Korea holds rate, sees ‘very moderate’ global growth

By Central Bank News
    The Bank of Korea (BOK) held its base rate unchanged at 3.0 percent, as most economists had expected, saying the country’s growth was slowing due to lackluster exports and domestic demand.

    “The Committee expects the pace of global economic recovery to be very moderate going forward as well, with the uncertainties surrounding the euro area fiscal crisis and the international financial markets persisting,” the BOK said in a statement following a meeting of its Monetary Policy Committee.
     Reflecting the global slowdown and its impact on South Korean exports, the BOK cut its base rate last month, its first cut in interest rates since February 2009.
     The day after the BOK’s surprising interest rate cut, the bank reduced its 2012 growth forecast to 3.0 percent from its April forecast of 3.5 percent, and its 2013 forecast to 3.8 percent from a previous 4.2 percent. In 2011 South Korea’s GDP expanded by 3.6 percent.

    The bank also trimmed its consumer price inflation forecast due to lower commodity prices to 2.7 percent in 2012, down from a previous forecast of 3.2 percent. In 2011 inflation was 4.0 percent and in 2013 inflation was seen ticking up to 2.9 percent.  The BOK targets inflation of 2-4 percent.
    The BOK noted that consumer prices rose by 1.5 percent yar-on-year in July, down from 2.2 percent  in June, mainly due to stable international oil prices and favorable weather.
    “The Committee forecasts that inflation will remain at a low level for the time being, despite for instance pressures to hike public utility fees and the instability of international grain prices,” the BOK said.
   The central bank’s BOK Economic Sentiment Index, which reflects business and consumer sentiment, fell four points to 92 for July. Any reading below 100 means that economic sentiment in the private sector is below past averages.
    The drop in the sentiment index had lead some economists to expect the BOK to cut rates further.

    www.CentralBankNews.info


How to Invest Outside the Government-Controlled System

By MoneyMorning.com.au

Ha, ha, ha.

We knew it would happen.

Ho, ho, ho.

And we’re sure you knew it would happen too.

Hee, hee, hee.

Of course, it’s not really a laughing matter…unless you like paying $5,653.85 for your laughs.


But that won’t be the last of it. The latest government bungle shows that by the time this huge taxpayer-funded folly is finished, the real cost to you will be many times that amount.

It’s time to protect your wealth and savings before the Aussie Welfare State and Australia’s biggest trading partner get completely out of control. Here’s how…

As far as the government and the public sector is concerned, private citizens are second class citizens. They see the private sector (especially individuals) as nothing more than tax fodder.

The role of the State isn’t to protect individuals from each other and abuses from the State. The role of the State is to protect itself from individuals.

A report in today’s Age highlights this view:

‘[Prosecutor] Mr Young said jail was the only appropriate sentence while [Magistrate] Mr Rozencwajg described the conduct as a serious example of the offence made more serious by the subjects being public officials.’

The case involves a man who pointed two fingers at Attorney-General Nicola Roxon and said ‘I’m spewing I don’t have a gun with me…’

In other words, according to the magistrate (himself a public employee), the life of a private citizen (you) is worth less than the life of a public servant. That’s nice to know isn’t it?

But it’s a perfect example of the attitude taken by authorities towards the private sector and individuals. What’s yours is only yours as long as the government allows you to keep it.

Whatever you own is at any point in time subject to confiscation at the whim of jumped-up governments that decide they can better spend your money than you can.

Take the National Broadband Network (NBN)…

The Cost of Fast Internet

Yesterday, communications minister, Senator Stephen Conroy revealed the NBN would – surprise, surprise – cost more than originally thought.

That doesn’t surprise us. We warned long ago that the real end cost will probably be at least three-times the original forecast.

As The Australian reported:

‘The funding required to roll out the super-fast National Broadband Network has blown out by $3.2 billion, with the vast majority of the extra money to come from taxpayer funds.’

The government says the NBN will now cost $44.1 billion. Based on the last Census which showed Australia has 7.8 million households, the NBN will cost $5,653.85 per household.

We’re sure that given the choice, you would happily spend $5,653.85 on an Internet connection too. What’s that? You wouldn’t…we thought as much.

As it happens, when we arrived home last night we saw a letter from our Internet provider, iPrimus. They had written to say that due to an upgrade in the Frankston area we could now use the iPrimus network to get faster speeds.

How much do we have to pay for this upgrade? $5,000? More perhaps? No. It won’t cost us a bean for the upgrade. In fact our monthly bill will be $20 cheaper.

Got that? The private sector can provide us with a better service at a lower cost. While the government has to charge each household $5,653.85 for a service we can’t be sure will be any better than the one we’ve already got.

But as usual, the government thinks it knows how to better spend your money than you. So it forces you to spend thousands on health insurance that you don’t need, and now it’s spending $5,653.85 of your tax dollars on an Internet connection you probably pay about $60 a month for.

The point is, instances such as this prove that you can’t rely on the government to take care of you in retirement. Governments are more interested in squandering your money to build their own legacy.

The Rudd Government’s school-building program wasn’t about improving schools, it was about them saying, ‘Look, we did that.’

The same goes for the Future Fund and the NBN. They’re about using taxpayer dollars to build memorials to boost their ego.

That’s why it’s important to remove as much of your wealth from the system as possible…out of the reach of government meddling…

Investing Outside the System

As we wrote last week, at the flick of a switch the government can freeze any electronic assets within seconds. There’s no way to access your assets once they’re frozen.

That includes cash and shares. Even property isn’t safe. You can’t hide a house from the government, and you can’t sell it if the government won’t process the title transfer.

The one asset you can keep away from the government is gold. It’s portable. It’s transferable between willing buyers and sellers without needing the permission or involvement of a third party (such as a broker or bureaucrat). And you can conceal it from tyrannical governments.

