Wednesday, 23 April 2008

mess ..

i have ingeniously managed to screw up. at work that is.
you see my job in an ideal world would be to intelligently guess things and then profit from things unfolding the way i imagined. the devil is in the details however, and while i may be right, i may be also wrong at the same time. how, you ask ?
because the time horizon of my guesswork is uncertain at best. you know something will happen, but you are not sure when. and between now and when your imagined scenario becomes a certainty, reality might turn out to be completely different. that different reality then, might then influence your actual guess.. this is what George Soros calls reflexivity. the feedback mechanism through which history drifts in an unpredictable way.

my view now ?
well.. let me start with a quote from a cleverly written website article i found:
"The insidious and dangerous unspoken corollary to all this: Financial pain is now unacceptable. Those in trouble demand to be rescued, and the government seems to agree that the "creative destruction" component of capitalism must not be allowed to do its work. It's a sad irony that as former communist countries embrace capitalism, we seem to be headed in the other direction."
what the hell does this mean ? that we live in a world where we sacrifice a lot to shield us from bad decisions taken in the past, at the cost of future pain, that is now not yet visible or clear.

you want an example? pollution is a good one.. we pollute because a lot of the comfort in our life comes from turning the planet into a junkyard. and while the forward looking solution would be to cut back pollution by limiting the use of fossil fuels, it would be too painful to do it, so we keep on polluting just because its too hard not to..

but not only that, we keep increasing the amount of pollution. eventhough there are efforts to be more green, the reality is that emerging countries like China or India keep increasing their pollution so that the standard of living in those countries can catch up with the 'Western' world.

and now here is another thing.. debt
debt - which has so many names is essentially a way to increase current consumption at the cost of giving up some future consumption. why only some? because debt can be used to let creative ideas come to fruition, which could benefit us, and maybe even improve our lives. or even reduce pollution.
suppose i have a great idea to turn undrinkable water into drinkable, but i dont have the dough to build my funky machine that does that. i can go and borrow money, invest it in my idea, and eventually pay the debt back. its a win-win for mankind.

nevertheless a lot of the debt is used to purely consume and therefore:
debt can create an artificial increase in the demand for non-renewable energy.
the simple evidence is inflation of energy. a dollar will buy you a lot less oil then it used to. since debt is in dollars (or other paper money) the continous borrowing versus the constant amount of oil on the planet creates a situation where paper money keeps eroding in value againt the value of oil, or to put it another way; the value of oil keeps getting dearer expressed in paper money.

lets suppose you can keep borrowing for ever, what will the result be ?
the value of paper money goes to zero (as it has many times in the past) and the value of commodities soar. much like now. do you know that the price of wheat (flour), rice, corn, soybeans..etc has double or in some cases tripled just in the last 2(!!) years. not the last 20 or 50 or 100, but in the last 2 years !

my bottomline: there is too much debt. commodities is just one example how too much debt - in my opinion - can cause distortions and risks but the same point can be made with house prices too, in fact anything of which there is a limited supply.
so either the authorities let the debt pile shrink causing pain now, or we will end up with a bigger crisis of the system at some stage. either because paper money goes to zero, or because the decision to take the pain will come later, when there might be more debt and hence more pain to be taken.

right now financial markets are of the view that the debt machine can hum along and everything stays hunky-dory. my view is that things are likely to collapse under their own weight. why? because the confidence to see enough returns (in paper money) to service and repay debt or just to keep consuming at current levels is shaken given how expensive food, energy, raw materials are. even if the emerging countries like China, India..etc have a lot of catchin up to do, it seems likely that their fortunes are still tied to the consumer in the 'West' who is beginning to understand the need to scale down consumption.

so overall I think the world ought to enter a phase of retrenchment which should cause a a repricing of financial market assets, like stocks for example.

hi ho

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