Tag: finance

By John Sharry, originally posted at The Foundation For The Economics Of Sustainability

Hope in the Face of Disaster – Creating a sustainable, viable, future path for civilisation

The Illusion of Progress

There was a small village located in the centre of a large rainforest. Over time, the people decided that they would like to voyage out of the forest and to make their way to the sea, which they knew was close by. To do this they consulted the wise people in the village, notably the engineer, the politician and the philosopher. The engineer and the politician quickly took the lead in the project. The engineer made cutting tools like machetes that could cut easily through the dense undergrowth, and the politician organised the villagers in small working teams. Over time an efficient system was evolved, the engineer made the best and sharpest tools and the politician streamlined their application. Soon the village was making steady progress through the forest and everyone in the village was employed and working hard together. The philosopher, who sat in the trees all day long, seemed to make little contribution and people wondered what his value was.

One day the group came upon a particularly high tree. It stood out as the highest tree in the forest. The workers quickly bypassed it as they efficiently made progress, but the philosopher stayed behind and climbed to the top of the tree. From the top he had a fantastic view of the whole jungle. He could see the villagers, cutting like a snake through the jungle and in the far off distance he could even see the sea. Then to his horror, he noticed that the villagers were not heading towards the sea, but in fact were moving in the opposite direction, towards a large hidden chasm. If they continued on the same course, all of the villagers would fall to their death. Alarmed, he climbed down the tree and he rushed over to the politician and engineer leading the group.

‘We are heading the wrong way, we are headed towards disaster’ he shouted.

‘Shut up’ the engineer and scientist replied in unison ‘we are making great progress’.

In many ways the plight of humanity represents that of the tribal village described in the story. We have created an apparently wonderful economic model that seems to provide us with so many benefits. When you consider the incredible feats of technology and the global consumerist lifestyle we enjoy it is easy to marvel at what has been achieved. Of course what may be less obvious is the dark side of the growth economic model which is deeply inequitable, restricting its benefits to the relative elite in the western world and trapping the rest of the world in poverty. Most dangerous of all is the unsustainability of the model and where it is taking us in the future. There is now a perfect storm gathering that includes economic indebtedness, resource shortages, population pressures, and climate change that is guaranteed to derail civilisation. Despite this the political and economic mainstream are largely in denial about what is happening– like the hapless engineer and politician in the story everyone agrees that we must restart the ‘growth economy’ and continue to progress down the business as usual pathway. Very few people are taking the long term view and watching the direction towards doom that this pathway leads us. Too invested in the benefits of our current lifestyle, no one wants to hear the counsel of the philosopher who sees the disaster that looms ahead.

Where is civilisation heading?

Human decision-making is complex. On our own, our tendency to yield to short-term temptations, and even to addictions, may be too strong for our rational, long-term planning.
– Peter Singer

Like the philosopher in the story at the beginning it is useful to take a moment to climb the ‘tallest tree’ and to consider where civilisation is heading. Unfortunately the long term vista is not pleasant. Under the current business as usual economic model we are facing into a series of interrelated crises and global problems that are already beginning to have an impact.

Economic instability/ Financial System Weakness

The world banking crisis in 2008 and the resultant global recession revealed to the general public the inherent weaknesses in our world financial system. The economic growth model on which we depend has created a parallel system of finance that has built up extraordinary amounts of debt between countries and banks that has grown into an unsustainable bubble. In 2008 the world financial system was revealed as co-dependent, embedded and very fragile. Much like a house of cards, the collapse of Lehman’s brothers bank send ripples through the world bands that the nearly brought down the whole system. While some stability has been created due to massive intervention on the part of nation states and central banks, unfortunately this is largely temporary and the central weaknesses remain. Many countries have completely unsustainable levels of debt that simply cannot be paid back and when a future crisis happens central banks and nation states will have less capacity to intervene (having spent most of their reserves to stabilise the system since 2008). Despite these problems there is widespread denial about the scale of the financial problems we face. As the economist and founder of Feasta, Richard Douthwaite[1] notes:

Few of us think that anything radical has to be done. We assure each other that minor tinkering, like holding an inquiry, beefing up the regulatory system and limiting bankers’ bonuses, will be enough to allow us to carry on living pretty much as we do now for the foreseeable future.

Resource Shortage

We are heading into an era of resource shortage and constraint. The cheap fossil fuel energy that has powered our civilisation will become increasingly scarce and harder to access. Such a peaking of supply will have serious ramifications across our economies and not just in transport and energy. Our world agricultural system on which we all depend is highly fossil fuel dependent – collapses in the supply of oil lead to collapses in food production and thus food shortages. Our world economy is so dependent on the cheap availability of oil, that even a small restriction in supply has the potential to collapse the entire system or plunge the world economy into depression.

Current and future resource constraints are not just limited to oil and indeed almost all the vital resources on which we depend are being depleted at exponential rates. Every human person and community depends on the availability of large supplies of water. With increased consumption and droughts caused by climate change fresh water is becoming harder to access in many regions in the world. Many countries are depleting underground water aquifers at exponential rates that far exceed rainfall’s ability to replenish them. Many highly populated areas of the planet will become increasingly uninhabitable in the near future.

In his book, Peak Everything [2], Richard Heinberg describes how we are facing decline in just about every resource our complex economies depend on whether this is uranium production, grain yields, fish stocks, arable land in agriculture etc. Having been used to everything on demand and plenty in the past, our societies will have to deal with resource constraint and shortage in the future.

Ecological Destruction

Many natural biologists argue that we are currently precipitating the sixth great extinction on the planet. Some estimates put the current extinction rate at up to 10,000 the norm – we are systematically wiping out the earths species. Perhaps most devastatingly, this can be seen in the on-going collapse of life in the oceans. Overfishing and increased ocean acidity caused by CO2 emissions is leading to the collapse of ecosystems and larger dead zones. In a recent report, Alex Rogers, professor of biology at Oxford University, said:

The health of the ocean is spiralling downwards far more rapidly than we had thought. We are seeing greater change, happening faster, and the effects are more imminent than previously anticipated[3].

While the mass extinction of species might be seen as an environmental problem, it will also threaten our own survival as the human species as our well-being is determined by the life in the oceans. In the same report Rogers continues

People are just not aware of the massive roles that the oceans play in the Earth’s systems. Phytoplankton produce 40 per cent of the oxygen in the atmosphere, for example, and 90 per cent of all life is in the oceans… The situation should be of the gravest concern to everyone since everyone will be affected by changes in the ability of the ocean to support life on Earth.

Climate Change

As if the problems above weren’t bad enough, by far the most serious issue to come is global warming caused by human CO2 emissions leading to catastrophic climate change – this is biggest elephant in the room.

Already, we are beginning to see the early stages of this in increased rates of flooding, severe heat waves and sea level rises but worse is to come. For many years, 2 degrees was proposed as the safe limit that civilisation could tolerate but this looks likely to be breached on our current economic trajectory. As Prof Kevin Anderson[4] of the Tyndal Centre notes

There is now little to no chance of maintaining the rise in global mean surface temperature at below 2 ?C, despite repeated high-level statements to the contrary.

