TechVest Econometrics

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A Congress of Black Swans in 2012                 

Legislative Branch versus Economy

As the joke goes, a herd of sheep is a flock, a group of geese is a gaggle, and a group of baboons is a congress. Clearly, the American Congress is at an impasse, with just about anything passed in the House (including most excruciatingly any budgets for the past 3 years) blocked by the Senate, and an Executive Branch impatiently acting preemptively, insulting the Senate as being in recess even while the Senate is in session, constitution be damned.

There are many who would believe that such a Congressional standoff is better for the economy than any action that Congress would take. Most of what has come from that source since 2007 has been proactive in social spending we cannot afford, or reactive with stimulus programs that do not stimulate. As we have seen, pumping money into a system where velocity of money is low and even perverse (as is the case today), does nothing to stimulate, and everything to create ever more excessive debt.

No wonder Congress has an approval rating in single digits. Conservatives cite lack of fiscal discipline. Liberals cite insufficient redistribution despite unprecedented deficits. Neither side really understands how the economy must create jobs. This must be through productive investments made by private industry, where losses teach lessons that are not repeated endlessly, as is government's wont.

The US Congress has been a black swan since 2007.

A group of swans can also be a congress, and the consequence of THAT kind of a congress are even more dangerous. Let's look at a few.

Anticipating 2012 Black Swans

A black swan is supposed to be unexpected and rare, but we can expect several in 2012.

Natural disasters may come (German volcano in Bonn anyone?), but man-made disasters (easily confused with "man-caused-event" terrorism) seem far more likely in 2012. Powerful instabilities are festering everywhere, and massive man-ipulation masks the true extent of the damage already done.

The Euro is no longer a black swan. In December, we expressed our conviction that the Euro would be bailed out yet again in 2012, with the express and crucial intervention of the Fed and Mr. International Liquidity himself, Ben Bernanke. We not only expect QE3 to be necessary for the US, we fully expect it to be extended by the Fed to Europe, as it was in 2008. Printing presses or derivative fiat monies, the national balance sheet will be further weakened. It may be the last gasp, but last gasps are routine policy in election years.

Back to Black Swans: Since the meddling with the Shah of Iran, every white swan in the Middle East has darkened inexorably. America has walked away from a potential white swan of a stable Iraq (and will slink away from Afghanistan) without a peace dividend and no oil reimbursement, politely having disengaged from Egypt and Libya as well. The vacuum of Iraq will join the rest of the Middle East in islamist-majority-tyranny chaos, leading to more powder-kegs and higher oil prices, even without further saber-rattling by Iran in the Straits of Hormuz. Given the policies, this might have been expected.

The resulting Black Swan however is Ron Paul becoming popular for a new American isolationism, which is as dangerous to an orderly world economy as Obama's retrenchments, just with a different ideology. If Paul runs as a third party, Obama wins, and all of Paul's legitimate and admirable rants against the Fed Plutocracy and the out of control Fed will have been for naught.

In a competitive and dangerous world where capitalism must be defended the way that the British Empire defended its trade routes and colonies, however, isolationism just means tolls will have to be paid for every international move that the United States wants to make. Without an international presence, influence, and credible strength, the only remaining tool is cash. Passivity is the opposite of initiative. This in turn involves bailing out western institutions (European banks and sovereign states) and increasingly paying tribute to international pirates (Somali-style, also to be found at the UN).

While we project dollar strength versus the Euro and many other currencies in 2012 because of their own troubles, the hollowing out of the dollar began long ago and is not being reconstituted for the long term by any economic policy we see now in play. By 2013, dollar strength will potentially be enhanced by a decidedly negative development: rising interest rates as the interest cost of America's massive debt rises. Rising interest rates and a higher dollar will happen due to a scarcity of willing lenders, not because of economic health. A stronger dollar will in any case further damage exports.

If such a projection on our part is merely logically expected, is it by definition NOT a Black Swan?

A lot of suspected Black Swans appear to exist in the Middle East, in its various Islamist Springs. Egypt and Libya uprooted. Even Saudi Arabia is now vulnerable. Pakistan has long been an unsustainable country with grave risks of a blow-up in leadership at any time, but at least its military tries to keep the country in a peaceful mode. Can Pakistan remain governable in 2012?  This first Islamic nuclear arsenal just does not look safe.

Iran is far worse, bent on impeding and punishing the world economy in a headlong rush for Persian Islamist dominance, to be implemented in an anti-Israeli genocide that does not entirely stem from affiliation with the Arab people. Iran commands a potential chokepoint for Western economies, as does Indonesia. An Islamic chokehold may well be THE Black Swan of 2012.

Even without the Middle East and Energy, political risk is oddly prominent in the advanced and supposedly politically stable countries as well, waiting inside Europe and Japan, hidden inside regulatory bodies like the European Union and the UN and in the US Congress.

Extended Executive Branch versus Economy

That is now joined by an overreaching Executive Branch that through various cabinets, agencies and tsarist fiefdoms is coming up with regulations and unfunded mandates that amounts to legislation by unelected lawyers.

The political risk is regulation and economic intervention, just waiting to tax and spend ... this indeed is a gaggle or congress of swans (see below).

Some Good Black Swans?

Not all Black Swans are unwelcome events. Technology advances can occasionally be surprising, though their impact is seldom sudden. Technology advances move markets, and there are an increasing number of disruptive developments at hand.

