Change and the Process of Transformation

There is a key difference between change and transformation.

We often speak of "change"--as a potent political slogan, as a permanent feature of life, as a "good thing"--but we rarely speak of the often-wrenching process of change. I think the reason is self-evident: change often involves loss.

This is why Kubler-Ross's five stages of grief --denial, anger, bargaining, resignation and acceptance--have become an increasingly mainstream model of the process of coming to terms with the losses of declining asset valuations, a devolving economy and a lower standard of living.

But change is not just about loss and grieving, though it may include those attributes; it's also about transformation. While I am sympathetic to the process of accepting losses, it is the process of transformation which motivates and inspires me.

That the Status Quo--dependent on ever-rising debt and asset values, on cheap, abundant energy, food and other resources--is unsustainable, is self-evident to all not firmly lodged in the cocoon of self-deception and magical thinking known as denial. It follows that the Status Quo will devolve or implode within the next 10-15 years, and be replaced by some other arrangement.

Precisely what that arrangement will be is what I term the Great Transformation.The proper way to think about this great social and economic transformation is to think of personal transformation, for as correspondent Bart D. recently observed, "society is a fractal function of the individuals of which it is composed," which boiled down to its essence means the process of transformation scales up from an individual to a household, group and eventually to an entire culture in a self-same fashion.

In other words, the process of transformation is essentially the same all along the spectrum.

Transformation requires a person face that their fantasy-self--the one who always makes a good decision, is always in control, always caring and selfless, etc., is not real.The person must then come to terms with their real self, which includes positive traits and also all those elements which are difficult to accept because they are not god-like strengths but very human frailties: weakness, selfishness, indecision, fear and a host of other unappealing faults.

This is also true of entire societies. As a nation, we cling to a fantasy version of the U.S., as a powerful, "can-do" innovative country of limitless wealth and freedom. The reality is much less attractive, and yet rather than face up to the darker aspects of America we are in a stage of denial saturated with rage.

In our fantasy view, iPads (made in China) are proof of our god-like innovation; so deep is the appeal of this magical thinking that we are blind to the reality that we are mired in failed policies and tragically outdated ways of thinking; innovation in mainstream healthcare, education, governance and the rest of our key structures is essentially non-existent. We are a bloated, high-cost, rigid, fragile, fractured society frozen in a profound political disunity strongly reminiscent of the Roman Empire just before its collapse.

Just like the ancient Romans, we cling to magical thinking, as if a glorious past will magically repeat itself without any effort or sacrifice on our part; rather than confidence about the future, our primary emotion is fear, and our primary defense is denial.

Measured by the dominance of self-serving Elites, we are nothing but a large-scale banana republic, a simulacrum of democracy with limitless high-quality official propaganda masking an economy and political machinery completely ruled by a tiny, utterly self-serving financial and political Elite. Just as in banana republics we once scorned, a shadow system of governance actually rules, while a phony facade of "democracy," "rule of law" and "liberty" is propped up by a servile mass media of bought-and-paid-for toadies.

Individually, we have surrendered our autonomy for complicity in the charade: We want the Savior State to keep paying our bills, and we don't care how it does so. We are terrified by the possibility that the Savior State might implode, even as we recognize it is also a dangerous force of oppression dominated by a self-serving financial Elite.

The typical first reaction to this unwelcome reality is anger, triggered by an awakening self-loathing: we only "like" the fantasy self and the fantasy nation, and we actively dislike and fear the weak, vulnerable, anxiety-ridden real self and the high-cost, rigid, conflicted, incapacitated, fear-driven real nation.

The process of transformation boils down to integrating the various conflicted parts of the self into a complete being that is accepted and nourished for what it is, a dynamic mix of impulses, habits, tropisms, thoughts, emotions and actions.

On a social and national level, we must accept that self-indulgence and passive acceptance of debt-serfdom and political servitude are not successful models of transformation. We have no models for decentralizing our economy and consuming less resources; we will have to invent them, and that is the innovation we desperately need, not the childish "innovations" of distracting tech toys.

