Economic Showdown

by | Jan 2, 2004 | Archives

A recent message at summed up global fundamentals as two gigantic forces struggling one against the other.   The positive force is the added efficiency mankind has gained by shifting into a computer driven industrial revolution, which is opening a global economy.   Individuals are empowered to do more, make more and have more.

The negative force is the congestion, and pollution to and from this change.  

The message also left me lost deep in the wilderness with the eve growing and a pack of wolves coming near.

Evolution takes place unequally and creates distortions.   As these distortions grow, the risks of a global economic crash are higher.  

One of these growing distortions is overspending.   Personal overspending has reduced western world savings to a dangerously low state.   Government overspending undermines the world's entire economic system.

As the world becomes more complex, governments spend more and more to ease rather than solve pressures of distortions. If savings continue to drop faster than investment needs and government spending grows, we will see a great contraction with deflation, massive unemployment and a free fall of the US dollar.   This crash will make the last great depression look like a Sunday picnic.

There is an important point to understand here.   Just two years ago we were led to believe that the US government had finally tackled its deficit problem.   Now we can see that the politicians had tackled nothing.  

Their overspending does more harm to the world economy then any terrorist attack.

Now picture one more negative thing about the timing of this growing debt.    October 2004.   This date spells potentoial economic doom that can be exaggerated by government interference.

First imagine a room, walnut paneled, carpeting of deep blue, thick, plush.   The table is of polished oak, heavy and important as are the men that sit there.   The tension is so thick it hangs in the air.   The soft hum from the heating system goes unnoticed. These men are powerful, but right now they are also afraid and their nervousness shows as the man at the head of the table speaks.   “Gentlemen the nation is closer to a monetary collapse than we would like to believe.”

This scene is real and took place in the United States of America at the headquarters of one of the most powerful financial institutions in the world, The Federal Reserve Bank in October 1987. Over several days in October 1987, stock markets around the world lost significant value. The worst damage occurred on Monday, October 19, 1987–now known as Black Monday–when exchanges plummeted. The Toronto Stock Exchange 300 Composite Index (TSE 300) plunged 407.20 points that day to close at 3,191.38–losing 11.3% of its value, or $37 billion. Investors, both individual and corporate, suffered significant financial losses. In the United States, the Dow Jones Industrial Average tumbled 22% on Black Monday alone.

At that time U.S. Federal Reserve policy makers grimly speculated that a run on the dollar might trigger renewed chaos or that consumer confidence might cause a recession.   Despite their reassuring public pronouncements, only later did tapes that were kept secret for over a year show that they confessed privately to an inability to foresee the economy's future with any certainty.    Greenspan underscored the seriousness of the situation saying at one point “the nation was closer to a monetary collapse than we would like to believe.”    This was not the first mid October crash. This took place when the stock market and financial system were suffering an enormous liquidity crisis.   Though the Fed talked reassuringly to the public Alan Greenspan admitted his true fears behind closed doors.  

The Fed's solution was to flood the market with liquidity and create money out of thin air. Regretfully this spend, spend, spend approach has since continued since and now we may be asked to pay a price for these bad economic habits.

Over the weeks ahead we will be looking at where these fundamentals of debt may lead us, how I survived being lost in the wilderness and how the lessons I learned then can help us survive and prosper in the economic wilderness ahead.

Speaking of wilderness, let's return to the Canadian woods because during times of chaos and change we need to be fleet of foot and to invest more in ourselves.

I was lost in the Canadian wilderness.   In the deep woods, alone, surrounded by wolves and a fast approaching, freezing night, without a coat or matches, I learned a few things about myself.   My decision making process tended to gain speed.   I needed a strategy fast!   (Just as we do right now!)

Being there in the woods reminded me that no matter how bad a situation may appear, one's strategy must still be based around oneself not around the apparent circumstances.   I thought about my position.   I am a fairly experienced woodsman (though with my stupidity of that last hour, one could wonder).   But instead of blaming my carelessness or trying to ignore the peril that might exist, I quickly accepted the reality that existed.   I thought through my predicament and accepted the fact that I knew I could not figure out how to get back to the lodge.   Based on this reality, I immediately decided to stop walking further. When lost in the woods, do not move.   This is good advice when investing too.  

Stop moving around, settle down instead and prepare .   

I decided to look for immediate help. Investors, when confused, likewise should stop making decisions and start asking questions.   In the woods I decided to use a couple my precious bullets.   I shot twice.  

There was no reply.  

The wind was strong.   Sound would not carry far and if my guide was upwind he might not hear my shots at all.  

I had only eight bullets left so I started cutting saplings and laying them across the swamp in the form of an X.   They would look for me by air in the morning.   The X marked the spot where I was and where I planned to stay until someone found me.

The same tactic should be true for we as investor when not sure of what to do.   We should move into defensive positions.   If we are not sure what to do, let's not wander aimlessly investing in whatever the next advisor suggests.

  Look for shelter.  

Once I finished laying out my X, I planned to build a shelter for the night with fallen logs.   This would protect me from my worst enemies, the wind, from the wolves and when filled with dried, pine needles, from the cold.   Then I decided to fire two more shots.   Six bullets were left. Still there was no reply.   I started piling logs.   Then I heard two shots far in the distance.   Had my partner heard?   Should I fire again?  

Investors when seeking information, once gained, must take advantage of any valuable information they receive and then act upon that information.   I fired again quickly, once.   Five bullets left.

        Later I heard shots again, a little closer.   I fired once more, gave up building the shelter and kept this up (after each response) until my ammunition ran out.   Then I continued to whistle.

I concentrated on attracting my partner rather than preserving bullets for protection or in using the remaining daylight to build shelter.   The closer I heard he was the more energy I put into letting him hear me.

Once investors have reached crossroads, have asked questions, have found answers to create strategies, they should then focus their energy on these strategies.   As the strategy confirms itself, they can become increasingly aggressive as they feel suits their personality and situation.       

I was lucky getting out of those woods with nothing but a bit of embarrassment and a lesson.

My goal is to be lucky in the economic turmoil ahead as well.   Tomorrow we'll view the rest of the problem we face and in followup messages look at seven strategies that protect from the investing wilderness we are entering now.   Until then, Good investing.