Make no mistake, the State is closing in on free individuals. As we said at the After America conference earlier this year, ‘it’s not that China is becoming more free market, it’s that the West is becoming more authoritarian.’

Western governments look to China for inspiration of how to suppress freedom and grow the central government.

As former Aussie PM, Paul Keating recently said at a book launch:

‘The seemingly perpetual invocation of this human rights mantra attributes no moral value to the size and quality of the Chinese achievement.’

This is a view taken by many central planners. The individual is subservient to the State.

The thing is, central planning is a flawed economic model. China’s economy is no different. Its destiny is to collapse, which while positive in the long term, will have a devastating impact to the world economy in the short term.

So much, that our old chum, Sound Money.Sound Investments editor, Greg Canavan says it ‘could end the retirement dreams of millions of Australians…’

To avoid that fate it’s important to do all you can to protect your wealth against a Chinese economic collapse and the actions of the State.

The best way to do that is to invest in the one asset the government can’t easily take…gold. To see what Greg has to say on this subject, click here…

Cheers,
Kris

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How to Invest Outside the Government-Controlled System

There is No Safe Haven – But You Should Still Own Gold

By MoneyMorning.com.au

‘Sell gold‘.

That’s the message from FT columnist Peter Tasker, a Tokyo-based analyst with Arcus Research. As far as he’s concerned, gold’s bull market is over.

I’m a fan of Tasker’s writing. He often talks a lot of sense. And I normally agree with him.

I even agree with many of the points he makes about gold.

But not quite all of them…

Why Hasn’t Gold Soared During the Eurozone Crisis?

If gold is such a ‘safe haven’ asset, then why hasn’t it rocketed during the euro crisis?

This has become one of the key arguments of gold bears. And it’s one that Peter Tasker makes in his latest column for the FT. ‘Where is the haven that offers protection against the turbulence of markets? Guess what: there isn’t one.’

He’s absolutely right. The term “safe haven” is lazy shorthand used to describe any asset that people pile into when they are feeling scared. But there is no such thing as a consistently “safe” haven.

For example, UK gilts, US Treasuries, and German bunds have all variously been described as “safe havens”. But they are among the most overvalued assets on the planet. And their prices fluctuate on a daily basis, so they don’t offer any sort of guaranteed protection against capital loss.

And let’s be very clear – gold isn’t a “safe haven” either. Try telling anyone who bought it in 1980 that gold protects the value of your money, and you’ll probably be greeted with a sardonic laugh. It might do so over the very long-term, but a 20-year bear market is enough to test the patience of even the most ardent goldbug.

What most people outside the financial world understand by the word “safe”, is that an asset provides a guaranteed safeguard against a nominal loss of capital (ie ignoring inflation).

The only asset that does that is cash. And unless you keep it under a mattress, even that guarantee is only as good as the government-backed deposit insurance scheme that stands behind your bank account. More to the point, it will do nothing to protect you against currency devaluation, debasement, or general inflation.

The Real Question: Why Has Gold Held Up So Well?

So why hasn’t gold performed spectacularly during the eurozone crisis? Here’s why. If the eurozone collapses, the outcome that people fear most is deflation. That explains partly why so much money has piled into bonds that yield very little.

During deflation, cash becomes more valuable. If prices are falling, a fixed amount of cash will buy more. So as long as you’re holding on to the right currency, you can do very well. Even a minimal yield on a bond issued by a reliable government, will be a big improvement on the complete absence of yield offered by gold.

In fact, I’d argue that the real wonder is that gold has held up so well during the eurozone crisis, particularly when you compare it to most other commodities.

The answer to why gold has held up so well? Well, if deflation is allowed to have its way with the eurozone, then you can expect mass defaults across the globe. That would be very bad news for the global financial system. In turn, that would increase physical gold’s appeal, because it’s one of the few assets that isn’t anyone else’s liability. Its value may rise and fall, but it will never go to zero.

The alternative – and I’d say more likely – scenario is that whatever lies directly ahead, the end game of this crisis involves central banks printing a lot more money. Again, that scenario is good news for gold.

The biggest threat to gold, as far as I can see, is if central banks start to hike interest rates. That time may not come for quite some time. And when it does, it’ll probably be in response to rising inflation, which tends to be good news for gold in the early stages in any case.

Gold Is Not The Only Investment – But You Should Hold Some

That doesn’t mean that gold is the only thing that should be sitting in your portfolio. It would be stupid to have 100% of your money in gold, just as it would be stupid to have all of your money in any single asset class.

And gold is certainly not as cheap as it was 10 or 11 years ago, when it was self-evidently undervalued. As Tasker puts it, ‘some assets offer more value than others’. He cites stocks in Japan and Europe, both of which I’d happily add to my portfolio just now.

Tasker also notes that US house prices are very low relative to the price of gold. Again, if you’re going to consider buying property somewhere in the world, I’d agree that the US looks more promising than most.

But I’d also hang on to gold. My view is that 5-10% is about right, but your exact allocation would come down to your own circumstances. It’s there to protect you against extreme financial risks, and there’s still a good chance that we’ll see more of those in the near future.

Also, I’d keep a close eye on the gold price over the coming months. As my colleague Dominic Frisby has pointed out on several occasions, gold’s bull market has followed a fairly reliable pattern of hitting new highs, then consolidating for periods of around 18 months.

The last peak came in late summer of 2011. So we’re not far off the 18-month mark now. If the pattern holds, 2013 could be a very profitable year for investors in gold.