In exploring future trajectories, the recent IPCC report concluded that if we continue our ‘business as usual’ rate of CO2 emissions, this could lead to 3- 5 degrees of warming by end century. Such rates of warming could make most of the planet uninhabitable for human life and threaten our very survival as a species. When you consider that the IPCC projections are relatively conservative and avoid taking into account many potential accelerating factors (such as permafrost methane release, dark Arctic Ocean heating etc.), then these predictions are truly alarming. As Kevin Anderson (quoted by David Roberts) states elsewhere[5]

The thing is, if 2 degrees C is extremely dangerous, 4 degrees C is absolutely catastrophic. In fact, according to the latest science, says Anderson, “a 4 degrees C future is incompatible with an organized global community, is likely to be beyond ‘adaptation’, is devastating to the majority of ecosystems, and has a high probability of not being stable”.

What is the basic problem?

Because of his greed the foolish farmer opens the goose’s stomach in order to access more of the golden eggs she produced. In the end he is left with a dead goose and no more gold.

Like all species, humans have exploited the natural environment to provide food, shelter and warmth. Unlike other species however, we are the first to exploit irreplaceable and unrenewable natural resources in such excessive quantities that we are destabilising the planet on which we all depend. The most significant of these unrenewable resources are fossil fuels such as coal, oil and gas which we started using a few hundred years ago to kick start our industrial economy and on which we now depend on an increasingly huge scale to power our modern civilisation and consumerist lifestyle.

In the early days such natural resources were in such abundance that it might have seemed churlish to see them as finite or limited. In addition, we had little evidence that our burning of fossil fuels caused harm to the environment. As a result, our economies started to grow at exponential rates and our modern civilisation became increasingly complex and dependent on exploiting these finite natural resources. Over time our industrial economy has morphed into a complex global machine that requires increasing energy and natural resources at its disposal in order to sustain it. The modern economy and the financial system in particular require on- going economic growth for it to remain stable. Loans that banks make now require future economic growth so that they can be repaid with interest. Any sustained recession puts banks in particular and the financial system in general at risk of collapse.

As a result modern civilisation is collectively caught in the following terrible bind: In order to avoid collapse the modern economy requires continual growth and thus the increased exploitation of natural resources; however, economic growth depletes the earth’s resource base on which the economy depends and so will eventually collapse.

This means that whatever choice we make we are facing into some form of decline and collapse. However, the earlier we choose ecologically sensitive alternatives to our current economic growth model, the more manageable such collapse and decline might be.

In simple terms we are reaching the limits of the natural world and things will not be the same in the future. Already, we are feeling the tremors of the future shocks to come. World agricultural output is declining, the availability of crucial natural resources such as fresh water, fish stocks, arable land are all declining. Fossil fuels are increasingly harder to access or cause increasing environmental damage as they are exploited. The mining of tars sands and the boom in worldwide fracking are examples of this, both of which are barely economically viable.

As children we all learnt the parable of the foolish farmer and golden goose who because of his greed kills the goose on which he and his family depends. We are making exactly the same mistake with the planet. Instead of accepting the natural limits of the resources at our disposal, we are living beyond the planets means and are perilously close to destroying the natural world on which we all depend.

Why is No One Listening?

There have been many warnings of the predicament in which humanity finds itself. In the early seventies the Club of Rome group published the famous book The Limits to Growth which outlined the unsustainability of the world economic model. As early as 1988 James Hansen explicitly warned the United States Congress about the dangers of human induced climate change. Some of these warnings were taken up by politicians of the day and indeed President Carter issued a passionate speech about the over- dependence of the USA on fossil fuels in 1977 and called for a switch to renewable and more environmentally friendly alternatives. With the Rio Earth summit in 1992, attended by 152 world leaders, there was perhaps a peak of world optimism that collectively we might now face reality and turn away from the unsustainable and disastrous path we were on.

Sadly, however none of this hope for change has been realised in the last 20 years and indeed if anything things have got much worse. Instead of reducing our dependence on fossil fuels we have rapidly increased our consumption at an exponential rate. Instead of reducing carbon emissions into the atmosphere these are now at the highest than at any time in human history. Further, what is particularly surprising is that people are now denying more than ever the reality of the problem. For example, research conducted by the University of Cardiff in 2013 found that the proportion of climate sceptics in Britain has risen to 19%, an increase of 15% since 2005[6].

Despite increasing and overwhelming scientific certainty about climate change, there is a parallel increase in denial of the facts by the public. Indeed, there are now active and well-funded denial lobbies intent on confusing the message. Even among those who accept the problems, there is an increasing avoidance of discussing these problems. As well as a growing number of ‘climate deniers’ we now have ‘climate ignorers’ who are people who despite a sense that all is not right in the world choose not to consider these issues and instead continue day to day on the same path.

So why would this be? Why would people choose to deny the serious problems of the future posed by not just by climate change, but also by resource depletion, and environmental destruction? Why would people deny such serious problems when they are becoming most apparent? Why would we turn away from corrective action at the hour of our direst need? While people have suggested the answer to this lies in the existence of well organised vested interests in the energy and fossil fuels industries and this is indeed true, I think there is also a collective failing in our human psychology that explains this rampant denial.

Denial, Fear and Loss

The only pain that we can avoid in life is the pain caused by trying to avoid pain.
– RD Laing

Denial is a common psychological response to deal with a serious threat or loss. Rather than experience the fear that we should normally feel when confronted by a major threat, we try to deny the reality of the threat in order to preserve our mental comfort. This is particularly when the evidence of the threat is indirect or far off. For example, many people who experience the early symptoms of a major illness will avoid thinking about it or seeking help for a considerable amount of time. They will reassure themselves that it is something minor and nothing to worry about, and avoid seeking help. Denial can be particularly strong when acceptance of the threat would mean we have to change or give up something we hold dear. For example, a person addicted to smoking or drinking will go to great lengths to deny the harm such behaviour might be causing their families and themselves, because they can’t imagine living without their preferred drug. In addition, because the damage of many addictions is far off and in the future, it is easier to deny its impact and to continue the habit unperturbed. For the smoker, the prospect of lung cancer in 20 years can be no deterrent to smoke the cigarette currently in their hand.

In many ways our collective behaviour in response to the prospect of climate change and environmental destruction is similar to the behaviour of a seriously addicted person. We in the West are addicted to availability of cheap oil and the consumerist economy that it provides us. Just like an alcoholic who will go to great lengths to deny the harm that alcohol causes in his life, so collectively our mainstream media and political system will go to great lengths to deny the harm that our economies dependent on fossil fuels are causing. When the denial is strong, people will cling to any belief (however unfounded) that seems to indicate there is nothing to worry about or that there is no threat to their livelihood. Picking perceived ‘holes’ in the evidence about climate, however tenuous, or clinging to ‘vague solutions’, however unrealistic are all powered by denial. When people read ‘denial’ articles, they can feel reassured momentarily and their fear of the future is abated. Of course such strategies only work temporarily as the evidence continues to grow and crises start to impact.

