My dog is smarter than I am...

Hillary has won again!

And on the economic front, we have, from John Mauldin’s most recent accredited investor email…

“Credit Default Swaps: The Continuing Crisis

As noted above, I said three weeks ago that the big story for 2008 would be the counter-party risk for credit default swaps. That story is coming faster and larger than I thought.  Bill Gross of Pimco suggests that the ultimate cost could be another $250 billion dollars on top of the $250-plus billion in subprime losses. That means we have only seen the tip of the iceberg in write-offs in the financial sector.”

Now, remember when I said several months back (gut feeling based on unprincipled and unsound lending practiced beginning 2003) that (same amount) $0.5T would be lost? Please note now how many “experts” presently seem to agree with this half-trillion number.

Also note that Mauldin seems to have abandoned his “muddle through economy" view for the foreseeable future and this week displayed a 10 year s&p500 chart –obvious implication being that we are just now entering another bear market cycle similar to the 2001-2003 period (at least). Many perma-bears (e.g. David Tice) have argued we began a secular bear in 1999-2000 and that 2003-2007 was a mere upward blip on the radar. The basic argument here can best be summed up by paraphrasing a commentator I overheard on CNBC on last Friday “… when virtually all world markets come off 75 years highs, it’s hard to imagine where the bottom is.”

But, as I have said on many occasions in the past, the “powers that be” (Bush/Greenspan/Iraq War/Iran War?) seem invariably to “fix” these seemingly worst-case scenarios – though few seem to realize (or care) that the “fix” is a sham (e.g. stock market goes up 20% -- but food and energy costs rise 40% and US dollar falls 25%...).

Such is the “powers that be” response to what can best be described as the “moral hazards” of economics – e.g. simply compare the economic policies of e.g. FDR (print money and “create” jobs until the presses run dry; then run them until they disintegrate, if you have to; and BTW get into a huge war for the future of civilization so we have something to do with all that stuff) versus Hoover (most people are fools; let them suffer! and may the strongest survive).

I have always generally been in the Hoover camp, unless of course I become un/under-employed. Unfortunately today, under stagflation, we are all under-employed (except for maybe 1% - e.g. Warren Buffet). So in short the “trickle-down” or "supply-side" argument that attempts to invert the basic law of supply and demand -- that believes that supply creates demand; that ambition is always good; and that progress has no consequences -- seems to once again, if only temporarily, screwed its pooch.  But that isn’t to say they won’t keep trying -- Hillary and Barak included.  After all, suffering (which I would instead describe as as self/societal restraint but which in American middle class terms means not having a new V8 Cadillac to blow down the road at 100MPH) never works politically in America.

So where to from here…

Factors leading to deflationary economic collapse

· Aging human population in developed world

· New technology may one day solve the fossil fuel conundrum.

· Young segment of world is largely Muslim – i.e. not especially friendly to US, given the history of its foreign policy.

· Huge, seemingly intractable social liabilities ($51T): Medicare, SSA, $9T current account deficit – at some point debt must be paid down. Therefore it will be paid down. Therefore spending will collapse.

Factors leading to inflationary economic collapse

· Inflation is a deceptive form of economic collapse, especially on a day-to-day basis – but in the end, after all: the icecaps are melting; 1B people are without potable water, not to mention food; etc. etc. etc.

· Younger population in emerging world begins to apply (already happening obviously) US/western economic ideals to “liberate” individual greed and consumptive excess which leads to innovation (more greed) and economic growth.

· Rising commodity prices: peak oil leads to peak h2o which leads to peak food which leads to no peak, ever in global instability.

Personally I favor crushing deflation and economic slowdown/collapse (but obviously not anarchy) as IMO the only thing that could help now is a massive, massive slowdown causing each of us to rethink what it means to be a human being and how to go about becoming enlightened, self-contained and localized instead of a globalized destroyer/consumer. Primarily this is because I have spent many years saving dollars and hope one day not to be proven the chump that his practice has proven me thus far. (What worked for your father, and his father, unfortunately, may not work for you at all).

The alternative (inflationary collapse) IMO redounds to a world that undoubtedly looks much like Soylent Green.

In the end, as I have said before, I believe it will be Soylent Green that wins. After all, humans are animals – and it is my experience that as such, invariably, the rules of the jungle, or the barnyard, or both take precedence. In other words, reason fails unless no stomach is empty and each is self-aware, world-aware and willing to sacrifice for the whole and above the self.  And honestly, after more than 2000 years of Christian progress, what are the chances of that?  Who among us chooses to be the next martyr in the cause of human enlightenment -- the next Jesus or Che or Tim Treadwell?  Not me.  Play the game.  Smile as you kill.  A Working Class Hero is something to be.

Meanwhile, I agree with Mauldin that one must go long into (brief, explosive) rallies, then take profit and short ASAP thereafter as rallies are not likely sustained (except through stupidity – which can never be predicted). In short, there seems likely to be more profit short (checkout short interest on financials during 2007) than long in 2008 (possibly through 2010/11), depending on the fixes our great and glorious leaders provide, coupled with the continuing delusions and brute stupidity of the herd.

Money is surely the root of all evil.  But I was born into this stock yard and am slowly drowning in my feces and that of others.  My bunker remains unfinished.  My funds must be preserved and grown if possible.  But the end is inevitable.  And at moments like this I marvel at how stupid I am for caring; for dreaming of the kind of world envisioned by Jesus, Che or Tim Treadwell, when I could be rubbing my genitals instead.  Even my dog is smarter than me.