Wall Street Analyst Crams 700 Years Of Data Into 12 Charts 'You Can't Ignore'

"The starting point of any financial analysis must surely be a consideration of the economic cycle: not just where we stand within the current cycle, but more importantly, where that cycle fits within broader economic history," writes Paul Jackson in his final note to clients in his role as an equity strategist at Société Générale.

The note — titled "Swan song: 12 pictures you can't ignore" — builds on the bank's recent call for clients to rotate out of U.S. stocks and into European stocks. The SocGen asset allocation team predicts the S&P 500 will fall by around 15% when the Federal Reserve winds down its quantitative easing program, then go nowhere for years.

"For now, equity valuations in Europe are attractive and with a bit of economic growth the next few years could be quite rewarding," says Jackson. "The immediate risks are that growth does not materialise in Europe or that the eurozone project unravels. For the longer term I worry more about latent inflation risks and central banks getting behind the curve. As bond markets react to that policy error, the folly of forcing banks, insurance companies and pension funds to hold so many bonds will become apparent. But that is for another day."

1. Current inflation trends are boringly normal.

Reuters, Ecowin, SG Cross Asset Research/Equity Strategy

"Inflation may feel low compared to the history through which most of us have lived, but in a broader context it is boringly normal," says Jackson. "Maybe without recent extra-ordinary policy settings, we would now be experiencing deflation, but we will never really know."

2. Inflation has little effect on stock market valuation.

Reuters Ecowin, SG Cross Asset Research/Equity Strategy

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"Not only is the current level of inflation boringly normal, the valuation of the U.S. equity market, though elevated, is hardly exorbitant (to be fair, the only times it has been above the current level was during 1928/29 and over the last 20 years)," says Jackson. "With the sort of inflation regime experienced over the last 15 years, history suggests just about any valuation level is possible."

3. History suggests low returns ahead for U.S. stocks.

Reuters Ecowin, SG Cross Asset Research/Equity Strategy

"The Shiller P/E may not be at an extreme, but history suggests the current level is associated with low single-digit future returns," says Jackson.

4. U.S. companies may be in for disappointment.

Reuters Ecowin, SG Cross Asset Research/Equity Strategy

"We could try to justify stretched valuations by the improved economic outlook and the consequent positive news for profits," says Jackson. "However...[the chart] shows that profits usually sink over the coming five years when starting from such a strong level. This makes sense given that competitive pressures will rise when profits are strong (new capital is committed) and that labour will claim a bigger share of the pie when the economy is doing well (and unemployment falls)."

5. Europe's economy has room to improve.

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Reuters Ecowin, SG Cross Asset Research/Equity Strategy

"Europe would appear to be at a disadvantage compared to the U.S. when it comes to profitability," says Jackson. "However, that is only natural given the state of the European economic cycle and a glass-half-full interpretation would look forward to higher profits once the European cycle strengthens."

6. A better European economy means better European profits.

MSCI, Datastream, SG Cross Asset Research/Equity Strategy

"[This chart] suggests European profits may be about to enter a new upswing, as the economy starts to grow again (profits rarely expand without economic growth, but that once output grows there is a geared effect on income)," says Jackson. "The acceleration in U.S. profits that occurred in 2009/10 may be about to occur in Europe (in a muted fashion)."

7. European stocks look attractive.

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MSCI, Datastream, SG Cross Asset Research/Equity Strategy

"A number of things can be said on the basis of this chart," says Jackson. "First, the correlation between the two data series is pretty good –– the cyclically-adjusted dividend yield appears to have predictive power when it comes to future returns; second, the higher the yield the better the future returns and, third, the current yield has historically been associated with future five-year returns of around 12%, which is about twice the norm."

8. Many metrics suggest Europe is undervalued.

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MSCI, Datastream, SG Cross Asset Research/Equity Strategy

"It is hard to conclude from the above chart that unconventional central bank policies have caused a bubble in stock markets," says Jackson. "Some indices may be at record highs, but so is my age. It is something that we have to get used to: markets that are nominal in value and that trend up over time will frequently be at record highs; my age hits a record level every day, though with no sign of a healthy correction! It is important to compare equity indices to the underlying profits and dividends that support them and, on that basis, are far from record levels."