John Stepek
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in MoneyWeek (UK)

From the Archives…

Revealed: Government to Get Hands on More Retirement Savings
03-08-2012 – Kris Sayce

Olympic Badminton Farce Shows How Capitalism Beats Socialism
02-08-2012 – Kris Sayce

How Low Natural Gas Prices Are Causing Energy Havoc
01-08-2012 – Dr. Alex Cowie

Silver Bounces Off Key Level, Where’s it Going Next?
31-07-2012 – Dr. Alex Cowie

How No ‘Plan B’ For The Australian Economy Could Boost Aussie Stocks
30-07-2012 – Kris Sayce


There is No Safe Haven – But You Should Still Own Gold

Bank of Japan keeps rate steady, sees moderate recovery

By Central Bank News
    The Bank of Japan (BOJ) held its policy rate unchanged, as widely forecast, repeating last month’s statement that its domestic economy was expected to recover moderately on the back of firm domestic demand and overseas economies that are emerging from a phase of deceleration.
    However, the BOJ, which held its overnight call rate steady at zero to 0.1 percent, acknowledged that there was a high degree of uncertainty about the global economy and Japan faces the challenge of overcoming deflation and returning to sustainable growth with price stability.
    The BOJ still expects the inflation rate to remain around zero percent for the time being and it would continue its policy of monetary easing by steadily increasing the amount outstanding in its Asset Purchase Program.
    “Regarding risks to the price outlook, careful attention should be paid to future developments in international commodity prices and in medium- to long-term inflation expectations,” the BOJ said.

    The BOJ has a target of 70 trillion yen for its asset purchase program but economists worry that it may not be able to meet its target. 
    Japan continues to combat deflation, with consumer prices down 0.20 percent in June from the same month last year. But the economy is continuing to expand faster than other advanced economies and in the first quarter the GDP rose 1.2 percent from the previous quarter for an annual rate of 2.7 percent.
    www.CentralBankNews.info


USDCHF remains in downtrend from 0.9971

USDCHF remains in downtrend from 0.9971. Another fall could be expected after a minor consolidation, and next target would be at 0.9500 area. Resistance is at 0.9770, followed by the downward trend line on 4-hour chart, only a clear break above the trend line could indicate that the longer term uptrend from 0.8931 (Feb 24 low) has resumed, then the following upward move could bring price to 1.0200 area.

usdchf

Daily Forex Analysis

GOLD close to confirming breakout to all-time highs

David Banister- www.markettrendforecast.com

Back in the fall of 2011 I was warning my subscribers and the public via articles to prepare for a large correction in the price of GOLD.  The metal had experienced a primary wave 3 rally from $681 per ounce in the fall of 2008 to the upper $1800’s at the time of my warnings in the fall of 2011. A 34 Fibonacci month rally was sure to be followed by an 8-13 month consolidation period, or what I would term a Primary wave 4 correction pattern.

We have seen GOLD drop at low as the $1520’s during this expected 8-13 month window, but at this time it looks to me like a break over $1630 on a closing basis will put the nail in the wave 4 coffin. I expect GOLD to rally for about 8-13 months into at least June of 2013 and our longstanding target has been in the $2300 per ounce arena in US Dollar terms. Some pundits have much higher targets in the $3,500 per ounce or higher area but I am using my low end targets for reasonable accuracy.

This 5th wave up can be difficult to project because 5th waves in stock or metals markets can be what are called “Extension” waves. This means they can have a potentially much larger percentage movement relative to the prior waves 1 and 3 of the primary bull market since 2001.  You can end up with a parabolic move at the end of wave 5, where those $3000 plus targets are possible.  I expect the 5th wave to be about 61% of the amplitude of wave 3, which ran from 681 to 1923, or about $1242 per ounce. If we were to apply that math, we come up with $767 per ounce of rally off the wave 4 lows.  $1520 plus $767 puts us at $2287 per ounce, or roughly $2300 an ounce low end target.

In summary, crowd behavior is crucial to the next coming movement in GOLD and it could be a sharp rally that catches many off guard, much like the downdraft last fall did the same to the Bulls. Be prepared to go long GOLD once over $1630 per ounce and buy dips along the way up to $2300 into the summer of 2013.

Receive our free weekly reports at www.markettrendforecast.com or sign up for a discounted subscription and get our reports daily on the SP 500 and GOLD.

 

David Banister- www.markettrendforecast.com

 

 

Is a Gold Price Rally on Its Way? [Video]

Article by Investment U

View the Investment U Video Archive

In focus this week: the return of mega-cap stocks, indicators say gold prices are set to rally again and the fattest slap-in-the-face award (SITFA) ever.

The Return of Mega-Cap Stocks

While the market has been taking its lumps this year, one sector of the stock market that has been out of favor for years has been lighting it up; ultra-large caps, $50 billion and bigger.

CNBC reported this past week that despite the EU, China and the fiscal cliff hanging over the U.S., the largest of the large, the Russell Top 50 Index, climbed 14% since last year. The darlings of the market since the early 90s, the small caps have gained only 1%.

When you add dividends, these behemoths returned a total of 18%.

In July alone they are up 2% and some analysts are saying this is a sign of a gradual shift back to the more stable U.S. big caps, even away from international stocks.

Jack Albin, CIO of Harris Private Bank, said in the CNBC piece that one of the factors driving the increased attraction of these monsters is stability, and of course dividends. The flight from the EU has also added to the big uptick as investors look for less troubled waters.

The 50 mega caps have a yield of about 2.2%, which blows away anything small caps have.

“One of the big surprises in this sector,” said Keith Trauner of the GoodHaven Fund (GOODX), “is that big companies have been much more adept at cutting expenses, adjusting their cost structure and adapting since the collapse in ’08, more than anyone thought they could.”

And, mega-caps currently have a PE of about 13 compared to small-caps at 20.

Mega-caps may finally be having their day in the sun…

Gold Price Rally on its Way?

A little over a week ago it was up 2.2%, which got gold bugs just a little excited.

