Moving to a Trans-Industrial Paradigm

Depression..or Collapse of Industrial System? 

Why is there an underlying assumption that a market collapse and financial meltdown needs to be a bad thing?  Doom and gloom is all the talk, as if the only positive thing is when the markets are going up.  Many believe that increasing markets are ‘healthy’ and declining markets need ‘fixing’. Isn’t the idea of pure market capitalism that the markets determine the prices freely, i.e. what market participants are willing to (and can afford) to pay, not what sellers would like prices to be?  Is it a question of what is vs. what should be?  Every seller would like a higher price, but their dreams about higher prices are only justified by people willing to pay the price. 

Short sellers have known for a long time the profits that can be made in declining markets.  Catastrophe is opportunity; it is the birth of modern day fortunes such as Rockefellers and Morgans.  These noble houses were not crafty geniuses who invented the cure for cancer, they were shrewd, well-informed executives who were at the right place at the right time, and they had the cash to strike. 

In fact, it is much easier to profit from calamity than success, because of the predictability and calculability of crises (.pdf warning).  Success is more difficult to predict, and you do not have a measure of how successful a company can be.  If a company goes IPO at $20 per share, and you expect them to increase, the price could go to $50 or $500 like Google.  However, if you expect bankruptcy, you have a ground floor at zero.  In addition, the statistics are in your favor, 95% of all businesses in USA fail.  Knowing that, it makes sense statistically to bet on failure rather than success.

Stocks have the tendency to swing upwards less on hype than downwards on fear.  Example, if there is a rumor that the FDA will approve a new drug for a drug company, it may increase by 5%.  However, if the existing business vanishes due to a lawsuit because their latest drug has a terrible side effect, it could drop into oblivion and possibly bankrupt the company.

“You Want to Profit at the Expense of Others?”

First, short selling a company stock is not profiting at the expense of the company.  In fact, if management proves a short seller wrong, a short seller can lose a lot in a short squeeze.  Short squeezes account for large upswings in declining shares that otherwise might not exist.  If a company is successful and the balance sheets are clean, there is no mechanism for a short seller to profit.  Secondly, there are many other opportunities to make money in a collapse than short selling.

Commodities

The commodity boom has been obvious after the fact, but some, like Jim Rogers, were predicting it from the beginning.  It is far from over if you can understand the basic fact that in a depression there is scarcity, and with scarcity comes increased demand and increased price.  The commodity bubble is not a traditional bubble and commodities are not inflated, they are reverting to real prices based on demand.  As global warming affects crops and real demand for hard commodities increases, there will be huge trading opportunities in the commodities markets.

Distressed Equity

Companies hurt by a failing industrial system will turn to anyone with cash to keep the business afloat, and those investors can make hefty demands.  There will be a fire sale of businesses and hard assets because they will be essentially worthless, as companies will face hard times to turn those assets into revenue.  However, the assets are not worthless, so there will be a value play in purchasing distressed assets in many forms: equity, real estate, debt.  Anyone who is financially desperate selling their family heirlooms on eBay understands there is someone getting value for 5 cents on the dollar.

Automated Trading Systems

As a contrast to investing, investors can place money in fully automated trading systems for any market.  Elite E Services specializes in FX, but systems’ trading is very popular for futures, stocks, and almost any electronic market.  The advantage of trading these systems is that it does not depend on market direction if the system is profitable.  Of course, not all systems are good systems, so one must be very careful when evaluating them.  However, a good system should perform consistently, and have an account protection to save the account from catastrophic drawdowns.  Systems like this do exist, and there are rankings of such systems available on many websites.  Short term systems have less risk of getting caught in choppy markets or losing the ability to predict trends over the medium or long term.

In a complex market environment, only an intelligent trading system can make dynamic decisions in seconds.  As the markets become more volatile and complex, as indicated by a trend in the VIX,

A Return to Value

What has intrinsic value?  Artwork, no matter how creative, has no intrinsic value.  Designer jeans, no matter how fashionable, have value the same as Levi 501 in terms of their use-value.  In an inflated economy when money is pouring out of consumers wallets, they may pay any price for something with no value at all, such as a $1,000 pizza; but that does not make a pizza worth more than the ingredients and labor.

A re-pricing of assets has begun, and a revaluation of money itself.  A safe bet is to invest in anything that has intrinsic value.  A power generator, no matter how ugly, can create energy and life.  A vase from the Ming dynasty, no matter how beautiful, will not help freezing homeowners in the Northeast.