In addition, just as an alcoholic or drug addict will increasingly employ desperate measures to satisfy his addiction (despite the harm and moral depravity of such measures) so we employ increasingly desperate and ecological harmful strategies to secure an interrupted supply of oil to fuel our economy’s voracious appetite (whether this is fracking, exploiting tar sands or dangerous deep sea drilling).

Denial can also be particularly strong, the greater the threat and the more helpless a person might feel in the face of it. For example, many people on receipt of a fatal diagnosis may choose to actively deny or ignore these facts because they feel there is nothing they can do to reverse the diagnosis and the pain of contemplating its impact and their eventual death is too great for them. The recent growth of the number of ‘climate deniers’ and ‘climate ignorers’ can be explained by an increased awareness (on one level) of the problems and a resultant desperation to deny the facts and put them out of collective awareness. Though people have an increasing sense of unease about these problems they will avoid talking about them or engage in some form of wishful thinking that solutions will be found. They refuse to let the scale of the pending catastrophe sink in and do everything to keep it at bay.

As we shall see later, in helping people move from denial to a more constructive stance, they need to discover a purposeful goal of how they can respond to the current challenges which points to constructive action they can take.

Over Optimism and Collective Denial

One of the most striking things about the response to the current predicament is the lack of leadership and/ or collective denial that is endemic across our mainstream institutions. Our political masters, the mainstream media and most of our economists all agree that we must continue the economic growth or our ‘business as usual’ model, despite the patent unsustainability of this pathway and the harm it causes. In the face of the world economic crisis, there is an almost across the board consensus in the mainstream that we must return to economic growth to solve these problems. This consensus extends from the political left to the political right from business leaders to trade unionists and no one in the mainstream is proposing an alternative. There is almost no political will to question this consensus and to really consider the short term nature of such ‘solutions’ which even if possible will have such long term devastating consequences. Focused solely on re-election in a year or two, the last thing a politician wants to do is to talk about the reality of challenges for fear of making people despairing and fearful and vote not to re-elect them.

When denial is punctured

Crisis can be a time of opportunity and change, as well as trauma, and fracture.

The fact that climate change is a relatively slowly emerging phenomenon and that we are out of touch with the environmental destruction we cause means it is easy for most people to continue to deny these problems. This is likely to change once society is beset by an unending set of crises and catastrophes. Even though early change or adaptation is far more preferable to emergency change and forced adaptation, it is likely that until our addicted society experiences catastrophes, will the penny finally drop and our collective denial be punctured. Once this happens this will of course be a very perilous time. People, who have been hitherto in comfortable denial, will become fearful and desperate and may embark on desperate actions leading to social unrest, war and society breakdown. We need to be prepared to manage these social difficulties in the future which is likely to be as significant as managing the economy.

The famous psychologist Kubler Ross[7] proposed a model of the individual’s response to bereavement or pending loss as going through the stages of denial, anger, bargaining, depression and finally acceptance. Once denial is passed a person may experience great anger at their loss, which is often accompanied by seeking to apportion blame and even seek retribution. This can be followed by bargaining or engaging in wishful thinking or unhelpful strategies to mitigate the loss and then by depression and grief as the impact of the loss finally comes to bear. Kubler Ross argues that once this grief work is done, the person can reach some level of acceptance and integration. Interestingly, many writers in the environmental field describe their own personal journey of awareness in similar terms. They describe a period of denial, before having a ‘climate change moment’ when they realise that the world on which they depend is unsustainable. This if often followed by a period of despair and finally by some acceptance and a commitment to constructive action.

Such a grief model may also give us some indication as to the stages we will collectively go through as the denial about the un-sustainability of our current lifestyles is punctured and we are beset by crises and consequences. If the first half of the age of oil has been characterised by exuberance, ever- increasing expansion, and an almost manic consumption of the world’s resources, the second half will be characterised by contraction, scarcity and depression. Once the denial falls away and it becomes clear that the decline of our western industrial economies is chronic and long-term, collective anger in likely to be widespread. People will seek to blame someone for the situation they are in, and there will be many looking for easy answers or scapegoats. It is at these times that people can choose radical and extreme political views. Just as the economic turmoil and the great depression of the 30’s led to the rise of dictatorships and totalitarian states in Europe, when the Nazis seized power by galvanising the public’s anger around easy scapegoats and negative ideals so these times will be fraught by similar dangers. In addition to anger, there is also likely to be widespread depression and despair. This is just as dangerous and has the potential to cause people to feel helpless in the face of negative forces within society, disabled them from taking action and to miss the positive opportunities in their midst.

Responding Constructively

In collectively, preparing for the many challenges ahead it is important to take into account the associated psychological, community and societal problems that will emerge. Once the crises occur, community and society leaders will have a particular responsibility to manage the public anger and despair that will emerge in order to avoid the destructive paths of social disorder. The twin challenges will be to help people channel their anger into constructive rather than negative courses of action and to present a vision that inspires hope in the face of widespread difficult circumstances. Such plans will be as crucial as economic and technological ones in helping people navigate a new future.

As a mental health professional my work is all about helping people face serious life problems such as addiction, disability or relationship breakdown and then in the face of such problems to live with meaning and purpose. I find it useful to conceptualise four stages to help individuals change which may provide a helpful framework in considering how we might collectively face the serious problems of resource depletion, climate change and economic collapse that are ahead of us. These four stages are

1)  Honestly accepting the reality in which we find ourselves
2)  Creating a meaningful vision/purposeful goal of how to live in the face of such reality
3)  Focusing on constructive action
4)  Building a community of support

Honestly Accepting Reality

We must let go of the life we have planned, so as to accept the one that is waiting for us.
– Joseph Campbell

At heart of addiction is fear. The addict fears that he cannot live without the drug or addicted object and will do anything to hold on to it. The antidote to this fear and the first step to overcoming addiction is to honestly accept the reality of your addiction and to take responsibility for your actions. Such honesty requires great bravery as you have taken responsibility for the harm your actions have caused. Using a second metaphor, our response to our collective predicament is similar to person facing a life threatening and potentially fatal illness. It requires great bravery for a person to face this new challenging reality and to allow the difficult feelings of anger and depression that might follow. Adjusting to accept a new much changed reality often requires a period of mourning, whereby a person experiences grief at the ‘loss’ of the future they were expecting and as they learn to live with very different expectations.

For us to face the hard reality of our collective predicament won’t be easy. Most people avoid thinking about it and those that do maintain a theoretical understanding. Scientists will talk about how we are committed to 2-4 degrees of warming, but may be reluctant to describe in detail what these facts will mean (inundation of major cities, killer heat waves, collapse of agriculture, social disorder). Some economists will talk about coming shortages in oil and other resources but few will visualise the food shortages, and the potential economic and social collapse that this will bring. Further, while many people recognise there are serious environmental challenges, such problems are minimised and not seen as a personal threat to their own existence. The melting of the Arctic ice is seen as a problem for polar bears, and climate change as one only affecting the third world, rather than both being seen as heralding serious threats to their own personal and national security. There is a disconnect from the obvious fact that we are utterly dependent on nature and the environment – its demise spells out our own destruction.

