Tuesday, December 31, 2013

Predictions for 2014

Works fine, don't worry!
The calendar ticking over into the next year is a traditional occasion to draw some conclusions and make some predictions. Lots of people take this to mean that they should talk about where they think the stock market will go, or how much gold bullion will cost, or what the cost of oil will be. And although I find such matters quite tedious, this year I will indulge them and do the same.

The equation that best describes the stock market at the moment is y=mt+b, a.k.a. the first order linear equation. Meaning, some market index or other (y) must be roughly equal to some fudge factor m (called the slope) times time t plus some base offset b (called the intercept). The way I imagine that works is, a bunch of gnomes that inhabit the entrails of big finance and have access to an endless supply of newly printed dollars lean on the "buy" button periodically to make sure that the index increases monotonically. (Actually, the gnomes might be robots, in which case we could all go extinct and the stock market would still continue to go up.) So, my prediction is that this will continue happening until something breaks. Nobody knows when it will break, or why, because printing money and using it to prop up the price of stocks is a brilliant business plan that can continue working forever. Yes, I know that some people are pointing out that nothing goes up forever. Look at the housing bubble circa 2008, they say, or the internet stock bubble circa 2000. Bubbles always pop, they say. Naysayers! Well, what I want to say to these naysayers is this: This Time It's Different. This is a new and amazing breakthrough: infinite wealth creation is now achievable through infinite money printing. It's like the Singularity! (Remember, you heard it here first.)

As far as the price of gold, the picture is also quite clear: it will stay roughly the same, because similar gnomes have the job of hammering it down whenever it shows signs of exceeding a certain threshold. Doing so is not necessarily a money-making proposition for them, but then who needs to make money when you can just print it? Again, this is a sound business plan with bright prospects as far as the eye can see. There is just one little snag: in places where actual savings do exist, people are switching out of dollars and into physical gold, meaning that at some point the cupboard will be bare, no matter what the price, resulting in something called market failure. Since physical gold cannot be willed into existence, and is currently selling for less than it costs to mine it and refine it, this is potentially a problem. Still, my prediction is that the price of gold will remain fixed, until the fix is off, but nobody knows when that will be, not even I.

Now, the price of oil is even simpler to forecast: it will be between $100 and $150 a barrel, roughly. It may briefly dive to as low as $20 a barrel, but that won't last. The past few years have allowed us to empirically determine that $100/bbl is the price that's necessary to keep the oil flowing in the quantities required to keep the economy humming along, now that all the supergiant fields are in depletion and all the new fields are super-expensive and involve deep-sea drilling or fracking or other expensive and/or risky ventures. Now, you might think that keeping the oil flowing in the quantities required to keep the economy humming along may turn out to be problematic at some point. Never fear! All that has to happen in case of a shortfall is that a bunch more workers suddenly get laid off. Yes, this will briefly affect the unemployment rate, but only until their unemployment benefits expire. After that it will only affect the labor participation rate, which has been trending toward zero, but nobody ever looks at it, so it doesn't matter. When people get laid off, suddenly they are not driving to work or consuming beyond what their paltry SNAP and WIC benefits allows them to consume. This causes oil consumption to drop and the economy is in balance again. At the other extreme, $150/bbl is sufficient to put the brakes on the economy for an entirely separate set of reasons: when expenditure on oil rises above some magic percentage of GDP (empirically determined) expenditure on everything that isn't oil drops enough to curtail economic activity, in turn curtailing oil consumption. So, you see, the system is self-regulating, and can continue this way forever. Until it can't. But nobody knows when that will be, not even I.

The whole thing sort of reminds me of the electricity supply situation on my boat. The picture above is of the electric plug and socket through which up to 30A of juice at 110V flows to my boat from the electric grid on shore. Every month the meter is read, and my credit card is charged for the correct amount. This, I think, can go on forever. In the interests of full disclosure, I do need to tell you that there was a funny plastic burning smell late last night, and some strange buzzing and then snap-crackle-pop sort of thing going on, but it didn't last long. And after that everything was fine again. I did end up having to spend oh maybe ten minutes stripping and splicing electrical cables, but that's OK, I don't mind. So, don't you worry, the system is resilient and self-regulating and can go on and on. Until it can't. But nobody knows when that will be. Not even I.

Happy New Year!


Sixbears said...

Happy New Year to you too!

Now I can safely go back to sleep. What I thought was gunfire in the distance is just fireworks.

kleymo said...

Actually, the economy is a complex issue. There are quite a few factors that go into our economic situation, as examined in this documentary.

1. finance
2. overshoot
3. misdirected faith
4. economics based on false presises

Kevin said...

Happy New Year Dmitry,

It's so nice to see you in such a cheerful and upbeat mood, a pleasant surprise given your usual posts of doom and gloom. And you have confirmed my belief that everything is just fine and we can keep humming along in this "recovering" economy indefinitely. Until we can't anymore. Nobody knows when that will be. Not even I.

Patrick said...

Ha ha. Thanks—advice you can take to the bank!

Happy 2014. Hopefully.

Darkstar said...

Well, at least between John Michael Greer and you I've had my laughs for the week. Thanks!

k-dog said...

y = mx +b is the equation of a straight line. How fitting since the QE money never goes through the economy but goes straight into the pockets of Wall street.

"The system is self-regulating, and can continue this way forever. Until it can't. But nobody knows when that will be, not even I."

You have thrown out a challenge, a problem to be solved and raised many questions. The sixty-four thousand dollar question shall be when do the wheels come off the cart and the 'until it can't' arrive.

I'll thicken the mix. Will there be a time just before arriving at the terminus when oil prices fall because the elite few who keep societies pretence of health alive become so few in number that supply and demand kicks in and the price of black gold ebbs. And will the rest who do not get to participate in the demand side of the equation have already starved to death?

Will the pruning of the branches to keep the monied aristocracy of the central trunk healthy ever result in rebellion that brings the whole tree down?

Will there be a time when such fictions as 'we're in economic recovery' clash so hard with reality that crimes of passion become commonplace?

Employment-Population Ratio

If nobody can predict when the sparrow falls from the sky, is there a possibility we could come up with a window of time before the walls come crashing in. Say not before 2020 or later than 2050?

You have left us with more questions than predictions.

Happy new year.

k-dog said...

I'm only a third of the way through; but thoroughly enjoying kleymo's 'documentary'.

The part where it says that instead of toys that require batteries we should play with squirrels is something I could really get into.

Stone said...

Dear Dmitry Orlov,

Might you talk a bit about what prompted you to remove the link to the article posted on January 5th, 2014 about a nuclear explosion at Fukushima?

Thank you, and best wishes for the new year.

Dmitry Orlov said...

The story was from a dubious source and uncorroborated. There were some indications that it was fake.

BrandFeelsGood said...

Well played Orlov.

There is a massive effort by the shriekers to paint the nuclear disarmament crowd as a bunch of crazies, they do this by baiting the common sense crowd with fake alarmist news articles, then they ridicule anyone who is taken in by their tricks.

The shriekers used this technique to great effect with their 'magic missile' theory after the three towers event.

Shriek all you want but you can't change physics.

Ivan G said...

Happy New Year,

I did not read your bitcoin prediction :)

Mark said...

Of course, there must be an algorithm somewhere, perhaps Professor Irwin Cory's blackboard, that the fed uses on an hourly basis, to keep things going. When the algorithm fails, send in the clowns!

Happy 2014 ~