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.

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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first harmony then prosperity

Harmony internally, then prosperity externally

Yes, “there is more to life than money.” Also important, “a fool and his money are soon parted.”

So be aware of the possibility of being foolish about wealth. Be aware of the possibility of being foolish about all of life or any of it. Then be aware of the possibility of being calm and clear and courageous about life, including the aspect of life regarding wealth.

Lately, many people are talking about financial risk and results that they have called surprising. Many of them have been investing their trust in mass media or massive bureaucracies like the insurance company AIG or the Federal Reserve or the government of the USSR– you thought I was going to say US, didn’t you?

What have been the consequences of investing trust in the mass media and massive bureaucracies? Have those results (perhaps such as being unpleasantly surprised) raised the question as to whether those methods might have been foolish? Is it possible that foolish methods of investing trust may produce the result of financial losses, rather like the saying goes that “a fool and his money are soon parted?”

What about discounting the importance of financial realities? Are finances suddenly important to you or were they always important and only recently recognized as important? How about this: are gasoline or electricity suddenly important to you or were they always important and only recently recognized as important because we could take them for granted until prices reached a point that we altered our perspective and our behavior based on things like rising gasoline prices.

For many years, I have been focusing on the possibility of rising fuel prices and their consequences on the economies of Japan, the USSR, Europe, and the US. My publication in 2004 of “the Real US Deficit: OIL” featured a section called “the DominOIL effect” relating to why I expected fuel prices to continue their dramatic rise that began in 1999 and what consequences I expected in the US, which I expected to be similar to what had been happening in Japan since 1989 and the UK and EU since 1999.

The next chart shows the all-time low of inflation-adjusted prices of gasoline in the US in 1999. Global oil prices also made a major low in 1999.

The last chart is a chart of the stock market of the UK. Next, here is what gas prices in the US were near the time of that article in 2004:

My central question (in this 2004 publication: www.gold-eagle.com/editorials_04/fibonacci110704.html) was “how many dollars will it cost to buy a gallon of gasoline next year?” Here is an 8-year chart of what happened:

(from here: http://www.indexmundi.com/commodities/?commodity=rbob-gasoline&months=120)

Some people have questioned my logic because of oil and gasoline prices falling sharply in 2008.  However, for those that have the courage to read my old articles, I did not say that demand for fuel would never drop or that prices would never drop.

On the contrary, I simply said that diminishing supplies (since the easily predictable peaking of global oil production in 2006) would raise prices enough to slow down the global economy, including that of the US. That predictable slowing of economic activity would predictably reduce demand for fuel, which would predictably drop prices. The drop in 2008 does not disprove the accuracy of the logic, but establish it. I may have even published all of that content, but it is pretty easy to see the logic one’s self if one is willing and able to face the simple facts.

How can the global economy expand after the 2006 peak in oil production? It must contract. Economic activity drops as fuel supply drops. Things like currency inflation or credit deflation are secondary financial measures relative to a primary tangible economic issue like an empty fuel tank in your car. Having lots of cash or credit but being out of gas in the middle of a desolate highway do not make a fool into a genius. Primary functional economic tangibles like gasoline and food are the things that we value having currency to access. No one cares much about currency (or gold) when they are starving, right?

So, it was the spiking of fuel prices by 2007 that were accompanied by the steep decline of global stock prices in 2008. After stocks began to plummet, fuel prices did too eventually- all as I predicted. Further, real estate borrowing had predictably diminished considerably as well, so real estate prices predictably declined dramatically, which resulted in financial trouble for many financial institutions, such as FNMA, AIG, and WaMu, as I specifically predicted in a video that has been online since 2006. (I can send a link to those interested.)

Once fuel prices fell, the global stock market began to recover. However, gasoline prices in the US recently approached their 2008 highs again (in red below).

