I. U.S. Markets
2011 should be another good year for U.S. stocks, with S&P 500 returns in the range of 10%. This will occur in spite of enormous challenges, including still high-debt loads for consumers and governments (federal, state, and local), high unemployment, a moribund housing market, and rising long-term interest rates. Corporations are in good shape: debt loads are manageable, profits have bounced back from the nadir (after 7 consecutive quarters of declining profits through the third quarter of 2009, we have now had 5 consecutive quarters of increasing profits through 2010), and strong growth overseas is offsetting slow domestic growth. U.S. GDP will grow in the 3% range. This represents anemic growth for this stage of an economic recovery, where GDP should be growing in the 5% range. This shortfall is the direct result of the over-leveraging hangover of the past decade. Sub-par economic and employment growth will be the result for many years to come.
The tax compromise reached during the lame-duck Congress in December, 2010 provided some juice to the stock market and will aid economic growth slightly over the next two years, at the expense of the federal budget deficit. This compromise bill was the correct course of action based purely on economics, regardless of the politics involved. Sound economic policy necessitates that a federal government run deficits during recessions and surpluses during economic booms. This provides a counter-cyclical stabilizing force (along with Federal Reserve interest rate policy) on the economy. A good blueprint for this happened in the late 1990’s, which provided the first U.S. federal budget surplus since the early 1960’s. Reduced tax rates enacted in 2001 were also appropriate since that was a period of weak growth. The breakdown in federal tax policy happened during the economic boom years of 2004-2007, where the U.S. budget deficit never got above 3% of GDP at its peak. If we had run a surplus during these boom years our nation would be in a much stronger fiscal and economic situation today. Subsequent to the economic boom, the deficit eroded to ~10% of GDP along with the economic depression of 2008-2009, leaving the U.S. economy in a severely weakened state with few options.
The third year of the presidential cycle has historically been the best year for stock returns, and has generated only one negative return since WWII. The reason for this pattern is that the party in power wants to put policies in place in the third year so that those policies have time to work so they can retain power in the fourth year. Although I predict U.S. stock markets will increase in 2011, it will be accompanied by significant volatility. The Federal Reserve’s $600B quantitative easing program #2 is scheduled to end in June, 2011.
The best U.S. investment category in 2011 will be in the microcap area (stock market capitalization under $1.0B) and large-cap (>$10B) areas. Mid-cap ($2.5B-$10B) and small-cap ($1.0B-$2.5B) categories dominated in 2010. Microcap companies could not easily obtain credit from risk-averse bankers in 2009 and 2010, so they may be ready to finally have their day in the sun. Also, large-cap stocks have been held back the past two years by the banks. Banks returns have been miserable due to their exposure to bad loans emanating from residential mortgages and commercial real-estate. That is slowly beginning to turn around to the point that large-cap company returns should at least equal that of mid and small-caps in 2011. It’s the micro-cap area that provides the best potential in 2011 as unappealingly low interest rates more investor tolerance for risk, coupled with better access to credit make these tiny companies attractive.
The long-term outlook for U.S. stocks is not good. Growth in the U.S. should be anemic for the next decade as emerging economies become integrated with the rest of the world. The world economic pie is growing nicely, it’s just that our slice of it percentage-wise is getting smaller, causing painful adjustment in Japan, Europe, and the U.S., including falling real wages, de-leveraging, and GDP growth averaging 2.0% (instead of the post-WWII average of 3.0%). U.S. stocks look good in 2011, fueled by Federal Reserve liquidity and some bounce-back from the 2008-09 depression, but after that stocks start to look a bit dicey. Higher inflation in the out years coupled with slower growth will almost certainly lead to a contraction in P/E ratios. The current S&P 500 P/E ratio of 14 represent the post-WWII average. However, profit margins are close to a peak. Higher business input costs from rising commodities and hiring (good for the unemployed) will shrink profit margins soon. Single digit P/E ratios are historically not uncommon at all
Stock market cycles generally last approximately 20 years, and a secular bear market started with the internet bubble bursting in 2000. I believe we have about 7-9 more years of generally side-ways action in U.S. stocks between the 2007 S&P 500 high of 1550 and the 2009 low of 700 (1285 currently). So enjoy it while it lasts!