The person who has never gone through this profound process often fears what will be uncovered; ironically, we fear the discovery of our true self, and cling to the fantasy-self which is fundamentally the cause of our problems and anxiety.

In other words, we fear the process that will make us whole and bring us a grounded well-being because at the start of ther process, the end result is unknown. The leap requires self-confidence and faith. The person--and the society--grounded in realistic appraisals and self-knowledge is not afraid of transformation or the stiff challenges of the future; the self-aware person meets the future with confidence, and has no desire to cower in denial and spew the rage born of abject insecurity.

If we want to move forward to a healthy realism, then we have to move beyond denial, magical thinking and the self-loathing that comes with recognition of our weaknesses and anxieties.

As a nation, this will require accepting that we can no longer consume unlimited supplies of energy at low prices, and print unlimited sums of paper money to support our Elites and asset prices. We must accept that allowing the nation to operate for the benefit of a self-serving Elite is not serving the interests of the lower 99.9%.

One of the key stages in the process of change is to accept responsbility for where we are right now, and fashion a realistic response. Offering some ideas on what constitutes a realistic response and plan of action is the subject of my books Survival+ and An Unconventional Guide to Investing in Troubled Times.

We are not victims, helpless, or trapped. There are things we can do to improve our resiliency, sustainability and well-being. We can opt out of supporting the Elite-dominated Status Quo, and actively pursue parallel, decentralized modes of enterprise and living that are not complicit in the domination of the nation's destructive financial and political Elites.

Recommended reading

Analysis of Financial Terrorism in America (four-part series, PDF format)

Analysis of Financial Terrorism in America (HTML web pages)

What others are saying about An Unconventional Guide to Investing in Troubled Times:

"There isn't a shrewder and more insightful observer of the chaotic, swirling American scene than Charles Hugh Smith. If you are having trouble making sense of your culture, please buy this book!"
--James Howard Kunstler, author of The Long Emergency and the World Made By Hand novels

"Less 'how-to' than how to think, An Unconventional Guide to Investing in Troubled Times is the perfect antidote to the smoke-and-mirrors groupthink that runs rampant on Wall Street. Chock full of insights on accumulating and preserving wealth in a rapidly-changing world, Charles Hugh Smith's latest book is a 'must have.'"
--Michael Panzner, author of Financial Armageddon and When Giants Fall

"For anyone seeking an original, eye-opening, unvarnished and practical approach to the real New Normal, and the capital markets that accompany it, Charles Hugh Smith, one of the very few voices in the noisy wilderness of the financial Internet worth listening to, has just released this must read book for anyone who wishes to learn about the other, and more importantly correct, side of the story."
--Tyler Durden, Zero Hedge

"A masterful synthesis of essential insight and practical guidance. This Unconventional Guide explains why our economy and financial markets have reached a level of unsustainable systemic risk -- and how understanding the nature of the forces at play enables savvy strategies for securing 'wealth' (of all kinds) as the inevitable dénouement unfolds. Few authors write with the intelligence and heart that Charles does; fewer books empower the reader more to face the certain changes in our future with confidence."
--Chris Martenson & Adam Taggart, proprietors of ChrisMartenson.com

If you have some doubts about Wall Street's permanently Bullish "guidance," you might be interested in my new book An Unconventional Guide to Investing in Troubled Times, now available in Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc.Click here for links to Kindle apps and Chapter One.


Readers forum: DailyJava.net.


My new book An Unconventional Guide to Investing in Troubled Times is available in Kindle ebook format. You can read the ebook now on any computer, smart phone, iPad, etc. Click here for more info about Kindle apps and the book.

Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle

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If the Market Crashes, Who Owns Enough Stock to Even Care?

Since 81% of all stocks are owned by the top 10%, a stock market crash has little effect on the bottom 90% of Americans.

