I’m presenting a very broad presentation about the emerging shift in economics and finance. I’ll start with a few simple definitions, and just these definitions may already be quite distinctive and insightful to you, even though you may already know all of this. You may have never thought of it this way, though….
Economics is the study of human behavior in regard to prioritizing different activities (basically, possible uses of one’s time). Finance is just a system of measuring economic patterns of behavior using prices (as in counting or accounting).
More specifically, economics addresses questions of priority: like what outcome to target first, what next, then what after that… as well as what methods to use and who will do what (and when/by when). Thus, economics is a primary realm of activity for housewives, farmers, breeders, choir directors and pirate captains as well as merchants and bureaucrats.
Finance may address questions of how to actually produce the priority results, and is particularly focused on counting the costs, including of time, involved in doing any particular thing. Finance tends to be a tool for comparing various methods to use to accomplish a selected outcome, but also informs which outcome to value as a priority.
Accounting is the field of activity in which people may focus most on time (like when a debt is due) and one very rudimentary form of accounting is taking inventory as in the counting of raw materials in stock, while finance is the specific type of accounting particularly concerned with prices and cash flow. At least that is how I will be using those terms.
Summary:
Economics addresses questions of why, what, who, when and how. Almost everyone explores those questions and more or less continuously.
Accounting and finance are tools used to inform choices regarding who, when and, in particular, how. Not everyone uses accounting or finance to explore those questions, or perhaps only occasionally.
There is one big distinction about finances as distinct from all of the rest of economics. Finances involves voluntary exchange.
Economics can involve all forms of piracy as well as hurricanes and earthquakes and bombs damaging infrastructure and interrupting plans. Farmers may deal with practical issues of soil chemistry, weather, transportation, insects, pollution, animals, thieves, war, natural disaster, employee management, as well as market prices.
Market prices are the only element of economics that involves voluntary exchange. Finance, as I use the term, is about the voluntary aspect of economics, including barter. That is actually a rather small part of economics, but it can be an important part, at least occasionally.
So, prices, generally speaking, refer to an actual agreement of a buyer and a seller to voluntarily exchange one thing for one or more other things. When two agree on an exchange rate between the two things to be exchanged and then actually exchange them, that exchange rate for a real transaction is called a price.
Of course, price can also refer to an offer to sell (like the asking price of a home that has not sold for 6 months, perhaps by a seller who may not be particularly motivated to produce an actual transaction) or a bid (like an offer to do a certain job or to buy an item at an open auction, which is basically what a stock market is: an open auction in which people buy and sell shares of ownership of private companies). Note that prices of actual transactions are generally much more relevant than recent prices of similar investments (AKA “comps“) or than “outlying” bid prices or ask prices. By outlying prices, I mean prices that lay outside the range of actual market activity- so far from the actual value to qualified buyers or sellers that the outlying offers may go weeks or months without producing any actual transaction or agreement.
Note further that there can be a lot of “involuntary” influences on prices. There may be extensive interventions beyond the voluntary realm and into the realm of mafia rackets and other forms of government. Note that any coercive activity to influence the behavior of other people involuntarily is what I mean by the term “government,” so thugs and warlords and the mafia and even churches may all fit within my definition of a governing operation.
If any system persistently influences or governs human behavior, especially involuntarily or coercively or deceptively, that is a form of governing AKA government. All forms of advertising and commercial media thus are also within my definition of government.
“Free markets” evidence patterns of voluntary exchange (buying and selling as well as borrowing and lending). Governments, as I define them, have the singular purpose of coercively influencing, inhibiting and redirecting the voluntary exchange of individuals and groups. Governments manipulate economic behavior with methods ranging from subsidies to prohibitive taxes, or from licensure requirements to criminal penalties for marketing or even just possessing certain materials, such as censored books or nuclear weapons or psychedelic plants.
Note that to many people, governments are no more heroic or villainous than the weather or soil chemistry. Government is just another reality to be considered in economic questions of priority results and methods. Obviously, a relatively small number of people form and direct governments to influence the behavior of other people.
In other words, this is the conspiracy theory of government, which is that all government is conspiracy (though a conspiracy that is as conspicuous and overt as any conspiracy could be). Of course, given that most private businesses also have trade secrets or exclusive copyrights and patents (and thus set up governments to protect the interests of those private businesses), it is equally true to say that all business is conspiracy and government is just the business of coercion, as distinct from retail businesses that target voluntary exchange.
So, commercial advertising, while designed to influence behavior, is not nearly as coercive as foreign militaries and the occupying forces of law enforcement. While there is clearly a spectrum of variations, there is really no clear distinction between what is a legitimate government of organized coercion and any other system of human activity. However, governments universally publicize claims of the legitimacy of their organized violence. Perhaps that is ultimately the only distinction: the open claims to legitimacy.
Withdrawing from such potentially challenging or even controversial questions about coercion and claims about legitimate coercions, let’s focus on voluntary exchange.
Voluntary exchange is the primary behavior that is of interest in the realms of finances. Again. the primary purpose of governments is to systematically interfere with voluntary exchange. Economic behavior includes voluntary exchange, but also includes any other way of acquiring or accessing or even just claiming something, as well as all sorts of non-financial things like building a house, repairing a house, tearing down a house, or even just composing this essay.