Bond markets in the U.S. had a volatile year in 2010 as anemic economic growth and Federal Reserve policy clashed with fears of incipient inflation. Junk bonds outperformed Treasury bonds slightly as fears of corporate default subsided. Fears of municipal default increased however, causing the municipal bond market to be the most volatile. Interest rates should slowly rise for the next few years, but not in a straight line, which translates to bouts of volatility. This means that bonds will return slightly less than their coupons in 2011: Low single-digit returns for the Treasury market, 5% for the municipal market and high-grade corporate market, and high single-digit returns for junk bonds.
II. Foreign Stock Markets
The three categories of foreign stock markets are: Developed (Europe, Taiwan, South Korea, and Japan), Emerging (China, India, Brazil, Russia, Indonesia, Mexico, Chile, Thailand, South Africa, etc.), and Frontier (tiniest markets in Africa, Middle East, Eastern Europe, South America, and Asia, such as Vietnam, Qatar, UAE, Nigeria, Columbia). The liquidity binge propagated by developed country central bankers is slowly migrating toward riskier assets due to unrewarding domestic interest rates and increased confidence in the world economy and banking system. Frontier market stocks were the place to be in 2010, and will repeat that feat in 2011. These markets returned ~35% in 2010 (tickers FFD and FRN). While these returns probably won’t be repeated in 2011, I expect returns in the 25% range. Emerging markets returned ~16% (tickers EEM and VWO) generally in 2010, but this value is comprised of a wide range of individual country returns. The weakest emerging market in 2010 believe it or not was China, with a return of ~3%. I expect China to do better in 2011, with returns in the 10-15% range. The strongest emerging stock markets in 2010 were in Indonesia (+40%, ticker IDX), Thailand (+50%, ticker THD), and Malaysia (+35%, ticker EWM). These returns will not be repeated in 2011 because inflation is starting to become a problem in these rapidly growing countries. Their governments are raising interest rates to combat rising prices. They are also putting restrictions on a destabilizing flood of foreign investment inflow from around the world.
One European market I like in 2011 is the Irish market. It was labeled as one of the PIIGS (over-indebted countries of Portugal, Ireland, Italy, Greece, and Spain) in 2010 and performed like a pig (down 3% when most countries experienced ebullient stock markets). The Irish have taken pretty tough austerity medicine in their federal budget and borrowed money from the EU for their banks. The market is extremely unloved, which is music to a contrarian’s ears.
III. Commodities
In general, 2010 was a good year for commodities. The broad-based commodities ETF basket (ticker DBC) was up 12% in 2010. As always with commodities, though, this overall return is comprised of a wide range of individual returns, such as palladium (ticker PALL, +79%), silver (ticker SLV, +82), gold (ticker GLD, +29%), agricultural products (ticker JJA, +38%), oil (ticker USO, -1%), and natural gas (ticker UNL, -36%). I believe these returns are part of a long-term secular trend that is based on the desires of the world’s 4 billion poor people to join the middle-class, and therefore should continue for many years, though not at the same torrid pace. In 2010 a decline in the value of the U.S. dollar juiced returns for commodities because most of them are priced in dollars (so you need more dollars to buy the same amount of commodity). I don’t expect this same tailwind in 2011 (see part IV). As is always the case with commodities, there will be huge divergences in returns. I believe the most likely winners in 2011 will be in the agricultural complex because better food is one of the first things that poor folks want when they have disposable income, and these products are much more vulnerable to unpredictable weather patterns. Most other commodities should rise in 2011, though not at the rate of 2010. I expect a volatile year for precious and semi-precious metals, including gold, silver, platinum, and palladium, with final returns up ~15%, after some huge swings and with possibly a blow-off high during the first half of the year.
The energy complex should be higher in 2011 by ~10%, with higher global economic growth outweighing abundant oil and natural gas supplies and a generally higher dollar. Oil prices should exceed $110/barrel in 2011.
