Extracting Silver from the Clouds of the Global Financial Crisis

We can pretend as much as we want that our current way of life is sustainable, but that doesn't make it so. Even while I drive on the highway, I sometimes wonder, "If gas prices go up to $5 per gallon, how many fewer cars are there going to be on the highway?" I cannot speak for all Americans, but I know in the Midwest, oftentimes rush hour can be unbearable -- that is when unemployment is relatively high. One has to wonder how much more crowded the highways would be if unemployment went down to around 4 percent.

These sentiments regarding gas prices extend to many sectors of the economy including (but not limited to) unemployment, higher education, the legal system, the prison system, health care, food consumption, developing technology, material goods, and labor. In addition to the aforementioned issues, the threats of war, societal unrest, climate change, and international terrorism make for quite an ominous global situation. One has to wonder if the problems are systemic. From a macrohistorical perspective, even political and economic leaders are seeing problems with the global economic system -- in particular, the capitalist free-market model. If Klaus Schwab, host and founder of the World Economic Forum, is correct in that "capitalism in its current form, has no place in the world around us", then the question arises: What else is there? Even further, what are we to make of the ongoing global financial tumult, and what can we learn from it with respect to investing? Even if we reconcile with the fact that our way of life is not sustainable, we have to find some way of continuing on.

I.  Present Predicament

It shouldn't take an economist to see that the global economy has found itself in a precarious state. Even as elites gathered in Davos, it is becoming clear that the pillars holding up the economic superstructure that we live in today known as capitalism are being rattled. Between political problems in the US and debt problems in the Eurozone, the situation appears to be grave.

Whereas many of us hoped that the ideological Kulturkampf in the US would be resolved in the November 2012 election where the US is left to make a decision as to its direction, it now appears that once again 50 percent (or more) of American citizens will be unhappy the day after the election. And though, per the Washington Post, "the country is hardening along more and more strict partisan lines", it appears that the actual ideological divide between the two political parties is blurring. Somewhere in the middle resides the struggling US consumer, trying to make his or her way in an uncertain world.

Whereas in 2011 the world witnessed the "Arab Spring", the Huffington Post's Monika Mitchell wrote Monday that "[w]arm weather, continued economic challenges and a contentious American election will oil the gears for what is sure to become 'the American Spring'." Mitchell continued, "Mark my words: Occupy will return to center stage and this time it will be bigger than before. Why? Because, nothing has changed." Indeed, "the rich are getting richer and the poor are getting poorer" -- thereby creating a situation where American society will be left to make some hard decisions in the years to come with respect to labor, retirement, and other issues.

The big issues in the 2012 election can be summed up in three words: jobs, jobs, and jobs. As youth unemployment festers leading to possible societal unrest, alienation, socio-economic dysfunctionality, and estrangement, Thomas L. Friedman recently commented on the gap between how politicians and business leaders think. Friedman: "They are literally looking at two different worlds -- and this applies to both parties." Where Republican presidential candidates may argue that easing regulations and letting the free market work make up the secret to job-creation, lackluster job growth appears to be reaching a point of counter-productivity in light of protesters' threats of shutting down the economy and making business-as-usual very difficult. Adbusters has recently warned that the Occupy movement will "make the price of doing business as usual too much to bear." Aye, per "Rabinowitz's law", there comes a point where non-productivity becomes counter-productivity.

In one word, the economic processes of humanity in the Western world are becoming dysfunctional. Wall Street bailouts, youth unemployment, excessive student loan debt, income inequality, high gas prices, take your pick. Per the Stanford Encyclopedia of Philosophy, from Karl Marx's perspective "when an economic structure fails to develop the productive forces -- when it 'fetters' the productive forces -- it will be revolutionised and the [economic superstructural] epoch will change. So the idea of 'fettering' becomes the counterpart to the theory of functional explanation (i.e., functional economic activity). Essentially fettering is what happens when the economic structure becomes dysfunctional."

In the book "Crisis Economics", Nouriel Roubini and Stephen Mihm shed some light on these ideas. Roubini; Mihm: "As capitalists replaced workers with machines in an attempt to cut costs, profits would perversely decline. This decline would spur capitalists to cut costs even more, eventually driving the economy into a crisis born of overproduction and underemployment." The authors continued, "At that point a brutal shakeout would trigger waves of bankruptcies and consolidations" leading to a "final crisis" of capitalism. Business people would seek to prevent such a final crisis via alternatives (or "countervailing tendencies") -- such possible alternatives include war, using surplus labor from abroad, bailouts, credit expansion, and increasing the workforce. Even so, Roubini and Mihm wrote that "those solutions would only defer the final day of reckoning by 'paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented.'" Citizens grow tired of bailouts, wars, and overworking.

In light of Davos, Roubini does not appear to have backed off from a cautiously pessimistic viewpoint. Roubini: "We live in a world where there is still a huge amount of economic and financial fragility. There is a huge amount of uncertainty...and there is also geopolitical and political and policy uncertainty." Roubini later added, "It's a very delicate global economy."

II.  Trading Strategies to Deal with the Possible Superstructural Collapse

Every cloud has a silver lining. As for extracting silver from the clouds of the global financial crisis, we may very well see opportunities with respect to stocks that deal with discretionary spending. In other words, stocks related to retail, entertainment, luxury items, and vacationing among other things. These stocks may be excellent opportunities for short positions.