The Hulbert Gold Newsletter Indicator (HGNI) gained 12.5 points last Friday, and Le Metropole Café reported that the HGNI has been under 20% for the last 100 days, a record for the index. The last time it did this was in 2002, which was followed by a 10.9% run-up over two months.

The bullion dealer Standard Bank reported that there is a large short position in Comex gold and there have only been five times since 2004 that Comex short positions have stood out like this.

Three of these spikes were followed by 25%, 23% and 36% run-ups.

HSBC said this past week that based on short positions gold has room to rally from here.

Last year the U.S. debt ceiling crisis was blamed for a 12.3% run-up in gold prices. This year we have our pick: Iran/Israel, the EU saga and the U.S. QE possibilities and looming fiscal cliff.

While it’s never a sure thing, right now there are lots of reasons to watch gold, and that’s coming from a committed non-gold bug…

Lastly, As Promised, the Fattest SITFA Ever!

Donuts are going big time! Tres Leche, Foie Gras, chili mango, apricot cardamom are some of the new flavors for donuts that cost as much as $11, for one donut.

I’m not kidding!

This saturated fat craziness is popping up everywhere. San Francisco has a shop that features a strip of bacon on a maple long john, yuck!

According to a Smart Money article, you used to be able to count on two things from donuts: they were cheap and guaranteed to kill you. Now you can only count on the later.

It seems when times are tough folks look for comfort food and what is more comforting than a donut? But 11 bucks? That’s a lot of comfort.

You can now get donuts made from locally grown ingredients, trans fat free… what’s the point of a trans-fat free donut, gluten free and organic? As the article said, you’re not pigging out on these, you’re doing the world a favor.

The amazing part, Megan Brown of Glazed and Confused, a super donut shop, said even at $3 a donut the margins are lower than the $6 a dozen at Dunkin Donuts (Nasdaq: DNKN).

A chocolate covered $.79 donut is fine with me.

Foie Gras on a donut, how awful!

See you all next week.

Article by Investment U

Foreign Currency Investing: Is the Almighty Dollar Going Down?

Article by Investment U

Since WWII, the U.S. dollar has been the world’s reserve currency.

However, since the economic collapse of 2008, the greenback seems to be getting less and less respect.

In fact, just as the U.S. Federal Reserve and the European Central Bank (ECB) decide on how to move their currencies forward in the coming weeks, other central banks around the world have quietly hedged themselves against the dollar and the euro, and have started loading up on another currency altogether.

I’m talking about the Chinese yuan. And what’s going on today hopefully will be a wake-up call for America.

A Growing Global Trend

Just look at what’s happened in the last few months…

On June 22, Forbes reported Brazil and China signed a currency exchange pact that’s part of a larger move with other BRIC nations, Russia and India, and even South Africa.

They have agreed that if there’s another financial meltdown and global credit dries up, each country’s central bank will have money set aside to help the other and keep their economies running smoothly.

Now let’s go back to March. Australia signed a $31-billion currency exchange deal directly with China to promote trade and investment between the two nations.

In December 2011, Japan announced a currency pact with China that topped headlines. Japan and China are the third and second largest economies in the world.

Also in December was another agreement with Thailand.

Every one of these deals limits the power of the U.S. dollar a little bit more in these countries and gives more value to the yuan.

However, all this being said, the yuan isn’t ready for the world stage, either.

Still Problems in China

Despite the yuan’s growing acceptance around the globe, its value is still managed by the state. In fact, while China will be the first to deny it, it has kept its currency artificially low for years.

What’s more, the yuan isn’t convertible or allowed to trade freely outside the country yet.

And on top of all of this, China really doesn’t want its currency appreciating right now. Over the past five years, the yuan has climbed 18% against the U.S. dollar.

That has made profit margins tight in China. With its economy continuing to slow down in recent months, Chinese exporters could get crushed if the yuan is left to trade freely in the markets.

Point is, the future of the yuan is as much about how China’s government manages its currency problems as it is how the United States and Europe get their deficits in order.

Moving Forward

Unfortunately, there’s no predicting the future. But one thing is certain: China knows it has to change the way it controls the yuan.

The People’s Bank of China, the central bank, proposed a series of currency reforms earlier this year that suggested internationalizing the yuan in stages.

As Time magazine reports, the plan would allow the markets to freely trade the yuan in the next three to five years. In the long term, between five and 10 years, foreign investors would be given more access to Chinese stocks, bonds and property.

China has repeatedly expressed how the U.S. dollar should no longer be considered the world’s reserve currency. But at the same time, it can’t exactly afford to see the dollar go bust against the yuan.

So how could anyone play this trend?

Our very own Senior Analyst Carl Delfeld recently suggested diversifying your global portfolio into other currencies altogether such as the Swiss franc, through the CurrencyShares Swiss Franc Trust (NYSE: FXF), or the Australian dollar, through the CurrencyShares Australian Dollar Trust (NYSE: FXA). And Jason Jenkins recently wrote about the relative strength of the Swedish krona, here.

However, as Carl warned, just don’t go overboard. You could be crushed by a snapback in the U.S. dollar.

Good Investing,

Mike

Article by Investment U

Another Reason to Stay Bullish: A Bottom in Home Prices

Article by Investment U

Over the past couple of weeks, I’ve encouraged readers to look beyond the negative headlines – and heated political rhetoric from both major political parties – and remain optimistic on the outlook for high-quality stocks.

You’ve already heard the national media report all the negatives ad nauseam: weak economic growth, high unemployment, runaway deficit spending and continuing troubles in the Eurozone.

But few seem to recognize the many positives that also exist: low inflation and interest rates, declining energy prices, expanding opportunities in emerging markets, low valuations and record corporate profits.