9. The real bubble is in the bond market.

Reuters Ecowin, SG Cross Asset Research/Equity Strategy

"Where central bank policies have caused a bubble is in bond markets –– not surprising as those are the instruments that are bought before the funds end up back with the central bank in the form of excess reserves," says Jackson. "The previous chart shows that bond yields have rarely been this low in the period since 1800. Indeed, the only other time was when the Fed was also manipulating the market during and after WW2."

10. The ECB's balance sheet has been shrinking for a while.

Reuters Ecowin, SG Cross Asset Research/Equity Strategy

"What is really interesting, and little appreciated, is that the decline in the ECB balance sheet started in July 2012, even before Draghi’’s 'anything it takes”' speech, has now brought the balance sheet back in line with where it would have been had the pre-financial crisis trend continued (see trend line)," says Jackson.

11. The euro is getting a boost from ECB inaction.

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Reuters Ecowin, SG Cross Asset Research/Equity Strategy

"[The decline in the ECB balance sheet] is no doubt why the euro has confounded the bears (including us) – the chart below suggests the mystery is rather why it is not even stronger," says Jackson.

12. The question is what happens when the Fed pulls back.

Reuters Ecowin, SG Cross Asset Research/Equity Strategy

"How much good has this done? During the 1930s and 1940s, each jump in monetary base growth was followed three to four years later by an uptick in inflation and the upward drift in inflation in the 1960s and 1970s was preceded by acceleration in the monetary base," says Jackson. "This time around, the effect on inflation appears to have been negligible (so far). An alternative interpretation is that without these policy actions deflation would have resulted. If that is the case, the fact that policy has remained so loose could be stoking up inflation risks."

A Complete History Of American Economic Performance Since 1790 In Two Charts

IMF researchers Vadim Khramov and John Ridings Lee have developed a new macro indicator called the "Economic Performance Index" — a measure that combines data on inflation, unemployment, government deficits, and GDP growth.

"Though structurally simple, the EPI is a powerful macro indicator that clearly measures the performance of the economy’s three primary segments: households, firms, and government," write Khramov and Lee in an IMF working paper. "The EPI comprises variables that influence all three sectors simultaneously: the inflation rate as a measure of the economy’s monetary stance; the unemployment rate as a measure of the economy’s production stance; the budget deficit as a percentage of total GDP as a measure of the economy’s fiscal stance; and the change in real GDP as a measure of the aggregate performance of the entire economy."

The basic calculation goes something like this: start with a "perfect" score of 100, then subtract the inflation rate, the unemployment rate, the government budget deficit as a percentage of GDP, and add back the real GDP growth rate (it's slightly more complicated than that — check out the paper for details).

The annotated charts below plot the history of the U.S. EPI since 1790.

