I want to spend a few moments talking about the world we live in, starting with the big-picture, longer-term perspective, then working down to the here and now.

Hopefully, the exercise will provide useful footing for plotting your investments as the world turns.

The Long View

When last I wrote, February 18, I wrote about the hypothesis that the world is speeding toward “singularity.”

As I have since realized that many dear readers may be unfamiliar with or unsure about the concept, I wanted to share some quotes from Ray Kurzweil, perhaps the most prominent of the “singulartarians.”

“What, then, is the Singularity? It’s a future period during which the pace of technological change will be so rapid, its impact so deep, that human life will be irreversibly transformed.”

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“The Singularity will represent the culmination of the merger of our biological thinking and existence with our technology, resulting in a world that is still human but that transcends our biological roots. There will be no distinction, post-Singularity, between human and machine or between physical and virtual reality.”

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“Can the pace of technological progress continue to speed up indefinitely? Is there not a point where humans are unable to think fast enough to keep up with it? With regard to unenhanced humans, clearly so. But what would a thousand scientists, each a thousand times more intelligent than human scientists today, and each operating a thousand times faster than contemporary humans (because the information processing in their primarily nonbiological brains is faster) accomplish? One year would be like a millennium. What would they come up with?

“Well, for one thing, they would come up with technology to become even more intelligent (because their intelligence is no longer of fixed capacity). They would change their own thought processes to think even faster. When the scientists evolve to be a million times more intelligent and operate a million times faster, then an hour would result in a century of progress (in today’s terms).”

The Singularity Is Near – When Humans Transcend Biology by Ray Kurzweil (buy it on Amazon).

The key concept is that we have arrived at the point where we humans are able to use technology to transcend the physical limitations of our biological minds. Within the blink of the proverbial eye, our new nonbiological minds, unleashed and with no limitations on how powerful and how fast they can become (very much not the case with biological brains), will begin tackling the big problems that have plagued humanity since the dawn of civilization.

Call me a hopeless optimist if you will, but the historical facts and exponential nature of technological advances where more powerful computers beget more powerful computers – working simultaneously across all areas of human activity – support the concept of Singularity. Which is to say that if humanity can avoid blowing itself up for another few decades, a radical improvement in the quality (and duration) of life is almost a certainty.

That’s not to say that Kurzweil and others who study the topic have perfect clarity on how the future will work out – no one does. But I do believe that they are directionally correct as to what’s coming down the road, longer-term. It should bring you considerable comfort, because if Kurzweil et al. are more right than wrong, and the technological trends now in motion stay in motion, literally everything will change – and almost certainly for the better.

In the Meantime: the Medium View

The current version of the world in which we live operates under the “Nation-State” model. Doug Casey did an excellent job discussing the nation-states, and why they are doomed, in his article, End of the Nation-State, which subscribers to The Casey Report can read in its entirety in the May 2009 edition, found in the archives.

The CliffsNotes version is that, unlike the previously dominant organizing structures of tribes and kingdoms, most humans today are organized within proscribed geographical borders within which there are commonly shared language, genetics and ideologies.

For any number of reasons I won’t rehash here, the nation-states are in decline, with almost all of them financially and intellectually bankrupt. I would support that by pointing to the nation-state that has long been held up as a shining example of the model at its best and most virtuous – the United States.

Unfortunately, though it is certainly better than some, a closer look readily reveals the flaws in the model.

Not only have the leaders of the United States run up the world’s largest debt – by a large margin, more than any other government in history – but over the past 60 years, it has interjected its military into more shooting conflicts, in more countries, than any other. The peoples of Vietnam, the Dominican Republic, Cambodia, Laos, Grenada, Panama, Somalia, Iraq, Afghanistan and a dozen or so others have all experienced American military boots on the ground and dodged American bullets. If bankrupt and aggressively militarized is the best of breed, the model of the nation-state has clearly failed and should be discarded.

