,000 layoffs last year. Ethan Allen Interiors: plans to close 12 of 300 stores to cut costs. Wilsons the Leather Experts – closing 158 stores. Bombay Company: to close all 384 U.S.-based Bombay Company stores. KB Toys closing 356 stores around the United States as part of its bankruptcy reorganization.
It Is Not 1930
People fear depression like it is a plague; however, there are many differences between now and 1930. First, there is the internet, not only a resource for information and entertainment; it can be a source of income and solution for transportation issues. Second, technology in energy, housing, and food production exists today that is currently cheap and accessible, if a group or individual decides to unplug from the system it is possible, whereas in 1930 all you could do is plant a seed and hope it grows. Many people who don’t plan properly, of course, will end up in the same situation as those in 1930, however back then opportunities of today simply didn’t exist, if you were out of luck there was little you could do. Finally, we have a robust, efficient global marketplace that encompasses real trade and finance. Entire countries could cease to exist while individual trading posts could carry on commerce independent of their physical location. Of course, those who are prepared mentally and in business will reap the rewards; others will face a very harsh fate. Corporate refugees from the cities will be psychologically incapable of dealing with real crises while ‘survivalists’ who are already living in a more dynamic environment will face these problems with little regard.
One could live debt free almost anywhere you can afford as long as there is power (which could be purchased with Solar panels) and internet and lead almost any life one chooses. It may be a bit lonely in suburbia due to a diminishing vacancy, but the place of life is a personal choice, how to structure it is clear: live in the 19th century with the amenities of the 21st.
Post Industrial Shift
What is happening to the economy is not a ‘depression’ and it is not the ‘end of the world.’ It is a major generational, historic shift from an industrial economy to a post-industrial economy. The industrial economy is not sustainable, and it is collapsing. Post-industrial life will flourish more and more as the industrial world collapses. Industry is not a factory it is a way of thinking and a culture. Farming has become industrial in this century, with the use of petroleum-based fertilizers and gas powered machinery and monoculture crop raising. Therefore, if you are an industrial business it is the end of the world for you, time to sing your swansong. This is not a new concept; however we are now seeing the beginning of the shift in the financial markets. Smart money is flowing into commodities because it has value, not for any other reason.
A debt-based monetary system, with the USD as the reserve, is financially, mathematically, unsustainable. Financiers and central bankers at the top are ‘borrowing from Peter to pay Paul’ which can keep the system running for another few months but essentially makes the debt problem worse. Every year, more debt needs to be issued just to service interest payments on previous debt. Therefore, each year more and more money needs to be issued into the system exponentially, which is a bubble that must eventually burst. It is not a question of if, but when.
The Meat
Elite E Services is not a group of philosophers or new age gurus, EES develops automated trading systems for the FX market and advises clients on investments. As such, we are interested in the pure economics of the situation. As with many historical shifts, a changing economy means a different way of life and a different thinking. Society has been spoiled over the last 50 years with cheap oil and a relatively stable USD which backed the world economy; that is no more. Anyone should seriously examine things for what they are, not what they should be, or what they hope things to be. Hope will not pay your mortgage or feed your family, nor will the government (who is facing an exponentially increasing debt burden).
Invest in things that have intrinsic value such as Agriculture and Commodities. EES promotes the investment into automated trading systems, because they can be tweaked and used on other markets (a EUR/USD system may work on Gold or even Oil). The development and trading of black box trading systems has intrinsic value.
The FX market will always exist unless there is a one-world government or a nuclear holocaust, both very unlikely scenarios. Other markets however can become extremely illiquid or regulated. As long as we have internet and power, we can trade FX. So aside from investing in energy generation equipment, so called ‘vice’ investments (alcohol, tobacco, and gambling) which typically do well during tough economic times, EES recommends investing in trading systems that can be traded for short term profits no matter what the state of the economy.
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