IMF

IMF

What A US Default Would Mean For The Global Economy

A U.S. debt default that lasts for more than a couple of days could potentially cause a financial crash unlike anything that the world has ever seen before.  If the U.S. government purposely wanted to damage the global financial system, the best way that they could do that would be to default on U.S. debt obligations.  A U.S. debt default would cause stocks to crash, would cause bonds to crash, would cause interest rates to soar wildly out of control, would cause a massive credit crunch, and would cause a derivatives panic that would be absolutely unprecedented.  And that would just be for starters.  But don't just take my word for it.  These are the things that top financial experts all over the planet are saying will happen if there is an extended U.S. debt default.
Because they are so close together, the "government shutdown" and the "debt ceiling deadline" are being confused by many Americans.
As I wrote about the other day, the "partial government shutdown" that we are experiencing right now is pretty much a non-event.  Yeah, some national parks are shut down and some federal workers will have their checks delayed, but it is not the end of the world.  In fact, only about 17 percent of the federal government is actually shut down at the moment.  This "shutdown" could continue for many more weeks and it would not affect the global economy too much.
On the other hand, if the debt ceiling deadline (approximately October 17th) passes without an agreement that would be extremely dangerous.
And if the U.S. government is eventually forced to start delaying interest payments on U.S. debt (which could potentially happen as soon as November), that would be absolutely catastrophic.
Once again, just don't take my word for it.  The following are 12 very ominous warnings about what a U.S. debt default would mean for the global economy...
#1 Gerald Epstein, a professor of economics at the University of Massachusetts Amherst: "If the US does default, that will make the Lehman Brothers bankruptcy look like a cakewalk"
#2 Tim Bitsberger, a former Treasury official under President George W. Bush: "If we miss an interest payment, that would blow Lehman out of the water"
#3 Peter Tchir, founder of New York-based TF Market Advisors: "Once the system starts to break down related to settlement and payments, then liquidity disappears, as we saw after Lehman"
#4 Bill Isaac, chairman of Cincinnati-based Fifth Third Bancorp: "We can’t even imagine all the things that might happen, just like Henry Paulson couldn’t imagine all the bad things that might happen if he let Lehman go down"
#5 Jim Grant, founder of Grant’s Interest Rate Observer: "Financial markets are all confidence-based. If that confidence is shaken, you have disaster."
#6 Richard Bove, VP of research at Rafferty Capital Markets: "If they seriously default on the debt, what we're really talking about is a depression"
#7 Chinese vice finance minister Zhu Guangyao: "The U.S. is clearly aware of China's concerns about the financial stalemate [in Washington] and China's request for the US to ensure the safety of Chinese investments."
#8 The U.S. Treasury Department: "A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse"
#9 Goldman Sachs: "We estimate that the fiscal pull-back would amount to 9pc of GDP. If this were allowed to occur, it could lead to a rapid downturn in economic activity if not reversed quickly"
#10 Simon Johnson, former chief economist for the IMF: "It would be insane to default, but it’s no longer a zero-percent probability"
#11 Warren Buffett about the potential of a debt default: "It should be like nuclear bombs, basically too horrible to use"
#12 Bloomberg: "Anyone who remembers the collapse of Lehman Brothers Holdings Inc. little more than five years ago knows what a global financial disaster is. A U.S. government default, just weeks away if Congress fails to raise the debt ceiling as it now threatens to do, will be an economic calamity like none the world has ever seen."
A U.S. debt default could be the trigger for the "nightmare scenario" that so many people have been writing about in recent years.  In fact, it could greatly accelerate the timetable for the inevitable economic collapse that is coming.  A recent Yahoo article described some of the things that we would likely see in the event of an extended U.S. debt default...

A default would upend money markets, destroy bond funds, slam the brakes on lending, cause interest rates to spiral, make our banks insolvent, and deal a blow to our foreign trading partners and creditors around the globe; all of which would throw the U.S. and the world into economic disarray.

And of course stocks would crash big time.  Deutsche Bank's David Bianco believes that if the U.S. government starts missing interest payments on U.S. Treasury bonds, we could see the S&P 500 go down to 850 by the end of the year.
There would be almost immediate panic among ordinary Americans as well.  In fact, it is being reported that some banks are already stuffing their ATM machines will extra cash just in case...

With just 10 days left to raise the debt ceiling and congressional Republicans threatening to force the government to default on its obligations, banks are taking some dramatic steps to prepare for the economic chaos that would result should the brinkmanship continue.

The Financial Times reports that one major U.S. bank has started stuffing its automatic teller machines with extra cash in preparation for a possible bank run from panicked depositors. The New York Times reports that another bank is weighing a plan to advance funds to customers who rely on Social Security and other government payments that could stop in the event of a default.

Let's hope that cooler heads will prevail and that a U.S. debt default will be avoided.
Unfortunately, it appears that the Democrats are absolutely determined not to be moved from their current position a single inch.  They have decided to refuse to negotiate and demand that the Republicans give them every single thing that they want.
And who can really blame them for adopting that strategy?  After all, it has certainly worked in the past.  Whenever Democrats have stood united and have refused to give a single inch, the Republicans have always freaked out and caved in eventually.
Will this time be any different?
The funny thing is that once upon a time, Barack Obama was adamantly against any increase in the debt limit.
Americans are extremely frustrated to say the least with Obama et al, as the rest of the world pulls together and moves forward constructively. lets look at the larger picture in the US -in order to get a clear view,this is what it looks like from outside the US (in very basic terms).
American foreign policy is always the same and the only thing that changes when a new president comes to power is the name of a country that gets bombed.for example:oldman Bush bombed Iraq,Clinton bombed Yugoslavia, George W Jr bombed Afghanistan and Iraq,Obama bombed Libya & almost starts WWIII in Syria and today Obama bombing Somalia.
Does anyone really believe that another US president will change imperial policy? until the American public wake the fuck up and take personal responsibility and say: enough is enough!!! nothing is gonna change in the USSA!


The funny thing is that once upon a time, Barack Obama was adamantly against any increase in the debt limit. check this out!