In 2007, stocks peaked while gasoline (and silver) rose. Then silver peaked next in early 2008), then gasoline. Doesn’t that imply that rising fuel prices may have been the cause of the decline in prices of stocks (in the US and globally) and even of silver? Or maybe it was the high silver prices that brought down everything, right? 😉

When gasoline prices in the US reached a high enough level in April to reverse the spending behavior of the US economy, dropping demand enough to reduce purchases and bring down gasoline prices. However, that reduction in a fundamental behavior within the US economy also brought down the prices of the US stock market (blue above) and even of silver (green above).

In fact, those three things peaked on the exact same day: April 29th, 2011 (close-up shown below). But no one could have predicted that rising gasoline prices would have in any way effected the US economy or spending habits or stock prices or even silver prices, right? Rising fuel prices could not really have any effect on popping bubbles of speculative mania, would they?

Then again, maybe the cause was President Bush or President Obama, not gasoline prices. Or maybe they are personally responsible for gasoline prices- like maybe whether the prices of gasoline rise or fall is totally dependent on the choices of exactly one person.

But why did the Japanese economy slow down in 1989? Why did European economies begin to slow in 1999? Did $11 gallons of diesel in the UK in 2008 have any effect on the spending behaviors and economic activities of business and consumers within the UK?

Possible? Yes.

Predictable? Yes!

So, what is coming next? More selling of stocks and real estate. I’ve been warning of that since before 2004. I knew that the speculative bubbles would not last forever and were nearing their extremes. Real estate began peaking in 2005 (in places like Phoenix) and soon extended to most of the US (and much of Europe etc).  Stocks began peaking in the US in 2007 (at least for most sectors, excluding high tech, which peaked several years prior).

Of course there were a few exceptions, like the US stock sector HUI (shown above). However, the mining stocks of HUI are part of the same economy, too. They actually peaked in early April this year (pink):

What has done well? Here are a few examples of gains approaching 100% gains in the last 10 days:

What else did well lately? I sold a put option for $1.07 today that closed Friday at $.17. That change (up over 400%) is a pretty decent increase for a single day, right?

But remember, the mass media and massive bureaucracies may indicate that there is no such thing as predictability, or at least not in certain instances. Even notice that as you are reading this sentence, there is absolutely no way to predict that this sentence is going to end with a punctuation mark, is there?

No one could have predicted any of this. The future is completely unrelated to the past- not just your personal future, but even the future of how this sentence is going to end.

Nature does not have any patterns in it. And that, as always, is entirely the fault of the US President. Or the Federal Reserve. Or OPEC. Or this sentence.

So how are we going to fix the problem of nature not having any predictable patterns in it? First, let’s blame someone else because that has always worked marvelously in the past, right? Then let’s wait for the person that we blame to save us from them. Finally, let’s complain about how waiting for them to save us from them is still not working again as usual as always.

Just do not adjust. After all, adjusting could effect your actual results, and no one is interested in financial security or economic prosperity because that would be evil and shameful and of no functional relevance whatsoever. So, is any of this fooling you?

Keep in mind that sometimes translations can shift the implication of a message. If someone were to suggest that proudly foolish naivete about financial speculative bubbles was a major risk, deserving great caution, do you think that message might be translated like this: “proud attachment to ideals about wealth is dangerous” or even “the love of money is the root of all evil?”

It’s not ignorance that is most risky. It is believing that something is so when in fact it is not.

From an emotional or irrational attachment to false presumptions, blame and anger and grief and agonizing and proud argumentativeness and shame all may arise predictably. Learn that, either the easy way or the hard way, but learn it fast.

By the way, yesterday at the close of trading (Monday 8/8/2011), I purchased some call options on the US Stock market. Those positions rise in value when stock prices rise. After one of the biggest down days in US stocks in decades, I understood that the panic of the masses after the weekend downgrade of US debt could be a short-term buy signal for US stocks.

So, after stock futures dropped another 2% in overnight trading, they then reversed 4% and are again pushing toward an open of more than 2% up. That should produce overnight gains of well over 100% for those instruments.

