Foiling Catastrophe

Yesterday, I suggested that Robert Prechter’s prediction of ‘Dow Under 1,000’ was worth reading but likely wrong. Today, some thoughts on how we might go about foiling it.

But first this . . .

AN INTERESTING NEW WAY TO HELP

In case you feel like helping your LGBT friends, relatives, or colleagues – or even just Charles and me – attain the same first-class citizenship you enjoy, here‘s a brand new way to do it. Take two minutes to watch the video to see if it grabs you?

And now this, which is vaguely related to the Prechter issue . . .

JAPAN TO BUILD INSANELY FAST NETWORK

As Shelley Palmer summarizes: ‘Japan’s EMOBILE has made a deal with Ericsson to build a new 42Mbps wireless network. And, they even have a workable plan to crank it up to 84Mbps after it launches. That’s so remarkably fast, we don’t have anything to compare it to in the United States. Luckily the government just allotted an additional $800 million to the nationwide broadband effort; even so, we may still be left in the dust.’

And these, which are directly related to the Prechter issue . . .

PRECHTER

Monty Goolsby: ‘Robert Prechter predicted that the Dow would lose 90% after the ‘correction’ of 1987. At that time the DOW was just over 1750. If you had followed his advice you would have missed the large bull market that followed.’

WAVES, SHMAVES

Chris Brown: ‘Re the Times Article you linked to: ‘Originating in the writings of Ralph Nelson Elliott, an obscure accountant who found repetitive patterns, or ‘fractals,’ in the stock market of the 1930s and ’40s, the theory suggests that an epic downswing is under way, Mr. Prechter said. But he argued that even skeptical investors should take his advice seriously.’ Elliot may have found any number of things in the 1930s, but they certainly weren’t called ‘fractals’ at the time. That term was coined by Benoit Mandelbrot in the 1970s. The same Mandelbrot that demonstrated that a random, scaling (non-normal) generator will make charts that people see cycles and patterns in, ex-post, even if there is zero predictive value in these patterns. Nearly every chart, ex-post, lends itself to a short-duration cycle, a medium-duration cycle, and a long-duration cycle. Which is also why if Gluskin Sheff’s David Rosenberg wants to believe that we have several years of bear market ahead because that is how long it takes for a massive deleveraging, then that is a reasonable hypothesis, but that if he thinks the Dow is going to 5,000 because that is what the 18-year chart pattern tells him, one should realize that particular datum lends no support to his argument.’

And now . . .

FOILING CATASTROPHE

Global collapse is always possible, though (echoing Chris’s point above) I think it might more likely come from some unforeseen panic-cascading catastrophe than from any inexorably predictable financial ‘wave.’

Yes, we face huge challenges, nationally and globally. But we also have astonishing new tools at our disposal. (My iPhone 4 is in Hong Kong as we speak, and I can track its journey as it flies east over a vast ocean into my outstretched graspy little fingers. A 3.6 kilowatt solar photovoltaic array sits on my roof, powering the equivalent of 36 100-watt light bulbs at peak capacity. Who would have dreamed of such things 50 years ago?)

There is the problem that, as a species, we’re breeding faster than we’ve learned to handle the extra load. (Were the people of Haiti – to take just one sad example – properly prepared to welcome so many million more children into the world over the last few decades?) There are the problems of ignorance and corruption, envy and short-sightedness – and the sometimes terrible consequences of religious fundamentalism. (Queen Isabella was a piker by comparison, yet even she acknowledged, ‘I have caused great calamities. I have depopulated provinces and kingdoms. But I did it for the love of Christ and his Holy Mother.’) And don’t get me started on evil dictators, cyberterror – or drugs.

So I’m not saying success is guaranteed – and I’m certainly not denying that many of us are going to have a tough slog as we work its way through the current mess.

But if we’re smart, it seems to me tremendous opportunities lie ahead.

Think about the basics. Can America – and the species, for that matter – grow enough food to feed everyone? Yes. Clothe and house everyone? Yes. Provide clean water and basic medical care for everyone? Yes. Provide the necessary energy? Yes.

The big problems come not in figuring out how to do these things, but figuring out how to organize ourselves to do them effectively.

How do you distribute the work that needs doing and then distribute the fruits of that work?

One strategy, born of high ideals and disastrous lack of insight into human nature, was ‘from each according to his ability, to each according to his needs.’ Communism. Which morphed into, ‘they pretend to pay us and we pretend to work.’ What a miserable failure that was. To address their most basic need, food, the Soviets thought collective farms would be a good idea – and all but starved their entire nation. They wound up relying in no small measure on the U.S., with its private farms, to supply their grain.

Another strategy is to have largely free markets, but with enlightened regulation, a modest level of government involvement, and progressive taxation. Our system. It’s worked awfully well, and the better once we added things like FDIC insurance to prevent bank runs, anti-trust law to preserve competition, and a social safety net to preserve individual dignity and lessen the severity of business contractions.

(Unlike the Soviets, we’re all about free markets and individual freedom. But even here government farm programs are in place – most at the request of the farmers themselves – to keep our farm sector strong. And few would argue that the SBA – or DARPA or the FDA – are bad ideas.)

I like our ‘enlightened capitalism’ strategy.

So the biggest point I want to make: the sun will surely come up tomorrow, and there’s plenty of work that needs doing – here in the U.S. and around the rest of the world – with both resources and technology equal to the task. If we’re smart, we’ll make the adjustments required to keep driving forward. And not get all freaked out if some of those adjustments include some temporary (or even some permanent) government involvement.

What adjustments?

The Republicans, as always, say tax cuts are the key (coincidentally lightening the load on those who are best off) and that we’d better slash government spending (coincidentally tightening the vise on those in direst straits). But as I’ve argued before, I don’t buy the tax cut notion, much as we’d all like that to be the answer. And can anyone think that laying off hundreds of thousands of teachers and cops and slashing the social safety net – by, for example, cutting off bare-bones unemployment benefits – will stimulate the economy?

Paul Krugman says now is not the time to slash spending, and as you can tell, I agree.

Matt Miller – who describes himself as a deficit hawk – ditto. He offers some interesting policy prescriptions to get things rolling in a better direction and then (but only then) applying fiscal discipline. Well worth the read.

Our country has a great deal of shaping up to do, most particularly in terms of becoming more energy efficient and independent but also in terms of renewing our infrastructure and educating the next generation.

At the same time, there are an awful lot of people looking for work.

Matching their talents with the tasks is no small issue. Indeed, it’s the challenge of our time. But as a general matter, it seems nuts to me that we would contemplate keeping them unemployed (with all the fiscal strains that puts on us to keep them from starving) when so much work needs to be done. What ended the Depression was a massive mobilization to win World War II. It ratcheted our debt way up, but had to be done. Now we should embrace a massive mobilization to become more efficient, energy independent, and to, well, shape up generally. (Insanely fast Internet, anyone? Smaller portions? Less meat?)

There’s no need for the country, or the world, to go over a cliff. And it probably won’t. But a rocky financial road is likely, so consider that four-prong strategy.

Tomorrow: Tax Fairness