Doomsday Capitalism: Should You Prepare for Market Collapse in 2012?
Marketwatch's Paul Farrell had an interesting article Tuesday contrasting the hope for an economic recovery in the markets with the fear of a global financial doomsday. Though USA Today reported that market strategists are predicting a "glowing 2012" with a 10 percent increase in stocks, international bank analyst Martin Weiss suggested that we should be expecting "[a]n historic world-changing event" that will "crush the US economy and stock market". Weiss claims that the coming crisis "will destroy the incomes, savings, investments and retirements of millions of Americans". So who should we believe?
In responding to that question, Farrell references 10 macroeconomic "triggers" that could flip the global economic boardgame over -- leaving the world's citizens to pick up the pieces amidst a great tumult. Some of these triggers that Farrell suggests "could ignite the global 'doomsday scenario' that Weiss is predicting" include political dysfunctionality, a failure of the political process, growth economics, market distortions related to algorithmic "high-frequency" trading, the breakdown of society, and global warfare.
While Farrell's discussion on doomsday prospects is not new, his most recent article takes on a much direr and more hopeless tone. On the topic of political resolutions to economic issues, Farrell writes that "Democracy is dead. 'All men are created equal' is now a political fiction." Farrell goes on to suggest that the American populace now has no voice in government and that people are catching on to this political game. Farrell: "Today nobody trusts Washington. Wealth rules government. Polls show the public now believes that no matter who's elected in 2012, our descent into disaster can't stop." In this same spirit, the Associated Press has recently noted that Occupy activists have said that the Iowa caucuses are meaningless due to the fact that the parties and candidates are "overly influenced by wealthy, special interests" that lead them to ignore key issues.
Farrell's commentary on the future of the stock market is equally dire and hopeless. Farrell: "Sadly, average investors are no match for Wall Street's 'high-frequency traders', who easily win by huge margins at this rigged game." Farrell compares Wall Street to being a casino. Thus, when it comes to Wall Street and investing in stocks, "The house always wins".
Where retirement is usually the goal of the investing game, Farrell suggests that the breakdown of society will lead to a scenario where everyday Americans will not be able to deal with the socio-economic chaos. Farrell goes so far as to suggest that the wealthy "Super-Rich" may want to prepare for this societal breakdown by storing up food and medicine and setting up farms with adequate ammunition.
With respect to the question of whether the US can change its direction, Farrell writes that according to Jeremy Grantham, a British investor, the necessary "paradigm shift in how our leaders think" will never occur. Farrell concludes that owing to the wealthy's desire to become richer, political dysfunctionality, and the prospects of war, we may want to prepare for financial Armageddon. In a recent article, I referred to such a scenario as the "specter of post-Marxism" now haunting the globe, but Farrell has an alternate phrase to describe the situation: "doomsday capitalism". Farrell seems to suggest that this "doomsday capitalism" will bring down the house that is our planet -- for human civilization socio-economically and perhaps even on an environmental level as well.
So we find the global economy in a precarious, dire, and dangerous predicament, is the situation as hopeless as Farrell portends? We could always hope for a "deus ex machina" or a global savior to arrive on the scene, couldn't we? Well, while we are waiting patiently, it might help to hope for the best, but prepare for the worst.
The crux of Farrell's analysis consists of two parts. The first is that capitalism & mainstream economics have failed owing to profit-seeking & a "grow-or-die" mentality, and the second is that the political process has failed the financial system & its constituents and is going to be unable to resolve issues. However, if only in theory, the capitalist system is generally able to deal with market changes and temporary setbacks. In theory, capitalism should work to prevent global collapse, let alone a breakdown of society.
For example, let us take for instance an island that subsists on papayas as food. An analyst who believes that the papaya supply may run out in the near future may claim that doomsday is around the corner that all chaos will break out when the papaya supply is depleted; the analyst may go so far as to say that the islanders will have to resort to cannibalism because all the papayas will run out. However, given the nature of the capitalist system, islanders may move on to bananas or passion fruit instead of papaya. Islanders may begin tourism businesses in order to create wealth and import papayas. Maybe new opportunities for subsistence will arise that had not been previously considered. In this way, doomsday could possibly be averted. If protected by a functional and balanced government, capitalism in theory works to establish a balance in order to prevent doomsday.