How Bad is the Collapse?

Walking around America, you may not notice much different, you may not notice a depression.  Kids playing in parks, teens gathered around movie theaters, restaurants filled on a Friday night.  Robert Waltenspiel has a different view.  He recently won a rent-free year in a nice new house in an expensive subdivision not far from the HQ of Wal-Mart Stores, Inc. (WMT). The Journal article continues:

Daily life in these developments seems a bit post-cataclysmic. Children play on elaborate but empty playgrounds. They walk their dogs past rows of shiny houses that have never been lived in. Voices echo up and down the block. Unfinished houses and vacant lots strewn with construction debris clutter the horizon. The hot tub at the community center doesn't work. The communal fountains are dry. Mr. Waltenspiel's kids have no one in the subdivision to play with, so he has to take them to a nearby park for social interaction. His 4-year-old "will walk up to strange girls in the park and say, 'Hey, will you be my friend?' " he says. "A, it's adorable. B, it's sad." The people who bought into these subdivisions encounter all sorts of other unexpected problems, including burglars looking to steal toilets, appliances and copper wiring. And blight. Krista Anderson, an administrative assistant, lives in a subdivision outside Phoenix where the developer suddenly halted construction last fall, leaving behind not just unfinished houses but also scaffolding, piles of cement and construction material that "is turning yellow and looks bad."Many residents aren't sure exactly who is in charge of mowing the weeds, maintaining the street lights, cleaning up when someone uses open space as a dump."

James Howard Kunstler said years ago that suburbia would be the slums of the future.  His predictions were based on peak oil theory and it is doubtful that he expected this to happen so quickly.

The media would have us believe that we are nearing a bottom, the joke being that it’s a new bottom every week.  But they aren’t painting even a small part of the true picture, and it’s not totally their fault.  Government and other statistics that used to be reliable indications of the economy are now being ‘revised’.  Similar to the corporate shuffle of junk to ‘level 3’ assets, now hard economic facts are being fiddled with.  An economist John Williams has been tracking them for 25 years at his website.

Consumer spending is 70% of GDP and retail is hurting big: 

Ann Taylor closing 117 stores nationwide.  Eddie Bauer to close more stores after closing 27 stores in the first quarter. Cache, a women’s retailer is closing 20 to 23 stores this year.  Lane Bryant, Fashion Bug, Catherines closing 150 stores nationwide. Talbots, J. Jill closing stores. Talbots will close all 78 of its kids and men's stores plus another 22 underperforming stores. The 22 stores will be a mix of Talbots women's and J. Jill. Gap Inc. closing 85 stores.  Foot Locker to close 140 stores.  Wickes Furniture is going out of business and closing all of its stores. The 37-year-old retailer that targets middle-income customers, filed for bankruptcy protection last month.  Levitz - the furniture retailer, announced it was going out of business and closing all 76 of its stores in December. The retailer dates back to 1910. Zales, Piercing Pagoda plans to close 82 stores by July 31 followed by closing another 23 underperforming stores. Disney Store owner has the right to close 98 stores. CompUSA (CLOSED).  Macy's - 9 stores closed. Movie Gallery – video rental company plans to close 400 of 3,500 Movie Gallery and Hollywood Video stores in addition to the 520 locations the video rental chain closed last fall as part of bankruptcy. Pacific Sunwear - 153 Demo stores closing. Pep Boys - 33 stores of auto parts supplier closing. Sprint Nextel - 125 retail locations to close with 4,000 employees following 5,000 layoffs last year. Ethan Allen Interiors: plans to close 12 of 300 stores to cut costs. Wilsons the Leather Experts – closing 158 stores.  Bombay Company: to close all 384 U.S.-based Bombay Company stores. KB Toys closing 356 stores around the United States as part of its bankruptcy reorganization.

