On the Verge of Chaos

Monday, November 24, 2014
By Paul Martin

By: John Mauldin
Monday, 24 November 2014

Bad Yen Falling
The Obvious Impacts
Every Central Bank for Itself
Seriously, the Fed Is Doing What?
Complexity and Collapse
The Fragile Eight
Home for the Holidays

“Great powers and empires are, I would suggest, complex systems, made up of a very large number of interacting components that are asymmetrically organized, which means their construction more resembles a termite hill than an Egyptian pyramid. They operate somewhere between order and disorder – on “the edge of chaos,” in the phrase of the computer scientist Christopher Langton. Such systems can appear to operate quite stably for some time; they seem to be in equilibrium but are, in fact, constantly adapting. But there comes a moment when complex systems “go critical.” A very small trigger can set off a “phase transition” from a benign equilibrium to a crisis – a single grain of sand causes a whole pile to collapse, or a butterfly flaps its wings in the Amazon and brings about a hurricane in southeastern England.

“Not long after such crises happen, historians arrive on the scene. They are the scholars who specialize in the study of “fat tail” events – the low-frequency, high-impact moments that inhabit the tails of probability distributions, such as wars, revolutions, financial crashes, and imperial collapses. But historians often misunderstand complexity in decoding these events. They are trained to explain calamity in terms of long-term causes, often dating back decades. This is what Nassim Taleb rightly condemned in The Black Swan as “the narrative fallacy”: the construction of psychologically satisfying stories on the principle of post hoc, ergo propter hoc.

– Niall Ferguson, “Complexity and Collapse”

I see a bad moon arisin’, I see trouble on the way.
I see earthquakes and lightnin’, I see bad times today.

I hear hurricanes ablowin’, I know the end is comin’ soon.
I fear rivers overflowin’, I hear the voice of rage and ruin.

Don’t go ’round tonight, well, it’s bound to take your life.
There’s a bad moon on the rise.

– “Bad Moon Rising,” John Fogerty, Creedence Clearwater Revival, 1969

As a college student, I reveled in the sounds of the Creedence Clearwater Revival and its lead singer and songwriter, John Fogerty. Fogerty supposedly wrote “Bad Moon Rising” after watching the 1941 movie classic The Devil and Daniel Webster. The movie is a paean to freedom, the American dream, and the ability of a man, even one who has sold his soul, to find redemption. There is a scene involving a hurricane that supposedly inspired the song. Fogerty claims that the song was about “the apocalypse that was going to be visited upon us.” Barry McGuire had sung “Eve of Destruction” only a few years earlier. A generation that had grown up with the Cold War, the growing conflict in Vietnam, the Free Speech Movement, and a nuclear arms race was increasingly distrustful of adults and government. “Don’t trust anyone over 30” was the maxim first uttered by Jack Weinberg, a leader of the Free Speech Movement in Berk eley. In a small bit of irony, the founders of that movement recently gathered to celebrate its 50th anniversary. As a side note, I find that Boomers are far more susceptible to talking apocalypse than our kids are.

Well, it’s a beautiful night here in Dallas, and there is no bad moon rising; but over in the Land of the Rising Sun, I do see a bad yen falling. As we will see in a minute, the recent yen price chart looks like a frozen rope (in the words of Jared Dillian). Understand, my bet (to use the word forecast would imply a level of precision in modeling that I have not attained) is that the yen goes to 200 against the dollar, so breaching 120 is not exactly a shocker to me. What is a little unnerving is the rapidity of the recent move.

In this week’s letter we’re going to explore some of the ramifications of the currency war that Japan is precipitating. It is more than just Germany, Korea, and China having issues and needing to contemplate their own competitive devaluations. If the yen goes too far too fast, there will be geopolitical repercussions far beyond the obvious first-order connections. As Fogerty ended his song:

Hope you got your things together.
Hope you’re quite prepared to die.
Looks like we’re in for nasty weather.
One eye is taken for an eye.

I’ll try to see if I can help you “get your things together” … and help you prepare your hedges. We may indeed be in for nasty weather.

Bad Yen Falling

The Rest…HERE

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