This metaphor, along with the eye of the hurricane analogy, is being used increasingly to describe our economic situation. The idea is that things are much, much worse than they appear, and it's only a matter of time before this becomes obvious. Unfortunately, I subscribe to this theory as well, and I also think that we may already be past the point of no return, we just haven't realized it yet.
If the warnings become too frequent and obvious to ignore, we might see a wholesale shift in attitudes, which could result in drastic action. Think of a bank run: everything is fine until a critical mass of depositors decide their money isn't safe and want it back at the same time. A change in perception or confidence can result in panic and catastrophe. What if we have a "bank run" on a global scale?
Today you can buy a 10-year treasury that yields 1.625%, which after subtracting the official CPI rate of 1.4% nets a real return of 0.225%. If you calculate inflation the old-fashioned way like John Williams does at shadowstats.com, CPI is currently about 5% using the methodology from 1990; the 1980 calculation pegs today's inflation rate around 9%. Using these numbers you end up with a guaranteed negative return of up to 7.35%. These numbers suggest bonds might be among the worst places to tie up your money right now. For a long long time bonds have been a solid, conservative investment. At what point do enough people change course from the status quo and move out of bonds?
We may already have stepped off this cliff without realizing it. China is no longer a net buyer of US treasuries but is using their money to snap up physical gold instead. In order to keep financing its deficits, the US needs to keep selling bonds. When demand is down the market solution would be to raise interest rates, but the Fed needs to keep rates artificially low so that interest payments do not spiral out of control. So, the Fed steps in to buy treasuries, I guess with I.O.U.s or some trick that ultimately inflates the money supply. Connecting the dots, absent any kind of spending control or restraint, there is either inflation or much higher interest rates in the future. Most likely the former then the latter, like in the late 1970's.
If enough people think this way, then I believe we would be plummeting towards the canyon floor instead of being suspended in mid-air. We may be around the corner from such an attitude shift. The timing is extremely difficult to predict, since we are talking about generational phases and the decades-long economic seasons of the Kondratieff cycle. If this type of economic watershed comes to pass, it could well be years from now. But I believe there is mounting evidence that it will happen sooner, perhaps in the next few months or even weeks.
Right now the world appears to be heading into a food crisis, with massive droughts pushing food prices higher; many believe this was the spark behind the Arab spring uprisings in 2008 and has the potential to cause similar unrest now. Domestic chaos is also fuelled by very high youth unemployment rates in many countries, and by the ever-increasing gap between rich and... well, the rest of us. After much management of the paper price, precious metals have consolidated and look poised to go up, as they almost always do in September. Europe is a series of dominoes that could start falling very soon. The US election may be a distraction, or it may focus attention and awareness on some of these issues; in either case America will have to face some kind of reality in November if not sooner. And of course, October is always a dangerous month for stocks.
Maybe this is just a gut feeling that something big is coming. I could be dead wrong. Or I might be overestimating the chance of it happening so quickly. But given all that is going on, I find it prudent right now to avoid stocks and bonds and stick to cash and precious metals. I may miss out on a great opportunity if I'm wrong, but that's a slight risk I'm comfortable with for the next few months while I sleep at night. The alternative strategy - don't look down - might work for a little while in the cartoons, but here in the real world never ends well.