It is assumed without question that the stock market is some quasi-sacrosanct barometer of the U.S. economy. But who even cares if the market crashes? Only the top 10% who own it. Yes, millions of (generally government) workers have an indirect stake in stocks and bonds via their state/union pension funds, but it's still informative to look at the distribution of who actually has a stake in the market's rise and fall.

This data is from pre-recession 2007, so I suspect ownership has become even more skewed to the top 5% as those below liquidated stocks to pay the bills as household income and housing equity plummeted.

So 81% of stocks are owned by the top 10%, and 91% by the top 20% of households. Thus we can conclude that 11.7 million out of the nation's 117 million households will actually be adversely affected by a stock market crash, while the consequences to the remaining 105 million households will be slight to zero.

A severe decline in the "wealth effect" would probably crimp the top 10% tranche's carefree spending, which accounts for some 40% of the nation's consumer spending. If the market crashes, high-end retailers and restaurants would likely see sales fall significantly. While there would be consequences, we should be careful not to overstate the stock market's role in the nation's Main Street economy.

And what are the chances of a real crash? For insight, we turn to the The Chart Store's chart overlaying the current rally and collapse with the Dow circa 1907. The similarity is rather uncanny:

The only difference is the Fed launched QE2 late in 2010, which kept the rally alive for another 6 months. But as we can see, it didn't change the future decline, it simply set it forward a few months: the current market has now caught up with the 1907 decline.

The past is simply one possible pattern of many to consider, but the remarkable similarity of these two charts suggests that there may be more downside ahead.

One last point: those who exited the stock market won't care if it crashes because they opted out of playing the risky game altogether.

PODCAST ALERT: Steve over at Two Beers With Steve kindly interviewed me last week, and here's the podcast of the discussion on investing and much more. Thank you, Steve, for the chance to talk about my new book and the future of investing.

If you have some doubts about Wall Street's permanently Bullish "guidance," you might be interested in my new book An Unconventional Guide to Investing in Troubled Times, now available in Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc.Click here for links to Kindle apps and Chapter One.


Readers forum: DailyJava.net.


My new book An Unconventional Guide to Investing in Troubled Times is available in Kindle ebook format. You can read the ebook now on any computer, smart phone, iPad, etc. Click here for more info about Kindle apps and the book.

Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle

Thank you, Cecelia A. ($100), for your outrageously generous contribution to this site -- I am greatly honored by your support and readership.

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About Those Permanently Rising Corporate Profits...

We're constantly assured stocks can't go down because corporate profits are rising. So what happens when they start falling as global recession takes hold and the U.S. dollar stops falling?

The entire "story" of the Bull market is stocks rests on one reed: permanently rising corporate profits. Too bad those profits are set to fall. Like everything else about the "recovery," the "rising corporate profits" story is founded on financial flim-flam, starting with the boost provided by a sinking dollar.

A simple example reveals how a declining dollar has grossly inflated U.S. global corporate profits. Let's say Johnson & Johnson made a 1 euro profit from a sale of toothpaste in Europe in 2003. Translated into U.S. dollars for its financial reports, that 1 euro became $1, as the euro and dollar were at parity.

Now when J&J earn that same 1 euro in profit, it translates into $1.40 in profit. The revenue remained the same, and the profit remained the same, but profits stated in dollars rose 40%.

And this effect isn't limited to Europe. Global Corporate America's profits made in China have risen 20% over the past few years when stated in U.S. dollars (USD) as the yuan has strengthened from 8 to the USD to 6.4 to the dollar.

To truly grasp the monumental scope of this smoke-and-mirrors game of "profits" rising from currency arbitrage, we have to recall that most of the big U.S. global corporations earn between 50% and 65% of their profits overseas. Since the dollar has weakened about 30% in the Fed's free-money campaign (quantitative easing), then we can guesstimate that fully 15% of all profits from global corporations is phantom: if half their profits are earned overseas, and the dollar declined 30%, then their overseas profits rose by 30%. Since that is half of all profit, then that 30% rise boosts total profits by 15%.