UPDATE:

I sold those call options for a gain of only 40% overnight. But that was just the start of the day. It got better…..

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“negativity” about when gas prices will be 65 cents again

Let’s start with an analogy. Then, I will tell you about when gas will be 65 cents per gallon again and when the US economy will recover. Okay?

Do you know how much the speed limit is for a school zone? Many school zones have speed limits around 25 miles per hour, but they can even be as low as 15. Imagine, however, that someone was driving through a school zone at about 50 miles per hour. This was during school hours, but there all that happened in this case was that the driver hit a speed bump pretty hard and was startled to notice that there was a bump there and only then noticed that the speed limit was 25.

Now, I do not know how many of you know any 84 year-old women. However, some 84 year-old women do not like the idea of speed bumps. Some of them say things like “I am concerned that this speed bump could damage my car.”

I might say, “the speed bumps are not likely to damage your car if you drive over them at 15 miles per hour instead of, for instance, 50 miles per hour.” She might say, “yeah, but I do not appreciate those people trying to damage my car like that. It’s just not right!”

So, this is how I found out about the 50 mile per hour race through the school zone and her startling discovery of a speed bump right there in the middle of the school zone. I said to her “wow, you know that driving 50 miles per hour over a speed bump can damage your car, right?”

She said, “Yes, but I do not appreciate your negativity about the subject. Think positive.”

I said, “I am thinking positive. I am thinking that because you like to stay out of jail, then you can observe the speed limit, especially in the school zones, and make sure to slow down before you drive over those speed bumps. It’s just not safe to drive that fast in a school zone.”

“So what you are saying is that should I buckle my seat belt? You always say that and it is so annoying!” she said.

“Didn’t you have it on?” I replied.

“No, I don’t like how they feel. You know that the strap just bothers my neck,” She said.

So, that is sometimes how conversations go. People may categorize as negative something that they would prefer to dismiss.

Categorizing something as negative- other than a negative number or a negative ion– can actually be a process of dismissing it or negating it. The so-called negativity of a recommendation to slow down before driving over a speed bump is not inherent in the recommendation or the speed bump. The label of negativity implies a contrast between positive reinforcement or encouragement and negative reinforcement or discouragement.

Now let’s talk about gas prices. Gas prices used to be 65 cents in the United States. That was many decades ago, but many people remember when prices were around 65 cents or even lower.

Imagine that someone asked in 1980, “when are gas prices in the US going to recover to their prior level of 65 cents?” I might say, “never.” They might say, “do not be so negative. Think positive!”

Next, imagine that someone asked in 1990, when are gas prices in the US going to recover to their prior level of 65 cents? I might say, “never.” Again they might say, “do not be so negative. Think positive!”

In the year 2000 or 2010 or 2020 or 2030, someone might keep asking me when gas prices will recover to their prior levels. I may keep answering the same answer. They may keep dismissing my answer as negative.

Next, let’s talk about stock market prices in Japan. We could be talking about real estate prices in Japan, but let’s talk about stock market prices in Japan.

In 1990, someone might have asked when are stock prices in Japan going to recover to their 1989 high. Someone might answer, “they might not ever recover to that level.” That might be called “negative,” right?

In 2000, someone might have asked again when are stock prices in Japan going to recover to their 1989 high. Someone might answer again, “they might not ever recover to that level.” That still might be called “negative,” right?

In 2010 or 2020 or 2030, someone might continue to ask when will the Japanese economy recover, when will stock prices recover, or when will real estate prices recover. The answer may still be “maybe never.” That answer still may be dismissed as negative.

Consider that one factor in the Japanese economy is the cost of fuel, which was recently over 7 dollars per gallon when priced in US Dollars. As fuel prices rose there, that effected the spending and borrowing behaviors of businesses and individuals. Their economy slowed down, kind of like an 84 year-old woman who was already startled by a speed bump the last time that she drove through that particular school zone. High fuel prices were like a speed bump interrupting the prior economic patterns from when gasoline was 65 cents a gallon.