For us to wake up to the sheer scale of the problems we face will indeed require great honesty and bravery. It will be particularly hard for us to accept our responsibility – that is it was our actions which caused all these problems in the first place through our refusal to abandon a harmful economic model. Hardest of all will be to accept that the problem is not fixable, that much of what we have done is irreversible. While there is a lot we can do to arrest some of the problems and to mitigate some elements of disaster it is very likely that we are gone beyond the point of no return in many arenas. At best, we are looking into a period of long term decline and managed collapse. There is no way to sugar coat these hard facts, though the psychological acceptance of this reality is the first step to health. After denial, the Kubler-Ross model proposes the hard steps of anger and despair before reaching a stage of acceptance when people can learn to live again in a meaningful way.

Creating a Positive Vision

Grant me courage the change the things I can change, the serenity to accept the things I can’t change and the wisdom to know the difference.
– Serenity Prayer

Hope is definitely not the same thing as optimism. It is not the conviction that something will turn out well, but the certainty that something makes sense regardless of how it turns out.
– Vaclav Havel

Once a realistic and grounded appreciation of reality is achieved the next step is to create a vision for living in the face of this reality. There are two parts to this new vision that are illustrated by the wisdom of the serenity prayer. On the one hand, our new awareness should motivate us to individual and collective action to create change. Anyone realising the facts of climate change and resource scarcity should indeed feel alarm about our current collective path and then throw themselves into action to change course. Like the philosopher in the story at the beginning, we need people to try to ‘shout stop’ and to work to get us to pull back from our course of ecological (and self) destruction. This is the work of the many groups that campaign for reductions of CO2 emissions and those that work to conserve and protect wildlife.

Setting realistic and specific goals is important in this area of work, whether this is achieving a definite limit on carbon emissions when tackling climate change or aiming for food and energy security when building nationals resilience.

While these goals are absolutely necessary to create a future for the next generation, some of these changes are inherently beneficial and can make sense as choices in their own right now. For example, setting goals for more community oriented sustainable living, where people rely on their own resources to live, can be a more healthy and happy choice than the choice to live in our isolated, individual consumer societies.

Such important actions require great courage in the face of powerful vested interests which seek to thwart them. There is indeed a lot at stake. Unless we inspire people to act immediately, even a chance of a sustainable future will be lost. Every day that is passed without changing course makes a survival future less likely. We also have to be realistic about what is achievable. While we cannot avoid two degrees of warming, (which though catastrophic might be survivable) we can do a lot now to avoid four degrees (which will result in wide-spread collapse for human society).

As well as a vision focused on change, once we understand the reality of our predicament there is also another vision for living that is focused on acceptance and serenity. Such a vision recognises that though we are facing into a difficult future of decline and collapse – we can still construct a purposeful and meaningful life in spite of this. This vision is not constructed out of optimism but one that is wrought out of hope. Such a vision might have many components. It can entail a refusal to go down the path of despair nor to give into misdirected outrage that can lead to enemy formation, scapegoating, totalitarianism. Central to this vision might be a commitment to hold onto values such as justice, fairness and compassion in order to preserve a future worth living for. Such a vision might also contain a commitment to appreciate and value the life we have, and a decision to reconnect to the wonder of nature as it is. In his work with people facing death, the great existential psychotherapist Irvin Yalom proposed a ‘golden’ stage of death awareness[8], whereby people move beyond a simple acceptance of death to a point where such awareness makes their current life all the more precious and vital – each moment that remains is to be savoured and lived well.

Taking Constructive Action

Taking constructive action is crucial to managing and overcoming problems. A person with an addiction may first accept the reality of his addiction and then envision a positive life without being dependent, but unless he takes action to create a new way of living he will never move beyond the addiction the long term. Even a person who has experienced an irreversible loss such as a bereavement can find a new purposeful way of living such as dedicating oneself to a cause that is important to the loved one they have lost.

Taking constructive action in the face of a difficult reality is crucial to psychological health. Positive action in itself is an antidote to fear, channels anger in positive directions and turns the person away from debilitating despair.

Facing the current economic and environmental crises, there never has been such an urgent need for constructive action. Such action is both about arresting our business as usual path to destruction and finding alternative pathways as well as trying to adapt and build resilience in the face coming crises. Despite this urgency, most current global effort is on continuing the business as usual path with CO2 emissions continuing to soar and the environment continuing to be depleted). Even those with some understanding of the issues propose action that is far too little to have any impact on the sheer scale of the problems. Alternatively, other people adopt a ‘wait and see’ attitude – we understand problems are coming but we will change only when we have to. However, if we wait until major crises hit and our economies are shattered then not only will our action be too late, it will also be impossible as we will have little economic infrastructure to put plans into action. You won’t be able to build flood walls or alternative energy sources if your economy is in chaos. Early preventative action, to build resilience or to reduce future problems, is always preferable and the sooner we act the better.

It can be useful to consider constructive action as taking place on four levels 1) personal, 2) community, 3) national and 4) international. Let’s look at what might be possible on each of those levels.

Personal resilience and preparedness

While it is easy to doubt what a single individual can achieve, one must not under estimate the power of individual leadership. Certainly, as they realise the unsustainability of our present world most people in the environmental movement go through a personal journey of alternating despair and fear as they reach a stage of acceptance of the facts. Such acceptance and psychological preparedness for what is to come is a very important stance going forward. Certainly, a lot of time is unnecessarily wasted by people holding on to out-dated worldviews that no longer fit reality and which cause further harm to the planet.

At the end of this journey is the challenge of personal action. What am I to do in the face of these challenges? What is my responsibility now that I know the facts?

There is a responsibility to communicate what you know and to campaign our leaders for the more sustainable use of the resources as well as to start emergency preparation for the coming crises. There is also the choice to build personal resilience and to learn how to help your family survive in a future world that may be devoid of the many comforts on which our survival depends. Simple things like prioritising one’s health, getting fit, learning useful skills and accumulating resources that will be of enduring value in challenging times all create personal resilience.

Building personal resilience is not just about building capacity to deal with future crises, the benefits also extend to how you live your life now. Take for example, the ‘Growing It Yourself’ movement, which has huge current popularity. Learning to grow your own vegetables not only teaches the useful future skill of self-sustainability, but it also provides you with physical exercise, a connection with nature (often lost nowadays) and the personal satisfaction of creating your own food. In addition, done as a family project, gardening can help improve your relationships with your family and has the potential to increase your connectedness with your local community if you share and exchange produce and ideas.

One of the most important benefits of a personal acceptance of the more challenging future we face is how it can alter a person’s appreciation of their current life. Realising the potential losses in the future, many people choose to live more deliberately and with great appreciation of what they have as they sense none of this may be available in the future.

Community resilience

If we wait for the governments, it’ll be too little, too late. If we act as individuals, it will be too little. But if we act as communities, it might just be enough, just in time.
– Rob Hopkins

While the current economy is global, the future one is most likely to be local. As economic problems and future shocks come to bear this is likely to unhinge the global industrial machine and people are more likely to depend on their local communities and towns. This is the basic premise of the Transition movement[9] pioneered by Rob Hopkins, which encourages people to come together in local groups to act now to build community resilience. These communities have initiated small-scale projects around energy, agriculture, transport, waste disposal, housing and education that all promote local supply and sustainability.