To this list, it’s also time to add another positive. According to S&P/Case-Shiller and the real estate website Zillow, U.S. home prices are at or near a bottom. That’s a very good thing. Here’s why…

Declining home prices have been a dark cloud over the economy and the stock market for roughly six years now. Having temporarily taken leave of their senses, home buyers bought into the mantra that “real estate always goes up” and drove prices up to the cirrus clouds.

It was bound to end badly and the ensuing adjustment has been painful. A home is most consumers’ biggest purchase. And the drop in prices didn’t just reduce or eliminate their home equity for millions. In many cases, it demolished household net worth. That, in turn, crushes consumer confidence.

So a bottom in home prices is a huge plus. And that appears to be what we’re seeing now. As Zillow Chief Economist Stan Humphries said last week, “After four months with rising home values and increasingly positive forecast data, it seems clear that the country has hit a bottom in home values. The housing recovery is holding together despite lower-than-expected job growth.”

Indeed, many homebuyers feel like they can’t hold off any longer, either because prices are so low or because their personal need for new housing is so high.

In the second quarter, values rose in 53 of the 167 markets covered in Zillow’s Real Estate Market Reports. And some gains were substantial. Home prices rose 12.1% in Phoenix, for example.

Similarly, the S&P/Case-Shiller 20-city composite index rose in the month of April, with 19 out of 20 cities posting gains during the month. Then, last Tuesday we learned the index rose 2.2% in May, marking two consecutive months of gains.

Another Reason to Stay Bullish: A Bottom in Home Prices

This doesn’t mean that home prices are set to rocket higher, of course. There are still millions of foreclosures looming – and these fire sales will keep a lid on prices. Yet Zillow reported this week that only 5.8 out of every 10,000 homes were lost to foreclosure in June, down from 7.9 of every 10,000 homes in January.

With the economy soft and many foreclosures still working their way through the system, it will be quite a while before we see robust growth in home prices again.

But a housing bottom is a necessary first step. And another reason to remain bullish on both the U.S. economy and U.S. share prices.

Good Investing,

Alex

Article by Investment U

How Will the New Social Psychology Affect Military Action?

How Will the New Social Psychology Affect Military Action?

History shows that negative social-mood trends, as indicated by bear markets in stocks, unfold in down-up-down Elliott wave patterns. But within such patterns, the first and second downtrends tend to produce qualitatively different types of social actions.

In large-degree bear markets, the second declines tend to produce major wars. That is not the case with first declines, when major wars are typically absent.

Elliott Wave International believes the stock market is currently in the first decline of a larger-degree negative pattern. If EWI’s outlook is correct, then, World War III is unlikely to commence until after the second decline begins, decades in the future.

Yet even first declines bring plenty of risks. The current Supercycle decline that began in 2000 has already hosted the 9/11 attacks, the wars in Afghanistan and Iraq, and multiple revolutions and protests. It is likely to spark more social conflict, but not global war.

Socionomics per se cannot predict the specifics, but if you understand what to look for, you can spot the risks.

This report sketches potential risks facing us during the rest of the first decline, which is wave (a) under the Elliott wave model.

Figure 1

 

Why Big Initial Declines Tend NOT to Produce Major Wars

As you can see from Figure 1, none of these first waves produced major wars. In Chapter 16 of The Wave Principle of Human Social Behavior (1999), Robert Prechter hypothesized why this is the case:

Apparently society handles the first retrenchment in social mood, no matter how severe. “A” waves surprise optimistic people, who are unprepared and unwilling to wage war. It is the second drop that makes a sufficient number of increasingly stressed people angry enough to attack others militarily.1

The largest-degree bear markets of the past several hundred years all began with intense deflation. The three largest deflation episodes in the past three centuries were in 1720-1723, 1835-1842 and 1930-1932–all of these occurring during first waves in large-degree negative social mood trends. Figure 4 in the September 2008 Global Market Perspective Special Report (click here to download the report) includes an index that shows periods of strong inflation and deflation.

We might hypothesize that during the first downtrend people are too busy adapting to the stunning financial setback to organize all-out war.

Deflation and Depression Influenced the Hoover Administration’s Decisions to Cut Back the Military

As concern for matters at home begins to dominate, people care less for expensive military excursions overseas. The Great Depression provides a textbook example. Consider these headlines from 1930-1933:

Hoover Speeds Delegates to Navy Conference Today; Hopes for Real Reduction; Cuts Put Before Politics

–The New York Times, January 7, 1930

All Forces are Included; Armies, Navies, Planes Would Be Reduced to Defense Needs … . Tanks, Chemical Warfare, All Large Guns and Bombers Would Be Abolished. OUR SAVING $2,000,000,000

–The New York Times, June 22, 1932

Foes to Hoover’s Arms Cut Offer Become Friendly … Many Leaders Predict Success of Proposals

… . a real reduction capable of affecting economic relief … . Eight European land powers, probably France, Germany, Italy, Russia, Poland, Rumania, Jugoslavia and Czechoslovakia will begin talks ….

— The Deseret News, July 12, 1932

Deflationary psychology is a collective mindset that produces contractions in credit and declines in money flow. It also leads to reduced prices of investments and, eventually, other goods and services. Since 2007, we’ve already seen many of its classic symptoms: creditors unwilling to lend, consumers unwilling to borrow, anger against banks, calls to balance the federal budget, mass layoffs, homebuyers holding out for lower prices, a spike in the personal savings rate and the Federal Reserve aggressively lowering interest rates–its price for renting money. Much as “irrational exuberance” characterized the extreme of the preceding bull market, deflationary psychology now has begun bearing society toward the opposite extreme, “irrational frugality.”

It is still early in the decline. But see if you hear echoes of the 1930s’ attitude toward the military in these articles:

Radical overhaul of military retirement eyed … . everything is a potential target for budget cutters.

— CBS News, August 15, 2011

Golden decade is ending for defense industry, and stocks … . The federal government is deeply in debt … . defense spending is poised to retreat, and so are industry profits.