If gasoline prices skyrocket because of military action in Iran, middle America might as well kiss a summer vacation goodbye. Likewise, US consumer spending on all of non-essential retail goods will probably plunge in the wake of sky-high gas prices. Even looking to the 2012 holiday season, if gas prices remain high, holiday shopping will decline thereby stunting the retail and service sectors of the economy. In this way, the number of individuals retailers employ seasonally for holiday shopping could also decrease, lowering aggregate demand as even seasonal jobs become scarce.

As the financial sector will be at the epicenter of a global financial collapse, it would make sense to seek short positions in financial stocks. That being the case, the current state of global finance is precarious; a trader may seek more streamlined strategies. Whereas it is uncertain whether some government will or will not be willing to bail out some bank in the future, at the end of the day, if the US consumer is paying more for gasoline for the sake of transportation, then the US consumer will most likely cut back spending in other areas including non-essential goods, luxury items, vacation, and entertainment.

Oil is currently the centerpiece commodity of world trading, but with the fears of a possible water crisis, might water be the world's next oil? Long-term investors could look to investments related to water -- including PowerShares Water Resource ETF PHO or American Water Works Co., Inc. AWK. Given the fact that the world population is rising, water-related investments could prove to be quite profitable in the long-run.

We must also not forget about precious metals. Zero Hedge reported on Jan. 30, 2012 how China is experiencing a "gold rush" with increased sales in the first week of the Year of the Dragon. On Jan. 27, 2012, Zero Hedge reported on how "Gold managed its biggest gain in three months as the Fed's QE-ness seemed to separate the precious metals from other asset classes." While gold may be a popular investment for now, as I discussed previously, I personally consider physical silver to be the most practical of the precious metals...at least if one anticipates an apocalyptic global financial collapse where precious metals are used as currency. In terms of practical exchanges between everyday consumers for small transactions, it would be much easier to break silver than a gold coin or bar. Of course, at that point, cigarettes, alcohol, soap, and cans of food would probably also be much more practical to use as currency.

III. Aftermath

Even if humanity is to face a collapse of the capitalist economic superstructure, this should not cause that much alarm; humanity has endured economic superstructural transitions in the past. With the advent of agriculture and civilization, our ancestors made the transition from egalitarian hunter-gatherer "primitive communist" societies to ancient society nearly 10,000 years ago. Nearly 1,500 years ago our ancestors made the transition from ancient society with massive empires and slave labor to feudalism. Even more recently, our ancestors made the transition from feudalism with a land-based hierarchical/monarchical structure to capitalism. These "revolutions" or turnings took place not with a loud bang or the sounding of a horn in a span of moments. The transitions from ancient society to feudalism and feudalism to capitalism did not occur in a matter of months, but over the course of many years.

Though many may want to blame this person or that entity for the global financial crisis, the fact of the matter is that we're not getting anywhere by blaming others; these are systemic problems. While the prospect of a global financial crisis bringing an end to the capitalist superstructure (or as Roubini wrote, "a final day of reckoning") may sound extreme given the volatile state of global affairs, I do believe that there is hope. It may not be the hope that financiers, government officials, and wealthy US consumers are looking for, but at this point, in the words of former US Treasury secretary Lawrence Summers, even "if a generous sovereign from Mars paid off Greek debt, the fundamentals of Europe in crisis would not be altered." Thus, ours is a systemic crisis...one that binds the world together as one globe. The hope I see includes a reassessment and reevaluation of life, labor, production, luxury, value, and wealth; perhaps such a reassessment would be a good thing for a weary, overexploited planet. Since the dawn of capitalism, humanity has confused life's true wealth with the amount of money one has in his possession, and maybe we should give this idea another look going into the future. A person may earn $10,000 per year or $10 billion per year; we are all mere humans in the end.

To be fair, such a global collapse does not appear to be imminent. Given possible remaining countervailing tendencies, I think that such a "final day of reckoning" with a complete overhaul of our economic system (in how humans interact economically in the superstructure) as a planet is about 100 to 300 years away (if not more). What will come about in the aftermath of the capitalist superstructure's collapse remains uncertain. While one might conjecture that socialism would emerge, barbarism is another possibility. In a world with terrorists and nuclear weapons, extinction is also a possibility.

That being the case, I choose to not be a pessimist -- or, at the very least, I try to be the most optimistic of the pessimists when it comes to the global economy. In terms of an economic superstructure, a hidden element has yet to manifest itself. In light of Marx's theories, the question arises: Why would humanity evolve to a form of communism without governments, classes, and private property? As Marx intuitively saw problems in capitalism, it appears that he felt that something would come that would shift the human consciousness away from selfish materialism towards a genuine & lasting sense of humanistic collective interest thereby bringing about "a restoration of man to himself": a missing piece to the puzzle of human history. Even in terms of humanity's embracing some form of communalism, there appears to be a missing piece to Marx's ideas. This missing piece could be a pandemic, another ice age, or some new technology.

I would like to believe that the missing piece in the context of a superstructural transition is none other than the evolution of the human consciousness. Where the idea of humanity providing for humanity with a collective sense of being may sound far-fetched in our current superstructure, perhaps the missing piece that will bring it all together will be humanity's growing up, or humanity's rising to a new sense of consciousness whereby humanity is able to provide for itself without a sense of selfish greed and prosperity at the expense of most of humanity. Such ideas may remain far-fetched for some time to come, but at one point, the idea that humanity would mature and grow out of slavery and absolute monarchical rule was also far-fetched. In this way, in the evolution of the human consciousness I retain a sense of hope...even if it does appear that the sky is falling for the global economic system. Though things may appear hopeless on a global level, we can still make a conscious effort to have hope.