Money Flow Trading Method along with Risk Management

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STOCK INVESTORS, LIKE ALFRED, TO LOSE 98% OF THEIR INVESTMENT
February 28, 2019

by Egon von Greyerz


Imagine a casino full of slot machines that all guarantee a constant high return. All you need to do is to put in a bit of money and you will get an incredible income stream for life.

Well, this is exactly what the stock market is, namely a remarkable slot machine with a continuous flow of guaranteed payouts. No skill is required, and relatively little money. And the wonderful thing is that you don’t even need to be lucky since the machine just continues to spew out money without the need for either a strategy or dexterity.


ALFRED – A STOCK MARKET WINNER WITH ZERO TALENT
Why should we time the stock market when it works so well for us. Let’s take the example of a stock market investor called Alfred who was born at the end of WWII and is now 74 years old. At his birth, his grandparents gave him $100 of stocks in the Dow Jones index and between the parents and grandparents $10 was saved monthly to buy stocks for Alfred. All the money went into Dow stocks and dividends were reinvested. By the time Alfred was 24, in 1969, he started working and earned a good salary since he had an excellent education. So he could save $250 per month. Ten years later Alfred had done well in his career and could save $2,000 per month until his retirement at 65 in 2010. His investment account had by that time grown to $6.7 million. He continued to be fully invested in the market from 2010 and saved $1,000 per month of his pension until today. By February 2019, Alfred has amassed a stock portfolio worth $14 million. Alfred had excellent tax advisors so he could avoid capital gains taxes or other taxes on his investments.


The total savings of Alfred’s parents, grandparents and his own amounted to around $1 million over a 74 year period which all went into stocks. Most of it was Alfred’s own savings from his work. The stock market looked after Alfred and his savings very well so that he managed to grow the money invested 14x from $1 million to $14 million. Alfred naturally considered himself to be a very talented stock investor but his luck was that no talent was required nor market timing since Alfred only bought the Dow Jones Index.


ALFRED IS A PERMABULL – IN SPITE OF MANY 40-60% DRAWDOWNS
So far so good. Alfred has done extremely well in the stock market in spite of some hair raising market falls. During this period Alfred had to suffer some major paper losses like in 1973-4 when the market lost 40% or in 1987 when the market had a similar fall of 40%. But Alfred was never worried since his experience was that stocks always go up. Alfred is a Permabull.
http://goldswitzerland.com/wp-conten.../02/bull-1.jpg


In 2000-2 Alfred suffered a 40% fall and then in 2008-9 came the Great Financial Crisis and Alfred had a 60% paper loss. But since markets always go up, Alfred had no reason to worry. And again he was right since the market continued to go to new highs.
http://goldswitzerland.com/wp-conten...2019/02/dj.jpg


Alfred is now 74 and he has, thanks to his Grandparents’ and Parents’ wisdom, which was passed onto him, amassed a considerable fortune of $14 million. Alfred knows that he is not going to spend all that money so it will pass over to his children and grandchildren.


ALFRED OUTPERFORMED 99% OF ALL INVESTORS
During his 74 year life, Alfred has probably outperformed 99% of all stock market investors. And he has had no mean competition. Especially since the late 1980s, the investment industry had become extremely sophisticated, using high powered computers, rocket scientists, high frequency trading and very complex financial instruments or derivatives. The asset management industry has built up a massive cost structure consisting of grossly overpaid staff with very expensive systems and infrastructure costs. But even with all these costly state of the art systems, the industry has been underperforming Alfred and any other index investors.


PROFESSIONAL INVESTORS FIRST LINE THEIR OWN POCKETS
So who is paying for these massive costs and especially the bonuses in the hundreds of thousands, millions or even tens of millions that many of the people in the industry are earning? The costs obviously reduce the returns that the investors earn and in the end these costs are paid by ordinary people such as fund holders, pension fund members, or other institutional investors.


These costs reduce the return over time dramatically and virtually no fund manager will have achieved the returns that Alfred did. Thus, there is a massive industry that has been created which only lines its own pockets at the expense of ordinary people.If we just take the example of the 2007-9 crash, we know that most investment banks would have gone bankrupt without a massive rescue package by central banks to the tune of $25 trillion including loans, credit lines and guarantees. In spite of this, staff at these banks got the same substantial bonuses in 2008 as in 2007, from banks that only survived due to government assistance.