You can also sense the degradation of the nation-states in the high esteem China is held in by so many. Life in a totalitarian bird cage, however gilded, may appeal to some – but if that’s the new operating model for nation-states, the world is headed for real trouble.

Which brings us to the medium-term outlook: great turmoil as the nation-states struggle to maintain the status quo in the face of their insurmountable challenges. Failing to maintain that status quo; in fact, expect the powers-that-be to redouble their efforts at maintaining, for as long as possible, the illusion of the status quo. For example, by jiggering economic data and otherwise prevaricating so that the populace retains hope and, more importantly, confidence in the ability of the government to keep the ship of state afloat. It can’t.

In a rare bout of candor, earlier this week the governor of the Bank of England actually told it as he saw it… and I quote from the Telegraph of London.

The Governor of the Bank of England warned yesterday that living standards may never recover from the financial crisis and that households were only just starting to feel the full impact of bankers' mistakes.

Mervyn King told MPs that ordinary people were not to blame for the pain ahead and that he was surprised there had not been more public fury.

"It is not like an ordinary recession where you lose output and get it back quickly," the Governor said when asked if the country would ever recover from a squeeze on living standards on a scale not seen since the 1920s.

"You may not get it back for many years, if ever, and that is a big long-run loss of living standards for all people in this country."

The reference to the “ordinary people” not being to blame for the pain is mostly true – “mostly,” because it is ordinary people who keep electing the dolts that run the asylum, and it was ordinary people who took loans they couldn’t afford to buy stuff they didn’t need. But I suspect the real reason for King’s publicly absolving the masses of blame is as spade work precedent to going after the “real culprits” – namely anyone who still has a net worth of a size that makes them attractive as a target for an asset stripping in order to keep the doors of the nation-states open.

On that point, flipping through the television channels on my JetBlue flight back from Costa Rica, I came across two different financial talk shows where the topic was how soft the current tax burden is on high-income earners in the U.S. One host, on MSNBC, was especially vivid in describing the situation, referring to past periods of economic growth during which nominal income taxes on the highest earners were in excess of 70%, and even pointing favorably to the days when it was over 90%.

Even David Stockman, an individual I have a great deal of respect for, is calling for canceling the Bush tax cuts – which is to say, implementing a huge new tax increase.

Viewed strictly in terms of deficit reduction (forget about debt reduction, that’s simply unpayable), Stockman may be technically correct – that it will take both tax increases and spending cuts to line up outflows with inflows. But, realistically, raising taxes won’t be how the deficits get fixed.

According to the latest census, there are 110,000,000 households in the U.S. The top 10%, or 11,000,000 households, earn on average $118,200 a year.

That amounts to about $1.3 trillion in annual revenue. So, even if you stuck it hard to the fat bastards who are oppressing the masses by running businesses – so hard, in fact, that you taxed 100% of every penny they earned – the country would still be in deficit.

As I have written in the past, as much as I hate the idea of anything more than a modest flat tax of, say, 10 to 15% to pay for essential services, you might be able to convince me to pay a bit more during a time of trouble. But not when the historical example shows that no matter how much government revenues increase, government spending soon adjusts upwards to the point that the nation-state is back in deficit. Viewed in that in context, advocating higher taxes is downright unpatriotic as it only serves to drain ever more capital from the economy and flush it down the toilet as government waste.

The medium term, therefore, will be all about higher taxes – and not just on the high-income earners but everyone, most likely through the implementation of a value-added tax and a myriad of new fees, fines, sin taxes and more. And it will be about currency debasements and stricter financial controls that use available technologies to ensure that no coin slips unnoticed through the government’s increasingly fine net.

As individuals, the threats to your wealth will be persistent. Likewise, your financial – and even personal – freedom will only be steadily degraded going forward.

Medium term, not so optimistic.