This gaming of corporate profits via weakening the dollar has long been a favorite Fed pastime:

Notice how the long slide in the dollar coincides with the Bull market 2002-08:

As noted on the chart, the game has been disrupted recently as global financial turmoil has led to the dollar slowly rising. Most commentators see the dollar as losing its "safe haven" standing, but safe haven has little to do with demand for dollars: it's much more a matter of needing dollars to pay down debt that is denominated in dollars.

As global financial crisis triggers margin calls and counterparty settlements in dollars, the demand for dollars rise. That's why the dollar spiked during the 2008 meltdown.

Now there is a second factor driving the dollar higher: the slow but sure demise of the euro. European authorities are rather naturally doing their best to slow the collapse, but their efforts will fail for the all the fundamental reasons I have covered here at length, for example Why the Eurozone and the Euro Are Both Doomed (June 23, 2011).

Since the euro is 60% of the dollar index (DXY), then the euro and the USD are on a see-saw: if the euro declines, the dollar must rise, and vice versa. The euro's current valuation looks extremely high in terms of standard deviation:

Notice how non-financial (i.e. global) corporate profits spiked up from 2002:

Here we see just how outsized corporate profits have become in historical terms:

What happens to corporate profits if the dollar stops declining? They take a huge hit, that's what.

The second reason why corporate profits have soared is labor costs have been slashed via layoffs, early retirement and the wholesale movement to contract/free-lance workforce. Put another way, labor's share of corporate revenues has plummeted, a fact reflected in this chart:

While mass layoffs may be declining, that doesn't mean Corporate America is hiring domestically. Rather, the slash-and-burn campaign to lower labor costs to boost profits continues with undimmed ferocity, as those of you within the gurgling bowels of Corporate America know all too well.

The third factor is the global recession. While headlines this morning are cheering a blip up in retail sales in America as "proof the recovery is intact," the majority of other data from the nation and around the globe indicate a slowing global economy. Corporate America has squeezed vast profits from slashing costs and the weak dollar, but it's reached the point where no more big profits can be reaped from those factors. If revenue slips, so will profits.

A fourth factor is the flow of government largesse will no longer be expanding.Corporations have been reaping guaranteed profits from government spending (not hiring people, just skimming profits), and now that the fiscal flood is facing some constraints, that trillion-dollar prop under Corporate America is weakening.

The easy money's been made from slashing costs and dollar arbitrage; all four supports of corporate profits are at risk. With these props gone, how are corporate profits going to keep rising? If the "rising corporate profits" story dissipates, so does the Bull market.

PODCAST ALERT: Steve over at Two Beers With Steve kindly interviewed me last week, and here's the podcast of the discussion on investing and much more. Thank you, Steve, for the chance to talk about my new book and the future of investing.

If you have some doubts about Wall Street's permanently Bullish "guidance," you might be interested in my new book An Unconventional Guide to Investing in Troubled Times, now available in Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc.Click here for links to Kindle apps and Chapter One.


Readers forum: DailyJava.net.


My new book An Unconventional Guide to Investing in Troubled Times is available in Kindle ebook format. You can read the ebook now on any computer, smart phone, iPad, etc. Click here for more info about Kindle apps and the book.

Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle

Thank you, Norman W. ($50), for your phenomenally generous contribution to this site -- I am greatly honored by your support and readership.

Thank you, Sean S. ($35), for your wondrously generous contribution to this site -- I am greatly honored by your support and readership.

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Welcome to the Age of Instability

The phony fixes have failed, and the dam of toxic sludge and debt is leaking; instability will be the New Normal until the dam finally bursts and the financial Status Quo is swept away.

If you liked the past two weeks, you're going to love the next two years: welcome to the age of instability. As I explained yesterday, the quasi-religious belief in the stock market as a secure store of wealth has faded, and for good reason: The Junkie in the Pool and False Idols: Faith in Wall Street and The Fed Has Has Eroded (August 10, 2011).