In 2008, prices of diesel briefly exceeded $11 per gallon in the UK. As fuel prices rose since 1999, the economy of the UK hit a speed bump. People bought less stocks and sold more stocks. Stock prices came down since 1999. Real estate prices came down, too.

Many people asked when would the UK recover. Other people said “maybe never.” Some people dismissed that answer as negative.

(UK stock market prices 1984-2011):

Now, let’s talk about a few price forecasts. In 2004, I published a forecast of rising prices for fuel worldwide and a series of predictable consequences on prices of other things, such as US real estate and US stocks.

These forecasts were based in part on the observation of prior developments such as in Japan or the UK. Even moreso, these forecasts were also based on reports from oil geologists going back to the 1950s.

I first published a warning about a decline in US real estate prices in 2003. I saw the change in lending behavior (in credit markets) and deduced the eventual consequences of it. At the time, I did not connect the change in lending behavior to the change in fuel prices. That was in 2004.

Many people have called my forecasts “negative.” In fact, my forecasts of a drop in price in various markets were forecasts of negative price change for those markets. My forecasts for rising prices for oil and gasoline (when that was my current forecast at the time) were forecasts of positive percent increases as in rising price change.

In my 2003 publication, I featured a US stock sector that was doing much better than the rest of the US stock market at that time. By 2010, the stock prices of that group of US stocks was up over 1600%. That would be a positive change in price. Prices of other things decreased or changed at a negative rate. Some forecasts are negative and some are positive.

Right now, I also forecast that driving over speed bumps at 50 miles per hour can damage a car. We could call that a forecast of a negative consequence. It is not positive thinking to talk about how driving over a speed bump can damage a car. Positive thinking would be something else entirely, like thinking positively of driving 25 miles per hour in a school zone while actually driving 50 miles per hour in a school zone.

So, when will the economy of Japan recover to what it was when gas was 65 cents per gallon? It might not. When will driving over a speed bump at 50 miles per hour be safe? It might not.

“Yeah, but when is someone going to remove that horrible speed bump from that annoying school zone?” They might. However, now the speed bump is there.

“Yeah, but when will gasoline be 65 cents per gallon again?” It might. However, it isn’t that now. It is something else.

In fact, gasoline prices are not the same everywhere. We mentioned that gas prices in Japan and the UK were higher than some other places. There is a table of prices here: http://en.wikipedia.org/wiki/Gasoline_and_diesel_usage_and_pricing

For instance, in Saudi Arabia or Iran or Libya, gasoline prices have recently been about 65 cents per gallon (with prices converted to US Dollars). Those places have a lot of oil and not so much demand from cars. You can imagine how people in Japan or the UK feel about gasoline prices that are less than ten percent of what the Japanese and British pay in those places with high demand for auto fuel and little or no crude oil.

In Venezuela, gas prices have been about 10 cents per gallon for many years (with prices converted to US Dollars). Again, you can probably imagine how jealous the people in Arabia or Libya feel about gas prices of only 10 cents per gallon.

Someone recently asked me “when are prices of gasoline going to be 10 cents again in Saudi Arabia? They are all the way up to 65 cents per gallon now- isn’t that just horrible?” Can you guess what I told them?

Naturally, what I told them is that gasoline prices will only recover after people stop driving 50 miles per hour over speed bumps. Further, US economic growth will not recover to come close to what it was when gasoline here was 65 cents per gallon unless it does. It might. It might not. It hasn’t yet.

It is interesting to note that, in Kuwait, the net trade surplus from oil is over $33,000 per year per person. That is an unusually large transfer of wealth from other nations to that one, like for an infant who happens to be born there.

My forecast continues to be that oil-rich regions like Alaska, Arabia, and Alberta will continue to experience profound economic growth relative to places like the UK or Japan or Nevada. I might be wrong, though. After all, the Soviet Union dissolved even though it was one of the most oil-rich regions of the planet (but not per capita- just overall).

