The Phoenix Recession

Borrowing this great scene again, this time with the further appearances by Fawkes.  Dumbledore's phoenix, Fawkes, goes up in flames, and is reborn.  In the last post in my personal blog, I predicted a major event will happen this month that will make it obvious that we're in for a serious economic downturn.  I think we're in the verge of a "Lehman Brothers moment," something in the business or economic world to make it obvious things are NOT as they should be.

It is part of the natural order of things that there are times when something old must die, it simply must collapse, it must go up in flames, its time is over.  And then, also part of the natural order of things, that at that point, something new will be born, and will grow in its place.  The mythical phoenix is a symbol of that period of change.  I think we're at a major point like that in Western society as a whole.  Writing that last post, I realized, I see this next recession as the flaming of the phoenix.  While tough economic times are hard for most everyone, I see the potential for something great to be reborn from the economic ruins.

"May you live in interesting times."

-Ancient Chinese curse

If you read my personal blog much, you know I've been drumming on about this coming recession for a couple of years now.  The reason is because I see this next economic downturn as much more than a slow economic period.  Being the weirdo I am, I've been drawn to little known and often overlooked social theories, and ultra long term trends.  There are several long term trends ending right now, in our little piece of human history, and the best way to describe this time is a transition of many transitions.  That's why my overall theory is something I call, The Big Transition.  Not a creative name, but it fits.  We truly do live in "interesting times."

On one hand, we are simply near the end of a bull run in our stock markets, and in the real estate markets of the most vibrant urban areas.  The stock prices and real estate prices (in prime areas) have been going up since early 2009.  The stock markets have been nearly stagnant for the last year ans a half, but hover near the high water mark.  Things are overpriced, and we're heading into a recession that will shake out, prices will drop dramatically, some businesses will collapse or go up in flames (if they have good insurance), and new ones will be born.

On another level, we are still in the long transition from the Industrial Age to the Information Age.  The rise of many new technologies, particularly communications, computers, the internet, and biology, are rapidly changing what's possible in many ways, and changing our everyday lives, the way we interact with each other, who it's possible to interact with, and how business and organizational structures work.  We're leaving an economic model based on factories in nearly every town, making physical goods, and selling those goods in mass market stores nationwide and worldwide.

We're going into an economic model based on nearly every person having a voice in society, a model where every person carries a small device that is a phone, a publishing company, and a TV studio, and a comedy club all in one.  One person can now share funny cat videos with a stranger next door and another in Spain, publish a video or blog post that can be viewed by billions, and can sell a homemade item and ship it to South Africa, or nearly anywhere else.  It's a world of tiny niches of interest, of many and multi-cultural voices, and a world that's extremely scary to a lot of people.  It's a world where old business models from the Industrial Age are collapsing, and where new, tech-enabled business models, are being created, and disrupting the old.  It's a world where the old school power structures are straining to keep control, while many of their long hid secrets come to light.  We're in a period of massive change at a frightening pace.  In a word, it's chaotic.

On yet another level, the United States of America, the grand experiment created unlike any other, where any individual, with hard and smart work, could create a business or idea, and move up in society, has reached a point of peak corruption in many businesses and political scenes.  After a full, generation of seeing the rich get much richer, while the lives of the majority of people have stayed financially stagnant, or have gone down, the common people are pissed off.  The average people have had enough, and we've been seeing the beginnings of a worldwide populist movement.  The people, in the U.S., and everywhere, are remembering they have the numbers, and ultimately, the strength, to change things to a more fair system. It's never pretty, and it can be brutal (like in Hong Kong at the moment), but it will keep happening.

On yet another level, America has been built on the idea of common people as business people.  Originally (after stealing the country from the Indians), Americans were farmers, traders, and shopkeepers, creating their own destiny.  Born in the early stages of the Industrial Age, America saw, and dominated, in the rise of the factories, and reigned as a super power in the late Industrial Age.  But with that came the rise of jobs, and most Americans went from being small businesses in the late 1800's (whether a farmer or shopkeeper), to being workers, punching a time clock ,and relying on a paycheck.  Now, with the rise of new technologies over the last 50 or so years, many Americans are turning back into entrepreneurs again, or trying to.  So that's another major shift that's happening.

Another transition is that we've been a country that looked up to the business people for 350 years.  But now the common people are rising, and standing up to the large scale corruption in many businesses, and other institutions.  As that rise bubbled under the surface, a new mentality has been rising to dominate the American collective psyche.  This is what P.R. Sarkar, philosopher and theorist from India, calls "The Warrior Mentality."  These are people who prize physical abilities and courage, more than the salesmanship and manipulation of Industrial Age business culture.

People doing scary and courageous shit have been slowly and quietly rising up in stature for several decades now.  Some of these people are the obvious, when you think of the core values of courage and physical ability, the soldiers, police, firefighters, and professional athletes.  We all know these jobs take physical ability, and courage, at different levels.  But courage is also needed, and demonstrated, by action sports athletes, activists, artists of all kinds, pioneers of all kinds, and entrepreneurs.