In a nutshell, the Federal Reserve and Federal government's extend-and-pretend, mark-to-fantasy, paper over bad private debt with trillions in public bad debt "fixes" of the broken economy have failed, completely, utterly, miserably. Rather than drain the cesspool of impaired debt, risky bets gone bad and rampant abuse of the rule of law, the Fed and the Central State have poured trillions of dollars more bad debt into the fetid pool of sewage and sludge, which is now full to bursting.

For a deeper explanation of why instability is now the norm, and destabilization is now inevitable, I turn to my new book An Unconventional Guide to Investing in Troubled Times for this excerpt.

As Nassim Taleb of “black swan” fame has explained, it is misleading to say the last few grains of sand on the debt pile, for example, subprime mortgages in the housing bubble, are responsible for the entire sand pile collapsing: the masking of risk was systemic, and thus the sand pile was doomed to collapse regardless of the nature of the final few grains of sand.

Similarly, it won’t really matter what the final trillion dollars of Federal debt was borrowed for; the default/collapse of the government debt pile is inevitable.

In betting the farm to prop up a façade of financial stability, the Federal Reserve and the Federal government have doomed the entire system to collapse. Taleb explained why in the June 2011 issue of Foreign Affairs: “Complex systems that have artificially suppressed volatility become extremely fragile, while at the same time exhibiting no visible risks.” That describes the global economy in 2007, just before the financial meltdown of 2008 “surprised” conventional economists and Wall Street apologists.

As Taleb has explained, the very act of suppressing fluctuations renders systems extremely prone to large-scale disruptions that are viewed as low-probability events, the infamous “black swans.” The key to understanding this rising likelihood of supposedly improbable disruptions is to understand the difference between linear and complex systems. Linear systems lend themselves to causal chains (A causes B which causes C) or probability (the odds of drawing two aces in a game of Blackjack) that can be calibrated with a high degree of accuracy.

Complex systems such as financial markets exhibit fractal or chaotic characteristics that lead to an unpredictability that is prone to disruption by seemingly small events. When volatility and risk (in political terms, dissent) are suppressed by central authorities, the variations that inform an open market (“variation is information”) are lost.

The misrepresentation (and thus the mispricing) of risk and the suppression of everything which doesn't pander to the Status Quo is a defect not of individuals or specific institutions but of the entire system, including the Federal Reserve, the Treasury and the regulatory “alphabet soup” agencies (SEC, FDIC, etc.).

The misguided attempts to engineer a false stability by suppressing "undesirable" volatility have created an intrinsically fragile system that is doomed to crises of ever greater dimension even as the periods of calm between crises shrink from years to months. Recall that risk is like water in a closed system: it can never be squeezed into nothingness. The more pressure that builds up, the more inevitable it is that the risk will burst out in some part of the financial system that was viewed as “safe” and “stable,” for example, home mortgages.

This is how financial events that are widely viewed by conventional economists and government officials as “impossible” can occur with increasing frequency.

One model for this type of apparent stability that is disrupted by unpredictable spikes of volatility is stick/slip destabilization. In “sticky” systems—for example, those with major forces creating credit and regulations to maintain the Status Quo--pressure builds up within the system that is invisible to those looking at an apparently stable surface. But at some impossible-to-predict moment, the built-up pressure within completely disrupts the system, and it “slips” into a new and unpredictable configuration.

The rules of the investment/speculation “game” will be changed without warning as authorities attempt to stabilize an increasingly chaotic financial system. Their attempts to force a superficial stability will only make the next round of instability more severe and less controllable.

The Grand Partnership of the Central State and the Financial Plutocracy (parasitic globalized cartel crony-Capitalism writ large) has suppressed this natural implosion of speculative debt by printing and distributing trillions of dollars in "free" money so over-indebted borrowers and speculators can continue to “extend and pretend,” that is, continue the illusion that they are solvent.