Thus, bank profits line the pockets of the bankers whilst losses are picked up by the state which means ordinary people.
Coming back to Alfred, he has had such a good run so should he now be concerned that he and his family will lose it all. Has he just been lucky or is he a very shrewd investor. He realises that it is not really his clever investment skills that have got him where he is today. He has never selected a single stock in his life since he has just invested in the index. Nor has he ever analysed a company or the state of the market. As Alfred says: “After all, investing is so simple, you just buy and hold and the market will do all the work for you.” And who can argue with Alfred. He started with $100 and now has $14 million.


STOCKS ALWAYS GO UP – DRIVEN BY CREDIT EXPANSION
So Alfred will hold on to his wealth in the stock market whatever happens. Alfred is not concerned about all the risks in the market. His 74 year old investment career has included many downturns but the market has always recovered.

Alfred has never asked himself if he has just been lucky to live during an extraordinary bull market cycle, fuelled by credit expansion and money printing.

He has for example never looked at the graph below and considered that there is a direct relationship between Central banks money printing and the stock market.Since the bottom of the market in 2009, $14 trillion have been printed by the Fed, ECB (European Central Bank) and the BOJ (Bank of Japan). Alfred has never considered that this substantial liquidity might have been the reason why the market is up 4x since 2009.
http://goldswitzerland.com/wp-conten...2019/02/qe.jpg


STOCKS OVERBOUGHT ON MANY MEASURES
But there are also other red flags that Alfred could look at to determine the risk level of the market. These are ratios like P/E ratio, Shiller’s CAPE ratio, dividend yield, Price to Book ratio, Price to Sales and the Q ratio which is dividing market value by replacement cost of assets. All these ratios indicate that the current market is more overvalued than it was in most of the 36 bull market tops in the last 100 years.
http://goldswitzerland.com/wp-conten.../overvalue.jpg


STOCKS TO FALL 98% AGAINST GOLD
What Alfred doesn’t realise is that the stock market already turned down in real terms in 1999. Between 1999 and 2011, the Dow fell 87% against gold. Since then we have seen a correction up in the ratio and the Dow is now “only” down 55% since 1999. This means that since 1999, gold has outperformed stocks by almost 100%.



But the correction up of the Dow/Gold ratio is likely to finish in 2019. In 1980 this ratio was 1 to 1 which means that 1 Dow unit was equal to 1 ounce of gold. They were both around 800 at the time.
http://goldswitzerland.com/wp-conten...2/dow_gold.jpg


The next decline of the Dow/Gold ratio is likely to reach 1/2 which means a further fall of 98% from here. If that is correct, Alfred will lose 98% of his stock portfolio in real terms which is against gold. Thus 74 years of substantial savings could all disappear in the next 4-6 years. This forecast might seem dramatic but we must remember (as the graph shows) that since the Fiat money era started in 1913, there have been three major declines between 87% and 96%. And this was during times when the preceding credit expansion was much smaller than today. So a 98% fall from here is certainly not unrealistic.


ALFRED HAS NEVER THOUGHT ABOUT RISK OR WEALTH PRESERVATION
Alfred will not be the only one to suffer such huge losses. He will be joined by most investors. Because very few will understand why the market this time won’t go up as it always has. For the first time in his investment life, Alfred could have benefitted from some understanding of risk and wealth preservation but sadly it will be too late for him.


And this is how we will see the biggest wealth destruction in history, bursting the asset and debt bubbles of the last 100 years. Most people will not realise what has hit them until it is too late.


GOLD – THE ULTIMATE INSURANCE
To own physical gold and store it safely outside the banking system is the best insurance against the coming calamity in world markets.
Short term, gold in US dollars has attacked the Maginot line around the $1,350 level. This line has been broken by gold measured in many other currencies but not yet in dollars.
http://goldswitzerland.com/wp-conten...gold_usd-1.jpg


The Maginot line is extremely strong and therefore we might see a few attempts before the price breaks through. Thus, we could see a minor correction down from current levels for a while which would give investors a superb opportunity to acquire gold and silver at prices which will never be seen again. The real fire works will start once gold has decisively broken the Maginot line.


Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management
Zurich, Switzerland
Phone: +41 44 213 62 45

Matterhorn Asset Management’s global client base strategically stores an important part of their wealth in Switzerland in physical gold and silver outside the banking system. Matterhorn Asset Management is pleased to deliver a unique and exceptional service to our highly esteemed wealth preservation clientele in over 60 countries.