The Warrior Mentality is becoming the dominant mentality, and the wishy washy fence sitters are getting the boot.   This is why nearly all of us hate most of our old school politicians these days, no matter what political party you belong to.  Our long term politicians are schemers who will flip at the drop of a hat, they are not leaders.  As all of this chaos happens, the average people are looking for courageous leaders, or (as we've unfortunately learned the hard way in the last couple of years), people that pretend to be courageous leaders, and can con a large part of society into following them.  But those types show their true colors soon enough, and most people see through them before too long.  Ultimately, the truly courageous, they will become our new leaders, in business, in political circles, and in other organizations.

So, in my geeky, big picture view, all of these forces and changes are coming together to make this next recession a time of incredible change.  And incredibly scary.  That's where the courage part comes in.  I think this next economic downturn, which will be severe, as the major shakeout of our lifetime.  A lot of major change will happen in a short amount of time.

Like the phoenix, one thing after another that we know well, will burst into flames and die off.  That will be catastrophic on many levels, and painful for many people.  But this is all to make way for new things that are, and will continue to be, born.

Welcome everyone, to The Phoenix Recession.

Why the Western world's economy is on the verge of the biggest collapse of our lives...

Yeah, yeah, yeah... massive debt... blah... blah... negative interest rates... blah blah.  $124 TRILLION in unfunded liabilities?  And we have a $20 Trillion economy.  Uh Oh. 

U.S debt clock.   Over $125.6 trillion now.  Bottom right on the debt chart page.

The accounting fraud allegations against GE... and why I care about them

Here's an interview with Harry Markopolos, whose team just published a 175 page report alleging serious accounting fraud at GE, one of the biggest and oldest companies in the U.S..  

This blog was set up mostly to share ideas that would help people either start a new business, or build small businesses.  The blog is also to share my ideas on the Big Picture of our world, our economy, and where I see things going from that perspective.  Since I was a little kid, I've been fascinated with trying to figure out what the future will be like.  I wasn't a kid dreaming about interstellar space travel or sci-fi stuff.  It was more that I just kind of naturally looked into the future, and wanted to figure out what the world would be like then, so I could kind of plan my life accordingly. OK, my life got derailed, basically, but I'm still a futurist.

When I moved to Southern California in 1986, with my first real job at a couple of BMX magazines, at age 20, the real estate market was rocketing up.  Everyone was talking about real estate, and I started watching the "get rich in real estate" infomercials every Saturday morning.  Initially that started as just wanting to make a bunch of money as a young gu,y so I could pretend to be cool and get laid a lot, like most young guys dream of. 

But it later turned into a fascination with economic trends, market trends, social trends, technological trends, and trying to figure which were most important when looking into the future.  Which of the thousands of economic and social forces out there were most important for figuring out where the world was really going?  That's what I was trying to figure out.  I began to watch the stock market day to day, and see what happened, and then try to figure out why it happened.  I read a lot of books on real estate, and then other business books, and kept reading and self-educating for the 30 years since.  My life has gone to some crazy places, and I was never to fully financially take advantage of what I've learned in these areas.

Over the last few years, after the economy had grown after The Great Recession, I began to wonder when the next recession would come along, and what it would look like.  As I looked deeper into this, I found this crazy convergence of a whole bunch of super long term trends, traditional trends, and completely new factors.  It became apparent to me that this next financial downturn would be worse than 2008. If you want to get a better idea of the weird array of trends and forces I look at, go back and read the last post.

In any case, as we get closer to the critical points of this next downturn, I knew there must be some company out there that would play a role similar to the role that (the now long gone) investment banks Bear Stearns and Lehman Brothers played in 2008.  The economy had been in trouble for months, and big bubbles were getting ready to pop, when Bear Stearns suddenly went belly up in March of 2008.  That really shook people up.  The sub prime mortgage crisis was a huge factor in this collapse, but not the only factor.

But the economy trudged along after that, or seemed to.  The stock market managed to go up for a couple of months afterward.  Then things really started to unravel, overleveraged positions hit sketchy and over confident investors hard, and in September 2008, the 158-year-old investment bank, Lehman Brothers, went bankrupt.  That collapse hit the financial world like a 9.0 earthquake, and the U.S. economy, and much of the world's economy, went into a horrible collapse. 

Much of the U.S., primarily rural areas and small towns, have never really recovered.  The stock market began to trend upward in early 2009, but the collapse in share prices took millions of people's retirements, and large portions of their wealth.  Average investors were gun shy, for good reason, about buying stocks again.  Now we're in the verge of a similar crisis, one that looks to me like it will be much worse than 2008, in the long run.

So as I was wondering what company out there had been doing shady stuff to make its numbers, and wondering who might become the "Lehman Brothers of this crisis," this major report drops yesterday, alleging massive accounting fraud at GE.  I read the first two pages (of 175) of the report yesterday, and that gave me the impression that these allegations were very serious, and not just some random guy making stuff up.  I just listened to this interview above, and now it seems even more serious.  It looks like GE is in serious trouble.  So here are the things I find most interesting about all this.

"Seven and a half months of our own time and money, no one paid us to do this."