Whereas in the past villages and towns depended more on locally produced food and energy, currently now locally grown food makes up less and 2% of produce and local energy production amounts to even less. This means that towns are extremely vulnerable to any global disruption to energy or food supply. Everyone is completely dependent on international supermarkets and oil suppliers for the basic necessities of existence. The Transition projects that encourage project such as community farms, local cooperatives and community energy projects, all reduce the dependency on outside sources and have the potential to build the local economy. Instead of most of people’s money flowing out of the community to pay energy and food bills, the money can stay in the local community and build local jobs. Indeed, as future shocks rock the international economy such local economics will become much more important.

Grassroots movements such as Transition towns are about galvanising local people and communities into positive constructive action. Rather than sitting back, complaining about what is wrong or being fearful about the future, the Transition movement puts people in touch with like-minded people who can act together to make a difference. These projects connect people with their neighbours, provide meaningful community work and build social capital within communities. The personal psychological benefits of such constructive community action are enormous.

In addition, while these community projects are still small-scale and not yet on national agendas, in the future they have the potential to lead the way. Once economic and environmental shocks occur and the current system begins to break down people will increasingly look for guidance from on the ground communities that are better prepared for what is happening. In his most recent book The power of just doing stuff Rob Hopkins[10] describes a myriad of small scale projects that have the potential to provide signposts for future action and sustainability.

National Resilience

While currently national politics is completely in denial about the unsustainability of the current economic system, this could change quickly in the face of serious crises. Such a change would be similar to complete transformation of the UK during World War 2. Politics became unified and focused on a single major goal of survival in the face of the Nazi threat. Out of necessity and within a short period the entire domestic economy was reorganised into a largely local one where communities returned to growing their own food and rationed their consumption of imported products. With the common enemy of the Nazis, political leadership was strong and communities were galvanised into action. The ‘Dig for Victory’ campaign to encourage locally produced food was extremely successful.

In the face of crisis, it is possible to conceive that current national politics could be transformed and reoriented in a similar way. Climate change and carbon emissions could become common enemies and national goals could be set for energy and food independence. Networks of cooperatives could be set up on regional and national levels that could support such projects. Having clear national goals such as growing 100% of our own food by a certain date, or building a renewable energy infrastructure, will be easier to explain to the public and to ensure national buy in.

While currently it may be difficult to persuade such a national reorientation, it will become more necessary as economic, resource and environmental shocks hit. As a result, early preparation is crucial. Even if most people do not fully accept the unsustainability of the current economic model, it still makes sense to create national plans now as to how we will deal with such potential shocks and emergencies. Some effort should be put into thinking how will we deal with a currency crisis? What will we do if oil/ gas supply is interrupted? How could we ensure food security for the population if world trade was interrupted? National ‘think tanks’ could be commissioned to plan a range of adaptive responses and emergency policies that can be enacted during crises. This can include plans for dealing with energy and food scarcity, mass unemployment, population migration, currency and financial collapse etc. Even in the face of large scale denial, there is a strong rationale for starting such preparation. Moving the discourse from an environmental one to one about national security is important in making progress. This is not about saving the environment, it is about saving ourselves.

International Cooperation and Resilience

One of the one most striking things about the global economic model is how interconnected it is. Most nations are bought into this co-dependent system and which our livelihoods depend. Whereas 30 years ago, countries like china and the soviet bloc seemed to possess some independence and to be following separate economic paths, this has all changed in the last few decades and these countries have fully joined the global economy thrown their hand into the consumerist lifestyle and the pursuit of economic growth. As a result, no nation is economically independent of another – shocks in one country quickly transmit across the system. The health of the European economy depends on that of US as well as on the economy of China and Russia and vice a versa. This co-dependence is particularly striking in the financial system – a collapse in one banking system has the potential to bring down every financial system.

As a result the problems associated with unsustainable growth such as climate change, environmental damage and resource destruction are all truly global problems. Any potential solutions or large scale mitigation strategies would only have a chance of working if they are international projects with buy in on a global level. Indeed, much effort has been put into broker international and global solutions such as the IPCC, in the large international meetings in Rio and Copenhagen.

Sadly, however, very little progress on the scale needed has been made. Nevertheless, while our global institutions exist we must continue to work hard to secure international agreements that might reduce CO2 emissions, limit environmental damage and share resources equally. When global crises start to hit hard in the future, it will be interesting to know how our global institutions will respond. While is possible that the stress of reduced resources and climate chaos could lead to fracture and conflict between nations, there is also the possibility that this could lead to more global awareness and force agreed global solutions as people work harder together to survive.

Building a Community of support

Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, it’s the only thing that ever has.
– Margaret Mead

In my work as a mental health professional rarely do people overcome big personal problems on their own. It is usually in the context of support from family, friends or even a professional that people turn their lives around.

While there is a myriad of future challenges facing humanity that are already beginning to impact, the future still is unpredictable and open to choice. While few people yet take the long term view and see the direction towards which we are heading, it is incumbent on those who are aware to prepare and act now. If we do survive and continue to live purposely it will be down to our personal and collective choices. While we don’t know what exact questions will be asked of us in the future, let alone begin to fully answer them, we can build resilience and a state of preparedness for whatever future challenges are to come. If we strive now to honestly face the reality of our predicament, set meaningful goals that bind us together and take constructive action, then we can build a future worth living for.

Endnotes

1. Richard Douthwaite and Gilian Fallon (2010) p2, Fleeing Vesuvius Overcoming the Risk from Economic and Environmental Collapse. Dublin: Feasta.
2. Richard Heinberg 2007. Peak Everything: Waking up to the century in decline in Earth’s resources. Clairview Books
3. http://www.theguardian.com/environment/2013/oct/03/ocean-acidification-carbon-dioxide-emissions-levels
4. Kevin Anderson, Alice Bows 2011, p 42, “Beyond ‘dangerous’ climate change: emission scenarios for a new world” Philosophical Transactions of the Royal Society. 369, 20–44 doi:10.1098/rsta.2010.0290
5. http://grist.org/climate-change/2011-12-05-the-brutal-logic-of-climate-change/
6. http://www.theguardian.com/environment/2013/sep/19/numbers-climate-sceptics-rise-uk
7. Elizabeth Kubler-Ross, 2005 On Grief and Grieving London: Simon and Schuster
8. 6 Irivin Yalom 1999 Momma and the meaning of life William Morris Agency, Inc
9. Rob Hopkins (2008), The Transition Handbook: From oil dependency to local resilience, Devon: Green Books
10. Rob Hopkins 2013 The power of just doing stuff Devon: Green Books

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With tensions raging in Asia (and the Middle East) and the anniversary of the start of World War I drawing closer, we thought it contextually useful to look at World War II from a different (and more broad) perspective. This History Channel documentary shows – using an all-seeing CGI eye – a satellite view of the conflicts, allowing you to experience it in a way that places key events and tipping points in a global perspective. By re-creating groundbreaking moments that could never have been captured on camera and by illustrating the importance of simultaneity and the hidden effects of crucial incidents, the war’s monumental moments in never- before-seen context. And with new information brought to the forefront, you’ll better understand how a nation ranked 19th in the world’s militaries in 1939 emerged six years later as the planet’s only atomic superpower.