As a special bonus to these financial Power Elites, this limitless pool of "free money" enabled them to ramp up their favorite pastime, leveraged financial speculations based on fraud, collusion and misrepresentation of risk. As any profits will be theirs to keep while any losses will be backstopped by the Central State and its taxpayers, it's a return to the risk-free days at the races for the financial Oligarchy.

But massive doses of free money unleash two destructive forces on the economy: as the free money flows into speculative bets on tangible resources, it reinflates asset bubbles and fuels rising costs.

As a result, the system is now facing the same old problems--asset bubbles held aloft by "free money," massive government intervention, systemic financial fraud--and a new problem: price inflation for the resources that sustain the real economy.

The Central State/Financial Elites are thus faced with an impossible choice: if they let the speculative free money flow, then their populations become impoverished as the prices of tangible goods such as food and energy skyrocket. Recall that the masses aren't provided with billions of dollars at zero interest; that privilege is reserved for the financial Elites who fund the campaigns of the Central State’s political class.

The Classical Capitalist answer to this vast financial overshoot is simple: once the unlimited free money and moral hazard guarantees stop, interest rates will rise as risk is repriced and the market “discovers” the cost of borrowing scarce capital (savings). Once interest rates rise, then the ballooning debt can no longer be serviced. Borrowers big and small go bankrupt, their assets are sold at auction on the open market, and their unpaid debts are absorbed as losses by their creditors.

This renunciation of debt triggers a domino effect as credit becomes increasingly expensive and other overleveraged borrowers and insolvent creditors are toppled into bankruptcy.

In other words, the Status Quo is now addicted to unlimited flows of free credit issued by central banks. If the flow continues, then inflation will destabilize it; if it's cut off, then rising interest payments will destabilize it. No matter what policy path is taken, the result is the same: instability and destabilization.

This is why a systemic financial meltdown is now inevitable.

Nobody knows how this devolution will play out, but we do know that those who are open to the possibility will do better than those who discount or dismiss the inevitable reckoning as “impossible.”

PODCAST ALERT: Steve over at Two Beers With Steve kindly interviewed me last week, and here's the podcast of the discussion on investing and much more. Thank you, Steve, for the chance to talk about my new book and the future of investing.

If you have some doubts about Wall Street's permanently Bullish "guidance," you might be interested in my new book An Unconventional Guide to Investing in Troubled Times, now available in Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc.Click here for links to Kindle apps and Chapter One.


Readers forum: DailyJava.net.


My new book An Unconventional Guide to Investing in Troubled Times is available in Kindle ebook format. You can read the ebook now on any computer, smart phone, iPad, etc. Click here for more info about Kindle apps and the book.

Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle

Thank you, Scott C. ($25), for your exceptionally generous contribution to this site -- I am greatly honored by your steadfast support and readership.

Thank you, Ted & Nancy F. ($50), for your extraordinarily generous contribution to this site -- I am greatly honored by your support and readership.

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The Junkie in the Pool and False Idols: Faith in Wall Street and The Fed Has Eroded

The Debt-Junkie Market has been pulled from the pool, gasping for breath, but nobody thinks he's healthy: faith in the Fed and wall Street has been irrevocably lost.

PODCAST ALERT: Steve over at Two Beers With Steve kindly interviewed me last week, and here's the podcast of the discussion on investing and much more. Thank you, Steve, for the chance to talk about my new book and the future of investing.

Oversold rallies notwithstanding, the Debt-Junkie Market just stumbled into the pool and was barely saved from drowning. The stock market party isn't over for strictly technical reasons, though the technical damage is severe.

The party's over for a much deeper reason: faith that the Fed can fix the economy has faded, and participants no longer believe Wall Street's self-serving hype about the recovery and rising markets. Oh sure, people go through the motions of expressing faith in the market, in corporate profits rising forever, in official pronouncements of the Fed's omnipotence, and in whatever snapback rally is in play at the moment, but it's all for show; nobody really believes any of it, they just don't want to be the odd man out by confessing their loss of faith in the false idols. America Is Just Going Through the Motions(November 19, 2010).