-Harry Markopolos in the interview above.  His team gets paid later in three ways, the SEC whistleblower program, the Dept. of Justice, and things like the arrangement with a hedge fund that's been mentioned.

-Harry Markopolos and his team self-financed this report.  The unnamed hedge fund didn't pay them to take on this project.  One way they will get paid back is by the SEC whistleblower program, years from now.  That means that at the beginning of this 7 1/2 month project, they thought there was enough wrongdoing to be found, to make it worth the while to take this project on.  That means they really thought there was a lot of wrongdoing to find.

-Markopolos was the guy who discovered the Bernie Madhoff Ponzi scheme fraud, a story that broke back in 2008, a scheme that followed a lot of sophisticated investors for many, many years.  You can get a brief version of the story here (it even mentions Markopolos).  So Markopolos and his team are no joke, they know how to find shady accounting and fraud.

-Markopolos and his team discovered issues with GE's long term care insurance while investigating another insurance company, it wasn't like they just said, "Hey, let's take out GE." There had been rumors about shadiness at GE since the 90's, and when they learned how the other insurance company cooked its books, it looked like GE may be doing something similar, which encouraged them to look into the company in a more in depth way.

-There are things this investigative team found that are not in the report, and went straight to law enforcement.  So they found evidence of illegal actions, serious enough to justify a serious look, and likely other investigations, by some level of law enforcement.

-Mr. Markopolos is smart and well informed on camera, but he's obviously not a professional on air personality.  As someone who's worked in TV years ago, I think that comes across in the interview.  He's all about the facts, he knows what he can and can't say, but he's just laying the facts out.  If this was a well planned public relations (aka P.R.) campaign, and the point was just to manipulate the stock market, or even to destroy GE, this would look completely different.  And... the guy's on Yahoo Finance, which, let's face, nobody watches most of the time. 

In a major P.R. campaign, there would be several people on multiple, major business networks, all of them would be very good looking and very good at speaking on camera, and would be repeating the same talking points over and over.  In other words, it would be the kind of mass propaganda we (well maybe you, I don't watch full scale propaganda as a rule) see every day on some news networks. 

The real P.R. campaign, the organized response by a team hired by GE, no doubt,  has kicked off today (the day after the interview above), with business news quoting Goldman Sachs "experts" and others.  If you want to know the truth about anything financial, the last "expert" you listen to is one from Goldman Sachs.  Hey, they do know finance, that's for sure, but they're the company whose people move often into government positions to work directly on behalf  Wall Street and Big Business, creating policies to help them.

So, in my humble opinion, these really are some serious accusations, and my bet would be on longtime corporate giant, GE, going bankrupt in 2-6 months or so.  I think the ultimate amount of fraud found will go far beyond the $38 billion alleged by Markopolos and his team.  He says he thinks what they've found is just the tip of the iceberg, I'm beginning to think he's right about that.

This leads to the next question, what is GE these days?  GE is a huge corporate conglomerate that started in 1892.  The company, according to Wikipedia has 283, 000 employees, so there may be a slight surge in resume's on Indeed next week. And next month.  And next year. To put that workforce in perspective, GE has more employees than the combined populations of Dayton, Ohio, Norton, Ohio, Massillon, Ohio, Coshocton, Ohio, Mansfield, Ohio, Shiloh, Ohio, Willard, Ohio, and Carlsbad, New Mexico.  Those are eight of the cities I lived in growing up, because my family moved too damn much.

GE has a whole list of subsidiaries, most of the names of which start with "GE."  Not too creative, definitely not as creative as their bookkeeping is alleged to be.  You can check out the subsidiary list here.  GE had an annual revenue of $121.6 billion in 2018, and an operating income of $ -20.72 billion.  (Well THERE'S your problem.)  They are also listed as having assets of $309.129 billion.

If these allegations prove true, which seems likely, the future trouble of GE is going to affect A LOT of people in a lot of places in a lot of industries.  After doing the basic research for this blog post, I think the issues apparently troubling GE could go well beyond a "Lehman Brother" incident.  With their huge workforce and operations all over the world, this looks more like the makings of an AIG-type crisis, because the ripple effects of big trouble at GE will be astronomical. 

In the meantime, expect GE to officially deny everything in public, and to see lots of pro-GE interviews and articles in the business media, if you watch the business media.  That's the P.R. campaign to make things look fine, while the top brass at GE tries to find out what's really going on, and how bad things might actually be there.  Most importantly, the top executives need to try to keep there asses from getting hit with criminal charges, and to get out with tens of millions in golden parachutes.  On this website, we can see that six top executives at GE get $7 to $16 million a year in compensation, as of fiscal 2019. 

We'll see what happens, but it appears that revelations of trouble at GE are just getting started.  If these troubles do turn out to be true, there will massive ripple effects throughout the business world, and U.S. economy.  Another question is, are there other companies out there that have been doing shady stuff, or have been using far too much leverage to try to optimize profits?  Undoubtedly, there are.  Are we going to see other large companies getting into major troubles as we head into the next recession, whenever it starts?  It's likely we are.  One really big company going bankrupt could spark a collapse, something like 2008, and now 125-year-old GE, the former General Electric, is a company to keep an eye on in the next few months.