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Submitted by Adam Taggart via Adam Taggart via Peak Prosperity,

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OPEN LETTER TO GOLD INVESTORS: WILL THE REAL MANIPULATOR PLEASE STAND UP

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When work is punished and the only policy tools left for a nation of must-sustain-the-credit-is-growth-Keynesian-state-wreck-status-quo believers, there can be only one outcome in the war on poverty in America… “promise zone” or no “promise zone”…

(h/t Sunday Funnies at The Burning Platform blog)

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Submitted by F.F.Wiley of Cyniconomics blog,

If you’ve ever sought advice from a financial advisor, you probably asked the question: “How much of my portfolio should I hold in stocks?”

Somewhere in the answer, you were probably offered long-term return estimates.

These estimates probably placed stock returns at approximately inflation plus 5 or 6%.

But what if standard estimates are too optimistic, as they were in the 1990s when advisors typically predicted double-digit long-term returns? Shouldn’t this change your investment allocations?

We’ll argue that the usual estimates are overoptimistic, and that investment allocations should be based on more realistic expectations.

Worse still, the discrepancy has reached enormous proportions. By projecting earnings forward over the next decade, we’ll show that stocks are now priced to barely outpace inflation at best.

Here’s a chart that demonstrates our approach:

The black line shows over four decades of S&P 500 (SPY) earnings, expressed in 2013 dollars. The colored lines are exponential trend lines calculated over the last one, two, three, four and five earnings cycles.

To define an earnings cycle, we begin at the exact point in a recovery when earnings busted through their prior peak. Therefore, cycles extend from the first all-time high in a particular earnings recovery to the first all-time high in the next recovery. This approach mitigates the problem of trend lines being sensitive to beginning and ending points. It’s far better to start and end a trend line midway through earnings recoveries than to calculate it from, say, an earnings peak to an earnings trough.

Conveniently, inflation-adjusted earnings likely breached their 2007 peak at the end of 2013, marking Q4 as the beginning of the next cycle and adding the period from 2007 to 2013 as the final cycle in our trend line calculations.

Estimating 10 year returns

As shown in the chart, we extend each trend line forward to estimate earnings in 2023. We can then estimate 10 year returns with suitable assumptions for the price-to-earnings (P/E) multiple.

Specifically, we use median P/Es from the same time periods that we used to estimate trend lines. Even though P/Es in 2023 will surely be higher or lower than historic medians, we have no way of knowing which of these possibilities will play out so far into the future.  Just like the earnings trends above, our approach to estimating P/Es is the most neutral (not cherry picked to produce the “right” conclusions) that we could come up with.

Here are our calculations:

As shown in the right-hand column, all but one of the real return estimates are negative. What’s more, the picture looks even worse with more history. Here’s another chart that adds trend lines covering six, seven, eight, nine and ten earnings cycles, followed by a second set of calculations:

While the results speak for themselves, we’ll share some thoughts on specific time periods:

1. Within the period shown in the first table, productivity grew most strongly in the latter half of the 1990s and early 2000s. This is probably the biggest reason for differences between the “last 3 cycles” return estimate (which covers the period from 1988 to 2013) and the other estimates.
2. Although our future could certainly include another productivity-based profits boom, other factors tell us to be cautious. Consider that earnings were boosted by declining interest rates in each of the last three cycles. Consider also the ratio of corporate profits to GDP, which reached all-time highs in 2013. While these developments are baked into the 1988 to 2013 trend line, they’ll eventually come to an end and even reverse direction. Interest rates can only fall so far, while profit shares can only rise so far.
3. Households, businesses and the government hold much more debt as a percent of the economy than they did forty years ago. Borrowing in all of these sectors has helped boost earnings in ways that can’t continue forever. In other words, even the worst results from the first table – covering five cycles from 1973 to 2013 – fail to convey the risks of our debt addiction.

Overall, our research couldn’t be further from the financial industry’s conventional thinking. Conventional estimates call for stocks to outpace inflation by 5 or 6%. The results above, on the other hand, show mostly negative real returns over the next decade.

Needless to say, we recommend questioning any advice that’s based on standard estimates.

Better yet, send our charts and tables to your advisor. Request an explanation for how stocks outpace inflation from today’s prices. Will earnings climb even further above established trends? Will P/Es never fall again?

Once you’ve established your advisor’s assumptions, weigh them against history. Challenge him to explain why this time is different.

Bonus chart

If you have to choose just one chart to show that current earnings (and especially 2014 forecast earnings) are out of line with established trends, we recommend our last chart below. We calculated trend lines for every combination of three or more consecutive earnings cycles (36 in all). The results leave little doubt about the discrepancy between current earnings and historic precedents.

More info

Technical notes for this post can be found here.  Also, we discussed the importance of long-term earnings trends in:  “Why Stock Prices Are More Stretched than You Think: A Tale of 3 P/E Multiples” and “P/E Multiples, Deleveraging and the Big Experiment: Sizing Up the Next Bear Market.”

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Last year, developed market equities were the big winners and if you didn’t have a large dollop of them in your portfolio, you invariably under-performed. Bonds had some of their worst losses in almost two decades while gold had its poorest year since 1981. And shock, horror – the vast majority of analysts and commentators are forecasting more gains for equities and more losses for bonds and gold (the end of their respective bull markets, apparently). Investor flows have been reflecting this advice. So far this year though, things haven’t gone according to plan with bonds and gold bouncing back and stocks under-performing.

Moving beyond price action, one of the most critical issues going forward will be the ongoing battle between inflation and deflation. For five years, central banks have been fighting deflationary forces in order to spur their economies into action again. Deflation is seen as preceding recession or even depression, while inflation has the nice benefit of reducing bloated government debts (inflation leading to depreciating currencies and therefore lower local currency debts). So far, the central banks efforts have met minimal success with a weak economic recovery and disinflation (declining inflation).

There are some signs though that this may be changing. U.S. inflation expectations are ticking up, giving us the first signs that inflation could be around the corner. If this trend continues, it may prove the defining theme for markets in 2014. It would be bullish for stocks, particularly in under-performing markets such as Asia. It would also be negative for bonds and commodities, the latter at least initially. So perhaps analysts could be right after all: that the performance of the various asset classes this year mirrors that of 2013.

Or perhaps not. Count me a continued skeptic of the view that inflation is on the way, at least for now. But it would be wrong to ignore incoming data which is contrary to my view. This newsletter then is an attempt to show some of the key trends which I have my eye on for what’s head for economies and markets.

Rising inflation expectations

The world’s central bankers have fought desperately to prop up economies for the past five years, after the worst downturn (at least, in much of the developed world) since the 1930s. Undoubtedly, their massive doses of stimulus combined with interest rates near zero prevented an even greater downturn. Whether they also prevented a faster recovery will be debated for years to come.

Anyhow, the deflationary forces which preceded the downturn and continue to haunt economies is perceived as enemy number one by these bankers. They’ll do anything to prevent these forces gathering steam.

