Economic Meltdown - The Winners & the Losers

"May you be born during rapidly changing times." This is an ancient Chinese curse of unknown origin, whose literal translation would be "May you have the misfortune of being alive during a changing of the guard".

China is an ancient civilization that has survived basically intact in it's present form for the last 2,500 years. During this time frame there have been over a dozen dynastic changes. When China was ruled by a corrupt Northern Dynasty, a peasant rebellion would occur in the South. While when China was ruled by a corrupt Southern Dynasty, a peasant rebellion would occur in the North. If these rebellions were successful, the leader of the revolt would found a new Chinese Dynasty. Yin and Yang on steroids.

During the 20th century there were two such changes. The first occurring in 1912 when the imperial Dynasty of the Royal Qing family was overthrown by Sun Yat-sen and the Kuomintang nationalist movement who upon victory proclaimed a Nationalist Republic. The second occurred in 1949, when Mao Tse Tung's Communists overthrew the Kuomintang under Chaing Kai-shek , and proclaimed a People's Republic.

A dynastic change was a period of great upheaval where a previous oppressive class was replaced is violently overthrown and replaced by a new oppressive class. These transitions were never peaceful, and invariably famine, deportations and mass executions would be an integral part of the power realignment . Up to 10% of the entire population of China would die as a direct result of change. The old saying it's always better with the devil that you know than the devil you don't explained why change in itself was for the most part considered bad. Change however is an evolutionary process, and a result of this process is that there are winners, and there are losers.

In this blog post, I am going to put my predictions, and hopefully my reputation out on a limb. We are witnessing an economic upheaval comparable to the Great Depression. Instead of calling the obvious losers such as; dummies who levered 3 to 1 with mutual fund company loans in October of 2007. Or the obvious winners; smart people who couldn't understand the gobbledygook that financial advisers were preaching and had their entire positions in cash, GICs and Government Bonds. I am going to identify groups of people and entities and through my assessment predict weather they will be better or worse off five years from today. Those that are worse off will be Losers, and those that are better off will be Winners. So let's start with the Losers.....

People who refinanced their principal residence as a day job - Losers

I had to grab at least one gimmee...... Government statisticians use GDP as measurement of the size of the economy. GDP or Gross Domestic Product is the sum of, consumption, investment, government and net exports. The primary component of GDP is consumption, which in most instances is anywhere from 50 to 72% of all economic activity. GDP as a measurement of economic well being has a couple of inherent flaws because it is possible to double count. An example of an of how government measures an improvement in "economic well-being (consumption) would be two next door neighbors called Bob & John. Bob and John both own their houses clear title. Bob and John each borrow $20,000 against their houses on an equity line of credit. Bob pays John $20,000 to dig and refill a hole in his backyard. John pays Bob $20,000 to dig and refill a hole in his back yard. While this sounds absolutely absurd, government statisticians would call this a $40,000 growth in GDP, when it is obvious that nobody is better off, and both John and Bob are worse off......

For the last eight years, most of North America has been operating under an illusion of growth, just as the government was deluded with Bob & John's holes. A significant portion of the population who had acquired real-estate before the expansion of the credit bubble made a startling discovery. Their homes were appreciating at a rate many times greater than their total annual earnings. Instead of waking up, when they did not want to, and doing jobs they did not want to do, they could just keep refianacing their homes whenever they needed money. The beauty of this lifestyle was all the money was tax free, and you got wealthier as you spent, because your underlying asset was appreciating faster than you could bleed it dry.

For the last eight years in North America, this spending of wall money amounted to up to 10% of total annual consumer spending, or up to 7% annual increase in GDP. To a government statistician a 7% increase in GDP sounds great. But when we look under the facade, we as a society were going backwards while fixated on Bob & John's holes..... Those that were too lazy to work, but energized enough to spend will lose bigtime.

Assemblies of God Megachurches - Losers

These cavernous monstrosities are built in exurbs. The land of 4,000 square foot houses, cul de sacs, and SUVs. These buildings sold spiritual well being to the indebted exurban masses. They proclaimed themselves non-denominational Christian. A funny thing happened during Christmas of 2005. That year Christianities, holiest day occur on a Sunday. Fearing empty caverns, most pastors closed their megachurches for a "Family Holiday". Funny thing happened during the 2005 "family holiday".... The US real Estate bubble popped........

The parishioners started to get squeezed. No longer could they refinance their McMansions. A horseman of the apocalypse in the form of skyrocketing energy costs appeared. The collection plate started to shrink just as the floating rate mortgages for these churches started to reset. Over the next five years don't be surprised to see megachurches converted into homeless drop-in centers.

Industrial Auctioneers - Winners

These companies are the Valkyries/Vultures, the agents of change in Schumpeters "Creative Destruction". They carry off to the corporate Valhalla the souls of bankrupt enterprises. They do not carry any risk of being stuck with inventory. They are guaranteed to earn their Auctioneers premium, as they run "No Reserve" auctions. They clear the landscape so the survivors may prosper. In addition, in a world where one does not know whom to believe, they bring about a a brutally clear true transparency in asset pricing. The speed at which they operate goes a long way towards facilitating the re-allocation of the factors of production in an efficient manner.

Investment Banks, and Financial management Companies - Losers

The share of the total economic pie that went to the people and firms involved in finance grew far faster than the economic pie grew. Prior to the meltdown, approximately 1/3 of all public companies profits accrued to financial firms. A entire religion was founded on mutual funds, the ten year rule, and 24 hour financial news. When people came to their senses, realized that they were gambling on which square the proverbial chicken would defecate on, while the house took 33% of all funds wagered. The house of cards collapsed. People found out that the people they thought were looking out for their interests destroyed half of their life's work. Once bitten, twice shy, the world will never allow the finance industry to steal a third of the total pie.

The Church of Jesus Christ and the Later Day Saints (the Mormons) - big winners.

The reason the economy collapsed is because we realized that the perpetually growing pie that would allow all of us to have more and more was an illusion. We could not continue to provide richer pensions,and higher levels of services to future individuals in perpetuity, at a lower cost. The birth control pill and the resulting decline in fertility robbed us of this comfortable complacency. The reality was that the individuals who were to be relied upon were never going to be born.........

The Mormons on the other hand have a high fertility rate that results in organic population increases. When a Mormon family has five or more children they are voting with their wombs that they have confidence in humanity. Their fertility rate is identical to the fertility rate that was assumed to be the underpinning of our great welfare state. The Mormon faith discourages debt, discourages conspicuous consumption, and encourages self reliance. The doctrine and covenants of the Church provide adherents with the expectation and duty to save a years worth of income, and to stockpile a years worth of food and necessities. Their doctrine limits their downside.....

Hopefully I guessed right, and I didn't put my foot in my mouth. BTW, I have not been talking to any Mormon Missionaries. I got my understanding of the Mormons from watching "Cannibal the Musical", "Orgazmo", and talking to traumatized former Mormons who had nightmares about sacks of wheat and jars of mayonnaise under their beds.

Til next time:)