Friday, January 20, 2012

In the Days Following a Plunge

I’ve been mulling over what we in the U.S. might see in the short run should mood turn very negative, very quickly. The assumptions that go into the following thought experiment include:

  • Big pieces of the current system (finance, insurance, real estate, consumer spending, new business development, farming), where access to easy credit underpins nearly every single financial transaction or decision that occurs in the U.S., is “brittle.” By “brittle” I mean that things work very well and very efficiently as long as individuals and firms have access to easy credit to finance operations. Should that credit be choked off via bankruptcies in the financial sector (MF Global, anyone?) and the fear associated with such a bankruptcy, the removal of access to credit would be like removing the fuel in an airliner 50,000 feet up – things are great, until they aren’t.
  • Speaking of farming, in hand with the brittle nature of the credit system, modern farming continues to come up in my mind when I think about the vulnerability of the current way of life we have built for ourselves. The vast majority of people have no idea just how reliant most farmers are on credit to get a crop in. Modern farming is very productive, but very brittle as well – it is like an efficient factory relying on just-in-time inventory. Take out easy access to relatively cheap fuels and man-made fertilizers, take out access to credit to buy those inputs and vast portions of farming in the U.S. would plummet in productivity. The way we farm today is totally reliant on modern inputs. Most soils are in very bad shape and could not be very productive should farmers be forced to return to more robust, if less efficient methods of farming. That is a long way of saying food is on my mind. We won’t be starving here in the U.S. any time soon, but as goes credit, so goes modern farming in the short run. 
  • The immediate result of a market collapse or major disruptions due to war will not lead to a Mad Max environment in the short term. Most populations handle short-term disasters or disruptions by being neighborly and dealing with it. A bank holiday is more likely to lead to a lot of pot luck dinners with neighbors or group meals at church or at the Rotary Club than to tanks in the streets – in the short term
  • War, even a war with a limited deployment of nuclear weapons – and even if some of those weapons went off in the U.S., will not result in an apocalyptic end-game of famine, shortage and environmental disaster. The wave count gives us a good chance at a war, but remember, you will still have to get up and be productive in some way, the sun will still rise, even if Teheran is nuked and refineries bombed in Saudi Arabia. Nuclear weapons are horrible, but they are not world-ending devices, despite the hype.

So what is my point here?

Well, I wonder about what happens in the month following a rush of events. How will we tell ourselves the story of our coming plunge in negative mood? It could be something like a banking collapse that results in bank holidays around the globe as regulators and financiers try and patch things up, a bombing campaign against Iran that results in blowback including a temporary closure of the Straits of Hormuz and some damage to Saudi Arabian petroleum delivery and refinery assets, anger directed by the “99%” against the “1%,” etc.

What would that mean to you and yours?

What Happens in the First Month After a Financial Collapse?

The short answer is, I don’t know. I have no idea how a highly interdependent global economy built on structures put in place in an era of cheap transportation fuels and extremely positive mood, high trust, and reliant on highly efficient movements of goods and credit would handle a new environment of very negative mood, low trust, expensive transportation fuels and little available credit.

There would of course be the initial shock. Many people are heavily reliant on debit and credit cards and carry far less cash than would have been the norm 30 years ago. What happens to the vast array of automatic bill pays and automated deposits that keep the wheels of commerce turning if regulators tried to implement a bank holiday? I haven’t cashed a physical paycheck in over ten years. How would credit rating agencies handle all the late payments on your credit score? Would there be anyone who gives a crap about your credit score a year later anyway? How would local businesses handle their cash deposits?

What happens when you make it home and see on the TV that some someones have bombed suspected nuclear sites all across Iran, along with bases and buildings belonging to the Army of the Guardians of the Islamic Revolution and Iranian Naval assets. Over dinner, you hear rumors being reported of fires at the Ras Tanura complex in Saudi Arabia and of Shi’ite uprisings in the east of the Kingdom that have caused damage to pipelines and infrastructure. You recall that you only had a quarter tank of gas in the car…

You make it to the end of the week. Your job will be affected, one way or the other, by these events. Are you in real estate, insurance or finance? You may have angry customers, worried customers, or no customers, depending on where you sit. Are you in long haul trucking? You may have real issues with fuel costs and maybe even fuel availability, especially as news of the U.S. involvement in Iranian regime change grows and rumors of fuel rationing spread.

Occupy protests would probably grow in intensity. Even now, no one is still sure of what to do with the anger expressed by that movement, but they would spread, especially as many workers will have been sent home on short weeks as small businesses worry about being able to pay employees or access their money and credit once the banks reopen...

And Then?

If a negative mood event kicks off in such a manner, there will be plenty to worry about. I do not know your situation, but please do keep a few things in mind:

  • If we apply socionomics, remember that mood is a herding event. It is tough, but you don’t have to participate. Be aware, but spinning around in worry and fear does no one any good. 
  • Be a positive bridge-builder in your immediate area. Get outside, talk with neighbors. Organize a potluck dinner at your house or a block party or a neighborhood dinner at local church or school. Do something that allows people to share a little and get a benefit of a positive communal interaction – being able to share some beans or a ham that has been in your freezer since Christmas, but get a meal out of the deal that allows you feed the kids some fresh vegetables or a fresh dessert at a potluck can go a long way to helping your frame of mind.
  • Be aware that past wealth-building strategies may no longer work in this environment. Easy credit for real estate speculation has already dried up. Other strategies, such as internet businesses that rely on credit transactions and cheap outsourced manufacturing overseas will face the headwinds of bank problems, trade barriers and possibly high transportation costs.
  • Cash on hand is great, but don’t flaunt it. “Flaunt it if you got it” is a philosophy that already rings hollow and will got out the window in an era of deep negative mood. Blend in. Be helpful. Don’t rouse envy.
  • Have some board games and decks of cards. In times of trouble it might be best to turn off the TV and spend get your mind off the fear out there and focus on games with family and friends.

I don’t have “the” answer as to how to make money a month into a negative mood event. You will see how things are trending. Know these things move in waves. Be ready to think differently. There may be many very successful people with large sums in the bank that never see that money again. There will be vast upheavals in politics and law. In the early days of a plunge, the world won’t end, though it may seem like it at times. Be ready to do a lot more comforting, bridge building and befriending than spending time looking for the best angle to make a buck.

The will rise every morning.  What you do with those mornings is what will define the future.

Further thoughts on how to handle a major credit and world crisis in the month following the first big sign of the drop?



David said...

The scope of potential change is so large that thought-exercises to imagine what to expect and what to do in preparation strike me as extremely difficult.

Other than the obvious things Prechter noted in CTC, not a lot jumps out at me. This dislocation is apt to be unlike any other recent one (e.g. Argentina 2001), worse in some ways, better in others.

One major problem we'll confront is the level of propaganda and misinformation is apt to rise from what is already a saturation level. I can imagine a worldwide situation analogous to the confusion on the luxury liner that recently rolled onto its side. Given the current office holders' and bureaucrats' preference for barking orders and otherwise monkey-wrenching everything they touch, rolling shortages of nearly everything strike me as likely.

Fall out of love with specific brands of foods and such. In the aftermath of financial dislocation it's apt to be "one brand, one size, take it or leave it" on store shelves.

Blogger said...

eToro is the ultimate forex trading platform for beginning and advanced traders.