–AP, August 19, 2011

Libya’s lessons for NATO – and US defense cuts … . Many of NATO’s 26 European allies sat out the five-month fight, either because they were unwilling to directly participate (notably Germany) or their recent defense cuts made them incapable of joining in (most of them).

— The Christian Science Monitor, August 24, 2011

Pentagon Seeks Biggest Military Cuts… . [The U.S.] Defense Secretary [said] the nation’s “extreme fiscal duress” now required him to call for cuts in the size of the Army and Marine Corps… .

— The New York Times, January 6, 2012

The U.S. and the U.K. have the world’s largest and third-largest defense industries, and both say they plan to cut military spending in coming years. “Legislation passed by Congress before its summer recess will trim the defense budget by $350 billion over the next ten years. In addition, up to $500 billion more in security cuts will kick in,” according to The Warner Robins Patriot. Even promised spending is being questioned now. According to CBS News, “A Pentagon-sponsored study says military pensions are no longer untouchable–they’re unaffordable.”2

The U.K. Independent reported on February 17, “Not just in the US and the UK but in the wider industrial world, pretty much everyone is cutting or flatlining on defence.”3 If you have any doubt as to the breadth of the developing spending retrenchment, check out this quote from the January 29, 2012, Washington Post:

NATO allies are confronting a sustained weakening of the military alliance as ailing economies are forcing nearly all members, including the United States, to accelerate cuts to their defense budgets at the same time. … [Members] of the alliance … can no longer afford their security commitments … a long period of austerity is in the offing.4

It’s true that it is common for the U.S. government to project military cuts that never materialize. Having said that, Hoover’s defense-cut plan grew widely popular near the 1932 low, when America was a net creditor and solvent. Now it is neither. If history is a guide, by the time of the wave (a) low, America–and the world–will demand defense cuts as they never have before.

The Current Mindset is Less Tolerant of Adventurism

In 2011, the Brookings Institution’s Peter W. Singer surveyed over 1,100 U.S. National Student Leader Conference attendees between the ages of 16 and 24 and found “a strong emerging narrative of isolationism… .” The broader public is beginning to hold similar feelings, Singer notes: “[The] American public and its policy leaders seem to be steering away from any [military] mission of scale.”5

Two recent national surveys agree. According to the polls, most Americans now think that the war in Afghanistan has not been worth the costs and that the U.S. should not be there.6

Until recently, waning enthusiasm for foreign entanglements was also evident in the staying power and rise in popularity of Republican presidential candidate Ron Paul.7 Paul was cheered in a recent debate when he said, “This country doesn’t need another war. We need to quit the ones we’re in; we need to save the money and bring our troops home.”8

Intra-Military Disunity

The increasing eagerness to end foreign entanglements extends beyond the civilian population. Members of the military are beginning to question the worth of their overseas missions. U.S. Army Lieutenant Colonel Daniel L. Davis recently published an article in Armed Forces Journal, “Truth, Lies And Afghanistan: How military leaders have let us down.” Davis described his 2011 observations in many areas of Afghanistan: “What I saw bore no resemblance to rosy official statements by U.S. military leaders about conditions on the ground. … Instead, I witnessed the absence of success on virtually every level.”9

Similar rank-breaking has emerged in Russia, where veterans of Russia’s elite paratrooper force have recorded “the most popular protest song in Moscow today.”10 The simple anthem has become the centerpiece of a growing anti-Putin protest movement. This happened as the Financial Times headlined, “Kremlin plans to restore the army’s flagging power are meeting resistance at home.”11

But perhaps the ultimate symbol of intra-military rebellion today is Bradley Manning, the U.S. Army private accused of leaking classified U.S. information to WikiLeaks in 2010. Manning was recently nominated for a Nobel Peace Prize.12

Finally, here’s a telling social expression: According to Ron Paul’s campaign, the candidate has “raised more campaign donations from active-duty members of the military than all other presidential candidates combined–Republican or Democrat.”13

These items are further evidence of rising skepticism about the value of military action, which is consistent with wave (a) psychology. Having said that, if negative social mood does not resume soon, expect to see a temporary renewal of interest in foreign military actions.

Expect Intra-National Conflict in Wave (a)

The wave-A urge to cut military spending is not driven solely by a desire for peace, however. In fact, it is accompanied by a rising desire for conflict. This should result in a larger number of smaller conflicts.

The current decline fits this pattern. The wars in Afghanistan and Iraq, while protracted and full of their own tragedies, nonetheless have been minor relative to the wars typical of second declines (again, see Figure 1).

A-waves tend to produce more-internal conflicts, as well. That is indeed the trend we observe today. In 2011 alone, revolutions erupted in Tunisia, Egypt, Libya and Syria. Large riots or protests began in a dozen other Arab countries, as well as in Chile, China, Greece, Israel, Italy, the Philippines, Portugal, Spain, Sweden, the U.K. and the U.S., to name a few.

Governments are responding. The Atlantic reported, “[Police] forces throughout [America] have purchased military equipment, adopted training, and sought to inculcate a ‘soldier’s mentality’ among their ranks.”14 The negative mood trend has created what one criminal justice professor has called the “militarization of Mayberry” (see photo).15

The 2011 annual report of the Sydney-based Institute for Economics and Peace quantifies the mix of violence and tranquility worldwide. It says:

The world is less peaceful for the third straight year … . The fall in peacefulness in this year’s Index is strongly tied to conflict between citizens and their governments rather than conflicts with other nations … . While the overall level of peacefulness was down, this year’s data did show increased peacefulness in some areas – most notably levels of military expenditure as a percent of GDP and relations between neighboring states.16

The Risks We Face in Wave (a)

As animosity rises and military budgets fall, expect even more belligerence-on-the-cheap. Verbal threats, espionage, trade wars, financial conflicts, internal terrorism, cyber attacks, authoritarian clashes, border conflicts, drone attacks and anti-satellite attacks should all increase.