GoldSwitzerland.com

Contact Us

Articles may be republished if full credits are given with a link to GoldSwitzerland.com.


COMMENTS FROM BENJAMIN: There is nothing that I can add to this commentary other than you better start to prepare now before you run out of time to do so.

Good Morning Benjamins, with reference to your post# 5962 above, what is MAGINOT LINE means??

Tomorrow is March 1st, when can I expect my 1st class/lesson for your proven Money Flow Strategy. Plz advise. thanks,

Good Morning

You can google your question concerning Maginot Line. Also I will call you tomorrow to discuss everything. You can still post here on my thread and I will reply.

Today we have kinda RISK ON however I am not sure that it will hold SO after today at NOON , I would consider shorting One Position of 50 Units of Dow 30 (US30) and One position of short SP500 with the amount being 50 Units. Make sure you enter your STOP LOSS of $1000 US dollars.


Benjamin

Canada will be one of the best Countries in the world. As for Turks & Caicos , my plans are only to stay there from November 1, 2019 until April 1, 2020. That is to get away from Canadian winters and it is also a very stable Country with excellent tax laws and they have a good independence from the USA. As to banking and other laws.


Benjamin

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Benjamin

Benjamins, so is it still Risk ON??, are you planning to enter, S&P & US30, for 50 units.

$1000.00 SL means 100 points, right??

Watch the last hour of Trading. We have RISK OFF NOW so if the Momentum after 3:30 PM is down there could be opportunity there. I am standing still for the moment.


Benjamin

so you watching Equity market, what channel??

BNN??

I always have my Samsung 50 Inch Smart TV on to CNBC while I am trading. I also switch channels all day to see news and current events from all over the world. I can do that at a low cost by using U Tube with my Smart TV. Each PIP is $10 so 100 PIPS is $1000 US dollars ...


Benjamin

https://www.oftwominds.com/blogfeb19...ubble2-19.html




The Doomsday Scenario for the Stock and Housing Bubbles

February 27, 2019
It was always folly to believe that inflating asset bubbles could solve the structural problems of a post-industrial economy.


The Doomsday Scenario for the stock and housing bubbles is simple: the Fed's magic fails. When dropping interest rates to zero and flooding the financial sector with loose money fail to ignite the economy and reflate the deflating bubbles, punters will realize the Fed's magic only worked the first three times: three bubbles and the game is over.


So what happens when punters realize there won't be a fourth bubble? They sell. Bids disappear because who's dumb enough to bet (with Japan and Europe as lessons) that more liquidity and negative interest rates will magically work when zero interest rates didn't move the needle?

Who's foolish enough to catch the falling knife (i.e. buying plummeting assets on the way down) on the unsupported assumption that the next dose of Fed magic will reverse a bidless market?

And should the Fed start buying stocks, mortgages, housing and bonds to prop up those bidless markets, what's the message it will be sending?

Desperation.If the only buyer is the money-printing central bank, that's pretty good evidence that your economy and markets are in free-fall.


The loss of faith in central bank magic will be gradual at first, as magical thinking dies hard. It's oh so comforting to believe the central bank will rescue every overleveraged mal-investment and bail out every high-risk speculation, but the funny thing about the Fed's magic is it only works in liquidity crises--in every other condition, it only makes matters worse.

Does making it cheap to borrow improve the productivity of capital investments? You must be joking. The poster child of Fed magic is corporate buybacks, which 1) create no goods 2) create no services 3) do nothing to improve real wealth creation, i.e. higher productivity and 4) burden the company with higher debt loads, inhibiting future capital investment in actual productive capacity.


The only thing stock buybacks accomplish is to enrich shareholders and top managers with stock options. Rather than fix what's broken in the economy, the Fed's plan of "make the already-wealthy even wealthier" has created a new and monstrous problem: soaring wealth inequality.


The Fed's idea of a solution was to triple the value of a small bungalow from $150,000 in the late 90s to $450,000 in 2007. When that bubble burst, the Fed's solution was to double the bungalow's value to $900,000 today.

