CHAOS
Chris Laird
Well with the conundrum making itself known in several spheres.....the gold
markets, and bond/interest rate markets... ill comment on the background
chaotic forces, and what I do see as the sole linear guiding force that will
decide things to come and give us at least some predictability.
First the so called conundrum. That word speaks of a mess that don't respond to what it seems it should. Isn't that what we are seeing today? More or less yes.
Interest rates conundrum: falling ten year interest rates combined with what would be typically bond crisis levels of deficits of various types. Gold
conundrum: gold languishes in a long pause when same deficits that should
kill bonds, don't boost gold as it should... and gold stocks are indicating
more of this to come anyway... aren't they?
The emergence of chaos, really isn't good for investment because a prime
characteristic of chaos is UNPREDICTABILITY. that's not conducive either to investment planning for things like insurance portfolios, any kind of value
investing for people like Buffet or Gross. It's not conducive to any
realistic pricing of risk either. So, we can be sure that all the risk
modeling behind the ridiculous derivatives pyramids are worthless time
bombs, awaiting the surprise that impoverishes the world of several times
the national GNP of the US in a month or two.... and leaving people like the
Fed trying to figure out how to raise the dead.
I wrote an article called US dollar speculative pathologies. Please read it.
Its theme is that predictable investments are gone, and speculation is all
that is available, or even wanted. Really one of the main issues here is
that there is a psychological disease that is prevalent wherein, people in
all sectors are greedy and don't save, and speculate. That disease is only
healed by a long depression. Which is why the Fed will fail in the final
reflation initiative to come, cause it wont address the disease, until it
progresses into its natural depression decline phase, and leads to a burn
out of all the speculative excesses.
Now back to the cause of the conundrums. There are always chaotic forces at work, they are indeed the real backdrop of all phenomena believe it or not, and chaotic systems show long periods of apparent stability, but then when certain thresholds are reached, bifurcations occur, and what appear to be discontinuities appear, and radical jumps happen in markets, or whatever is being modeled with chaos.
The elegant logistics equation which models consumption and production in an
economic system, is really simple looking. It also appears in many
population models. What's scary about it is that it just friggin bifurcates
and jumps at times, in an entirely unpredictable manner.
x = constant * x * (1 - x)
I'm not going to go into a detailed discussion of this equation as the study
of it is rather arcane, the concepts of this non linear equation are rather
hard to even comprehend in their basic forms, but...
the equation relates population growth vis-à-vis a consumed resource
new-population = constant . (old-population) . (1 - old-population)
or thus here:
x = constant * x * (1 - x)
If you go look at non linear dynamics, the behavior of this equation has a
period of stability, sometimes very long initially and can appear to be
modeled linearly for a time, but deep inside the plot of it, are little
erratic jumps appearing within a small orbit.... anyway... it appears
stable initially... what happens is: some infinitesimal change which
seemingly would not alter it significantly causes it to bifurcate (jump) and
find a new orbit far away for where it was.....
The idea here is that there are changes that are unexpected, hence the name chaos. THESE BEHAVIORS ARE WHAT ARE BEHIND ALL ECONOMIC PHENOMENA.
The behavior of our economy is indicating fluttering of stability, and that
we are losing the linear behavior of our markets, these times are called
times of first, low liquidity then high. (I'm broad brushing this).
The linear tracker I am using for this paper, not the only one, but one of
the foremost, is debt. A while back I wrote a GE editorial about the growth
rate of debt in the US: household debt The data I got was from the fed. It
showed that when the US household debt growth approaches 12 to 17 percent, there is a recession every time. We are in this range now, and perhaps exceeding that. Funny thing is, the source of the data was altered two months later, completely. Strange .... maybe not so strange. The data was changed to reflect an averaging of all the data I posted to appear to be a nice monotonically rising debt ratio over 40 years!
Infer what you want from this.
Now back to my linear tool, growth of US household debt. I highly recommend the credit bubble bulletin by the incomparable Doug Noland at prudent bear. There you will find all you need to know about the growth of debt in all sectors of the economy, and lo and behold in those bulletins u see growth of most sectors of debt being in the 12 to 17 percent range repeatedly.
So. Logistics equation chaos aside, tracking the growth of debt clearly
indicates that we are at the point of a change, with the economy fluttering
in instability and the indicator is that the growth of debt world wide is in
the 12 to 17 percent range or HIGHER. (ALMOST ALL OF these measurements are flirting with 12 to 17 percent growth), courtesy of Doug's great work.
The gold market is indicating to me a deflationary expectation. The bond
market same.
One thing I am wondering about is, well, gold and bonds are the
quintessential smooth market forces/baselines. Are their counter intuitive
behaviors right now indicating the approaching bifurcations of the
underlying logistics equations of our economy???????
It wouldn't be fair for me to lay out all this strangeness without some
prognostications.
I believe we are going to head into a deflationary debt deflation. I believe
reflation will fail, because unless the government just hands out checks to
everyone, it wont be effective, and if they did hand out checks, well, its
just a prelude to the destruction of the dollar once and for all. Then a new
currency. So that's just suicide. Hence no checks (helicopter money, all
threats aside).
There is one caveat here, that is that the fed may indeed be secretly
thinking of debasing and destroying the dollar to destroy all the outstanding obligations of the government..... If so then perhaps there will be a inflationary outcome, but only if they do it before a real deflation sets in. If a real deflation sets in, it won't help to inflate, that's my view.
One other comment, I wrote that if the 10-year note rises one percent in
interest, then that's the end of the housing bubble and US consumer. I still
stand by that, but I am surprised by the lack of response of the Ten year
rate to the incremental fed increases. All this means is that there is the
OTHER worse alternative to the end of the housing bubble. IE just a maxing
out of the debt sustainable at the present low rates... and this is a worse
outcome because we'll get maybe another year to grow debt, inflate the
housing bubble more, by several trillion more, and then deflate all the more
anyway later. It's a worse outcome. I would have rather had the interest
rates stop the madness.
May 4, 2005
Chris Laird
tec_10000@yahoo.com
Email this Article to a Friend 
Printer Friendly Version