But now Obama says that it is so unreasonable to be opposed to a debt limit increase that any negotiations are out of the question.
So which Obama is right?
If the Democrats will not negotiate, a debt default could still be avoided if the Republicans give in.
And that is what they always do, right?
Perhaps not this time.  Just check out what John Boehner had to say on Sunday...

'Putin’s Syria role deserving of Nobel Peace Prize'

"God created us all equal".
 -'Vladamir Putin, Russian President to the US President, on why not to unilaterally bomb a sovereign nation.

President Putin should get the Nobel Peace Prize for his moves to resolve the Syrian crisis, according to a group of Russian activists and political scientists who have indicated that they are officially proposing the president’s nomination.
Alfred Nobel setup the peace prize after inventing TNT. He was disgusted how his invention was being used to kill. So, I certainly think the prize has a valuable background. Unfortunately, awarding it to the US president Obama has turned this into a mockery. People who kill innocent civilians are now apparently peace-lovers. I simply don't get it.
President Putin however should get the Nobel Peace Prize for his courageous efforts in coming up with a solution to the Syrian crisis, Putin's negotiations where genius. This man loves Russia and the Russian people. He will take good care of his people and his country. He is the kind of leader American's dream of. He is a man of his word. He is a genius. Russia, you are lucky to have him for your leader.
Secondly, Awarding the President of the Federation Putin the Nobel prize could be the only thing that brings back any credibility to the award, that's just a fact, i think foreign minister Lavrov needs to be on the hook for a nomination also.

In Russia, Putin wrestle black bear into submission while bare chested.
In USSA, bear skin rug wrestle Obama into submission after 1/2 a beer.

Putin V's Obam.

If aliens landed tomorrow, who would you prefer to be humanity's representative?

Vlad is stepping into this vacuum of political credibility created by the Western "Demon-ocracies" and by god, he's making it work.

"Authored by Vladimir Putin"

Go Vlad! The KGB appears to be winning.

Shut Happens.. USSA Government Shut Down!

Try this experiment.
Ring up your credit card company at the end of this month. Tell them that you can’t seem to reach an agreement about how to allocate your monthly budget.
So in the meantime, you have been forced to shutdown your household... but you hope to be back on track in a few months.
Chances are, they won’t take you seriously. Yet for some reason, this has been dismissed as commonplace and benign in the Land of the Free.
Here’s a list of quotes I’ve heard from the TV and Internet coverage talking heads over the last 24-hours:

“We’re still the richest, Smartest most powerful nation in the world.”

“It doesn’t matter, the bond market is going up, and who cares we don't have to pay it back, lets just walk away.”

“The United States will never default, we are the greatest nation on Earth.”

The hubris and arrogance here is amazing. And it just goes to show that if you just repeat something over and over again, people will believe it... no matter how absurd.
This is the basic premise behind propaganda. Start with an idea. Inundate the population through constant repetition. And soon it becomes the unquestionable truth.
To suggest that the United States is NOT the richest country in the world, or that the government could default, is tantamount to blasphemy.
It doesn’t matter that every objective scrap of evidence points to the inevitable conclusion that the US government is going to have to default on its obligations.
They could default on their obligations to foreign creditors– China, Japan, the Gulf states– and risk a total collapse in the dollar’s ‘value’ internationally...
Or they could default on the Federal Reserve, rendering the central bank insolvent, and risk an epic currency crisis…
Or they could default on domestic financial institutions and risk an even bigger banking crisis…
Or they could simply default on their obligations to citizens by curtailing Social Security and debasing the currency.
The only question is– who gets screwed?
Having this sort of public discussion, however, is considered ludicrous and irrational. The propaganda is so effective that people continue to believe in this fairy tale that America is the Land of the Free and the richest country in the world.
Yet it’s this fairy tale that is ludicrous and irrational. Looking at the data objectively, having a candid discussion, and getting your own affairs together to withstand the inevitable fallout– this is the most rational thing that anyone can do.
However,  the collapsing nation being the USSA also has nukes, the biggest military in history, and a bunch of jarheads who are dying for any excuse to launch a full scale invasion of Whereverstan.
To call it "arrogance" and "hubris", and you wouldn't be wrong except for the even scarier fact that it might not be arrogance: It might be backed up with World War Three. And historically speaking, this is exactly how such clusterfucks start.
Military empires don't go silently into the night unless the lid is kept tightly on them by a greater militaryforce. And in this case, there ain't one. So grab your ankles everyone because this shit could get exponentially uglier than just a "default".
Finally;  Many of us wonder what a government shut down would be like.
I think a lot more people wonder what a government running properly would be like. 
SHUT IT DOWN!