The rare-earth metals complex (lanthanum, neodymium, yttrium, etc.) is a very interesting area. China mines most of the world’s rare-earths. They have made noise about restricting exports to make sure domestic demand is met. This sent the world rare earth markets (ticker REMX) into a tizzy and sent some of the western rare-earth miners stocks’ soaring. Expect more volatility in 2011, with announcements from western miners and the Chinese alternately roiling rare-earth markets.
IV. Currencies
Currency movements are driven primarily by perceived sovereign economic management, relative interest rates, and balance of trade. The U.S. dollar was abused in 2010 by the Japanese yen, Canadian and Australian dollars, and the Swiss franc, due to their perceived economic and banking stability. The U.S. dollar held its own against the euro and the British pound in a race to the bottom in 2010, as all three economies had major problems with excessive sovereign debt and anemic economic growth. The Chinese finally started to allow the yuan to appreciate at mid-year, albeit at a slow pace of ~5% per year. This should continue into the foreseeable future. This rate of yuan appreciation is not enough to make a significant impact on China’s huge trade surplus. The Chinese may increase the rate of yuan appreciation to tame domestic inflation (which is currently running at ~5%), not to appease foreign pressure on the trade front. If this happens it will be in the second half of the year.
I believe the U.S. dollar will appreciate against the euro, pound, and yen in 2011 by 5-10% due to rising interest rates and relatively better economic growth in the U.S. The U.S dollar should stay flat against the Canadian and Australian dollars in 2011 because these currencies appreciated in 2010 and are now at or near parity with the U.S. dollar, which is a level that will start to pinch their economies if it continues.
V. Final Tally on 2010 Predictions
I predicted last year that the U.S. unemployment rate would stay above 9%. It ended 2010 at 9.4%. I predicted U.S. stocks would return “high single digits” in 2010, which was low. The S&P 500 returned ~15%. I predicted junk bonds would return 9% in 2010, and they returned 12%. I predicted that natural gas prices would stabilize in 2010, but the increased supply from shale drilling has continued to weigh on natural gas in spite of good demand. I was a year early, as this same prediction should hold in 2011.
I predicted at the beginning of 2010 that gold and gold-mining stocks were a “good buying opportunity.” Gold was up 29% in 2010 and gold-mining stocks increased by 33%. Finally I predicted that the U.S. dollar would appreciate against the euro, pound, and yen in 2010 and depreciate against the Canadian and Australian dollars. I got three of five correct, as the dollar fell against euro and yen.
Thursday, January 13, 2011
Monday, July 26, 2010
Manage the U.S. Economy Based on Sound Economics, Not Politics; Debunking the Myths about Federal Budget Deficits
Aren't you sick and tired of the spin and half-truths that corrupt the debate about the U.S. economy, taxes, spending, and the budget deficit? Do you feel that you can't believe anything that any politician or their hacks in the media say because ideological spin makes it impossible to engage in truthful, honest debate? What we need are pragmatic, centrist adults to govern our economy.
Here's the lowdown based on sound economics and facts, not politics:
1. Federal budget deficits are ok during a recession, even preferable. Economies are cyclical, because they are based on human behavior and therefore subject to greed, fear, short-sightedness, and all the foibles of humans. Maintaining federal spending while private spending and tax revenues are in decline is ok, as long as it is off-set by a corresponding surplus.
2. The problem with the federal budget deficit really comes during growth periods, not recessions, because politician do not raise tax rates during the booms and therefore run a surplus. The one exception to this rule was during the late 1990's, when tax rates were maintained or raised slightly during a period of strong economic growth. Guess what, we ran a federal budget surplus for the first time since the early 1960's! I remember people opining about what would happen to the world economy without U.S. Treasury Bonds as an investment option. Yea right!
3. There are structural issues, namely (in the order of importance) Medicare and Social Security that go beyond the cyclicality of the U.S. economy and it's influence on budget deficits. Look at what happened to companies such as GM and Chrysler, as well as governments such as Greece, and many others that don't manage their long-term commitments prudently. Structural deficits must be addressed politically, preferably by a bi-partisan commission with teeth.
An additional area that is ripe for reigning in the budget deficit is plugging the thousands of loopholes in the tax code (such as the mortgage interest deduction, which also contributed to the housing bubble, and should be known as the Bank-Handout law).