The structural problems of the U.S. economy cannot be solved by inflating asset bubbles, but that's all the Fed can do. Ironically, everyone cheering on Fed dovishness today is writing the obituary of Fed influence going forward because the masses have awakening to the Fed's role and the political blowback against enriching the already-rich is going to blow away the Fed's political leeway to further enrich the already-rich.

Since the Fed has lost the political permission to further increase wealth inequality, it won't be able to inflate another asset bubble. But even if the Fed was able to bamboozle the populace into allowing it to inflate another asset bubble, the mechanisms no longer have the desired effect: what worked to inflate the prior three bubbles no longer has the power to inflate a fourth bubble.

Those who are confident that there's nothing standing in the way of a fourth asset bubble need to back up their faith with some historical examples of bubble economies running past the third bubble.

This will lead to a sudden realization that the Fed has failed and can't possibly succeed in inflating a fourth asset bubble. This will unleash a phase shift in the market's belief system that will lead to a conclusion that the only rational strategy is to sell now before the bid disappears entirely.
But by then, of course, it's too late, because everyone else will be hitting the "sell" button at the same time.


It was always folly to believe that inflating asset bubbles could solve the structural problems of a post-industrial economy in the throes of profound demographic and technological change. The Fed has pursued the folly for 25 long years to the cheers of the class that has seen their wealth soar but reality is about to play Godzilla to the Fed's Bambi.


This is the Doomsday Scenario for those who believed $900,000 bungalows were going to $1.8 million and the S&P 500 was going from 2,800 to 5,600., but for those who understand the mortal danger of relying on asset bubbles to prop up a failing status quo, it will be a welcome reset that will enable desperately needed structural changes.
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COMMENTS FROM BENJAMIN: We will see this year a COMPLETE Collapse in the World Financial Markets. Nothing paper is safe. Hard Assets is the only protection in my learned opinion and all other intelligent and knowledgeable analysts.

There is not much time left to get your financial and other affairs in order.

http://economicprism.com/

Why Warren Buffett Should Buy Gold
Posted on March 1, 2019 by MN Gordon


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Warren Buffett bought his first shares of stock at 11 years old. He saved up $114.75 and “went all in,” purchasing three shares of Cities Service preferred stock. The day was March 11, 1942 – nearly 77 years ago. Buffett recently reminisced about this purchase in his annual letter to shareholders:
“I had become a capitalist, and it felt good.”

Buffett was merely getting started. Over the succeeding 77 years Buffett’s investing acumen, and a rising tide of government sponsored fake money, garnered him a personal net worth over $80 billion. That’s a breathtaking haul, indeed.

Most nights Buffett sleeps well. Why wouldn’t he? He’s got more dough than he could ever possibly spend. And as for the burden of extreme wealth, Buffett’s been given a nifty – tax free – escape route from beneath the mass of this weighty condition.

His pal Bill Gates, via the Bill & Melinda Gates Foundation, offloaded his conscience and flattered his ego. Thus, even in the late night hours, when the coyote’s howl at a full moon, Buffett sleeps soundly and with the full knowledge that his fortune will be used for noble philanthropic causes. Buffett’s pledged to give more than 99 percent of his wealth for benevolent endeavors.

To this we neither applaud nor find fault. How one chooses to spend their wealth is a personal decision. Perhaps some good will come of it.

As an aside, foundations are frequently used by the ultra-wealthy as a means to pass on their wealth, while avoiding estate taxes. Remember, someone – likely a familial heir – has to run the foundation well into the future. A well-structured foundation leaves posterities with good work, at good incomes, for generations.

We don’t know whether this is the case with Buffett’s ventures with the Bill & Melinda Gates foundation. We do know that Buffett’s a master at limiting his income tax. Perhaps he’s applied this predilection to limiting his estate tax disbursements too.

Again, we neither applaud nor find fault with how Buffett chooses to spend his personal wealth; we’re merely adding context to the popular refrain of the goodness of his philanthropic benevolence.


“All In”
Beneath the wealth and affluence Buffett’s still human, of course. He’ll be asked to explain himself when he meets his Maker. And in the interim, there’s still one remaining fear that gets caught up in his mind’s eye during the darkness just before dawn…like a fly in a spider’s web.

Buffett first “went all in” to American business in 1942. He’s remained all in up to the present. His timing has been impeccable. He’s ridden the crest of the American wave of economic dominance, and unprecedented issuances of debt based fiat money, like no other.

