Survivalism goes mainstream

If you listen out for them, you'll hear them: voices telling you to prepare for disruption to normal civil life.

Years ago, it'd be American gun nuts - the type that quotes Ruby Ridge and Waco as revealing the soul of government. They'd be researching the continental US to find rural areas safe from floods, earthquakes and tornadoes; they'd be building houses quickly and cheaply from straw bales (it works very well, apparently). Pioneering without the Apache has a superficial romantic attraction.

But there is a new Apache: your fellow man. In northeastern Ohio, a sheriff's department has suffered such severe budget cuts that it now has only one police car to cover an area twice the size of the British West Midlands. A judge has advised residents to arm themselves, to be careful and vigilant and make connections with their neighbours. (htp: John Lott)

In Australia, an investor education website has turned from advising us how to build a balanced portfolio, to considering what happens when complex societies collapse:

Marc Faber is recommending that investors have half of their investments exposed to Asia. That is a very useful advice for very high net worth people who have the money and connections to resettle. But for the rest, it is very important to have your own plan B if something happens in your local area...

Your entire country will not be likely to collapse overnight. But if you are unlucky, your local region can be the one that descend into chaos first. The hard question to ask is: do you trust that your government [...] will have the resources, and competence to cope with large-scale crisis? We are not talking about small-scale crisis that affects small communities- we are talking about a scale large enough to affect at least hundreds of thousands of people.

If you are going to plan for Plan B, then you will have to increase the margins in your life and acquire skills outside the area of your specialisation.

Here in the UK, the Fleet Street Letter (an investor publication established in 1938 and edited by Lord Rees-Mogg, formerly editor of the Times) is striking a dramatic note with its headline "The Great Financial Deception of 2010". The thesis of the latest edition is that:

• British government credit will be downgraded (leading to a very damaging rise in interest rates)
• The FTSE will halve within the next three months
• A consumer sea-change from reckless spending to saving/paying off debt will tip Britain into deep and prolonged recession
• Residential and commercial property will halve in value within the next 10 years

One of my former clients, a very decent, hard-working man whose business was wiped out in the recession of the 90s, at one point told me that he now understood why people turned to crime. Fortunately, before his understanding grew seriously practical, he sold up and emigrated with his wife to the low-cost Far East. Good for him: he acted, instead of waiting for the government to solve his problems.

Our handkerchief of an urban lawn won't grow enough to support us, and I'm still debating what to do for the best if the worst looks like happening. But one thing is clear: forming and strengthening community links will be a vital part of our survival plan.

Two to note

1. Charles Hugh Smith reflects on something that's been nagging me for quite a long time, namely, the seeming impossibility of measuring "real" prices. Everything is relative to something else.

2. The Contrarian Investor's Journal fairly succinctly shows that the USA is fast approaching a debt level so high that Uncle Sam won't be able to service the payments. However, I think it may be time to separate actual here-and-now debt from notional debt in the form of medical and social security undertakings. Surely the latter will be revised radically, voluntarily or perforce.

Our Achilles heel?

The Contrarian Investor suggests that the next market destabilizing factor is the need for minor European nations to refinance.

Step by step - how the dollar is recycled via China

A propos China and monetary inflation, please see two very useful and enlightening articles by The Contrarian Investor - this explaining why the money supply is growing there, and this detailing the steps by which money from the US goes on a round trip to China and back.

The East is [in the] Red

Here's an interesting one: the Contrarian Investor reckons a credit bubble could be brewing in China.

For now, a cloud no bigger than your fist on the horizon; but sometime... This is how we ourselves started, back in the 80s.

Survival

In a Dublin talk last week, Dmitri Orlov bears out my repeated theme of diversity, dispersion and disconnection - the way in which efficiency and survival are at odds. It's also a theme of James Howard Kunstler. Even Rob Kirby's latest post refers to a "financial ecosystem" and asserts that the concentration of power at the top threatens the structure.

Big changes are on the way. Jesse reports on how the world is weaning itself off the dollar; the Contrarian Investor notes how China is cornering the market in rare minerals vital to modern technology.

There is a power struggle - a host of power struggles - going on. The good news is that life goes on, too. The bad news is that not everybody makes it.

Don't be the doughboy this time.

Deflation, inflation, distress

The Contrarian Investor gives a lucid explanation of the potential consequences of deflation.

In Australia (as in the UK, as I think I showed here), the nation owes more money than it has in savings, so it depends on foreign investment.

If interest rates fall, foreign capital will go away to where it can earn more. This reduces the demand for our currency and makes it cheaper. So goods we sell to foreigners get cheaper, and things they sell us get more expensive. They buy more from us, we buy less from them (or they have to cut their prices so we can afford their stuff). More money comes into our economy; all well again.

Except...

• What if , thanks to decades of spending lots without earning much (and borrowing the difference), we no longer make things foreigners want?

Then we become "distressed gentlemen". As the money runs low, we run up accounts at the tailor and the wine merchant, and write IOUs which we hope will not be presented to us soon. Maybe we begin to cut a few luxuries, but old habits die hard, not to mention ingrained addictions.

• What if they sell us things we can't do without, and won't cut their prices?

The money runs out. Unless we are Royalty, and too dangerous to dun, eventually the bailiffs must arrive. In the modern world, the sovereign wealth funds, perhaps.

What can they take? In Australia, there are mineral deposits the Chinese will want, thinks the Contrarian Investor. Here in the UK, maybe some remaining profitable businesses and valuable technical expertise, maybe patents and secret technologies. And it's not only the Chinese that have been lending us their surpluses. We have other creditors.