And they’ve struggled, to this day. Let’s focus on the U.S., the world’s most important economy and market. Here, the monetary base (commercial bank reserves plus total currency in circulation) has exploded more than 4x since the financial crisis, reflecting massive central bank stimulus.

The Fed has bought bonds off commercial banks in the hope that these banks would lend the said money to the public. Unfortunately, bank loan growth has been tepid, and trending down of late. That’s indicative of weak demand for debt from consumers.

That’s resulted in money velocity dropping to more than 60 year lows. This means money isn’t changing hands and circulating in the economy. A strengthening economy has rising velocity, or the same quantity of money being used for several transactions.

The U.S. inflation rate itself has reflected the above. Inflation peaked near 4% in 2011 before declining to 1% in November last year, and a minor pick-up to 1.2% in December.

The important thing to note is that these charts are all lagging indicators: they tell us what’s happened rather than what’s going to happen.

That brings us to what we consider the most important chart in the world right now: inflation expectations.

Inflation expectations are measured by the difference between U.S. Treasury yields and Treasury Inflation Protected Securities (TIPS). TIPS are indexed to CPI and as the latter increases, so does the value of TIPS. In other words, you own TIPS as a hedge against inflation.

As you can see from the chart, the spread between the two is rising. What this indicates is that investors are expecting inflation ahead. The chart is crucial because it’s normally a forward looking indicator ie. these expectations filtering through to official inflation statistics. In other words, it’s suggesting that investors see the pace of economic recovery in the U.S. picking up and that filtering through to inflation.

Winners, if the trend holds

The rise in U.S. inflation expectations is consistent with recent market action. Markets are forward-looking and the considerable out-performance of stocks versus bonds in 2013 has been telling us that a U.S. recovery may be gaining hold and inflation is coming.

It’s important to note that inflation expectations and stock market multiples (price-to-earnings multiples) are closely correlated.

Inflation only becomes bad for equity multiples in the U.S. once it reaches above 4%. More than 6% inflation leads to the more dramatic de-rating of stocks.

Therefore, rising inflation without a concomitant rise in interest rates is very bullish for stock markets. Given developed market central banks are pledging to hold interest rates near zero for a considerable period of time, there may be a sweet spot for equities to outperform further.

If bond yields rise sharply, and interest rates with them, that would be negative for stock markets. The first rate hike in the previous six rate cycles in the U.S. has resulted in corrections of 2-9% to the S&P 500.

If the sweet spot of rising inflation expectations and low interest rates continues though, what can we expect from markets? Well, we’ve mentioned that this environment would be bullish for equities. But more specifically, you’re likely to see Asian equities explode higher, substantially outperforming stocks in developed markets. Asia has been a considerable laggard and any global recovery scenario would be very positive for the export-dependent economies in the region (think South Korea, Singapore, Malaysia and China).

Bonds would obviously suffer under this scenario, heralding the end of a huge bull market. Many bond markets haven’t seen such low yields in hundreds of years and therefore the rise in these yields could prove a painful event.

Lastly, commodities are likely to under-perform, at least initially. That’s because rising U.S. yields would result in a higher U.S. dollar, which is normally inversely correlated to commodity prices. However, if inflation really does take off, commodities could increase considerably from current depressed levels.

Why I’m not buying it yet

The question then becomes: do you buy into this scenario? Asia Confidential doesn’t and here’s why:

1) Central bankers and sell-side strategists want us to believe that a normal business cycle is about to ensue after the most extraordinary global stimulus measures, probably in history but certainly since the Great Depression. Normality after grotesquely abnormal central bank policies, in other words. The central bankers themselves have all but admitted that they don’t have a clue about the end-results of their post-crisis policies. I’m betting on more unintended consequences over a return to normality in 2014.

2)  In the debate over inflation versus deflation, I’m still in the latter camp, at least for the next few years. Weak demand and global excess capacity are likely to weigh on inflation. Japan yen depreciation and a China downturn won’t help either.

3) But I could be wrong and if recovery does take hold, serious inflation is likely to follow. All those bank reserves will make their way into economies and money velocity will spike accordingly. Put simply, I’m betting on the unintended consequences of either a deflationary shock (my preference) or conversely serious inflation. Mild inflation from here seems like a central bank (wet) dream.

4) If I’m right about deflation, then over-sold bonds could make a significant comeback and prove the doomsayers (99% of pundits right now) wrong again. But given the risks from current policies, making grand bets on such things is a mugs game and it’s best to diversify your assets (beyond just stocks and bonds) as much as possible at this juncture.

AC Speed Read

– Inflation expectations in the U.S.are rising, indicating inflation may be around the corner.

– If that trend continues, stocks are likely to continue to out-perform, but Asia should start to play catch-up to developed market equities.

– Asia Confidential isn’t buying into the coming inflation and global recovery thesis. Deflation remains the primary risk in our view.

– If that view is right, bonds could stage a big comeback, defying the doomsayers (99% of pundits) once again.

This post was originally published at Asia Confidential:
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At the risk of oversimplifying, there seems to be a single overriding driver of the global capital markets in the coming days.  It is how investors see the implications of last week’s dismal jobs data.  

In particular, many observers are suggesting that it raises doubts over the Fed’s willingness to continue to pullback from its asset purchases, as generally outlined along side last month’s tapering decision.   Some observers have linked it to arguments that the economy has become dependent on QE and at the first sign of withdrawal there is a loss of activity.  

The immediate response was to send US Treasuries broadly higher and the dollar lower, against nearly all the major and many emerging markets currencies.  The main exception was the Canadian dollar, which was weighed down by its own poor data and the beginning of speculation that the Bank of Canada may cut interest rates.  

The weakest monthly jobs report in a couple years spurred speculation that the Federal Reserve may postpone the next tapering move.  It was expected to be announced at the month-end FOMC meeting, and would have brought the Fed’s asset purchases down to $65 bln a month, which, incidentally, is lower than the BOJ’s own QE program.  For some others, who had begun playing with scenarios about the possibility an  upside surprise for the US economy this year and the risk of an earlier Fed rate hike, the jobs data was also a blow.

We expect the Fed to go ahead with slowing of QE purchases.  Fed officials have argued that there has been a cumulative improvement in the labor market.  A month’s disappointment will not change that understanding, though a second dismal report may be harder to shake off.  Moreover, one does not have to venture much beyond the weather is seen mitigating factors.  

That said, the market’s apparent lack of conviction may be an important signal in its own right. Specifically, as we have argued, the Fed’s recent decisions, and especially the forward guidance, was issued by, for the lack of a better one, a lame duck Federal Reserve chairman. Moreover, as Obama’s nominations of two new Fed governors (and renomination of Powell, currently a governor), including a new vice-chairman to replace Yellen, before the weekend, underscores, the seven-person Board of Governors is also changing.   The fact that the Federal Reserve that provided the forward guidance is not the same Federal Reserve that is to implement it simply cannot be as credible is the same personnel doing both.  “There’s many a slip twixt the cup and the lip”, the English proverb teaches and investors beware.  