What’s more, the success of his thrilling ride has led him to believe he can predict the future by projecting from the past. From his recent letter to shareholders:
“If my $114.75 had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019 (the latest data available before the printing of this letter). That is a gain of 5,288 for 1. Meanwhile, a $1 million investment by a tax-free institution of that time – say, a pension fund or college endowment – would have grown to about $5.3 billion.


“Let me add one additional calculation that I believe will shock you: If that hypothetical institution had paid only 1% of assets annually to various “helpers,” such as investment managers and consultants, its gain would have been cut in half, to $2.65 billion. That’s what happens over 77 years when the 11.8% annual return actually achieved by the S&P 500 is recalculated at a 10.8% rate.”


Buffett then took a moment to knock the doom and gloom concerns of runaway debts and deficits. He also took an errant swing at gold buyers:
“Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400-fold during the last of my 77-year periods. That’s 40,000%! Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency. To “protect” yourself, you might have eschewed stocks and opted instead to buy 3 ¼ ounces of gold with your $114.75.

“And what would that supposed protection have delivered? You would now have an asset worth about $4,200,less than 1% of what would have been realized from a simple unmanaged investment in American business.”

Hidden within Buffett’s boasts and blusters is his final remaining fear…

Why Warren Buffett Should Buy Gold
Buffett, you see, is locked in – with no escape route – and will have to ride the American wave of economic dominance, and its fake money system, as it crashes down upon the jagged rocks. His remaining fear is that the status quo will be overturned. That a social, political, and financial reset obliterates the wealth edifice that he’s erected over the last 77 years.


To clarify, a reset is a complete collapse of the world as we know it. Certainly, history has seen plenty of resets. WWI and WWII. The French Revolution. The Russian Revolution. The War between the States. The Great Depression.


No doubt, the present order’s long overdue for a reset. And when the current reset hits its fever pitch, Buffett’s holdings – which are concentrated in American businesses – will be directly impacted.


Of course, wealth is more than just money. And some of Buffett’s businesses will hold up better than others through the reset. For example, his railroads will still be an important asset – assuming he has the capital to operate and maintain them. But his insurance businesses – his greatest money makers of all – are a construct of dollar based fiat money, and their ephemeral value will disappear before you can say Jack Robinson.


Being “all in” – to use Buffett’s words – on anything is a bad idea. This goes for being fully invested in American businesses, or an S&P 500 index fund. It also goes for being all in with gold.


Buffett’s other mistake is in equating gold to an investment. It’s not. Gold, on the other hand, is real money that retains its purchasing power over time – including through epic resets. Hence, misconstruing gold as an investment will be fatal.


Fiat money, unlike gold, has an unblemished record of perfection. All fiat money eventually returns to its intrinsic value of fire kindling, toilet paper, or birdcage liner.

Fiat based digital monetary credits will also ultimately disappear – like AOC’s cow flatulence into the atmosphere.

This is precisely why Warren Buffett should buy gold…and why you should too.


Sincerely,
MN Gordon
for Economic Prism

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BY CHARLES HUGH SMITH

POSTED

FEBRUARY 23, 2019

The Approaching Winter: The Super-Cycle Has Turned

How would you describe the social mood of the nation and world?


Would anti-Establishment, anti-status quo, and anti-globalization be a good start? How about choking on fast-rising debt? Would stagnant growth, stagnant wages be a fair description? Or how about rising wealth/income inequality? Wouldn’t rising disunity and political polarization be accurate?


These are all characteristics of the long-wave social-economic cycle that is entering the disintegrative (winter) phase. Souring social mood, loss of purchasing power, stagnating wages, rising inequality, devaluing currencies, rising debt, political polarization and elite disunity are all manifestations of this phase.


There is a template for global instability, one that has been repeated throughout history…

Historian Peter Turchin explores the historical cycles of social disintegration and integration in his new book Ages of Discord.

Turchin finds 25-year cycles that combine into roughly 50-year cycles. These 50-year cycles are part of longer 150 to 200-year cycles that move from cooperation through an age of discord and disintegration to a new era of cooperation.

That we have entered an era of rising instability and uncertainty is self-evident. There will always be areas of instability in any era, but instability and uncertainty are now the norm globally.

