We’re all familiar with the image of a magician pulling a rabbit out of a hat. From time to time, those who write on political developments in general (and economics in particular) make reference to a “magician” - a government, central financial institution or other significant body metaphorically performing the same feat. The inference here is that, in a situation that seemed dire, the body in question has saved the day with a brilliant concept that made the problem go away.
About fifteen years ago, as I began to believe that the principle economies of the world were headed for a major debacle, I began to refer to “dead rabbits.” In discussions with fellow investors, I would suggest that the magician may well pull rabbits out of hats… but… that it would be advisable to recognize when they reached the point at which the magician was actually pulling out “dead” rabbits. This, on the surface, would seem rather obvious, but I had noticed with disturbing frequency that as long as Government claimed to be taking care of the problem, many of my associates were satisfied.
My definition of a dead rabbit is a solution that appears on the surface to improve or eliminate the problem, but that ultimately exacerbates it.
In a moment, I will return to that metaphor but let’s get to the topic at hand: predictions and specifically economic ones. It goes without saying that, in order to invest successfully, we should not simply “chase the market.” This would invariably result in eventual loss of our investment capital. Instead, savvy investors do the best they can to educate themselves as much as possible as to what is coming politically and, therefore, economically, in order to determine how to invest wisely.
If we are wise, we start by listening to those individuals with long histories (that is to say, decades) of successfully calling the trends. Along the way, we may advise our friends and associates to do the same. However, we often find that, if our friends are unprepared to make the requisite effort at study and, particularly if our conclusions regarding the situation are contrarian, our friends are likely to regard us as misinformed at best.
Recently, I met one such friend for lunch, who said, “Well your boy turned out to be dead wrong about the collapse of the FDIC by September 2010. It’s almost a year later and the FDIC is still there and will continue to be.” My friend was referring to one of the most respected prognosticators of the Austrian school.
Most of us who study the projections of those of the Austrian school of thinking have repeatedly faced the embarrassment of this sort of comeuppance. The problem, of course, is not that the prediction was wrong; only that the timing was off. For example, here are just a few predictions by well-respected forecasters:
- April 2010: Commercial real estate collapse
- June 2010: Third wave of depression imminent
- September 2010: Weimar or Argentina – style hyperinflation in the US
- September 2010: Gold to go to $1500
- December 2010: 40% Devaluation of US dollar
- January 2011: Martial law in US
- February 2011: Severe depression
I should mention that, at the above-mentioned lunch, my friend asked me why I bothered to study the musings of such plainly paranoid fools. The honest answer I gave was that, in nearly every case, I agree with them. Clearly, the timing of the above predictions has proven to be incorrect but that doesn’t mean they will not occur.
Again, these are not predictions from hacks. These individuals have, for decades, published newsletters that serve investors as primary sources for accurate investment information.
It is well for us to keep in mind that each of these prognosticators has, at one time or another, stated himself that while the outcome of a course of action may be predicted, the timing almost never can. Again, I agree. I should also point out here that, while my own forecasts over the years have generally been proven right eventually, the timing was often incorrect. When I have been incorrect, almost invariably, my projected date was premature. And this is the case with most prognosticators. Almost without fail, if a projected date later proves to be inaccurate, it was too early, not too late.
Why is that? Why are projected dates so consistently both incorrect and premature?
Enter the Dead Rabbit
Most of us who are investors are businesspeople, and, if we are to be consistently effective, we tend to conduct business in a conservative and profitable manner. When we do get into trouble, we endeavor to be creative and, hopefully, pull a rabbit out of the hat – a creative solution that fixes the problem. Those who deal in other people’s money (governments, large financial institutions, etc) think differently. They are only too willing, once they have run out of live rabbits, to employ the “dead” one. This represents a major difference in philosophy and methodology.
A shining example of a dead rabbit would be Quantitative Easing. The US has endured (some would say enjoyed) QE1 and QE2, which have falsely buoyed up the US economy. This has assured that all of the predictions on the above list would unquestionably be delayed. Now, in June of 2011, we are facing the end of QE2. The effect of QE up until this point has been to elevate the economic state of the US only slightly, while incurring tremendous toxic debt. The crash, when it comes, will therefore be far greater as a result of this dead rabbit.
For years, I have been warning friends and associates of “the Crash of 2011.” I thought that it could have happened in 2010 or as late as 2012. However, the middle year seemed most likely to me. It may well be that “The Great Unraveling,” as I term it, will not happen this year. I believe it depends almost entirely on whether the US government magician reaches again into the hat and pulls out another dead rabbit – QE3. I imagine that the fact that the first two “easings” have not been successful will not dissuade the powers that be from instituting another round, as once again, they are dealing with other people’s money. There is no reason not to do the wrong thing once more – to begin QE3 before the unraveling begins. It will exacerbate the problem, but it will buy time, just as QE1 and QE2 did.
So, does this review of the situation have a point?
I believe so, and it is this: When we make our predictions, we should do our best to try to identify what the dead rabbits may be. This we tend not to do, as we are, quite frankly, not good at it. Investors tend to be businesspeople - problem solvers, not schemers. If we are to identify the dead rabbits that may be on the way, we would need to think like schemers.
Right now, we stand at significant crossroads. If we assume that QE3 will not be implemented, it is time to fasten our seatbelts, as The Great Unraveling is about to begin in earnest. If we assume that it will be implemented, there will be yet another delay, possibly into 2012. I am personally of the belief that one more round of QE is likely to be the last time. Since 2008, several growing “cliffhanger” situations have developed. It is only a matter of time before one becomes untenable.
To be honest, I wouldn’t even hazard a guess as to which of these cliffhangers will trigger the collapse… The realization that paper gold has been grossly oversold? A sudden rejection of further debt by US creditors? A sudden drop in the stock market that triggers a reaction from already-fearful investors? Any one of these (or one of many others) could trigger sufficient panic to cause “The Great Unraveling” to begin in earnest.
Can I hazard a firm date upon which this is likely to occur? As John Wayne used to say, “Not hardly.”
For this reason, it is of paramount importance that we prepare as soon as possible, both economically and (if we are located in an exposed country) by creating a back door for ourselves and our families. Creating a back door can be a slow process and those who haven’t yet begun would be well-advised to start now.