WAAaaaaaaa! An Awesome version of "The Cup Song" you gotta hear this...

The Asian Century

Time to look backward

Winston Churchill once said "The longer you can look back, the farther you can look forward" [Churchill by himself (2008)], he also paraphrased George Santayana when declaring "Those who fail to learn from history are doomed to repeat it!". Churchill was an avid student of history, both his own family's and the world's, in the inter war years he compiled a panegyric of his ancestor the Duke of Marlborough and many biographers attribute his conduct and determination during the war campaign to the admiration he had for his ancestry and the lessons he learned from it.

At the time of Churchill's birth Great Britain was the most powerful Nation on earth, the unmatched power of the British Navy had provided the country's merchants with the ability to cover the globe, setting up trade routes to every corner of the world, importing natural resources as well as goods for sale to Europe's capitals. One firm alone, the British East India Company, practically controlled the entire area of South East Asia. The skillful administration of the brilliant Sir Isaac Newton as Master of the Mint saw Britain fix the Gold/Silver ratio at a level at which Silver was deemed to be undervalued by the market. Silver began to flow out of England at these "sale prices" and England's holdings of Gold sky rocketed. By the the early 19th century Gold had become the de facto international reserve currency and, thanks to Newton's actions, Great Britain had the largest Gold stores in the world. Plush with liquid reserves and with its last remaining threat, France, defeated at Waterloo, Great Britain embarked on a course of industrialization, trade and expansion.

Great Britain at the pinnacle of its Empire

A combination of conquest, trade and the industrial revolution created in the space of 40 years the largest empire the world had ever known. The sun never set on the British Empire and at the time one could be forgiven for believing that nothing could threaten Britain's supremacy in world affairs. Towards the end of the 19th century events began to change; In order to maintain its empire as well as sustain the required growth to pay for its Empire, Great Britain began to spend enormous amounts of money on military spending. The Empire's treasury began to be depleted to pay for the expanding infantry, artillery and naval forces. Of course in order to maintain their own national security the rest of Europe began matching the British spend on armaments and by the end of the first decade of the 20th century Europe was stuffed with over sized armies and a growing nationalist spirit. Of course history records that these tensions finally spilt over into the battlefields of World War 1.

The world had never seen a conflict like it in terms of both scope and casualties; A war which was expected to be "over by Christmas" dragged on for four long years and drove most of the participating countries (including Great Britain) off the Gold Standard in order to facilitate massive levels of deficit spending. By the end of the war Great Britain was heavily in debt, it had lost an entire generation of young men from the work force and the domestic economy was in tatters. Although at the time few people in Britain recognized it, flush as they were with victory, their Empire was coming to an end. Over the next two decades Britain remained heavily in debt, post war austerity and then the Great Depression prevented any significant recovery in the Nation's financial health and by the time the second world war arrived soaring national debt, deficit spending and monetizing of debt had become the norm. The destruction of Europe's industrial sectors during the second world war was the final nail in the coffin for any hope of Britain regaining its empirical prominence.

With the end of the Second World War the people of Great Britain had decided that it was time for peace, prosperity and security; The only problem of course was that the country was bankrupt, it was running a massive trade deficit, the Marshall plan had allowed France and Germany to get back up and running far quicker than should have been the case and any post victory boom for Britain quickly evaporated. The introduction of full blown socialism through such programs as the National Health Service (NHS) and the National Pension Scheme loaded even more stress onto the fragile economy until finally in 1976, after several lost decades of stagnant growth, Britain declared it was bankrupt and had to be bailed out by the International Monetary Fund (IMF). It would have been inconceivable to a British gentleman in 1900 to consider such a prospect.

The century of Uncle Sam

While Great Britain was basking in the glory of its empire during the middle of the 19th century America was passing through deep waters. In the midst of a bloody civil war, on the verge of bankruptcy and having lost over 500,000 people not to mention the productive capacity of almost half the country, things didn't look too good for the United States. Despite these challenges the US had several things in its favor and the effective management of these factors (or rather lack of management as we shall see) situated America in the perfect position to take advantage of the chaos which was about to unfold in Europe.