Here and Now: The Short Term

For the upcoming edition of The Casey Report, I interviewed Rick Maybury, an exceptional thinker when it comes to geopolitics. In his view, in the not-too-distant future, people will find themselves thinking about the world “pre-Tunisia” and “post-Tunisia.”

In the short term, the uprisings in the Middle East and North Africa (a topic Bud Conrad also weighs in on at length in The Casey Report) have the potential to change the world, and profoundly so.

For starters, the price of oil has a very direct effect on economic activity. At the least, the turmoil in the oil states is going to result in a near-term crimp in supplies that will keep oil prices high into the immediate future, and maybe for years.

At worst, if the unrest spreads to any (or all) of the big three of Iraq, Iran and Saudi Arabia – as it almost certainly will if Gaddafi follows Mubarak out the door – then speculative fervor alone could send the price of oil upwards toward $200 a bbl. That would be a crushing blow to the fragile global economy and maybe even send the U.S. military into action once again, this time in an attempt to regain American influence in the region and to ensure that oil continues to flow west.

The other near-term factor to watch very carefully is the Fed’s decision regarding continuing its quantitative easing. Friends in high places I have talked to expect, come June 2011, a hard stop to the easing, and based on the trial balloons now being sent up by the Fed, I have to agree. This, today, out of Bloomberg.

Federal Reserve policy makers are signaling they favor an abrupt end to $600 billion in Treasury purchases in June, jettisoning their prior strategy of gradually pulling back on intervention in bond markets.

“I don’t see a lot of gain to reverting to a tapering approach,” Atlanta Fed President Dennis Lockhart told reporters yesterday. “I don’t think that is necessary,” Philadelphia Fed President Charles Plosser said last month.

Central bankers, who next meet March 15, are about half way through their second round of bond purchases. To bring the program to a full stop in June, they must be confident that the economy is strong enough to endure higher long-term interest rates and rising expectations of an exit from the most expansive monetary policy in Fed history, said Dan Greenhaus at Miller Tabak & Co. LLC in New York.

“If this is a self-sustaining recovery that can withstand higher interest rates, then why not get the hell out?” said Greenhaus, Miller Tabak’s chief economic strategist. “Still, I am nervous about their ability to withdraw from this policy without broader disruptions.”

Full article here.

The Fed’s decision on further monetization is important on a couple of levels. The first is the potential impact a hard stop would have on the U.S. (and likely, global) stock markets.

Though I have previously shared this chart from the February 2009 edition of The Casey Report, I include it here again as it speaks volumes about the pending Fed decision. It is a snapshot of the interrelationship between Japan’s quantitative easing and that country’s stock market. The mechanics are easily discerned – pump up the money supply, and stocks rise. Pull the plug on the money supply, and the stock market goes down the drain.

Here’s a quick response back to me from our own Bud Conrad about the Bloomberg story quoted above.

You saw the possibility early that they might stop QE 2. They are floating balloons of policy change, and Geithner's sales pitch to the banks suggests that they are trying. But I just don't think they will get away with it, for all the consequences you articulated: rising rates would hurt stocks, the economy would tank, and the weak economy would get weaker. It might help the dollar, but the dollar has not collapsed at a level requiring the Fed to protect it.

Let's see if the discussion by the Fed affects the markets as badly as the QE 2 discussion affected markets positively before the actual purchases. The 10-year Treasury bond dropped to 2.4% or so in August on just talk, and is a full % above that on the actual big purchases. If the talk scares the market (rates rise and stocks fall), I bet they extend QE 2 or diminish it slowly. They must be looking at the calendar for election year and will want to turn on the fire hose of new money printing at least 6 months or maybe a year before the election.

I wrote about all this over a year ago, explaining that the federal government deficit is too big to be absorbed by anybody but the Fed, and that they would do what came to be QE 2. The deficit hasn't changed, so my prediction is that even if the Fed stops buying Treasuries for a few months, the bad reaction of markets will force them right back to the money printing press.

