by James Dale Davidson
At Strategic Investment, our secret is the theory of “megapolitics.”
Megapolitics is a concept I developed with Lord Rees-Mogg in Blood in the Streets and The Great Reckoning: Protecting Yourself in the Coming Depression.
You don’t have to read the books to understand the main idea: The world is shaped by big, powerful forces or trends that nobody can control.
Unfortunately, the current period is fraught with grave danger. That’ s because big governments and empires are much more prone to collapse than to grow and prosper
Very few people are even aware of them, but there are historical cycles that repeat themselves over and over.
For instance, there have been nine depressions, spaced about 60 years apart, since the mid-16th century.
One explanation for this is human psychology. After a depression, the generation that suffered through it is very careful and conservative. Lenders make only totally-safe, no-risk loans. Investors will only invest in sure things.
It was 1954 before the Dow reached the level it had been in the boom of the 1920s.
Then, about 30 or 40 years after a depression, a new generation begins to take over.
Its members have little memory of the crash. They think their elders are over-cautious old fuddy-duddies who are missing profit opportunities.
And, in a way, they’re right. It’s time to get more aggressive. Think of the 1950s and 1960s.
As this new generation takes control of banks, corporations, government and other institutions, these people eventually throw caution to the wind.
By about 60 years after the last crash, there’s almost no one around who remembers what it was like. Stocks and real estate have gone up for as long as these people can remember.
The stage is set for another depression, caused by cheap money, bad loans and the foolish investments of the boom generation.
That’s where we are now. The “credit cycle” began to unwind in August 2007, with the collapse of subprime mortgage securities, but it still has a long way to go. The worst is yet to come.
The 500-Year Cycle
There is also a long 500-year cycle. No one knows precisely why this is.
What we do know is that this cycle is unusually precise.
Between 50 B.C. and 50 A.D. the Christian religion began and the Roman Republic was replaced by an empire. Around 500 A.D. the Roman Empire collapsed.
At about 1,000 A.D. the Dark Ages gave way to the Middle Ages. And around 1500 A.D. the Modern Age – our age – began.
We are now at the turning point of the 60-year and the 500-year cycles. If history is any guide, this will be a period of war, depression, dramatic changes in technology and vast social and economic upheaval.
All turns in the 60-year cycle follow a period of excessive debt. All involve a credit crisis, all lead to a collapse of property values, all ruin independent businessmen, all have serious political consequences and all cause high unemployment and social distress.
This isn’t idle chitchat. There are opportunities to make enormous amounts of money.
For example, from those Brazilian bonds I told you about earlier we’re making an almost 70% annualized return! On bonds!
In four months one special type of gold company that I recommended has spiked up over 60%.
Yet another recommendation – a financial services play – made 38% in four days.
These are just some of the real fortune building returns racked up so far this year…
And I’m seeing many more of these high-profit anomalies on the horizon… many more than there were a few years ago…
That’s because we’re in the middle of a cyclical collapse. And that’s when asset mispricing and great opportunities abound.
Each of the great 60-year turning points creates a whole new class of millionaires and wipes out the accumulated wealth of the old class.
There’s really no escaping it. Society has to write off debts that were piled up too high when times were good.
Government can shuffle the pain around… but government cannot escape the pain.
The Market Is More Powerful
Than Any Government
The biggest mistake of our time is the belief that government can avoid the costs of bad debts and failed investments.
Just as the Russians found out that you can’t create a society in which no one can make a profit, we’re going to find out you can’t have a society in which no one takes a loss.
President Obama has set off on a policy of rescuing failed companies and big unions. It’s not going to work.
Anyone with a sense of history knows it…“old timers” who’ve seen crashes like this one before.
Take Richard Russell.
Russell is 84. He’s been writing his investment newsletter, Dow Theory Letters, for 50 years. It’s one of the most respected financial publications going. The People’s Bank of China is a subscriber. So are many Wall Street traders.
“People in this country don’t realize how bad things can be,” Russell told a close group of insiders recently.
“I lived through the Great Depression. I remember people standing in bread lines. It was hard to get a job, any job, back then.
“But now, you see the restaurants are still full. People are still spending money. They may be worried and they may be beginning to save, but there’s no sense of urgency.
“And there’s a rally on Wall Street. You know, every bear market produces a rally. You can expect the market to retrace its steps by one- to two-thirds.”
There are a lot of people with opinions on the economy and the stock market. You can hardly turn on your computer without getting dozens of them.
But there are not many opinions with the depth of experience and knowledge behind them as those of Richard Russell.
He’s been studying “the language of the markets” for more than half a century.
“The primary trend is down,” Russell told the same select group of friends and investment professionals recently.
In the end, Russell believes that no matter what Obama and Bernanke do, the primary trend will have its way. The bear market will continue until it “has fully expressed itself.”
“What would you do if you were suddenly in a position of power in the United States?” asked one of the guests at the recent gathering.
“Nothing,” replied Russell.
“I’d do nothing. I’d let it happen. I’d let the bear market do its work.”
But that’s not what President Obama – who’s just over half Russell’s age – is doing.
Obama wants the government to act. And this means tax, print, spend and legislate.
Prop up failed automakers. Stuff money into zombie banks. ‘Stimulate’ with pork-laden spending bills.
This year’s first ‘stimulus’ plan has conspicuously failed to create the millions of jobs the president promised. Reports indicate that the White House is now working on yet another stimulus’ to spend even more money out of an empty pocket.
Of course, Obama plans to print trillions of fresh new dollar bills to pay for it all.
Obama doesn’t remember the Great Depression. Richard Russell does.
The Most Important World Trend
Under the cover the economic crisis President Obama and his allies in the Federal Reserve are radically altering the U.S. economy.
We now have a projected budget deficit of 13% of GDP. That’s more than twice the size of the next largest deficit since the end of World War II.
The federal government now has massive stakes in the banking, mortgage, auto, health care and insurance industries.
Unfunded liabilities – Social Security, civil service and military pensions, the Pension Benefit, Guarantee Corporation, Medicare and Medicaid – are over the $100 trillion mark.
An entire year’s worth of US economic output stands at just under $14 trillion. Total federal tax receipts are just $2.4 trillion.
Something’s got to give. This much is obvious.
Well, behind the scenes something already is: a 100% increase in the money available to the economy.
It’s the biggest increase in what economists call monetary base – made up of currency in circulation, bank reserves at the Fed and vault cash – in 50 years… by a factor of 10.
Think of this as a huge build up of potential cash, rather like a build-up of water behind the walls of a giant hydro dam.
Once the flood gates open, the water will gush out and drown everything in its path. Money will flood the economy and lead to higher inflation and interest rates.
It’s difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed’s actions because, frankly, we haven’t ever seen anything like this in the U.S. To date, what’s happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits. Gold prices went from $35 per ounce to $850 per ounce, and the dollar collapsed on the foreign exchanges. It wasn’t a pretty picture.
So why is the Fed expanding the money supply so recklessly, if results are so disastrous?
That’s easy. The expansion of money can also result in higher stock prices, higher house prices and a weaker currency in the short term.
And these are three things Washington desperately wants right now.
Higher stock prices mean that banks and big corporations can raise money by issuing shares, rather than by relying purely on government hand outs.
Higher house prices would make it easier for families to pay the banks back for mortgages they took out on their houses.
And a weaker dollar makes the government’s debt pile cheaper to pay back.