TechVest Econometrics presents a decidedly capitalist view of investment economics, driven specifically by technology advancement. Real economic progress comes NOT through Progressivist redistribution, but instead requires economic added value, derived from real velocity and real acceleration of real productivity and real technology. The changes now needed are fundamental and drastic. Core principles (including those in the Constitution) have been neglected for hundreds of years. Leadership from behind puts us even further behind.

The Death of Sovereign Debt: a Black Swan in a final realization that governments cannot be trusted ?

The Euro situation embodied in Greece is of course the present catalyst: a smallish country so deeply in debt and deficits and overconsumption and inability to adjust its own currency inside the Euro zone. This is just the start of a very bad confluence of events. The other extreme, another massive catalyst if you will, is a very large country totally undermining its own economic strength so that there seems less and less chance of a lender of last resort coming to the rescue. And we are not here referring to Germany, though Germany is as we have seen before in rather serous total debt, much more severe at 4.8x GDP including pension obligations, with weaker German banks than is generally perceived. No, we are talking about America, which in 4 years under Obama will have added $6.2 Trillion in unfunded debt, as much as all predecessors combined in the previous 200 years. As a result, the last gasp of western civilization's finance capacity is at hand. As we have said, we expect that Obama will lead from behind reactively, using this last ability to print and create fiat money to bail out Europe for another year. But whether or not he wins in 2013, all bets are off in 2013 as there will be no more cards left to play.

With almost inevitably declining confidence in the dollar in 2013, sovereign debt will have lost its last chance to be considered "reliable" and creditworthy, there will not be a trusted country left that is big enough to absorb the capital looking for safety, and China and India will not be healthy enough.

When I stated in my own Yale Economics Thesis in 1975 that Britain and America could and probably would default as sovereign risks if then-already-evident trends were maintained, I was dismissed as an alarmist not having enough proof. Economic policies and spending profligacy since then have only worsened enormously, and today the proof is everywhere to be seen. Government bureaucrats, with Keynesian glee, thought they had a free ride forever. Obama and Bernanke have put the final Keynesian touches on a bankrupt philosophy of social engineering, with marxist redistribution borrowing all conceivable future private capital resources.  

Sovereign Debt, through gross mismanagement, economic incompetence, and occasional significant criminality, is becoming a toxic instrument. Most state and municipal governments in America are not much better off. One might think that this would not apply to Canada, or to non-Western nations not as highly indebted as Europe and the US, but this is not the case: unless interest rates rise dramatically to reflect the risk everywhere, the attractiveness of sovereign guarantees is very much in doubt.

This trend would ordinarily finally shift capital supply back toward the private sector, but if capital contracts through massive write-offs in further deflation, or becomes valueless in massive inflation, and if government  largesse is maintained at unsustainable levels, that redirection will not matter. The time of government-steered economies may now be gone, if it ever was much more than an illusion.

The Confluence of Black Swans: EVERY Market Turning Down at once ?

2012, even with continual QE quantitative easing, may see no sparks of economic growth anywhere. That confluence, a perfect storm, may well be the Black Swan that we hope will not happen.

Instead, the good black swan would be a sudden conversion from profligacy to sanity, from unsustainable redistribution to realism and thrift. This may be impossible for Europe and the Euro to do voluntarily but may be imposed by facts on the ground. It is perhaps still possible for America, but highly unlikely. It could return America into the ranks of a sovereign credit based on an incomparably wealthy country with an enviable future, but there are too many negative geo-political factors arrayed against a rapid economic recovery from 100%-of-GDP-debt and 400%-of-GDP unfunded mandates.

All that said, there is going to be eventual redemption: Rapid Technology Transformation

Private-Economy Technology as the Ultimate Driver of Economic Progress

Silicon Valley will be implementing the technology of near-field communication NFC, which will be a surprisingly large boost for the entire internet industry with a lot of sudden new applications. Free-energy sources are nearing commercialization in curious and perhaps unexpected ways. Older, forgotten or suppressed technologies may finally come to the fore, specifically Tesla wireless power. We will know these Swans only when we see them. But it does not take an energy Black Swan to develop America's energy self-sufficiency and even net energy exports. This last week, despite regulatory interference in all sorts of energy industries, the US became a net exporter of energy. This is largely the result of effective use of natural gas recovery technologies.

To make progress, private industry must take back responsibility for proper steerage of energy and other major industries where massive regulation and re-direction by government has attempted to outfox the markets through centralized political decision-making. That shifts resources to non-market and non-productivity ends.

We will give government and universities credit for funding basic science infrastructure when private industry does not pump enough money into this form of "education" that promotes basic knowledge.  Much of this is useful and legitimate for military purposes. In fact many commercializable technologies have emerged from military programs, enhanced by motivated private industry. However, beyond the research stage, government spending is neither wise nor productive and has never been a proper stimulus. In fact, government spending generally merely offsets private investment. In an era of unlimited budgets, that "crowding-out effect" on the private sector is statistical (see below), hardly felt, but still very real. This trend has been going on a long time, and unless government spending declines, long term real GDP growth will continue to decline, possibly to zero.

In any era of constrained capital such as deflationary contraction of credit as we have today, government spending does not stimulate the private economy but rather draws a similar amount of private spending away.