Even the gathering of twigs into a nest by a bird could be considered an economic activity. While the organized violence of governments is inherently economic, so is most everything else, including the organizing of a choir or orchestra or the creating of a work of visual art. Economics is simply doing anything “on purpose” – that is, consciously or with awareness, as in pre-meditated. Even if I spontaneously create two pieces of artwork, the choice to display one or both or neither is an economic choice.
So, all of that was background to clarify common misconceptions as preparation for the following. Now, I’m going to compare three broad categories of economic value. Here are three broad categories that people may value differently at different times:
1) raw materials (things like oil, food, cotton fabric, and bricks)
2) human ingenuity, technology, and voluntary exchange (the value of other people in general)
3) governments which openly and systematically take things by force (the value of the organized violence of law enforcement and militaries)
I’m proposing that global commodity prices reflect the voluntary and spontaneous human valuations of various raw materials. That is uncontroversial. I’m also proposing that global stock market prices reflect the voluntary and spontaneous human valuations of private commercial business based on voluntary consent. Again, that is not especially controversial.
We can compare price valuations of commodities and stocks and presume that those prices tell us something about the voluntary and spontaneous behavior and preferences of humans worldwide in relative to the priority they give to raw materials relative to the ownership of private businesses in general. Of course, the fluctuating valuations of certain businesses may be distinctive, such as AIG or Microsoft (United States) or Sony (Japan) or BMW (Germany), just as are the fluctuating valuations of a few tangible materials, such as oil or gold or sugar or paper (or the most famous original ingredient of Coca-Cola: cocaine).
Again, none of that is especially controversial. What I have never before directly stated, at least not in a published format like this, is that government bond markets may reflect the voluntary and spontaneous human valuations of the priority value of operations of organized violence.
To be quite direct, governments collect debts with the use of force. That is a primary function of the court systems of modern governments: the systematic collection of debts using force. That includes foreclosures, garnishments, levies and repossessions as well as evictions and bankruptcies.
What people may be saying when they choose to direct their investments toward government bonds instead of raw materials or the ownership of private businesses is that the investors value the promises of government to use force, including to involuntarily collect debts and repay claims of debt ruled to be valid by that governing operation, over the prospects of human voluntary exchange (ownership of commercial businesses through stock markets) or the value of tangible materials. In other words, people who are investing in government bonds want accountability and practical security, not more stuff or more ideas.
Ideas are the business of businesses. Sometimes people want more of that. Stuff is always valuable, too, but sometimes people want more protection for whatever they already have- more armed security- not more stuff. When people are investing their trust not in more ideas and not in more stuff but in more organized violence, they may voluntarily and spontaneously choose to buy more government bonds.
Yes, these patterns may also correspond to baby boomers retiring and ballooning the population of elderly people who systematically liquidate their pensions and sell their stocks to pay for their retirement, favoring the bonds of the governments that they perceive to be most stable… over the much less stable investments of stock markets (and who want young and healthy people to provide for them with the intervention of coercive governments through taxation). However, an awareness of such demographic trends is optional. The fluctuating valuations of price charts are clear enough, and anyone with access to the internet can confirm the relevant data.
So, I’m proposing the above interpretations on the following information. I’m reporting to you that there has obviously been a major shift in the overall values of humanity in the last 10 or 11 years. I’m also proposing that it is clearly evident in the following chart:
That is a chart of the last 11 years of prices for a bundle of commodities priced in US Dollars (in blue), the red Dow Jones Index of global stock market prices (not to be confused with the more popular but much less comprehensive Dow Jones Industrial Average of 30 leading US companies), and the green line of yields (interest rates for the lending of money to the US Treasury for 30 year periods, also known as “buying government savings bonds“).
Obviously, the most remarkable thing about that chart is the huge surge in the US Dollar prices of commodities from 1999 to 2008, followed by the sharp drop in 8 months from 10942 to 3105, a decline of about 72%. (People worldwide wanted a lot more stuff, then basically changed their minds abruptly and dramatically.) Here is a close-up of the last few years of that Commodity Index:
Note that the 8-month rebound which peaked in October 2009 only recovered about 21% of the losses of the prior 8 month period. In other words, there are now two clear pieces of evidence that we may have seen the end of the prior multi-year trend of increasing demand for raw materials in general. First was the historic collapse in commodities prices, and second was the weak rebound.
Since October 2009, prices have twice approached the prior high (see yellow highlights below). After faltering from the shelf or plateau in April 2010 (the yellow line), prices fell in May to approach the level of several prior reversals (blue line with four reversals in purple). So far, the subsequent rebound across June 2010 has been quite small and may have already ended.
Next, let’s look at global stock prices compared to that same price index for commodities:
You may notice that the prices of stocks and commodities generally have moved in the same direction. In 2001, they came down together. In 2003-2005, they went up together, and did so again in 2007. In 2008, they came down together. In 2009, they went up together. Note the arrows below showing the periods of consistent price movement.