America was rich in natural resources, oil, gold, silver, agriculture, coal and iron ore allowed the US to rapidly climb out of the destruction after the civil war and surge forward into the modern industrial age at a pace which, by the 1880's, far outpaced Great Britain which was resource poor. It wasn't just the abundance of such resources that spurred America's growth but the completely unregulated access to them. Men such as J D Rockefeller, Andrew Carnegie, J P Morgan, Henry Ford and Thomas Edison were able to leverage these resources, coupled with the countries abundance of cheap labor and the extremely laissez faire approach to commerce that existed in America at the time to create fortunes and revolutionize the face of the American landscape.

Henry Ford, Thomas Alva Edison and Samuel Harrison Firestone, 1929

By the time the First World War erupted America was easily on par with the great Empires of Europe and four torturous years of war where neutral America (until 1918) was the sole, readily available source for food and resources, meant that on armistice day 1918 the United States of America was ready to provide the capital and the resources to help rebuild Europe, for a healthy profit of course.

Despite the setbacks suffered during the Great Depression, a second World War in Europe, Africa and Asia once more provided a market without competition for America industry and post war as Great Britain and the rest of Europe sunk into the stagnant growth associated with democratic socialism America thrived! A burgeoning middle class became the icon of the American dream. For the first time in history a well educated, affluent middle class controlled the majority of a nation's wealth. America was strong, secure and the future looked bright. Does this remind you of anyone? Remember our British gentleman from the late 19th century? Could America suffer a similar fate?

Sadly with the accuracy of hindsight we can answer that question today. The prosperity of the 20th century had developed a taste for success, growth and security for the American public. They had lived through the potential downturns associated with free market capitalism during the 1930's and they never wanted to experience that again. So when President Franklin D Roosevelt put forth the idea of establishing some "social safety" nets the idea became very popular. Following Great Britain and other European nations down the path of Democratic Socialism, national pension plans (Social Security), health care programs (Medicaid and Medicare), welfare (food stamps) were all introduced and with all Government subsidized ventures participation rates soared and so did the costs. In fact costs in America soared right across the board, from food prices to fuel prices, housing to labor costs.

Historical chart of US inflation

America had been involved in a 40 year cold war with the forces of communism around the world, unlike a hot war this conflict didn't directly impact American industry or workforce capacity, it did not incur the same levels of casualties we had seen during the first and second world war, however when the Soviets finally capitulated and collapsed in 1989 there was no significant post war boom that normally follows war. The only thing that followed on from such a war was enormous levels of debt and deficit spending.

By the middle of the 1970's it had become clear that America had lost its competitive edge and with the highest standard of living in the world something had to be done.  American corporations found the solution in "emerging markets", one by one Blue Chip American corporations began to dismantle their manufacturing operations in the US and shipping them overseas, mainly to Asia were there existed a willing and hardworking low cost workforce. The results for America are well documented and tragic, all across the country communities were devastated as long standing industries ceased operations and laid off the majority of their work force. Places like Michigan, Pennsylvania and Ohio which had been the cradle of the American industrial revolution saw entire communities ravaged first by the loss of jobs and then by all the accompanying social issues which inevitably follow.

America had become the World's super power during the 20th century by winning its wealth from the rest of the world, by manufacturing and selling goods and services here domestically and exporting them all over the planet. In the 1980's this all started to change, we had ceased exporting our wealth, we were now burning through it to maintain the charade of prosperity and we were borrowing from our neighbors in order to cover and short falls in liquidity. Slowly but surely the national debt began to rise at unprecedented rates, in the short space of 15 years America had gone from being the world's largest creditor to becoming the world's largest debtor until finally now we stand as the largest debtor nation in history.

We had followed the exact same pattern as Great Britain, we had built true sustainable wealth on a diet of sound money, strong industry and a free market but because of the resulting prosperity we sank down into the false security and naivety of of opulence and comfort. We are now in the same steady decline that gripped Great Britain over the course of thirty to forty years. We have replaced genuine productive capacity with a consumption or serviced based economy, take a look at this list of the largest American Corporations, notice how four of them are involved in finance (JP Morgan Chase, Wells Fargo, Citigroup, Berkshire Hathaway), another three (Wal-Mart, GE and Apple) manufacture or purchase their goods overseas (mainly in Asia) and sell them to Americans on credit, the last two (Exxon and Chevron) extract our national resources and guess where we send them? ASIA!

2013 Forbes Global 2000 list

The best Communists Capitalists in the World!