Nevertheless, we cannot forget the ominous outlier of an "Easter Island" scenario where overpopulation, environmental degradation, warfare, disease, and famine all come together in a perfect storm that brings down the house. Given that our current predicament is global, I believe it is this "Easter Island" doomsday scenario that Farrell portends. Even so, though the world is getting smaller every day, we still live on a big planet.
Though Farrell suggests that the world will face "doomsday capitalism" by the year 2020, there are opportunities for investors and everyday individuals even with the prospect of financial Armageddon. If investors and traders really believe that the societal infrastructure will come apart in the near future, there are investment & trading opportunities in food stocks like Kraft Foods Inc. (NYSE: KFT), General Mills (NYSE: GIS), and ConAgra Foods, Inc. (NYSE: CAG) that could prove to be beneficial.
Another bearish strategy for a trader anticipating financial doomsday in 2012 could be to short everything in sight. In particular, a trader forecasting financial meltdown could short anything in the financial sector. Construction stocks and discretionary spending stocks related to expensive products, leisure, and entertainment could be good targets for short positions. Some analysts may disagree with me, but one might even consider shorting retailers like Amazon (NASDAQ: AMZN), Macy's (NYSE: M), Dillard's (NYSE: DDS), and Barnes & Noble (NYSE: BKS) as consumers move into survival-mode.
If our predicament is as Farrell writes, then discretionary income will diminish leaving anything related to leisure, entertainment, travel, and luxury to be abandoned in the interest of survival. If Farrell is correct, leisure spending will go out the window: Forget about vacations, cruises, hotels, casinos, etc.
Those long-term investors who want to go all-out Mad-Max/Book-of-Eli in terms of investing for "doomsday capitalism" may want to invest in physical holdings of things like soap, rice, water, canned foods, ammunition, thread, and needles. Such things could very well become items used for barter or as an alternative currency if society breaks down.
Even with Farrell's prospect of doomsday capitalism, there may be viable avenues of investment for entrepreneurs. I believe one such route for entrepreneurs would be to establish "free city" communes for individuals who are struggling in the current economy. I've repeatedly discussed how communalism could be used to solve some of our socio-economic problems related to commerce and law. Were honest, ethical, and compassionate entrepreneurs to credibly establish "free city" communes that welcomed wayfarers, struggling families, and honest workers in order to grow farms and businesses, I believe such ventures would be highly profitable. Communes could be established akin to Israeli kibbutzim or Bruderhof communities in the US in order to bring about economic progress.
Just as religious communes are relatively cut off from macroeconomic up-down dynamics, entrepreneurial communes could be a formidable shelter from substantial socio-economic adversity. As communism served as a buffer to the Great Depression (albeit communism brought with it its own problems), some form of communalism may serve as a buffer for families and individuals if the global economy breaks down. In the scope of economic adversity, the prospect of communal farms & businesses may be fertile soil for landholding entrepreneurs.
On this topic, companies may soon take the reins in providing health care, food, and shelter for employees in the wake of societal upheaval. I suppose such a situation would give a whole new meaning to living in the mall or living in a Wal-Mart as in the 2000 film "Where the Heart Is". Where corporate adoption of employees and their families may seem unfeasible or impractical, given the prospects of high gasoline prices, high energy costs, and rising food prices, companies will have to find some way to adapt in order to remain profitable.
Why not have employees live closer to their jobs? If we find ourselves in a situation where it costs more to get to work than what one is paid for his work, then commerce will effectively come to a halt. While this living-at-work scenario would bring with it major problems and issues, the market may find itself forced to radically adapt quickly if civil society is to persist.
It is important to note that Farrell is by no means alone in his assessment. Even so, nature has ways of finding a balance in the most adverse of situations; capitalism in theory should work to maintain this balance in nature. Nevertheless, we must remind ourselves nature did not spare Easter Island a micro-doomsday scenario. In this way, our world could learn a lesson or two from the story of Easter Island. Even in the context of doomsday, c'est la vie...there are still investment opportunities.
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