The above is a quote that has influenced me more than anything in my mature financial life. It was from Alan Greenspan’s book. He was the former Federal Reserve Chairman who had more power over our lives in the last generation than all of the US Presidents combined. It was a fascinating book, and it snapped so many things into focus for me.
What are the imbalances? Where will they resolve? Notice one thing missing from that sentence. The word “when”.
If you followed my old xanga blog, or my Facebook posts, or my public life in general, you’ll recall that in the last 15 years I have had a 100% accuracy about where things were going, and I published them. The craziest thing was I predicted the explosion of the mortgage crisis the day before Lehman blew up. Up to that point, I told you exactly how and why housing prices, lending, and all, were going to collapse.
True to their consistent form, my fans on the dpreview forums were there to express anger at my warnings. Back in January of 2008, one troll posted how angry he was by my “anti-american” sentiments about the future of the economy. He was soon followed by a consensus of opinions that I took a load of money from the US, moved to Canada, and flipped the finger to the US economy. Here’s the thread: “Can You Believe Gary Fong Said This” The trolls on DPreview can’t stand me, because a long time ago, I started blogging about dying segments or brands in photography (Kodak, medium format, film in general – and now Canon DSLR) people got so defensive. I was not surprised when one of my biggest critics (first name, “Dave”) wound up losing his business and getting a job at FedEx. The crazy thing is – he predicted that would happen to me, and it wound up happening to him. When I came up with Montage software, he posted that it was going to fail, even sending Art Leather a photograph of a bomb landing on my desk. It wound up being the biggest vertical market software package for photographers at the time. When Pictage came up, he said, “this time for sure will be the end of Gary Fong!”. Wrong again – it sold for $35 million.
I’m not anti-american. I’m just warning people it is not a safe place to be. It is a country in a debt that is unfathomable. It has the strength of a currency that is only buoyed up because of the foreign debt that controls it. China and Japan, each with over a trillion dollars in IOU’s from the U.S. do not want to see their investment vanish before they can quietly apportion their holdings to other assets before the crash. Forecasting Is Determining Where Imbalances Will Ultimately Resolve. Nobody knows when, but we all know where.
Just so you know, my factories and distribution center are all in the U.S. Everything we make is made in the USA. While I have some creative jobs here in Canada, we never moved out of the U.S. My warnings back then were because I cared about the exposure of my friends to what was about to come. I wanted my friends to be prepared. I suggested that if they held US assets to liquidate them. A few months later, the economy imploded following the collapse of Lehman Brothers (see wikipedia article)
The reason I’m writing this is because I’ve been thinking a lot about our house fire. I just came across a page in my best-selling book, “So You Want To Be A Rockstar Photographer“. I described my paranoia about protecting images from fire, and that paranoia paid off as I lost nothing irreplaceable in the fire that leveled our home. Just before our fire, on my Facebook page, I described how we had purchased a fire pump, how I consulted a firefighter in the summer to come up with a fire plan, and how I was going to purchase a fire truck until my wife Melissa said no.
I got out of wedding photography when I knew that fees in that profession were going to plummet when digital photography appeared. I got out of the lab business before hard prints became a novelty. And I got my US assets out of the country before 2008.
Equities have rebounded to new highs. But these are as mythical as the crazy, unsustainable climb in real estate we all witnessed before the crisis. Today is way worse than any situation before it. To get the economy going again, the U.S. did something unprecedented by printing an astronomical amount of money out of nowhere. This made its way to asset prices for the investors, but not for the standard of living for the middle class. It worked as an illusion. We aren’t more prosperous. We are more in debt – yet again – and using these inflated values to finance the expansion of an economy that hasn’t really grown in productivity in goods or services. The numbers just keep going up.
I mentioned on Facebook that the crash of the Starbucks payment system last week was as creepy to me as the recent serial crashes of Home Depot, Staples, Target, Sony, JP Morgan, Yahoo and now Starbucks. The creepy part is that people got into these highly protected systems, knocked things around a bit, but left without taking anything. It’s like burglars breaking into a casino vault, showing that they were there on security cameras, and leaving without taking anything. Why spend the tens or hundreds of millions of dollars to break into a system and not take anything? To me, it’s because they are rehearsing. The russians are renowned as the world’s best code-breakers, hackers, and systems experts. Obama’s emails have been allegedly hacked by the russians. If you can enter a username and a password, you can hack a system.
Where are the imbalances? Where will they resolve? Well, there are heavy sanctions against Russia, who controls a majority of the natural gas for western europe (google ‘gazprom’). Dropping energy prices would hurt Russia the most, and I knew OPEC and NATO would coordinate their efforts in dropping energy prices in the severe european winters. So oil dropped by $107 to $45 a barrel in a few months. As we come into spring, you’ll notice that energy prices are quickly rising – 22% from $51 to $60 in the first month of spring! See how that works?
Sure it hurt Russia, but it didn’t phase them. This generation of russians is used to hard living. They can handle this. Now, if you were them, how would you respond to crippling sanctions? Would you open your nuclear silos? Send your forces to Western Europe? Way too risky.
Or would you silently hack into US financial systems, and see if you can get in and out and make a little bit of a mess, but not really hurt anything. Until one day there is a coordinated attack of all systems simultaneously. So you go to Starbucks. Payment system is down. Weird. You go to the grocery store, and credit card terminals are down. Oh oh. This is looking like the first of the twin towers – not feeling safe. And then the ATM’s are down, and all EFT systems, bank wire transfers, everything. But social media is still up so people can retweet their panic. At this point, what can possibly be done to restore the situation? Panic ensues, and then instead of finding out that these pesky little hacks went in and turned off the lights for a few hours, they wipe out everything permanently.
When I learned about game theory, I learned that mathematicians taught us what is so basic about human nature. Every man for himself, right now. In game theory, you simply put yourself in the shoes of each player, and ask yourself what they would do for the most benefit, at the least cost possible at the moment. That’s how you have an edge in predicting the outcome.
So combine game theory with determining where imbalances will ultimately resolve, and the future looks clear. Crystal clear. We know what, and where. We just don’t know when. But we do know it’s coming.
So to all of the people who get made when I try to warn my friends about preparation, maybe for once drop your pride and ask yourself. What if I’m right – as I’ve always been so far?