Part 10 - Riders on the Storm
August 16, 2001 © Copyright 2000 James J. Puplava
The ocean and the atmosphere form a two-layer system that produces what we call climate or weather. The interactions that take place between these elements produce heat or cold, rain or drought, calm or storms. Climate is often referred to as the prevailing weather in a region. Weather is of interest to those who make their living on the sea as well as on land and it impacts every industry from agriculture to tourism.
The main problem with forecasting weather is it has too many variables. It involves an educated interpretation of air mass movements throughout the atmosphere. At best, forecasting boils down to educated guessing based on fundamentals and what is likely to occur.
Everyone is familiar with climatic seasons caused by the rotation of the earth's axis around the sun. The angle of the earth relative to the sun's radiation affects the amount of heat energy received, which in turn impacts weather patterns. During the winter months, the earth is tilted away from the sun; while during the summer, it is tilted towards the sun. So one man's winter can be another man's summer.
While it's summer or winter, the weather patterns are more predictable. We expect colder temperatures during the winter and warmer temperatures during the summer. It is when we transition from one season to another that unpredictable variations occur. If everything remained constant, we would have only one weather chart with few changes.
However in the real world, variations in the sun's output of energy, evaporation rates, tidal flows, and a host of other factors make many weather forecasts unpredictable. This results in constant weather variations that produce an alternating mix of weather. The same holds true for the economy. Like the weather, it too has its seasons. We have recessions. We have recoveries. And busts always follow booms. The nature of our economic cycles also varies. Some are mild, while others are more severe. Our downturns (winters) have been recessions. When they become severe, they have turned into depressions. Our upturns (summers) have been recoveries. When they become severe, booms turn into bubbles.
In writing The Perfect Financial Storm series I have used the analogy of weather because it has many similarities to our economic cycles. I felt early last year that our economic cycle was changing. There were too many people talking about summer when we had summer for far too long. Wall Street and Washington were telling us that summer was a permanent condition. I saw too many telltale signs that the financial climate was about to change. Just as climatologists use barometers, anemometers, Doppler radar, satellites and other instrumentation to forecast weather, financial indicators were giving warning signals that a storm was brewing in the world's financial system. The epicenter of that storm had its origin in the United States.
As with any storm, the severity, the duration and the direction are hard to predict. For these reasons I have discussed alternate courses that this financial storm may take. The storm's path could end up being deflationary or inflationary in nature. Or something else may be brewing – something we haven't experienced before - The Perfect Financial Storm, the simultaneous occurrence of two storm fronts that collide with each other to form The Perfect Storm. I do not pretend to have the answer as to the exact outcome or severity of the current storm that is now in its formative stages. There are others far smarter than I who may know the path this storm may take. However, I believe the financial maelstrom that is currently brewing will end up being of the Nor-easter variety. The severity of a recession or bust is oftentimes determined by the boom that preceded it. In this case we've not only had a boom, but that boom that grew into a bubble has rippled throughout the financial system inflating financial assets and real estate prices. In this final installment, I hope to help you chart your course so that you will be able to ride the storm.
With best regards,
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"A word fitly spoken is like apples of gold in pictures of silver." Proverbs 25:11