It Is Not 1930

People fear depression like it is a plague; however, there are many differences between now and 1930.  First, there is the internet, not only a resource for information and entertainment; it can be a source of income and solution for transportation issues.  Second, technology in energy, housing, and food production exists today that is currently cheap and accessible, if a group or individual decides to unplug from the system it is possible, whereas in 1930 all you could do is plant a seed and hope it grows.  Many people who don’t plan properly, of course, will end up in the same situation as those in 1930, however back then opportunities of today simply didn’t exist, if you were out of luck there was little you could do.  Finally, we have a robust, efficient global marketplace that encompasses real trade and finance.  Entire countries could cease to exist while individual trading posts could carry on commerce independent of their physical location.  Of course, those who are prepared mentally and in business will reap the rewards; others will face a very harsh fate.  Corporate refugees from the cities will be psychologically incapable of dealing with real crises while ‘survivalists’ who are already living in a more dynamic environment will face these problems with little regard.

One could live debt free almost anywhere you can afford as long as there is power (which could be purchased with Solar panels) and internet and lead almost any life one chooses.  It may be a bit lonely in suburbia due to a diminishing vacancy, but the place of life is a personal choice, how to structure it is clear: live in the 19^th century with the amenities of the 21^st. 

Post Industrial Shift

What is happening to the economy is not a ‘depression’ and it is not the ‘end of the world.’  It is a major generational, historic shift from an industrial economy to a post-industrial economy.  The industrial economy is not sustainable, and it is collapsing.  Post-industrial life will flourish more and more as the industrial world collapses.  Industry is not a factory it is a way of thinking and a culture.  Farming has become industrial in this century, with the use of petroleum-based fertilizers and gas powered machinery and monoculture crop raising.  Therefore, if you are an industrial business it is the end of the world for you, time to sing your swansong.  This is not a new concept; however we are now seeing the beginning of the shift in the financial markets.  Smart money is flowing into commodities because it has value, not for any other reason.

A debt-based monetary system, with the USD as the reserve, is financially, mathematically, unsustainable.  Financiers and central bankers at the top are ‘borrowing from Peter to pay Paul’ which can keep the system running for another few months but essentially makes the debt problem worse.  Every year, more debt needs to be issued just to service interest payments on previous debt.  Therefore, each year more and more money needs to be issued into the system exponentially, which is a bubble that must eventually burst.  It is not a question of if, but when. 

The Meat

Elite E Services is not a group of philosophers or new age gurus, EES develops automated trading systems for the FX market and advises clients on investments.  As such, we are interested in the pure economics of the situation.  As with many historical shifts, a changing economy means a different way of life and a different thinking.  Society has been spoiled over the last 50 years with cheap oil and a relatively stable USD which backed the world economy; that is no more.  Anyone should seriously examine things for what they are, not what they should be, or what they hope things to be.  Hope will not pay your mortgage or feed your family, nor will the government (who is facing an exponentially increasing debt burden). 

Invest in things that have intrinsic value such as Agriculture and Commodities.  EES promotes the investment into automated trading systems, because they can be tweaked and used on other markets (a EUR/USD system may work on Gold or even Oil).  The development and trading of black box trading systems has intrinsic value. 

The FX market will always exist unless there is a one-world government or a nuclear holocaust, both very unlikely scenarios.  Other markets however can become extremely illiquid or regulated.  As long as we have internet and power, we can trade FX.  So aside from investing in energy generation equipment, so called ‘vice’ investments (alcohol, tobacco, and gambling) which typically do well during tough economic times, EES recommends investing in trading systems that can be traded for short term profits no matter what the state of the economy.

Comments

[aquaculture:]

Lucid, down to earth, honest assesment.
seekingalpha.com/artic...

2008 Aug 04 07:07 AM

[contrariwise:]

"It is far from over if you can understand the basic fact that in a depression there is scarcity, and with scarcity comes increased demand and increased price. The commodity bubble is not a traditional bubble and commodities are not inflated, they are reverting to real prices based on demand."

These statements are truly bizarre. Do some research and find out what actually happened to commodity prices during the Great Depression. Farm producer prices and other commodities. Let me give you a hint: a housing bust is not good for lumber, copper and other building products related commodities. Tariffs on ethanol imports are distorting the market for agricultural commodities, creating artificial demand for inputs such as fertilizer. Oil markets are distorted by (unsustainable) overseas government subsidies. Oil is a special case because of dwindling conventional reserves and inelastic demand (in the short term). When the tariffs and subsidies go (as they must) watch out. The same things that are happening to lumber and copper prices will come to pass in agricultural commodities. Which is what happened in the 30's - farmers could not pay the freight to get their produce to market because the prices were so low. Low commodity prices. Demand destruction follows credit destruction.