Following are some of the major dangers and types of actions we will face as we wend our way through wave (a).

1. Living in a Materiel World

The world today brims with historically high stockpiles of conventional weapons.17 When a nation becomes destabilized, individuals and groups within the country may access the weapons. For example, one military expert said Libya’s arms imports “reached farcical levels in the late 1970s and 1980s.”18 The 2011 Libyan Revolution “liberated” many of those weapons. Libyan rebels and others looted some 12,000 land mines and an estimated 20,000 hand-held, heat-seeking surface–to-air missiles capable of shooting down commercial jet liners.19 Peter Bouckaert, emergencies director at Human Rights Watch, said, “weapon proliferation out of Libya is potentially one of the largest we have ever documented … . a thousand times the explosives that the insurgents in Iraq had.”20

In addition, CNN reported that Libya still has about 10 tons of deadly mustard gas.21 To put all this in perspective, consider that Libya doesn’t even make the list of the top 15 arms importers. Nor is Libya unique in its status as an unstable state with an impulse to collect weapons. In late February, U.S. State Department officials warned about Syria’s weapons caches: “It’s an exponentially more dangerous program than Libya. We are talking about legitimate WMDs here–this isn’t Iraq.”22

2. Soldiers of Fortune

The world now has hundreds of thousands23 of trained mercenaries–called “private contractors” by the Pentagon–who continue to seek employment. In its 2011 report to Congress, the Commission on Wartime Contracting wrote, “U.S. agencies engaged contractors at unprecedented levels to help achieve mission objectives in Iraq and Afghanistan…. The number of contractors and the scope of their work overwhelmed the government’s capacity to manage them effectively.”24

3. Nukes

Much has been written about the various nuclear threats in the world today, including so-called “suitcase” and “dirty bombs” and their ease of transport. In addition, a handful of states have active nuclear weapons programs and are not signatories of the nuclear non-proliferation Treaty of 1970. India, Pakistan, North Korea and Israel all famously have the bomb, although details about their programs are secret.

Many other countries now hold dangerous nuclear material to produce electricity. Those programs operate under international oversight, but concerns persist about the material’s security.

Finally, even after decades of programs to reduce their number, the world today contains an estimated 19,000 warheads, about 5,000 of them active. That number is especially sobering when you consider the damage one of these “official” warheads would wreak–much less the retaliations that would surely follow.

4. Cyberwar

The commander of the newly formed U.S. Cyber Command warned in September 2011,

Threats posed by cyber-attacks on computer networks and the Internet are escalating from large-scale theft of data and strikes designed to disrupt computer operations to more lethal attacks that destroy entire systems and physical equipment.25

Atlantic magazine recently reviewed several articles by Chinese analysts in Peoples Tribune Magazine to sum up China’s expectations about cyberwar with the United States:

The picture is not pretty. All [the analysts] see cyberspace as an emerging, critical area of competition and are notably pessimistic about the future. Conflict seems almost inevitable … . Chinese analysts believe the United States is ahead in the competition.26

The Peoples Tribune headline declares “The New Cyberwar Disaster.” The lead article says, “Chinese Internet Security officials stressed that China has become the biggest victim of cyber-attacks.” The U.S. online-security firm McAfee claimed the opposite on August 3, however, when it pointed the “finger of blame … firmly in the direction of China”27 for Operation Shady RAT,28 “The world’s most extensive case of cyber-espionage … . a massive loss of information that poses a huge economic threat.”29

Such opposing viewpoints tend to be reconciled when social mood is trending positively, but often come to blows in a negative trend.

As The Economist ruminated recently, while responsible governments realize that extensive cyberwar would produce unpredictable blowback, smaller groups may exercise less caution:

[An] attacker cannot be sure what effect an assault will have on another country, making their deployment highly risky. That is a drawback for sophisticated military machines, but not necessarily for terrorists or the armies of rogue states.30

Non-government capabilities are evolving rapidly.31 The hacker group Anonymous recently shut down the websites of the F.B.I., U.S. Department of Justice, U.S. Copyright Office, Warner Music and several other major media publishers, and later hacked the private intelligence firm Stratfor and copied 5.5 million of its emails. Now the group says it is teaming up with WikiLeaks, which “has partnered with 25 media organizations to sift, analyze and publish” Stratfor’s emails.32 Such information theft is but a nuisance compared to the Stuxnet computer virus (discussed in our November 2010 issue), which targets physical infrastructure and is now available to individuals. CBS News reported on March 1, “You can download the actual source code of Stuxnet now and you can repackage it…point it back to wherever it came from.”33

As governments struggle to neutralize such threats, they will seek to control and shut down larger and larger swaths of the Internet. This will fuel the growing global authoritarian/anti-authoritarian conflict.

Indeed, on February 22, Forbes magazine warned, “We lose freedom incrementally, even subtly, at times. Certainly this has been the case with the War on Terror. Brace yourselves for the War on Cyberterror.”34

5. Drones

Training just one F-15 fighter pilot requires about 5000 hours and $10 million, yet an operator can learn to fly a medium-sized Hunter unmanned aerial vehicle (UAV) in 120 hours, and a smaller drone such as the Raven UAV in 60 minutes.35

Advances in military technology36 increasingly reduce the costs of monitoring and controlling people.37

No country has a monopoly on such systems. In February 2010, Peter W. Singer wrote in Newsweek:

At least 40 other countries–from Belarus and Georgia to India, Pakistan, and Russia–have begun to build, buy, and deploy unmanned aerial vehicles, or UAVs … . All told, two thirds of worldwide investment in unmanned planes in 2010 will be spent by countries other than the United States.38

Nor are governments the only ones who can procure drones. Libyan rebels, for example, last August bought a $120,000 micro-drone from a Canadian manufacturer and used it to observe Gaddafi’s military activity.39

In the January 21 New York Times, Singer observed that the U.S. Central Intelligence Agency (CIA), which is composed of civilian political appointees, now runs the U.S. drone campaigns with no Congressional authorization. He wrote, “We don’t have a draft anymore… . We do not declare war anymore… . We don’t buy war bonds or pay war taxes anymore… . And now we possess a technology that removes the last political barriers to war.”40 With no actual political debate, he notes, the U.S. government’s drone campaign has “set an enormous precedent, blurring the civilian and military roles in war and circumventing the Constitution’s mandate for authorizing it.”

