when do global stock markets crash?

If the costs of conducting “business as usual” rise enough that profit margins turn negative, wouldn’t any business owner consider shutting down? When costs rise so much that net operating profits do not just disappear, but turn into net operating losses, what would you do as a business owner? When continuing to operate a business clearly is less favorable than simply shutting down, then any business would likely close, right? What if a bunch of them closed at once?
That is probably one of the most unappealing possibilities conceivable. If one business depends on others (suppliers, customers, etc), and then even just one essential supplier shuts down, then other businesses depending on that supplier CANNOT continue to conduct “business as usual”- at least not until they can replace that supplier.
This is the same basic issue that people have been concerned about in regard to the government of Greece or of Minnesota, but those isolated budget issues are symptoms of a broader issue: the end of the age of cheap fossil fuel. I will come back to the rising cost of commodities in a minute.
First, if the government of Greece ceased to function, that would definitely effect the operation of private businesses in Greece, right? Private businesses typically rely on government courts not only to provide basic services like road maintenance, but in particular to enforce all legal contracts with organized coercion. If private businesses could not hire governments to use force to evict delinquent tenants and foreclose on them, or to force their suppliers and customers to do as they legally promised, then private businesses would be responsible for the additional cost of acting as it’s own collection agency, rather than hiring the court’s deputies to take their guns and enforce contracts with organized coercion.
From an economic perspective, one can think of any government as a collection agency that is organized and funded by the owners of private businesses in order to arbitrate debt claims for validity and then collect validated debts using organized coercion. The owners of private businesses uniformly agree to promote a sort of monopoly in the use of organized coercion. While there are different levels of government, like city and county and state and national, usually these concentric monopolies co-exist peacefully.
Of course, nations have a history of invading other nations. But outside of that, the only time that local and national governments have a major conflict is when there is a “civil war” between one operation of organized coercion that is claiming to have authority over smaller operations of organized coercion that then “secede” and band together, like to attempt to preserve the patterns of a prior system of relatively decentralized organized coercion.
For instance, let’s say that the government Treasury of Greece eventually defaults. It owes debt to the US, Italy, Germany, and so on. Well, what if Italy, Germany, and the US all start to fight over ruling Greece and cutting up it’s resources? That is basically a world war, like if it includes a distant global power like the US coming over to Europe to defend “US national interests” in Greece from the “axis” of an alliance between Italy and Germany.
Or, what if Germany or Greece wants to secede from the EU instead of being subject to the decisions issued down by the central EU authority? For instance, what if the EU decrees that Germany is liable for the debts entered in to by Greece. That might produce a civil war, right? If a lot of the debt that is owed to Germany (and Germans) is suddenly declared to be paid by Germans and Germany, there is also a logical or logistical issue there, right?
With the USSR, various smaller jurisdictions might “secede” and rebel from the central authority. With the US in the 1860s, the same could happen. With the EU today, it’s about the same. Also, Yugoslavia used to be one country, then, in the 1990s, ceased to function as a singularity and officially split in to several republics, but not before a civil war that involved the militaries of lots of outside nations.
When one government falters or is defeated militarily by another, that is not the end of government monopolies on organized coercion, but sudden changes in procedure can arise. Certain businesses also tend not to operate as profitably when there is a civil war going on and large portions of consumer population is getting killed or goes to war to kill their opponents. Consumption may shift towards the basic “staples” or even “the bare essentials.”
Sometimes a prior central unity of organized coercion is maintained and sometimes a new centralizing of organized coercion develops. Sometimes what happens is a split in to two or more independent operations of organized coercion. In the case of the European Union in recent years, numerous nations went from relatively informal alliances like NATO or NAFTA or the UN to a much more formal alliance of a single set of consistent procedures, passports, and currency, such as the EU and it’s Euro currency.
Now, before we look closer at prices of commodities and how rising commodities prices are related to global economic activity, let’s look at a chart of the cumulative stock prices of 1800 global companies, priced in Euros:
Here is the same global stock market index, but priced in US Dollars:
While the two charts are very similar, a few differences are notable.  In 2007, the Euro pricing topped and reversed prior to the $ pricing. In 2008, the Euro pricing made a low and started a multi-year rebound while the $ pricing made another low in early 2009  and then started a multi-year rebound. Finally, in early 2011, the Euro pricing topped and reversed while the $ pricing once again topped a few months later and then reversed sharply.
The pattern is obvious. The Euro pricing is the leader and the $ pricing is the laggard.
However, as I have indicated from the beginning, the real leader may not be stock prices at all. It may be that those fluctuations in stock prices are symptoms of a simpler development.
Since 2004, I have suggested that rising commodities prices, especially rising fuel prices, would eventually slow down and then de-stabilize the global economy. I even specified that the issue was debt, and that eventually the cost of borrowing to pay for increasingly scarce resources would “pop the credit bubble” and bring down real estate prices worldwide, which I have been forecasting since 2003.