2008 Aug 04 09:09 AM

[simplesimon:]

Sobering analysis 's ( such a plural? analysiii?) are difficult to read and digest. Like taking castor oil for our digestive disorder. Yet there have been realists , like John the Baptist', voices crying in the wilderness throughout this obscenely venal, you can have it all, "Flip It" Hummer Era" we have enjoyed, like drunken sailors on long overdue shore leave. Every generations has at least one prolonged day of reckoning, such as the one we are "enjoying" now, up to our Emmet Kelly necks. We will emerge. That too is a given we can bet our last farthing on it.

Some of us recall being in the military, with our "Flight" ( Air Force Boot training ) brought to a company halt; left face, parade rest-and without a word from our drill instructor, encouraged to watch as bedraggled, wrinkled, filthy uniformed, no hat, no haircut, hair flopping like comb overs, as they shame facedly pick up cigarette butts and chewing gum wrappers. With the occasional, "Hey Sealed Beams...you missed a spot" being heard from the sharply creased squadron. My thinking here is that a few million 'what were you thinking' type executives should be paraded around like this, sweeping and cleaning, and repainting, and pot hole patching, with hot steamy tar on 95 degree days, for the whole world to see. Not beaten, not tormented, just humiliated for a few months incarceration; and then returned to the work force from which they came...like the desk from which they issued risky loans. I say this, for a guy in our Sunday school class who is a car salesman ( they can make $100K a year, people, selling cars with blown engines and not losing a minute's sleep over it! ) ..who when asked about the repossession rates, confessed that approximately 22% of all cars sales end up on the back of a repo truck at 3 a.m. for having missed as little as the Second Payment ! And THAT only because GMAC would NOT accept a partial payment, and demanded both payments at once on the next due date. This, of course, set you up for the 2 payments in arrears. This provided the legal right, at one minute past the second due date, at midnight, to come get the car, sell it to auto advantager, and carmax, for 50% its value or less..and the remaining balance owed, billed to the repossessee! Why? Simple...this is a fabulously lucrative business. but think, people!! think!...how long does it take for 60 million people to wind up the worst credit rating possible, and teh infamous subprime, translate usorious loan sharking...and thus completely torpedo new car sales? Had any one thought of the down side of this unbridled, ruthlesness? THESE are the folks we would all love to see picking up cigarette butts. "Hey bubble gut,plumber butt...you missed spot!"

2008 Aug 04 09:54 AM

[cjwirth:]

"A vase from the Ming dynasty, no matter how beautiful, will not help freezing homeowners in the Northeast." For the same reason, people who hold gold as an investment will find out in the future that gold is pretty, but doesn't buy much and could be used instead of lead for fishing sinkers. Clifford J. Wirth www.peakoilassociates....

2008 Aug 04 10:00 AM

[alajac:]

If the bank owners were personally responsible for loan losses do you think they would have made all those bad loans? They can socialize the losses and take all the profits, so they do. Fractional reserve loaning is totally corrupt, a government approved Ponzi scheme.

Loans from fractional reserve banks are inherently “liar’s loans”, the lie being, the bank is loaning money that it really doesn’t have. The Fed and the thousands of banks creating these liar loans create inflationary conditions that actively discourage thrift: people throw their money at something that hopefully will go up in a lot in price in order to hold onto the buying power of their money, trading the certainty of being screwed in the long run for the chance to possibly avoid being screwed at that future time. Debt-money leaks out value like a bucket with a hole in the bottom leaks out water. This is just going to keep happening until the basic cause gets fixed.

First of all, WE NEED OUR OWN DEBT-FREE CURRENCY, backed by all of the real estate owned by the United States (which is, in fact, all of the real estate within the national boundaries, and really more than that including other nations whose continued claim to existence depends on U.S. defense of that claim; case-in-point, Kuwait, 1991), we should distribute that new currency in monthly equi-dollar amounts to all legal residents (amounts due minors to be held in trust accounts). Also, we need bankers to be held financially responsible for any loss of depositors’ money (if they want to gamble with fractional reserves, it’s the bank owners who should pay, not taxpayers, and if you lose your own money by depositing it in a fractional reserve bank, again, it’s YOU who should pay, not taxpayers. How can we ever expect things to get right with a system based on socializing losses?