Turchin’s model identifies three primary forces in these cycles:
1. An over-supply of labor that suppresses real (inflation-adjusted) wages
2. An overproduction of essentially parasitic Elites
3. A deterioration in central state finances (over-indebtedness, decline in tax revenues, increase in state dependents, fiscal burdens of war, etc.)
These combine to influence the broader social mood, which is characterized in eras of discord by fragmented loyalty to self-serving special interests (disintegration) and in eras of cooperation by a desire and willingness to cooperate and compromise for the good of the entire society (integration).


Rising discord can be quantified in a Political Stress Index. Do we find evidence of Turchin’s disintegrative forces in the present era?
1. Stagnating real wages due to oversupply of labor: check.
2. Overproduction of parasitic Elites: check.
3. Deterioration in central state finances: check.
Is it any wonder that political stress, however you want to measure it, is rising?

Cycles are the result of the interaction of complex dynamics, and so they are not entirely predictable in terms of pinpointing the exact moment of crisis or the outcome of a systemic crisis.

These long cycles parallel the cyclical analysis of David Hackett Fischer, whose masterwork The Great Wave: Price Revolutions and the Rhythm of History.

In Fischer’s well-documented view, there is a grand cycle of prices and wages which turn on the simple but profound law of supply and demand; all else is detail.

As a people prosper and multiply, the demand for goods like food and energy outstrips supply, causing eras of rising prices.
Long periods of stable prices (supply increases along with demand) beget rising wages and widespread prosperity. Once population and financial demand outstrip supply of food and energy — a situation often triggered by a series of catastrophically poor harvests — then the stability decays into instability as shortages develop and prices spike.

These junctures of great poverty, insecurity and unrest set the stage for wars, revolutions and pandemics.

It is remarkable that the very conditions so troubling us now were also present in the price rises of the 13th, 16th and 18th centuries.

Unfortunately, those cycles did not have Disney endings: the turmoil of the 13th century brought war and a series of plagues which killed 40% of Europe’s population; the 16th century’s era of rising prices tilled fertile ground for war, and the 18th century’s violent revolutions and resultant wars can be traced directly to the unrest caused by spiking prices.


(The very day that prices for bread reached their peak in Paris, an angry mob tore down the Bastille prison, launching the French Revolution.)

After a gloriously long run of stable prices in the 19th century — prices were essentially unchanged in Britain between 1820 and 1900 —the 20th century was one of steadily increasing prices.

Fischer challenges the notion that all inflation is monetary; the supply of money (gold and silver) rose spectacularly in the 19th century but prices barely budged. In a similar fashion, eras of rising prices have seen stable money supplies.

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Monetary inflation can lead to hyper-inflation, of course, but there are always mitigating factors in those circumstances. Fischer argues the long wave is not one of hyper-inflation but of supply and demand imbalances undoing the social order.

Americans are inherently suspicious of anything which seems to threaten constraint of the American Dream; thus it is not surprising that cycles of history are largely unknown in the U.S. As Fischer explains:

This collective amnesia is partly the consequence of an attitude widely shared among decision-makers in America, that history is more or less irrelevant to the urgent problems before them.

Fischer notes that he describes not cycles but waves, which are more variable and less predictable. In response to this great rise in prices of essentials, both commoners and governments debased the currency.

In old days, this meant shaving the edges of coins, or debasing new coins with non-precious metals. The debasement was an attempt to increase money to counteract the rise in prices, but it failed (of course). Every few decades, a new undebased coinage was released, and then the cycle of debasement began anew.

Just as insidiously, wages fell:

But as inflation continued in the mid-13th century, money wages began to lag behind. By the late 13th and early 14th centuries real wages were dropping at a rapid rate. This growing gap between returns to labor and capital was typical of price-revolutions in modern history. So also was its social result: a rapid growth of inequality that appeared in the late stages of every long inflation.

And what happened to government expenditures? It’s deja vu all over again — deficits:

Yet another set of cultural responses to inflation created disparities of a different kind: fiscal imbalances between public income and expenditures. Governments fell deep into debt during the middle and later years of the 13th century.

Crime and illegitimacy also rose. Fischer summarizes the end-game of the price-rise wave thusly:

In the late 13th century, the medieval price-revolution entered another stage, marked by growing instability. Prices rose and fell in wild swings of increasing amplitude. Inequality increased at a rapid rate. Public deficits surged ever higher. The economy of Western Europe became dangerously vulnerable to stresses it might have managed more easily in other eras.