However, many of the times that both price lines reversed, the reversals were preceded by an obvious divergence (that is, one price index reversed before the other). Note the orange marks below showing periods of diverging trends, when global commodity prices and global stock prices moved in opposite directions.
Those are the divergences that are easy to see. Not so easy to see on the above chart is the following brief divergence.
In early 2009, global commodity prices rose in late February while global stock prices continued down for a few more weeks. That was a signal to me to look for a rebound in stock prices. (Note that I publicly forecast most of the reversals shown above and, for those interested, I can document that.)
Further, note again that the commodity index topped in October of 2009, months before stocks, but now both are dropping together. There was a period of divergence, perhaps marking a destabilizing of the prior trend, and then stocks, which had been continuing the prior trend of rising prices beyond October 2009 into early 2010, then joined the downward trend of commodities.
Again, these price charts are simply measurements of the voluntary behavioral valuations (buying and selling) of investors worldwide. In summary of the chart above, we can conclude that global investors across the last 10 or eleven years were relatively stable in their behavior and valuation regarding the publicly-traded stock share ownership of private businesses. I say relative in regard to their behavior and valuation in relation to commodities, which favored commodities over stocks from 2002 through 2005 as well as 2007 and much of 2008.
However, as of late 2008, global investors not only dramatically decreased their valuation of global stocks, but decreased their valuation of raw materials even faster. In 2009, global investors continue to relatively favor stocks over commodities (as they had during 2008 when commodity prices plummeted 72% while stock prices fell only 59 percent). In 2009, the rebound in stocks was a 59% reversal of the prior decline of 59%(!), while commodities rebounded only 21% and that rebound lasted only 8 months, while stocks continued rebounding. (Top to bottom was 320 to 130, a change of 190, with a rebound of 112 points: 59%)
I’m going to briefly devote some time now to the geometric pattern of the above chart. Look at what geometric patterns you can notice by yourself before going to the next page.
What I have highlighted above is two double zigzags (separated by another shorter double zigzag). Since the latter part of the second zigzag is about the same size as the first zigzag, we could count these as two zigzags or as three.
Note that the rebound also forms a triple zigzag with momentum clearly declining as of late 2009, highlighted below:
By declining momentum, I simply mean that the slope of the line of rising prices is steepest in the early part of the rebound. Further, each of the three segments of the rebound is smaller than the one before, which is another sign of decreasing momentum.
Now, having looked at the prices of commodities and stocks (representing the relative priority of stuff and ideas), let’s look closely at the most stable of the three lines from the first chart: the interest rate (yield) of long-term US Treasury bonds. Again, consider that this line may represent the perceived valuation of organized violence (though a declining interest rate means an increasing confidence in the organized violence of the US Treasury to collect debts from it’s underwriters, which is the US citizenry including private businesses, and repay it’s lenders, which are the people who lend money to the US Treasury by purchasing bonds, which are just written promises to repay a loan.)
Here is the most obvious thing I see when I look at this chart, a steady trend (see blue line below) of declining interest rates:
Again, looking at the geometric patterns, I see two double zigzags (note that this chart is for 11 years).
Again, they are also divided by a double zigzag in the middle (ending at the second touch to the blue line), plus the first zigzag (of 1999 – 2005) can be further subdivided into more double zigzags:
Finally, the last year or so has formed another double zigzag (and this chart also highlights the double zigzag in 2006 and 2007):
In other words, there are a lot of double zigzags showing up in these charts, as well as occasional oddities such as the blue trendline above. While some people might speculate that these zigzag patterns (or the three peaks that form a straight line) are somehow random, consider that they simply reflect clear trends in human behavior and valuation, that is, the priority that people give to various alternatives. These trends sometimes form waves and they sometimes form straight lines.
In other words, they might not be random at all. They might be an orderly transition forming over a period of time.
I propose that the last 11 years has clearly evidenced a global shift toward human investors voluntarily prioritizing of the operations of organized violence, organized coercion, organized force, an organizing of the involuntary transfer of affluence and influence. While there have been continuing increases in demand for stuff and for ideas, the demand for action (or for a certain type of action in particular) has been increasing rather steadily in zigzags of fluctuation across the last 11 years.
Further, as of 2007, the demand for ideas has dropped. In 2008, the declining demand for stuff joined and surpassed the declining demand for ideas. Now, we are ripe for an accelerated shift in demand away from stuff and ideas toward action (or a certain type of action in particular).
I first published forecasts of the shift of the last several years in early 2003, and detailed the precise sequence of events in later years. The “capitulation phase” has already begun. Soon, even those most resistant to acknowledging what is developing will admit that investors worldwide have demonstrated the shift in their priorities. They have demonstrated that shift in priorities or values through their behavior, including of buying and selling as well as of borrowing and lending.
Consider, last, that none of these conclusions are actually at all controversial. Of course, history will let us know one way or the other.
Change equals opportunity. Are you willing to experience all change as opportunity?
Note that certain private businesses may not decrease in demand. Are you willing to be part of the exception?
By the way, not everyone can be above average. Are you willing to be above average anyway?
power of language blog: partnering with reality by JR Fibonacci 