Next, we should REPLACE ALL FEDERAL NON-CONSUMPTION TAXES with a one-half percent(+/-) Tobin-type tax on ALL outgoing electronic transactions (avoidable by using cash for all transactions, and, since avoidable, the tax will be arguably being paid voluntarily) in order to:

1. Pay off the national debt,

2. Repair the damage that the U.S. government has done to persons and the free market by favoritism (reparations for having “Constitutionalized” slavery might be considered) and excessive regulation (e.g., we need about 4 times as many doctors and healthcare professionals as we currently have in order to have enough competition extant to get medical costs back to the realm of affordability, and we would have had them had there been a free market in medical education), and

3. Extract and destroy excess currency as required to avoid inflation.

No other form of Federal non-consumption tax should be allowed (this tax could go to zero when it has done its job if there is no inflation in the system).

The monthly equi-dollar distribution amounts should be of sufficient quantity (assuming $1000, that’s $24,000 Federal tax-free per couple, plus whatever wages and other income they bring in) to be considered sufficient replacement for all forms of corporate, farm and personal welfare, including subsidies, welfare, tax incentives, Social Security (to be phased out), Medicare, the Federal Minimum Wage law, and ALL OTHER forms of Federal financial redistribution schemes; there won’t be any need for separate Federal retirement accounts since there won’t be any income or investment taxes.

For those who like their political solutions morally justified, the monthly equi-dollar distribution amounts can be considered “justified compensation” for the denial of free access to all the property that the government has privatized.

With everybody getting the same monthly amount, and everybody paying the same percentage increase of fiat money, there is no redistribution nor inherent injustice in the plan.

2008 Aug 04 10:27 AM

[shaman:]

The "post-industrial" doesn't thrive because "there's the internet. If the author had even read any of the work done on post-industrialism s/he would have understood that the "post-industrial" is built on the superstructure of the industrial. If the industrial is unsustainable and collapses, there will be no "post-industrial" except in the most literal sense.

2008 Aug 04 10:46 AM

[Charles-A. ...:]

alan jacquemotte would have you believe that real estate is real.

That land was land and that its value was unchanging.

But if he owned land in Chernobil or New Orleans or Alaska during the second world war, he would have seem incredible change and fluctuation in the value of the land he would base his debt-free currency on.

Money is a relative thing and always will be because its a human invention.

2008 Aug 04 11:46 AM

[El Bandito:]

Does anyone else notice the dissonance between the theme of this article -- in a post-industrial economy, wealth only exists in things of intrinsic value, such as tools and commodities -- and its parting advice -- use your wealth to trade in foreign currencies?

2008 Aug 04 12:41 PM

[Joe Gelet:]

Many of the posters of comments miss the points. First, Foreign Currencies have no intrinsic value per se. What EES does is we develop automated trading systems which in a very real sense are cash generating machines. If we were so inclined we could use those profits to purchase things like commodities (for daily use not for investing). That happens to be our profession - if your profession is hair cutting then I would suggest investing in a fine pair of scissors. However the context of posting on Seeking Alpha is to suggest places those with 'excess capital' outside what they need for purchasing of scissors, etc. could potentially be invested. One such market is the FX markets which have a low minimum and many advantages. Is that biased? Or did we come to the FX market by much research and real experience trading stocks?

Regarding the post industrial title, it is just a nomenclature to describe 'after industrial' .. the word 'trans' was chosen instead of 'post' in the title due to research that was conducted on that term: en.wikipedia.org/wiki/... and it's connotations. The point being, our society is designed based on an industrial system that developed during the 20th century. In Cambodia and pre-industrial cultures and most of the third world, there isn't much industrial infrastructure to speak of. With the internet, and small modular technology such as Micro Nuclear Power Plants: blogs.zdnet.com/emergi... It is possible to live almost anywhere and trade anything. In fact, agricultural society has less impediments to adapt because they do not have highways, bridges, zoning laws, etc. Wall St. was in Manhattan because NY was an industrial solution to solve the problem of major corporations who needed big filing cabinets (skyscrapers) which are outdated. Even before the crash, many trading firms have only sales and marketing offices in NY while trading and R&D is done in remote facilities which are highly customized and highly secured. (Reston, VA vs. Washington D.C.). Saying people shouldn't live in NY or Wall St. is this or that is not the point. The point is NY and big cities served the major societal function pre-internet and pre-computer which now doesn't have value. Wall St. has the branding value and the associative value but is it really worth $50,000 /month to house servers there?

2008 Nov 17 01:12 AM