The financial Status Quo has an unsolvable problem: reality isn't swayed by propaganda. Does anyone really believe another couple years of low interest rates and a snapback rally or two will fix what's broken in the U.S. and global economies?

Hasn't it been made abundantly clear that super-low interest rates only fuel speculation and malinvestment?

This loss of faith is not a temporary phenomenon but rather a sea change in the zeitgeist, somewhat akin to the loss of trust in a partner caught cheating: you can never go back to what existed before, even though you go through the motions of a return to normalcy.

I have covered this systemic loss of faith in the Status Quo many times--a process of delegitimization that is reflected in declining participation, withdrawal of funds, and increased skepticism of official pronouncements and statistical "proof" that the Status Quo is healthy and sustainable.

When Belief in the System Fades (March 12, 2008)

When Belief in the System Fades, Stock Market Version (March 26, 2010)

What we're seeing is a gradual, generational abandonment of the stock market as a trustworthy place to secure wealth. The closest analogy is the 1970s, when participants' euphoric belief in the permanence of the go-go stock market of the late 1960s was slowly destroyed, along with their wealth.

There are plentiful signs that the quasi-religious faith in stocks has reached an apex and begun a long, slow slide. For example, the Q ratio leaped to previously unimaginable heights, and is still far above its previous lows registered when people had lost faith in the market and its institutional cheerleaders (The Fed, Wall Street, etc.)

The value of the stock market relative to the GDP (a proxy for the real economy) has been at historically high levels for decades:

Here's what markets look like once institutional credibility has been lost: note the long decline in the Dow through the 1930s and the Nikkei market in the 90s. Yes, there were rallies lasting several years, but the markets never recovered the wealth that had been wiped out in their declines.

Faith in the Fed and Wall Street has eroded because their bailouts failed to repair the real economy or household balance sheets. If all the Federal/Fed backstops are included, the total exceeds $23 trillion, but let's see where the most visible $10 trillion ended up:

Over on the fiscal side, the Federal government has borrowed and blown some $6 trillion over the past four years in debt-enabled "stimulus." And how much did that torrent of debt accomplish? Looks like it yielded a negative return: the experiment was a failure.

Meanwhile, back in the real economy, labor's share of the national income has dropped:

And so has household income.

Rather than question the loss of faith in the Fed's magic wand and Wall Street's perpetual cheerleading, we might ask why it's taken so long for people to realize the Fed is a clueless cabal of cargo-cultists in servitude to the rigged game known as Wall Street, and the only solution is to opt out of playing the market.

The Debt-Junkie Market has been pulled from pool, dripping wet and mumbling, but the onlookers' frothy party conversations have dwindled to whispers. Yes, the Market has been "saved" once again, and the Fed will undoubtedly continue announcing new Methadone treatments that it promises will work wonders.

But anyone looking at the haggard, bent wastrel standing on the pool deck, arms scarred with tracks from previous Fed "treatments," is forgiven for excusing themselves: the party's over, even if the hosts are loudly declaring it has barely begun.

If you no longer believe in Wall Street's cheerleading, you might be interested in my new book An Unconventional Guide to Investing in Troubled Times, now available in Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc.Click here for links to Kindle apps and Chapter One.

Readers forum: DailyJava.net.


My new book An Unconventional Guide to Investing in Troubled Times is available in Kindle ebook format. You can read the ebook now on any computer, smart phone, iPad, etc. Click here for more info about Kindle apps and the book.

Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle

Thank you, Jon D. ($10/mo), for your phenomenally generous subscription to this site -- I am greatly honored by your support and readership.

Thank you, Rebecca D. ($10), for your much-appreciated generous contribution to this site -- I am greatly honored by your support and readership.

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