I finished reading Financial Armageddon by Michael Panzner on Sunday. After reading this book you will soon grow weary of Nouriel Roubini's overly bullish rantings (humor attempt).
I don't believe I have ever read such a dark prognosis before. Michael believes it could even get to the point where there is not enough money for normal maintenance of infrastructure causing regular black outs.
As a matter of philosophy I tend to not expect the most extreme outcome (in either direction). If you know who Michael Panzner is you know he is very smart and very experienced but that does not have to mean he is right.
For everything to come unglued in the manner and with the all-encompassing depth he thinks will happen would require an incredibly perfect storm. The thesis seems to be that everything, and I do mean everything, that is unhealthy will play out to its worst possible outcome. Hyper inflation, asset price death spiral, higher unemployment than in the great depression and so on are all in the cards and we may take down a few other places with us.
He goes on to discuss the unraveling of the social fabric of the United States, higher crime rates, people having to take in destitute family members (which will lead to increased domestic violence and more stress related health problems) and maybe even Martial Law.
As I read it seemed like some of his beliefs were more opinion without a clear and obvious cause and effect. This last statement is obviously subjective on my part.
There were several things in the book that flat out do not add up to me and I'll mention a couple of them in this post.
Michael brings up the notion that some banks are too big to fail and so would not be allowed to fail. Given the US's role in the world economic order and the number of countries that have vested interest in the US staying solvent that the US might seem to be too big to fail. While this may or may not be true I think the point needs to entertained in order for the discussion to be complete.
Michael envisions banking problems similar to the bank runs that occurred during the great depression. I have trouble envisioning people going down to the bank fro any reason when money can be moved electronically from home. Michael does touch on this some but a bank run seems to ignore the general modernization of society that has happened.
Throughout the book Michael makes historical references to support his argument but most of them (maybe all?) seemed to not have had anywhere near the impact that Michael sees coming. Put differently there is an assumption that some things will repeat but with a much larger impact. I'm not sure why that has to be and I'm not sure that the case for why was made either.
About a year ago Michael and I took different side on whether derivatives would be the financial undoing of the US economy in the Wall Street Journal (I looked for the link but it was no longer there). You can probably guess who took what side. Shortly there after Amaranth blew up with relatively little lasting impact. There are a lot of scary things that have happened before and will happen in the future but they are not necessarily systemic in nature.
I think he is correct that there are a zillion problems that threaten to make things more difficult here on the home front. I have written about this many time noting that I expect generally lower equity returns, slightly higher interest rates and some nasty changes in the various entitlement programs. However I do not place any realistic probability that the world will metaphorically end.
Reading the book is worthwhile and I would encourage you to judge for yourself. Michael, if you still read this blog I would welcome your feedback.
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15 comments:
I was moving house this week.
One box circa 99 was a bubble jet printer container with the words 'Y2K compliant' on the side. I mean what harm was going to come to you from your clunky bubble jet printer!? It's easy to forget how big a potential threat Y2k was seen as at the time.
I also believe that one of the most eloquent 'worst case scenario' writers for peak oil outcomes J.H. Kunstler was also riding the Y2K pony at the time. Feedback loops operate here maybe, and the boundaries of predictions need to get pushed so we don't go to sleep.
I respect the markets ability to discount bad stuff, we are still waiting for you guys in the US to have your recession, and for the USD to collapse... But my thoughts are that these events are so well discounted potentially that they are not most likely scenarios anymore.
I would imagine such armageddon scenarios are not most probable. I agree with Roger's sentiments re: extremes.
Having said this I'm looking for my can opener and flash light? Anyone seen them? When Y2k hits it will catch us all by surprise.
Andrew.
It is as easy to overstate as it is to understate any peril which is probably why both permabulls and permabears tend not to do as well as cautious optimists (COs) on average; if I remember the relevant research studies COs tend to live longer too. It is possibly true that permabears may not do as well overall since the market is generally up more often than down but their analyses tend to be more interesting on the whole regardless; not sure why that is but perhaps its because permabulls usually sound like they are trying to sell something.
But truth be told there are probably not too many people who are permanently anything and terms such as permabull or permabear have a sufficiently ad hominem ring to them (particularly when uttered in a comment that otherwise adds neither substantive analysis nor civility to a discussion) that perhaps we could just drop the whole bull/bear bit altogether, eh.