Absent that, the obligations to pay interest on the debt at higher and higher rates will make the deficit so bad that the dollar really crashes. There is no way for the Fed to stay out of the business of bailing out the federal deficits for more than a quarter, in my opinion, and I'm still not expecting they can really pull that off.

I think Bud has it right, though I expect that the Fed will actually pull the trigger and announce the end of quantitative easing, albeit with a strongly worded caveat that they will reinitiate buying Treasury bonds if the situation changes for the worse – and may even use higher oil prices as cover for doing so.

At least initially, I suspect the market reaction to ending quantitative easing will be very negative for stocks, even those of the gold and silver variety that we so favor. Conversely, when the Fed ultimately reverses itself and restarts its purchases of Treasuries, it will be very good for stocks… and especially those associated with precious metals.

While this service is not really intended to provide specific investment recommendations – that’s where our paid services come in, as they track the recommendations carefully – I will close this segment with some general thoughts on portfolio allocation at this point.

• The risks associated with an overvalued stock market, higher oil prices and the Fed’s fumbling about for some sort of rational monetary policy are very high and will increase acutely in the months just ahead.
  
  
• Stepping out of the way of that risk by selling highly appreciated stocks in favor of a higher allocation to cash or bullion is worth consideration. Yes, you might miss some upside, but I personally fear the downside more than any missed upside.
  
  
• If the Fed does announce a full stop to its monetization and the market gets crushed, give it some time, then buy the best precious metals stocks with both hands, and even pick some up with your toes if you are able.
  
  How long should you wait to buy if there is a crash? Generally, I don’t think there will be any great rush to get repositioned, but that will depend on a couple of variables, including how steep the crash is, if one occurs. The worse the crash, the greater the anticipation that the Fed will again reverse course and the quicker the precious metals stocks will come roaring back. So, we’ll have to cross that bridge when we get there.
  
  
• If you still have a variable-rate mortgage, or one you are paying more than 5.5% fixed on, consider refinancing in a hurry – like yesterday. At this point, the 30-year rate is on the order of 4.88% – that’s like free money. Rates are going higher, and soon. And once that trend is in motion, it’s likely to stay in motion for a good long time.

In Conclusion

In the short and medium term, things are going to become very challenging for pretty much everyone, but especially for those without a nest egg and steady income. Once the Fed steps aside and the warping effects of its money printing are mitigated, people will quickly discover just how much worse off they are than they thought.

And it will only get worse when their governments then show up at their door demanding more, in exchange for less.

Expect the turmoil now so evident in the Middle East and North Africa to continue and to spread – here, there and everywhere.

Those are the risks. The opportunity will come following the next big shock to the stock and even commodity markets, which I would expect before June, as that will plant the seeds for spectacular gains for those with the dry powder to buy following the carnage.

What if I’m wrong? Well, you may pass up some profits between now and then by being in cash and bullion, but I’m betting you’ll sleep better – so there’s that.

Now, this is not to say that you should dump all your investments, wholesale. Rather, just be extra sure your portfolio is reasonably well balanced, and that the prices of your stocks are undervalued based on their underlying assets. The time will come for the Mania phase in the resource sector, and probably sooner than later. If your portfolio is in fighting trim, riding through to the other side of any big correction should work out just fine. But if your portfolio is made up of a hodge-podge of stocks that you have forgotten why you own them, then the sooner you clean things up, the better.

In the medium term, as the power elite in charge of nation-states take increasingly desperate measures to retain credibility, and therefore power, things will only get uglier. If you can afford to do so, this will be a good time to be observing things from a distance, in some comfortable corner of the world where your own government cannot readily lay hands on you or your money.

In the long term (maybe 20 years?), the payoff from technological advances should become the dominant controlling force in the global economy. And after that, it’s all good.

On that last, more optimistic point – do yourself a favor and pick up Kurzweil’s book. It’s a fascinating read and I suspect, like myself, you will find your perspective on the world substantially improved by the time you are done with it.