Any American who has bought something at a big box store over the last twenty or so years is very familiar with the phrase "made in China", it seems that the lion's share of American consumables are now imported from Asia in general or China in particular. As this article is being written China ranks first among the G20 in terms of Economic growth with GDP growing at 7.8% annually. China has embarked on a new revolution, a new form of socialism has emerged as unique as Marxism, Leninism or Maoism, we are now on the verge of age of Communist Capitalism.

By the late 1970s the party leaders in China realized that the great Mao cultural revolution had failed and that China was on the same path as the Soviet Union toward ultimate destruction of the system. Zhao Ziyang was the premier of China in the early 1980s, a vocal critic of the policies of Mao Zedong and an active proponent of reform behind the bamboo wall. When Zhao came to power he immediately began opening up China to the outside world, encouraging visitors from the west and even trade with western nations. By the mid 1980s a fledgling market had developed on a local level and there was even a small stock exchange in operation. Famed investor Jim Rogers availed of this opportunity to visit China and ride a motorbike across the country examining the changes which were taking place. His trip was documented in 'The Long Ride' and it gives a very accurate representation on China as it emerges onto the world scene at the end of the 20th century. This documentary is well worth the time to watch.

A long ride in China - Jim Rogers

Let's revisit the 2013 Forbes 2000 list, this time the list is sorted to show the top 10 companies according to assets, notice that out of the top six companies, four are Chinese entities! China has emerged from behind the bamboo curtain and the Chinese (all 1.5 Billion of them!) are hungry for wealth, for advancement, for a higher quality of living. The Chinese are hard working, they seem to recognize that they are on the cusp of a genuine change in the outlook of their country and they know that this forward momentum will take the entire population to a whole new plane of prosperity and abundance.

World's largest companies listed by Assets

The Chinese economy today is remarkably similar to the American economy of the latter half of the 19th century. Yes there are problems, freedom of speech, freedom of thought, political choice, freedom of religion, all these things are in their naissance in China, the images of Tiananmen Square are still fresh in the eyes of the world and China has many hurdles to leap BUT consider this: Where things that different in America in the 1860s? Half the country was trying to kill the other half, a huge portion of Americans were in slaves, freedom of speech and religion were heavily regulated and restricted. I wager that if you took a modern American from 2013 and sent him/her to 1861 they would barely recognize the country of their birth.

China has a long way to go but they are on the right path; All over the world the Chinese are going making good deals and buying up natural resources such as Gold, Silver, Coal, Diamonds, agriculture etc. China is now such a power house in the Global economy that they can enter into bilateral trade agreements with other nations and use direct currency trades (bypassing the US Dollar!). This would have been unthinkable a mere 20 years ago! In Europe, where politicians have traditionally looked to the US for trade agreements, funding for corporations and invitations to come setup corporations on European soil, the leaders are now looking east to Asia and China in particular.

Of course China is not the only emerging market, all throughout Asia there are countries which have traditionally been closed off which are now in the markets looking to compete. Thailand, Vietnam, Korea, Singapore, Taiwan are all growing at a rapid pace with several nations such as Myanmar, Cambodia and Laos on the verge of making the traditions that China and Taiwan have made. I do not believe it to be out of the realms of possibility to even see North Korea, through encouragement from China, begin to enter the markets and transition to a more open society.

It is perfectly obvious that Asia is the best placed continent to dominate the 21st Century, Asia is resource rich (China is the largest producer of Gold in the World), it has a low cost, agile and educated workforce, also the current generations of Chinese have no expectation of security of comfort or any other form of entitlement. When a Chinese person shows up for an interview they don't ask about health insurance or vacation days, they ask how many hours or days they can work and how they can climb the corporate ladder and pay scale. Asia now stands in the same spot that Great Britain found itself at the turn of the 19th Century and the United States a century later. If we study history we learn that one day Asia will get itself into trouble and decline but prior to that decline there will be enormous opportunities for growth and lots of money to be made. Keep a close eye on China and if you are thinking of learning a new language or teach your kids a new language then make that language Mandarin. Proficiency in Mandarin this century will most likely become as important as a proficiency in English has been over the last 200 years!

Intervju med Niall Ferguson from E24 on Vimeo.

All bubbles eventually revert to their starting level

If bubbles eventually revert to their starting level, Phase 3--capitulation and a return to pre-bubble prices--still lies ahead for the housing market.

 

Way back in 2006 at the height of the housing bubble, this chart was prepared proposing the housing bubble might exhibit symmetry, i.e. the decline would mirror the rise. I also proposed that the decline would be characterized by phase shifts that corresponded to the decay of whatever reason was being given for the "recovery" in housing, for example, "this must be the bottom."

