(P&I) Extreme Economics – The World’s Bubble Wrap

Figure 1: The World’s Bubble Wrap

Drama. The World markets have declined significantly since May from about $46 trillion to the current $39 trillion – that’s nearly 20% off – and not too many people have noticed because investors tend to focus on the markets that they know best in any of but not all of the US, Europe, or Southeast Asia.

But not all markets are the same in what they have and how they’re priced and capital gains and losses are transient and don’t count for much in economic terms – it’s just money moving from one pocket to another (and hopefully ours against all odds) – but what matters is the search for an income which is much harder and although economists are generally well-grounded in the theory and meaning of capital and monetary theory, their “theory” tends to fade when we try to get to the bottom-line – how do we make more money from money and get to keep it or spend it?

And that’s what we have to do today.

Depressions, Recessions, Bull Markets and Bubbles

The capital and monetary theory of money as a “store of value” is bankrupt and we need to understand, instead, how to earn an income in depressions, recessions, deflation and inflation (including hyper-inflation) and the workbench for that understanding is right in front of us because every market has aspects of all of them all of the time and it’s not hard to understand what we have when we see it.

To really dumb it down (and we’ll build on this foundation), we can say that in a “depression” money can’t buy an income at any price (there’s no “production”) and all that it can buy is goods and services at a “cheap” price (because people need to eat and pay the rent and for that they’ll need money or an income) but income-producing properties can’t be had because why would anyone want to sell them absent a liquidity concern and it’s this latter necessity – the need for liquidity and money to spend – that might create an opportunity to buy income producing properties at a low or “cheap” price.

On the other hand, an economy is “deflationary” if the price of an income is “high” and that is the reason that the markets in aggregate have gained more than +50% in the last few years for the price of the properties (the companies) which are essentially the same as they were in 2012 and investors have been willing to pay a high price for those properties (by buying their stocks) in order to earn dividends and possibly capital gains to boost their income – but they need to “invest” their money in order to get those and there might not be enough of them (investments) and they might also have a liquidity concern before their investment can pay-off.

Finally, an economy is “inflationary” if the price of an income is “low” because we can exchange our “money” which is losing its value (as we speak) in an inflationary economy for properties that are producing revenues and earnings in an increasing amount and hopefully, at an increasing rate, to offset the effects of inflation; for example, that is very evident in a hyper-inflationary economy in which baskets of money and then trunk loads of money are required just to buy necessities and other goods and services.

A “recessionary” economy mediates between a deflationary economy and a recession and then a depression (one way, down) and also between a “normal economy” (which we can characterize but we all know what it is – it’s an economy with more or less full employment) and an inflationary economy, one way, on the way down to a “normal economy” or a deflationary economy also one way, on the way to a recession and possibly a depression (as above),

Figure 2: A Brief History of the Human Race for Time

In particular, recessions are always positive for wealth (money as cash can buy more at a cheaper price) and negative for an income (the income producing properties (if there are any) might have to be sold for cash to pay the bills) and inflation is always negative for wealth (it’s evaporating) and positive for an income from money (and labor, although that’s a different story) because the cash price of income producing properties will tend to rise to offset the decline in the purchasing power and, therefore, the worth of cash; please see Figure 2 on the right for how the pauper becomes king and the king becomes pauper.

Depression

There’s a depression in the Canadian mines and it’s been unfolding for more than three years and it hasn’t hit bottom yet (please see our Post “(P&I) Extreme Economics – The Canadian Mines“) but there’s also a depression in the World markets somewhere and we can pick a number for how much “depression” we want and the reason that we might want to buy into a depression is that buying into a “depression” is how paupers become princes and then kings if liquidity is not a pressing concern although the (B)-class portfolio will do well in any market if it is; please see Exhibit 1 below (and click on it and again to make it larger as required).

Exhibit 1: (B)(N) The World’s Bubble Wrap

Figure 1.1: The World’s Bubble Wrap

For more information and examples of the Free Market Yield and the terms that we have used above, please see our Posts “(P&I) The Dismal Equation (Ecclesiastes 9:1)” and “(B)(N) S&P 100 Volatility Risk and The Full Moon” and “(B)(N) NASDAQ 100 Volatility and The Stone Bunnies“ and for an introduction to The Barometer “(B)(N) What’s A Girl To Do” or “(P&I) The Swiss Franc Debacle“.

And for more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

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Disclaimer

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