Some folks are deeply skeptical of this market (includes me), others are not, but the last time I looked the only thing that mattered to an investor was what went into his or her pocket and stayed there. FWIW I think most of Panzner's conclusions live in the long tail of the curve but if they help me guard my flanks and keep some more filthy lucre in my pocket then that's okay with me and, if it should turn out that the curve is skewed and/or platykurtic and even one of Panzner's scenarios comes to pass, well, I may just be grateful regarding the opportunity cost.
Parenthetically I worked with several COBAL engineers on a very large-scale legacy accounting system in 1998 and under simulated Y2K rollover conditions it became unstable and/or delivered erroneous results (sometimes measured in millions of dollars). There were similar reports in the industry so, w/o any deep knowledge of that industry, it could be that the reason we can now treat Y2K lightly as a non-event is because they and others like them did their work well. Perhaps we'll even think the same of the Fed some day, at least to the degree we think of such things at all when there is no disaster to focus our attention. Just a thought.
RW makes an important point. Y2K was a big deal. It was a key driver in many of the bank mergers at the time (whose forgotten that!?). Why? Because the massive costs required for switching over legacy systems.
My hope is that there will be massive work to remedy/mitigate some of the looming problems. Unfortunately, unless you have the "Armegeddon" scenario put plainly, inciting action is difficult.
RW, thank you for this important reminder. Will probably end up with private equity taking over government operations!
I'm not a follower of Panzner, haven't read his book and have no idea whether his scenarios will come to pass. But it is surprising how easily most people dismiss such "predictions" seeing that the one thing that hasn't changed over time is people. I wonder if many people predicted the French Revolution and the ruling elite ending up with their necks in the guillotine.
"I have trouble envisioning people going down to the bank fro any reason when money can be moved electronically from home"
Seems short sighted. Is it out of the realm of possiblity that if a banking crisis would happen the internet banking sites and electronic means of commerce could be shut down or disabled? "We're sorry but we are experiencing techical difficulties right now, please contact your branch".
Hey Roger, have you read Boomsday by Christopher Buckley yet?
Jeb you are right that is a possibility. I still think very remote.
have not read Boomsday.
Ordered a copy of the book. I'm working on a screenplay that assumes some of these same components join together in a "perfect storm" not dissimilar from Panzer's suggestions.
Now that you've finished that... how's the ABA book treating you? I would have hoped that a vacation would mean you'd put the "light reading" first... ;-)
hey Chris, I'm about 85 pages in...just finished the part about Connie Hawkins.
Yes, Roger, I still read your blog, because it is very informative and I usually learn something every time I pay a visit (which is most days).
I appreciate you writing about my book. As usual, your comments are intelligent, thoughtful, and measured. I think you raised some valid criticisms, but I think the key difference between us comes down to the way you and I perceive and quantify risk.
Perhaps your assessment will turn out to be the right one (nobody knows for sure, including me), and we can all breathe a sigh of relief. Unfortunately, I feel that we are approaching that rare, perfect-storm moment, where the risk of being wrong is so devastating that it is unwise to discount it.
I am unsure of Mr. Panzner's specific concerns. But history is full of long tails. Often the scenario is one of the ones "predicted." But as the scenarios are often mutually exclusive, it is not surprising that there are more scenarios then events. In extreme terms, you may accept that the world may end someday, but it can only end one way.
And not all tails are bad ones. On a positive note, I have heard that the Tweetsie Railroad has managed to extend its lease on life through 2010. To the four-foot and under crowd, this off course is very important news.
Michael, thanks for posting, very much appreciated.
Seems unlikely that everything goes wrong at once, but that's probably what they said in the early 1900s in Germany (Weimar Republic) late 1920s here in the US, in the 1940s in China, etc. etc. It seems to me that at even low probability, the result is so bad you have to at least consider possibility and how to protect against something really bad happening.
Cautious,
I agree with that and have written several times about what I would do and disclosed several times the couple of bomb shelter holdings I use.
The first book I read with my book of the month club free 6 books back in the 70's was How to Prosper During the Coming Bad Years (author?). It taught me a valuable lesson...hope for the best but plan for the worst. I think the global catalyst for the big slide will be the legislated and tax payer backed move to ethanol and biodiesel in the west. As the price of food stock soybeans, sugar beets and corn is driven up by the insatiable appetite for fuel, global starvation will make warming and market values insignificant. I hope I am wrong but I see an exponetial rise in the signs in the last few months. How does this scenario fit into the armageddon?
Thanks for the great posts...I am off to buy Michael's book.
Greg
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