It's The End Of The World And Farrell Knows It

If you thought Paul Farrell was a pessimist before then after reading this article from him you will look back on the others and view those as the musings of a cock-eyed optimist drinking Kudlow Kool-Aid.

In his most recent he takes inspiration from Taleb's trust (almost) no one idea and lays out a scenario for the Fed to fail no later than 2020 under the weight of layers of corruption and conflicts that leads to class warfare and riots over food and water. If it is not clear his is talking about the US.

First things first the Fed as we know it (or think we know it) is the third central bank the US has had so the Fed failing one way or another would not be unprecedented and the reasons Farrell cites are close to the reasons why the first two shut down (per my limited understanding).

A modern failure of the Fed would certainly be disruptive in a meaningful way but as a practical matter would probably look more like a restructuring of some sort. The country would continue to have a central bank. During such a disruption I would expect just about every foreign market to panic down with the US market as a restructuring of the US central bank would reasonably scare the hell out of a lot of people.

In the article Farrell cites quotes from various people that were very wrong about the financial crisis including “Emerging markets are the global investors’ safe haven" from Worth (magazine?). Again were there to be a central bank failure I would expect most world markets to panic down right along with the US as in 2008. A realistic expectation for global diversification should not include completely missing a panic like 2008 or the crash of 1987.

I believe I set a reasonable goal for global investing before the crisis and have mentioned it many times since. In seeking out countries that offer the best chance of diversification I think you need countries that have different fundamental attributes than the US--they should also be relatively healthy and give some reasonable hope of doing well. In that light a realistic hope is that some countries with different attributes might turn down at a different time than the US, recover quicker, go down less or any combo of the three and there were many countries that did exactly this through the recent/current financial crisis.

The three that I wrote about most often in that context were Brazil, Chile and Norway. We know that the S&P 500 peaked in October 2007. Brazil and Norway peaked in May 2008; they generally kept going up for eight months past the US peak. Chile peaked about the same time as the US but only went down about 30% at its worst compared to 55% for the S&P 500. Chile is now about 40% above its old peak, Brazil is about 20% above its old peak while Norway is down a little less than 20% from its peak and the SPX is down around 26% from its peak.

There are many other examples of course but these are the ones I wrote about the most. In the face of another panic that might come about due to some fundamental shock, real or perceived, something similar will happen again in terms of other markets. Looking over the course of the last decade, as I have mentioned dozens of times, the US along with several other "important" markets were down for the decade while plenty of markets were up plenty--as I have said those countries went on without us and this effect would happen again. That is not to say it will necessarily be same ones, that is for you to sort out for yourself but it will happen.

There will always be an argument like the one Farrell is making and it will always be compelling to you on some level but the most extreme outcomes are incredibly rare although markets often brace for the absolute worst.

The picture is from the website of a company I was researching yesterday. I got a kick out of all those people standing in the bucket of the uber front loader.