Above is a chart of the prices of a bundle of global commodities (priced in US Dollars and shown in blue) and an index of the overall prices of 1800 global stocks (priced in US Dollars and shown in red). It is easy enough to note that eventually (by 2007), the mutual rising of those two lines diverged. As commodity prices soared to such a high level that economic activity declined, like when the price for a gallon of diesel exceed $11 in the UK in 2008,  stock prices fell first and kept falling.
Once demand for commodities dropped enough that commodity prices came down, stock markets were already “caught in a tide” of a deflating credit bubble. In other words, the aggressive borrowing that had allowed for global stock prices to keep up with global commodity prices from 2004-2007 did n0t resume. Previously stable lenders were in trouble.
Naturally, I am oversimplifying a bit, but the basic idea is that a relative scarcity of resources (especially fossil fuels like oil) drove up commodity prices leading to other effects. The “relative scarcity,” by the way, is not that supplies of tangible commodities were plummeting, but that demand was growing at a historic pace while supply volumes (production of crude oil, for instance) was flattening or even declining slightly.
In the case of oil, this development (relative scarcity of oil supplies- relative to ballooning demand) was predicted in the 1950s and was repeatedly referenced in the 1970s by US Presidents Nixon, Ford, and Carter. However, that was just a national issue, since as US oil production peaked, the US could afford to import oil from elsewhere. now, with global oil production peaking in 2006, a much more widespread issue is emerging.
This issue is not specific to a particular exclusive region of the globe like the US or to a single currency or to a particular system of organized violence (court system) which enforces the value of all currencies and indeed of all financial contracts. There is no particular national political solution to a global economic shortage of fuel. Courts only have power over human activity (including the “activity” of human perception or interpretations in language), but not over the geological facts of the volume of oil reserves globally. Reports can lie, but deceptive reports do not deceive the wells or the amount of oil in the oil deposits.
That bring us to a different perspective on the prices of the global stock market. Above, we reviewed the price of the global stock market relative to the US Dollar and also relative to the Euro, which we also saw has a clear history of forecasting the trend reversals of global stock prices measured in US Dollars.
Now, let’s look at about 4 years of global stock market prices relative to global commodity prices. This is a chart showing changes over time in how much tangible resources can be purchased by selling the same set of global stocks.
The most obvious thing is that this chart has gone down rather consistently for all 4 years. There was no recovery in the tangible purchasing power of the global stock market in 2009 and 2010 relative to that particular set of major global commodities called “CCI.”
Global stocks measured in US Dollars made a low in early 2009. Global stocks measured in Euro made a low prior to that in late 2008.
However, prior to both of those, the above chart of global stocks relative to global commodities made a low in mid-2008, then rallied in to late 2008, then floated a bit for a year or two and recently broke sharply below the lows of early 2011.
As in late 2008, we may now see prices of global commodities and global stocks tumble together. In late 2008, global commodity prices did the worst, then global stock prices, then- much better than either of those two- the Euro did quite well. However, by far, the US Dollar did better than any of those 3 other alternatives (for late 2008).
That is a fit with what I began predicting in 2003. Now, we are one the brink of a continuation of the shift that was notable in global stocks by 2007. Relative scarcity of global commodities is slowing global economy activity, especially in relation to fuels, but that rising fuel prices also cause rising prices in transportation costs of all things shipped long distances.
Rising fuel costs are not inflation. If it was just inflation, then US real estate prices would not have begun a historic plummet in 2005. If it was just inflation, then global stocks priced in whatever currency would not have plunged.
Back in 1999, when global oil prices began a rally and doubled in less than 12 months, the prices of a group of companies very dependent on the price of fuel fell by 40%: airlines in the US. Stock prices of ending institutions also declined, though not as far. Again, the decline in prices of airlines and lenders preceded the top of the high-tech bubble as well as the broader stock market decline of 2000-2002.
Commodity prices matter. When diesel hit $11 per gallon in the UK (and Germany) in 2008, people changed their behavior, including business owners.
Stock prices shifted (down). Currency values shifted (eventually, way up relative to historical norms).
Now, the instability in the EU that myself and others have been referencing for many years is now getting attention from the mainstream media in the US. While there is perhaps no open talk of civil war, there have been a series of riots, including riots not directly explained by economics or politics. However, when an economy is de-stabilizing, that can manifest in “short-fuse” public hysteria, in epidemics related to stressed immune systems, and of course in prices.
Previously, people perceived that stocks were quite safe, as in a “safe haven.” Then, when stocks fell, people perceived that real estate was safe. Then, when real estate was safe, people perceived that all commodities, including gold and silver, would be safe.
However, silver prices fell over 90%  from 1980 to 2000. Is that the kind of safety that people are seeking?
In late 2008, the Euro was safer than most alternatives (rising against a wide variety of alternatives), and the US Dollar was even safer than that. This time, the Euro may not do so well. The entire EU may not do so well.
The economy of the EU is much more dependent on foreign oil than the US. The economy of the EU is a bit more like the economy of Japan, which is even more dependent on foreign oil, and has been in a deflation for nearly 22 years now.