 

 

Let's compare this idealized bubble symmetry with a chart from reality: housing in the bubblicious Los Angeles market.

 

 

Here's another look at the L.A. market as measured by Standard & Poors:

 

 

Hmm, what would have happened if the Federal Reserve hadn't dumped trillions of dollars into the mortgage market, and the Federal housing agencies hadn't subsidized mortgages and housing with 3% down payments and tax credits?

 

Perhaps all the trillions of dollars of intervention has accomplished is extend Phase 2. Central bank and state manipulation distorted the symmetry of housing's decline, but did they stave off Phase 3 permanently?

 

If bubbles eventually revert to their starting level, Phase 3--capitulation and a return to pre-bubble prices--still lies ahead.

Let's compare the idealized bubble symmetry chart above with a chart from reality: housing in the bubblicious Sydney Australian market.

When the banks are finally forced to push the houses off their books then we will find a natural bottom. As long as they can keep them on the books we will keep up this game until every neighborhood looks like Detroit. The bank will have vacant houses that are ready to fall over on their books  valued at $100,000 +.

Bubbles never end pretty...that's the sin quo non of "bubble mania." One needs to take on the traders mindset when investing in Real Estate also (buy low/ sell high)

Some Australians have managed a solid exit by marketing their Real Estate heavily to the Chinese because they're not all that familiar with the Ponzi game.  It becomes the lure of it all; they start to try and out-compete each other.  I have to constantly remind my Japanese wife that "sale" (or, "cheap") doesn't mean "value."  Such people are easy to set up as lemmings.  BUT... nearly everyone is or has been in the lemming pool; those that left learned what "bigger sucker" means.  And, as is always the case, there's always the end of the line, the last sucker.  This time it's the Chinese, as there are no other suckers around.  And to be a non-resident AND from a country that is increasingly shifting toward the bad-guys list, well...

The Japanese tried that once and it didn't turn out so good for them.  Let's see if the chinese are any smarter.

when it comes to housing, people think they're buying a house when what they are really buying is a monthly payment.  Remove the Fed from what we laughably like to call the bond market and require the Federal Government to compete for financing and the resultant increase in rates would crush the housing market.  You'd see prices fall to levels last seen in the late 80s.

The trick is to identify a bubble and not participate because while the idea of a fast buck is appealing, the downside is worse. 

Remember the secret to making money in any market is not to lose money, your gains will come over time but losing is hard to overcome.

Does That Australian Housing Bubble Chart Remind You Of Anything?
Most bubbles take on the form of the chart you see here when normal assets take on a life of their own and become something you must own ONLY because it has to go higher, right?  wrong!

Asset Bubbles 'Pop! Go the Weasel' A Visual History

Bubbles are a reflection of humans' herding behavior carried out to periodic extremes, or expressed differently, they are momo investments on steroids.

Maybe not all, but certainly the vast majority of the most popular asset bubbles since before even the Tulip Mania of 1637 (including the Kipper and Wipper currency debasement of the German 30 years War, circa 1621, which is appropriately enough deja vu in contemporary retrospect, only the war is missing). Its worth noting that all the bubbles to the right of center have been central-bank induced (except for that amulet bubble of 2006, although even that is likely debatable), I will not note it as it is quite obvious even without me highlighting this simple fact. One can only imagine what would happen to asset prices - all of them - when the world's central banks, which are now collectively and voluntarily "all in" on reflating the biggest asset bubble of all time across all asset classes, decide to close the liquidity spigots (if ever).
Perhaps I should also mention to add the youth unemployment bubble of Spain and Greece? The invalid pension bubble of the USA? I was also going to say the firearms bubble in the USA until I remembered that that might come in handy for popping the government bubble.
The fall of the Roman Empire up there when the middle class was driven out of the city by taxation and into the welcoming arms of Alaric appears to be  a) it’s happening again now and b) we will get the same result.

Check out one of the best books on the subject : A Short History of Financial Euphoria.

Another one on the biggest bubble of them all - the rise of private credit creation and fiat money - is called "Web of Debt" by Ellen Brown.

http://www.planbeconomics.com/2013/04/interview-with-ellen-brown-author-...

 and so 'Pop! Go the Weasels'...thanks to the banks.  I'll stick with things that I can hold...