Nevertheless, the jobs data and this uncertainty, means that the market will pay extra close attention to the Fed officials that speak and data in the week ahead.  Half of the twelve regional Fed presidents will speak during the week, as will Bernanke.  The Fed will also release the Beige Book, ostensibly used for the next FOMC meeting.   The same considerations that have prompted many economists to revise up their forecasts for Q4 GDP (due the day after the next FOMC meeting), may see a relatively upbeat report.  

Separately, the US real sector data, like retail sales, industrial production and housing starts, risk being on the soft side.  These reports, like the jobs data, suggest that even if Q4 GDP is in the 2.50%-2.75%, the quarter ended with poor momentum (and this was before the polar vortex).  

We already know that auto sales were poor and weakness in brick-and-mortar sales may be partly blunted by growing internet commerce.  It is notable that household consumption is steady and this is with limited new credit card usage.  The employment data and weather suggest some weakness in industrial production, though maybe mitigated by greater utility output.  The outsized 22.7% jump in November housing starts and the weather factor highlights the downside risk to the December report. 

If the real sector bias is on the downside, the bias on the price metric, import prices, producer prices and consumer prices is on the upside.   This may in part be due to higher energy prices. However, given that the Fed chose to taper despite the lack of evidence that its preferred measure of inflation, the core PCE deflator was moving back toward the 2% target, means that barring new weakness, inflation measures are not very helpful in determining the near-term course of Fed policy.  

While we expect a mostly US-centric week, there are a few economic reports from other countries to note.  In light of recent Canadian developments, the central bank’s senior loan officer survey, to be released Monday, may be important in assessing the financial conditions.  On balance, we think the recent sell-off has been too much too fast and anticipate some consolidative, short-term gains in Canadian dollar, perhaps fueled by a bout of short-covering or exporter purchases.  

Australia’s December employment report will be released early Thursday in Sydney.  The Bloomberg consensus calls for a 10k increase after the 21k rise in November.  We suspect the risk is on the downside, a combination of  firmer currency (back-to-back weekly gains and now more than 2% above the multi-year lows) and say a net loss of jobs, might be enough to revive speculation of an RBA rate cut.  

A current account deficit for November, on a seasonally adjusted basis, would the Japan’s third in a row.  The depreciation of the yen may boost exports, but it is also boosting the cost of imports, especially energy.  What is driving the yen, however, is the not its external position, but the US-Japan 10-year interest rate spread and Japanese equities.  The yield differential narrowed sharply after the jobs data to 215 bp, its lowest level in a month and below its 20-day average for the first time in more than two months.   

We note that the tight link between dollar-yen and the Nikkei has lessened.  The 90-day correlation between the percent change of the two is a little over 0.42.  The 60-day correlation is near 0.37 and the 30-day correlation is 0.35.    This can also be seen in correlation on simply the level of dollar-yen and the level of the Nikkei.  The 60-day correlation is 0.94, while over the past 30-days, the correlation has fallen to a still lofty 0.75. 

With the ECB and BOE meetings last week, not adding much to the current information set or expectations, this week’s data is unlikely to be very inspirational.  The euro area is expected to report a solid increase in industrial output in November. The euro zone appears to have grown around 0.2%-0.3% in Q4 (not due until mid-Feb).  It will also release its final estimate on the harmonized CPI measure. 

The UK reports December inflation readings and retail sales.  Bolstered by energy, the headline CPI may rise by 0.5% on the month, but due to the base effect, it may still leave the year-over-year figure at 2.1%.  However, even if this measure does not increase in December, it may do so this month as last January the CPI fell 0.5%.    The Bloomberg consensus has UK retail sales rising 0.3% on both the headline and ex-auto measures.  

Finally, a brief word about two Latam emerging markets.  Brazil’s central bank is expected to continue to tighten monetary policy.  Previously, many observers expected a 25 bp rate hike, but over the past week or so, the pendulum of market sentiment appears to have swung to another 50 bp move.  The Selic rate currently is set at 10.0%.  A local press report over the weekend suggested the government also expects a 50 bp move.  

The Chilean central bank to keep rates steady at the upcoming meeting at 4.50%.  Last week the government reported that December consumer prices jumped to 3% from 2.4% and the monthly headline and core rates were also firmer than expected.  This seems to preclude a rate cut that some had begun talking about.  The US dollar was trading at two year highs against the peso before the employment report an then proceeded to reverse course.  A break now of CLP529 could seen another 1%, or a bit more,  pullback in the dollar.  

via Zero Hedge http://ift.tt/1iCxpsX Marc To Market

With over 1,000 new merchants adopting Bitcoin every week, it is perhaps not surprising that, as NY Post reports, the first Bitcoin ATM is about to debut in New York City. Following success in Canada and Europe, Brooklyn native Willard Ling, 30, is set to introduce the first bitcoin ATM to New York City at the East Village bubble tea shop 'Just Sweet'. State regulators with the Department of Financial Services are expected to hold hearings later this month to discuss how the digital currency should be regulated; and until then, Ling’s bitcoin ATM will sit in his apartment.

Via NY Post,

Josh Harvey, co-founder of Lamassu, showed off the first bitcoin dispenser at last week’s Consumer Electronics Show and has found quite a bit of interest for the $5,000 machines.

How does the ATM work?

The machine, designed and manufactured in Portugal, looks like a typical deli ATM — but functions more like a vending machine. You put in US dollars and receive bitcoins back on your phone.

 

 

Users first download a bitcoin wallet mobile app — such as BlockChain or Mycelium — and set a password. A black-and-white QR code appears. They press the phone against the ATM’s glass window so it can scan the code, then feed in cash.

 

Presto, the machine sends bitcoins to the phone.

Coming To New York…

Brooklyn native Willard Ling, 30, is set to introduce the first bitcoin ATM to New York City.

 

After scouting locations, he has chosen the East Village bubble tea shop Just Sweet, on 3rd Avenue and 12th Street. He is now in talks with the owners on a rent deal.

But there are still hurdles…

State regulators with the Department of Financial Services are expected to hold hearings later this month to discuss bitcoin and how it should be regulated.

 

Until rules are drawn up, Ling’s bitcoin ATM will sit in his apartment.

 

He thinks New York should get on with it if it wants to still be considered a center of finance.

We would tend to agree since, as Mike Krieger at Liberty Blitzkrieg notes, over 1,000 new merchants are accepting Bitcoin per week (via BitPay alone)…

Earlier today, the Bitcoin news website Coindesk reported that BitPay is adding 1,000 new merchants per week, within an article highlighting the fact that private jet company PrivateFly had just teamed up with the payment processor to accept BTC for its charter flights.

Just to put this into perspective and understand just how staggering this growth it, BitPay only first surpassed 1,000 total merchants in September 2012 and a total of 10,000 in September 2013. At its current growth rate, the company is set to double the milestone of 10,000 merchants every two and a half months. Incredible.

From Coindesk:

“We believe that merchants are starting to see the value that accepting bitcoin can bring to their business,” said BitPay’s Jan Jahosky. “We’re adding merchants at a pace of 1,000 new merchants per week.”

 

“We expect exponential growth in the popularity of bitcoin around the world with both merchants and consumers, and anticipate seeing the biggest growth in China, India, Russia and South America.”

Full article here.

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By EconMatters

Market Churn

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