Will Europeans (others who have been invested in the EU) flood to the US Dollar and US economy? I think so. However, I do not think that the US economy will do well.
In fact,  as we look at the chart above of Japan, the Japanese currency (Yen) has done extremely well in recent decades even though the economy there (and stock market prices) have not done so well. As the court system in Japan is recognized as more and more crucial to the economy of Japan, the Yen have been very well-respected by the Japanese and others.
Will the Yen or the Euro or the US Dollar collapse in to hyperinflation or a civil split (civil war) resulting in the use of multiple currencies? Or, will the global centralizing of court systems continue as the UN, World Court, World Bank, and BIS continue extending their empire?
In the case of the USSR, the central government disbanded, but initially a monetary union was maintained by 15 of the independent states (operations of organized coercion). As time went on, the various independent jurisdictions (of organized coercion) issued their own currencies.
See http://en.wikipedia.org/wiki/Soviet_ruble#Replacement_currencies_in_the_former_Soviet_republics
Russia continued to use rubles, but in the old USSR, rubles were only good to purchase certain things from the government, rather like credits for a prisoner in jail or like gift certificates that can only be used with a certain store or certain catalog. The rubles had no particular functionality outside of the USSR. Now, Russian rubles are traded in open market exchanges at variable rates with other national currencies.
Relative to the US and the $, the EU and the Euro may do well, but I do not expect so at least in the mid-term. While many in the US are concerned about the creditworthiness of the US Treasury, everything is relative in investment markets.
Relative to US real estate, US Dollars have done very well for several years. Relative to US stocks, US Dollars did so well in 2008 alone that stocks are still way behind and, as of recent months, have resumed falling.
Today, I have titled this blog post “when do global stock markets crash” because today is an interesting juncture in global stock markets. In 2003, I was already forecasting the type of stock decline that developed in 2007. I am clear, especially when looking at prices of global stocks relative to global commodities, that the decline that began in 2007, which I forecast back in 2003, did not end.
Further, in the days and weeks and months ahead, I expect that more and more will realize that the global stock market top in 2007 is not going to be exceeded any time soon. I expect that market pricing of global stocks, including in the US, will reflect that recognition with a series of large declines and increasing volatility.
In other words, people will increasingly recognize the value of the operations of organized coercion within their midst and increasingly recognize the instability of most if not all private lending institutions. I expect that the attention to credit ratings as if they are anywhere near as important as cash and cash flow will end.
English: Various Euro bills.

Image via Wikipedia

When a currency is only accepted by one particular government and that government operation of organized coercion has a functional monopoly on the operation of all businesses within a jurisdiction, credit ratings may simply not be an issue. Similarly, with food stamps, there is no issue of credit rating. Prisoners are not lent funds by the prison. Soldiers do not apply for credit lines at the commissary, but are issued a ration of coupons. During wartime, that is also common for civilians, and something similar happened in the US in the 1970s in regard to gasoline.
Private credit markets are destabilizing. I have published warnings about this since 2003. But that is just the symptom of a simpler issue.
Human populations are increasingly demanding access to diminishing resources. Governments will change or arise to stabilize and regulate access to resources.
Governments are operations of organized coercion. Organized coercion is the basis of the purchasing power of all currencies (and all financial contracts).
Increasingly, populations will recognize the value of organized coercion to maintain order. They will seek to pay off old debt and will diminish involvement in borrowing as well as lending. Private credit markets as we know them may cease to function, as in the case of jurisdictions like the USSR or Cuba. Public trading of private corporations may drop in volume considerably, or private corporations may be socialized, as we see happening in the US within such fields as education, gambling, health insurance, and health care, plus, as of 2008, the auto industry and banking industry. Of course, the US national government with the FDIC, FHA, HUD, GNMA, FNMA, FDMC, SLMA and so on… have long been involved in direct financial responsibility for much of the US economy.
50 years ago, what percentage of the public lived in government housing? 50 years ago, what percentage of the population received subsidies (like social security or unemployment) from the federal government?
How about 100 years ago? Socialism has made immense progress in the US in the last 100 years, though many might resist even considering that idea or would at least propose some other alternative as favorable.
Imagine that if the bureaucracy of the EU were to so dominate the economy of Europe that after, for instance, 150 or 250 years, Europeans forgot that Germany and France were ever not united? That would be like New Yorkers and Georgians forgetting their historical roots- back when they had independent currencies and very distinct cultures, and even fought in wars against each other. Impossible?
However, a major logistical problem in the EU is the absence of a common language. Will a global empire establish English as the imperial language, or will the EU dissolve, or what?
Well, I do not know yet. But the EU is facing huge logistical problems, especially due to rising gasoline prices which have recently approached their highs of 2008 (in Europe and elsewhere), and the US is in position to receive a huge surge of people seeking a “safe haven.” However, perceived safe havens have a history of being perceived as safe only temporarily.

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