And there you have our future, visible in the 13th, 16th and 18th century price-revolution waves which preceded ours.

It is hubris in the extreme to think we have somehow morphed into some new kind of humanity far different from those people who tore down the Bastille in a great frustrated rage at prices for energy and bread they could no longer afford.

It is foolish to blame “speculators” for the rise in food and energy, when the human population has doubled in 40 years and the consumption of energy and food has exploded as a result.

Based on the history painstakingly assembled by Fischer and Turchin we can thus anticipate:
— Ever higher prices for food, energy and water.
— Ever larger government deficits which end in bankruptcy/repudiation of debts/new issue of currency.
— Rising property/violent crime and illegitimacy.
— Rising interest rates (until very recently this was considered “impossible”).
— Rising income inequality in favor of capital over labor.
— Continued debasement of the currency.
— Rising volatility of prices.
— Rising political unrest and turmoil (see “Revolution”).


And there you have our future, visible in the 13th, 16th and 18th century price-revolution waves which preceded ours.

With this list of manifestations in hand, we can practically write the headlines for 2019-2025 in advance.
Regards,
Charles Hugh Smith

for The Daily Reckoning

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The Exchange Rate
Exchange rate stability was an essential element of the Bretton Woods arrangement. This objective was explicitly incorporated into the IMF Articles of Agreement, as it was also seen as crucial for guaranteeing another purpose of the IMF, ‘to facilitate the expansion and balanced growth of international trade’. The system of fixed but adjustable pegs worked well for more than a quarter of a century, with some flexibilities. All countries are essentially free to choose any exchange rate regime they prefer. The only constraint, according to the revised Article IV of the Agreement agreed in 1976, is that countries should avoid manipulating their exchange rates, in particular to gain competitive advantages.


As agreed at Bretton Woods, exchange rates are essential for their effects on international trade, and play a central role in correcting global payments imbalances.

This is the basic reason why they should be under IMF jurisdiction and be part of broader mechanisms of macroeconomic policy coordination. Indeed, one of the major issues in relation to exchange rates is their ‘excess volatility’ since the North Atlantic financial crisis, including that which characterizes the most important bilateral exchange rate, the euro/dollar rate. It is unclear what purpose this high level of volatility between the world’s two most important currencies serves.
https://cdn.shopify.com/s/files/1/00...g?v=1551368491


The system could therefore be improved by introducing elements that enhance the capacity of exchange rates to contribute to correcting global imbalances and to provide a reasonable level of stability, which is of course crucial for international trade.
https://cdn.shopify.com/s/files/1/00...g?v=1551368138

A simple set of indicators should be used, mixing reference exchange rates with information about current account deficits, reserve levels, and global output gaps.

Capital Account Regulations
The central role that capital flows play in determining exchange rates and exchange rate volatility brings into focus an additional leg of international monetary reform: the management of the capital account. This issue links with broader concerns of financial stability, which the recent crisis placed at the centre of global cooperation. 

The essential problem is that capital flows, like finance in general, are highly volatile and pro-cyclical. Furthermore, capital account volatility tends to be stronger in emerging market economies than in advanced economies (with lower-income countries being largely rationed out from private capital markets). Cyclical swings in net flows, risk spreads, and availability of long-term financing are some of the major determinants (and, under certain conditions, the major determinants) of business cycles in emerging economies.


Furthermore, given the dominant role of advanced economies in international finance, a small change in their portfolios can have major repercussions on emerging economies.

This is the principle that should apply to rules on the liberalization of capital flows of the OECD and investment rules in free trade agreements.
Capital account regulations should be seen as part of the normal toolkit of macroeconomic interventions that should be used simultaneously with other macroeconomic policies to limit excessive capital inflows and avoid domestic overheating or exchange rate overvaluation.
https://cdn.shopify.com/s/files/1/00...g?v=1551370978


Furthermore, capital account regulations should be seen as a continuum, which includes macro-prudential regulations of a strictly domestic character (those that affect domestic assets and liabilities in the domestic currency), regulations that relate to the use of assets and liabilities denominated in foreign currencies in the domestic financial system, and those that regulate cross-border capital flows as such. The particular mix between these three forms of macro-prudential regulation depends on the policy objectives of the authorities and the characteristics of the domestic financial system of the countries involved.

Interestingly, this more pragmatic view is implicit in the only frame work on this issue adopted by the Group of Twenty.

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