The coming Panic Chaos

Column box-John Mangun-Outside the Box

Political Chaos followed by Economic Chaos followed by Panic Chaos. The first two are inevitable. The third depends on how deep and wide the first two were and who is running the circus.

Bad economic policies resulting in bad economic results lead to Political Chaos. The duration and severity of those bad policies determine the extent of the Political Chaos. “Chaos” is not an event. It is a process that led to Brexit and Trump and is still being played out. The UK and the EU still have not figured out how to make Brexit work as evidenced by the recent British/French “Fishing War.”

The political upheaval that brought Trump has now given the US the worst Presidential approval rating for Joe Biden since World War 2 (except briefly for Trump) and the lowest approval for Kamala Harris of any modern US vice president. While Angela Merkel may have been the longest serving German Chancellor, her CDU/CSU conservative bloc decidedly lost the last election to name her successor.

Of course, it is easy to dismiss the idea of these cycles as the ramblings of an old man. And we are told it is all Covid’s fault. But, these same cycles occurred about 700 years ago. The political chaos came as the feudal system of the nobility, the vassals who owed allegiance to the nobility, and the peasantry started crumbling.

The nobles left the “economy” to the serfs while the lavish parties in the castles continued. When the Great Famine of 1315–1317 hit, the 200-year period of prosperity ended. The European economy turned even worse with the Black Death Pandemic from 1346 to 1353. With some 30 percent of the population dead, there was no one left to grow the crops. Economic chaos.

Then came the Panic Chaos when, because of the shortage of workers, the nobility had to actually pay people to be farmers. The military also decided that salaries were good and “lifetime” allegiance went to the highest bidder. Capitalism was born.

Our panic cycle is being fueled by inflation. For the US, inflation has no end in sight. Gasoline prices are up 58 percent in 12 months. Food/energy prices rose at the most rapid pace in 13 years.

Price increases are an economic event. Inflation—a general continuing increase in prices—is psychological, reflecting lack of trust in government. We expect vegetables from the North to be more expensive after a typhoon. But if prices do not go down, something systemic is wrong.

US inflation is being blamed on high oil prices. Pick any number of reasons why oil is “high.” But oil is actually cheap by historic standards of comparison to other assets. There is no shortage of oil. But by comparing the ratio of oil prices to other major asset classes over 20 years, oil appears cheap.

Relative to broad levels of various asset prices like global stocks, bonds, and commodities, to trade at the historical median of 50 percentile of price ratio, oil should be $120 per barrel. If compared to “expensive assets” such as central bank balance sheets and global “speculative” stocks, oil should trade at $400 per barrel.

Oil is “cheap” because of Covid-reduced demand. But because of governments doing all they can to reduce oil production to “save” the planet, and as Biden’s catastrophic oil and gas policies fail, prices will rise.

This oil inflation will continue as people realize government policies to help keep oil supply and demand in balance—which government can and is supposed to do—have crashed and burned. Trust in government will continue to deteriorate and there will be a Panic Chaos caused by inflation.

 E-mail me at Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis provided by AAA Southeast Equities Inc.


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