Eventually, one of my forecasts will probably be wrong- even inevitably. So far though, there has been a distinctively positive correlation between my forecasts and actual developments. Many other people have made alternate forecasts based on such methodologies as “positive thinking” and “hope for change” and “irrational exuberance,” but there has been a negative correlation between their declared forecasts and the actual reality that emerged.

Now, I have a few more questions for you. If a person has $50,000 of cash and then they make a new promise to pay $500,000 on a mortgage, then how much additional cash do they have after making that new promise and spending $5,000 as a down payment on their real estate speculation? Did you notice that the question itself reveals a lack of comprehension of the subject matter?

Next, if an insurance company has $50 million dollars and then they make new promises to pay up to $500 million dollars in policy claims, then how much additional cash do they have after making all those new promises and spending $5 million in paying out prior debts? Again, did you notice that the question itself reveals a lack of comprehension of the subject matter?

If a bunch of naive stock market speculators pour millions of dollars in to trading the stocks of various companies, such as AIG (pictured above) how much does that increase the profitability of those companies? In other words, how much does it increase net profits of a company when investors buy and sell stocks of a company? It doesn’t.

Similarly, when investors buy and sell stocks of other companies, driving up those share prices, does that really have any lasting effect on the tangible book value of other companies who also own sharing of, for instance, Enron or AIG or FNMA? How do fluctuations in the market pricing of the stocks for a company filing bankruptcy effect the debt to asset ratio of the company (their solvency)? It doesn’t.

To compute the book value of one thing off of the market pricing and recent comps of another thing is one method of computing a book value figure. However, to do so reflects some fundamental presumptions about prices, the stability of prices, and, in particular, the risk of the sudden deflating of credit bubbles (as in bubbles of legally valid promises for future performance which may or may not actually occur in the future as promised).

I assert that most people are not related realistically to the reality of prices (or speculative bubble of credit promises). For instance, they may not be related to the reality of how gasoline prices vary from place to place and from time to time. They may even call such variations in pricing unpredictable or incomprehensible or horrible or negative or unfair.

Similarly, most people may not be related to a realistic future cash value of their insurance policies or their real estate or their stocks. They may be surprised by future variations in pricing.

Accountants may know the term “Tangible Book Value Per Share.”
http://www.investopedia.com/terms/t/TBVPS.asp

That is a computation of the value of a business based in large part on current assessed value of current assets. Some companies may have a negative “book value,” such as insurance companies who regularly make promises far in excess of their current capacity to pay.

Again, those computations are based on current assessments, including current assessed value of their stock holdings in other companies and current assessed value of their real estate holdings. But that is a problem. “Book values” are being computed based on other assessed values (current market pricing), not on other “book values.”

Accountants may also recognize other ratios such as Price to Book Value. That means a ratio of the difference between the market pricing or assessed value and the book value, which is computed off of other market pricing or assess values. Again, do you notice the irony in this?

How much additional cash does an insurance company have after making new promises totaling $500 million in debt? They might not have any new cash based on taking on new debt.

How much additional cash does a real estate borrower have after making new promises totaling $500,000 in debt? They might not have any new cash based on taking on new debt.

Finally, how much additional tangible book value does a company have if the market pricing of it’s own assets rises by 100%? If those assets with rising market prices are just inflated real estate mortgage contracts or inflated stock prices or inflated promises from insurance policies, there might not be any new tangible value in that company.

New promises do not in themselves produce new tangible value. New debts do not equal new net profits.

Call this comment negative if you like, but going 50 miles per hour does not remove the speed bump from the road ahead or convert the school zone into an abandoned highway. Consider also that there is an immense opportunity present, but it is not available by presuming first that prices never change, and second that when they do, those changes are totally unpredictable.

www.OneEyedKingsWealthClub.com

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