Then, as the laden carts depart and the keys of the mansion are handed to the new owners, the decayed gentry become vagrants and vagabonds.

Unless we are too dangerous to dun. Perhaps America is; can we be so? And what if our creditors are not certain of our might? Uncertainty can trigger inappropriate actions. There is a Chinese saying, I believe: fear a weak enemy. Catastrophe can be avoided, but unless our leaders are tough with us now, we will learn a harder way later.

But if the master has become poor, what of his servants?

What if, like me, you're not one whose power and social status protects him from the worst effects? Do you believe that democratic societies can do the right thing? If not, this is a time for individuals to make their own quiet plans and preparations.

Shares: why bother?

The Contrarian Investor raises an issue I've been pondering recently: in today's financial climate, are stocks and shares old hat? They're only a market in what companies are willing to let the public invest.

If I were a rich entrepreneur who'd been smart enough to get into cash a year or two ago, I'd be looking to take my company back into private ownership, or buy another for a suitcaseful. Who wants to be told what to do by shareholders with bees in their bonnets, institutional investors looking to maximise profits like, NOW, and other goons? It's like being in a three-legged race with the fat kid.

Venture capital - is that the place to be?

Under the floorboards

The Contrarian Investor reports that the Chinese will have difficulty stimulating demand within their own country, if the Western buying spree stalls. Poverty, compulsive saving by those who can, and stacks of cash hidden under corrupt officials' floors mean that helicopters filled with banknotes won't tempt the population to get out and blow their wads.

Fishy business in the gold market

Contrarian Investor reports that gold is being loaned out at negative rates of interest, which he thinks is in order to help short the gold market. There's a manicured thumb on the scales, it seems.

Waves and tides

A most apposite article by the Contrarian Investor, in which he considers how all this economic information leaves us confused as to the future direction of the economy. It's like getting millimetre-accurate radar images of all the waves in the harbour, without knowing about the effect of the moon on the tides. Not that the information itself is accurate, anyway.

Twang money, encore

The Contrarian Investor is also struck by the elasticity of fiat money, and how this vitiates attempts to make fair comparisons and store wealth. Gold for the long term, he thinks.

In the short term, we have this contest between credit contraction and currency expansion. I'm getting the feeling it'll be the first followed by the second, which is what Michael Panzner predicts in "Financial Armageddon".

Anatomy of a CDO

The Wall Street Journal provides a grisly visual dissection of a subprime mortgage package - thanks to The Contrarian Investor for the lead.

If I follow correctly, the trickery seems to come in step 4, where a CDO largely composed of middling-rated mortgage risk sells bits of itself with unreasonably optimistic ratings attached. "Skimmed milk masquerades as cream".

Can democracy resist the hyperinflation route?

The Contrarian Investor thinks that rather than face economic depression, voters will force the US government to destroy wealth by hyperinflation. The arguments are therefore not economic but political.

I'm not so pessimistic; and if I were, investing in gold would be of less concern than physical survival.

Hark what discord follows

David Galland rehearses the argument for gold. He points out that, relative to stocks, the gold market is so small that a small shift into it from stocks would massively inflate demand. Against that is the fact that it hasn't happened yet, and that a small market can also be manipulated downwards by suppliers, particularly the central banks. Besides, in a real panic, Joe Average isn't looking to make a killing in commodities, he's trying to pay bills in cash and buy food and fuel ditto. Nice area for speculators with quick reflexes, though.

What is inflation, anyway? Ronald Cooke looks at the damned lies and self-serving statistics that underpin the official Consumer Price Index.

Jim Patterson reads the stockmarket runes and concludes:

Sub-Prime issues have been discounted. With overall market returns compressed the downside is limited. We expect a better market in the weeks and months ahead.

In his slightly starchy prose, The Contrarian Investor agrees with Patterson, up to a point, but also gives a serious warning:

1. In today’s market, the probability of the market going up is higher than the probability of it coming down. Hence, it is rightly called a bull market.

2. But should it come down (which is unlikely), it can collapse at extremely great speed and magnitude.

Hence, the stronger and longer this uptrend continues, the greater in magnitude and speed (as in volatility, not timing) the Great Crash III will be. Hence, the coming Great Crash III is a Black Swan event—an improbable but colossal impact event.

The importance of a particular event is the likelihood of it multiplied by its consequences. Black Swan events are events that are (1) highly unlikely and (2) colossal impact/consequences. One common mistake investors (and many professionals) make is to look at the former and forget about the latter i.e. ignore highly unlikely but impactful events.

Therefore, when contrarians are preparing for a crash, it does not necessary mean that they are predicting doom and gloom. Rather, they see the vulnerability of Black Swans and prepare for them.

Stockmarket crash on the way?

Clearly, The Contrarian Investor (2 Dec) thinks it's a possibility. So does Frank Barbera, who looks at the jaded market response to interest rate cuts and says:

All investors take heed, you are staring at a market that is NOT responding well to “Good News.” Markets that cannot rally on Good News tend to accelerate downward on any type of bad news, and that is the kind of market which appears to be taking shape.

The long-term price of gold

I referred yesterday to an article by Tony Allison, which reproduced a graph of the long-term inflation-adjusted price of gold. Here is the original article from InflationData.com.

It looks to me as if the median price of gold (in 2007 dollars) runs at around $450/oz., but I'd be glad to hear from anyone who can give a better estimate.

And the Contrarian Investor's Journal argues why, even in deflationary times, gold may still be a good choice.