Prediction: Things Will Unravel Faster Than You Think

Prediction: Things Will Unravel Faster Than You Think

Friday, October 1, 2010

Executive Summary

• We do not live in a linear world
• Complex systems are inherently unpredictable (sort of)
• Accepting “what is”
• Banking on perception
• The dawning of awareness of Peak Oil, sovereign insolvency, & currency debasement
• Hope alone is a terrible strategy
• What you should do

Part I

If you have not yet read Part I of this report, please click here to read it first.

Part II

Banking On Perception

When it comes to markets riding on a flawed fundamental premise, perception is everything.  

Consider that in December of 2007, the world had plenty of food, but by February of 2008, we saw food riots and the international perception of food scarcity.  Almost nothing had changed with respect to the fundamental quantities of food stocks between December and February, and that’s the point.

Or consider that one month Iceland was in fine shape and the next month desperately broke.  Ditto for Greece.  Again, there was nothing that had fundamentally changed from one month to the next, in terms of cash flows or debt levels, that would justify the size of the adjustments, but they happened nonetheless, and they happened quickly. 

In each of these situations, the difference from one month to the next was more a matter of perception than a critical shift in the underlying fundamentals.  Admittedly, the fundamentals were poor and their defects were just waiting to be discovered, but it was a shift in perceptions that precipitated the rapid changes.

Today there are innumerable market participants who know that the basic fundamentals remain seriously flawed, but most of them believe that they can play the game and get out of the way in time.  Perhaps some of them can, but everybody can’t; in fact, only a minority can. 

When the fundamentals are out of alignment, instead of cataloguing the additional incremental imbalances as they mount, it is far better to begin tracking the perceptions of the major participants, because that is where the spark will originate.

The Dawning Awareness of Peak Oil

Unless you have been on an extended news blackout, you are certainly aware that a growing chorus of government institutions and industry groups has rather suddenly come to the conclusion that Peak Oil is not only real, but imminent.  Like, “within the next 1-5 years” imminent.  By which they mean that supply will