Looking further into the future, in a November 2011 Harper’s essay, Daniel Swift quoted physicist Freeman Dyson on pilotless planes: “Natural evolution will make them smaller and smaller, cleverer and cleverer, he says. They could be as small as hummingbirds … and then everybody would have them. Then they won’t be ours.”41 Nor are micro-drones likely to be limited to surveillance use, as they are already being weaponized.42

Drones have scary potential,43 but three years of smaller-degree positive social mood trend have eased society’s fear. Law enforcement, scientists, real estate agents and private individuals already use the relatively inexpensive devices.44 On February 6, the Senate sent to President Obama legislation that would require the Federal Aviation Administration to provide airspace for remote-controlled flying drones.45

But when social mood shifts into another strongly negative phase, we expect Congress will rescind any such legislation and impose strict controls on unmanned, remote-controlled aircraft. Drones will become another flashpoint in the authoritarian/anti-authoritarian battle.

6. Bioterror

Making a biological weapon is easy: “A person at a graduate-school level has all the tools and technologies to implement a sophisticated program to create a bioweapon,”46 warned a former director at the Pentagon’s Defense Advanced Research Projects Agency recently. A January 2010 report commissioned by Congress gave the U.S. government a grade of “F” in bioterror defense:

The United States is woefully behind in its capability to rapidly produce vaccines and therapeutics, essential steps for adequately responding to a biological threat … . [The] lack of U.S. capability to rapidly recognize, respond and recover from a biological attack is the most significant failure identified in this report card.47

The National Biodefense Science Board issued its own report in March 2010: “Where are the Countermeasures?” It described a “lack of urgency in national effort … lack of coherence in how to organize federal assets … lack of prioritization of threats … lack of synchronization and integration of effort … failure to fully engage biotechnological and pharmaceutical industry and … inadequate resources.”48 In October 2011, Wyl S. Hylton wrote in The New York Times: “As one senior official in the Obama administration put it: ‘We need a new model. This is never going to work.'”44

As with other items in this list, the bio-threat can emerge at any level in society. Thus the friendly old guy whose neighbor said he “drove a church bus [and] enjoyed giving presents to neighborhood children on Christmas”49 can be a bioterrorist in his spare time. In October 2011, the FBI arrested four elderly men in Northeast Georgia and charged them with plotting explosive and bioterror attacks.50 At least one of the men was a member of the “Georgia Militia,” a right-wing anti-government group.51 The local good old boys fell for an eight-month undercover sting. But others are not caught so easily. For example, it took the FBI more than eight years to close their case on the 2001 anthrax attacks, which was “one of the most vexing and costly investigations in U.S. history,” according to Fox News.52

Biodefense is a formidable task. In his October report, The New York Times’ Hylton interviewed over 100 federal bioterror officials and concluded, “At times it seemed that the most virulent pathogen in biodefense was mutual hostility, and everybody had it.”44 Negative social mood makes a tough job tougher.

Bottom line: The social mood trend increases the likelihood of bioterrorism, increases society’s susceptibility to disease and degrades the trust, cooperation and funding necessary to prevent or respond to attacks.53

7. Radically Empowered Individuals

In April 2000, Bill Joy, co-founder of Sun Microsystems, warned that technology would give rise to radically empowered individuals wielding “knowledge-enabled mass destruction” (KMD) capabilities:

The 21st-century technologies – genetics, nanotechnology, and robotics (GNR) – are so powerful that they can spawn whole new classes of accidents and abuses. Most dangerously, for the first time, these accidents and abuses are widely within the reach of individuals or small groups. They will not require large facilities or rare raw materials. Knowledge alone will enable the use of them.54

Society is swiftly embracing GNR technologies and their associated risks. In our December 2011 issue, we quoted a Washington Post report about risks inherent in genetic technology,

Imagine … new organisms that wipe out entire populations and bio-toxins that target world leaders. … [It] is possible to create all of these today, using the latest advances in synthetic biology.55

High-tech manufacturing is increasingly possible in a small workshop.56 Much robotics technology is now available as modular, open-source components. Individuals can make their own tools and potentially, weapons. The trend already has a name: “lone wolf” terrorism. “Since 2009, according to one senior US terrorism official … all terrorist plots in the West have been the work of lone individuals… .”57 A recent amateurish attempt by a 26-year-old to fly explosive-packed, remote-control model aircraft into the Pentagon and U.S. Capitol bodes more sophisticated lone wolf actions to come.58

Use Socionomics in Your Decision-Making

If wave (a) unfolds as EWI expects, it should produce smaller, cheaper, less-coordinated conflicts. One or more events may be at least as surprising and tragic as the 9/11 terror attacks.

We believe the socionomic perspective–using stock markets as the primary indicator of future social behavior–can help you to anticipate times of increasing hostility and perhaps stay out of their way.

Actions

  • The Global Peace Index, which ranks 153 countries for peacefulness, may help you to assess your relative vulnerability.59
  • See also SIPRI’s map of the top 20 arms importing countries from 2006-2010.60

 

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