4. I propose that we establish a realistic baseline for U.S. long-term economic growth, say 2-2.5%. This would be done by economists, not politicians. If economic growth exceeds the baseline, individual income taxes and individual capital gains taxes would rise on a graded scale. The more we exceed the baseline, the higher the tax rates go (up to a maximum). If economic growth is sub-par and below the baseline, then individual income taxes and individual capital gains tax rates automatically decline.
I purposely excluded dividend taxes from this scenario because earnings are already taxed at the corporate level before they are paid out to shareholders. I also excluded corporate tax from the equation because corporate long-term planning (e.g. hiring) tends to be more sensitive to tax rates.
These proposals would make the Federal Reserve Board's job much easier because the Fed's main policy tool of raising interest rates during "excessive" growth and lowering rates during recessions would be naturally complemented by individual income tax rates. Additionally, these tax rates would naturally fight asset bubbles such as the technology stock boom and the housing boom because if people have to pay higher capital gains taxes, they may think twice about buying into a "mania." These proposals provide a natural brake on speculative activity, put our economy on a sound, long-term growth trajectory, and are fair to all our citizens.
One last thing that has to be debunked, namely this idea that lowering tax rates raises revenue for the U.S. Treasury via increased economic activity. What nonsense! There is no economic evidence for this assertion, but I hear it all the time, mainly from ideologically-oriented talking heads. To take this argument to it's natural conclusion, why not just decrease tax rates to zero, the ultimate stimulus. How much money would flow into the Treasury. Exactly ZERO!
Here's the lowdown based on sound economics and facts, not politics:
1. Federal budget deficits are ok during a recession, even preferable. Economies are cyclical, because they are based on human behavior and therefore subject to greed, fear, short-sightedness, and all the foibles of humans. Maintaining federal spending while private spending and tax revenues are in decline is ok, as long as it is off-set by a corresponding surplus.
2. The problem with the federal budget deficit really comes during growth periods, not recessions, because politician do not raise tax rates during the booms and therefore run a surplus. The one exception to this rule was during the late 1990's, when tax rates were maintained or raised slightly during a period of strong economic growth. Guess what, we ran a federal budget surplus for the first time since the early 1960's! I remember people opining about what would happen to the world economy without U.S. Treasury Bonds as an investment option. Yea right!
3. There are structural issues, namely (in the order of importance) Medicare and Social Security that go beyond the cyclicality of the U.S. economy and it's influence on budget deficits. Look at what happened to companies such as GM and Chrysler, as well as governments such as Greece, and many others that don't manage their long-term commitments prudently. Structural deficits must be addressed politically, preferably by a bi-partisan commission with teeth.
An additional area that is ripe for reigning in the budget deficit is plugging the thousands of loopholes in the tax code (such as the mortgage interest deduction, which also contributed to the housing bubble, and should be known as the Bank-Handout law).
4. I propose that we establish a realistic baseline for U.S. long-term economic growth, say 2-2.5%. This would be done by economists, not politicians. If economic growth exceeds the baseline, individual income taxes and individual capital gains taxes would rise on a graded scale. The more we exceed the baseline, the higher the tax rates go (up to a maximum). If economic growth is sub-par and below the baseline, then individual income taxes and individual capital gains tax rates automatically decline.
I purposely excluded dividend taxes from this scenario because earnings are already taxed at the corporate level before they are paid out to shareholders. I also excluded corporate tax from the equation because corporate long-term planning (e.g. hiring) tends to be more sensitive to tax rates.
These proposals would make the Federal Reserve Board's job much easier because the Fed's main policy tool of raising interest rates during "excessive" growth and lowering rates during recessions would be naturally complemented by individual income tax rates. Additionally, these tax rates would naturally fight asset bubbles such as the technology stock boom and the housing boom because if people have to pay higher capital gains taxes, they may think twice about buying into a "mania." These proposals provide a natural brake on speculative activity, put our economy on a sound, long-term growth trajectory, and are fair to all our citizens.
One last thing that has to be debunked, namely this idea that lowering tax rates raises revenue for the U.S. Treasury via increased economic activity. What nonsense! There is no economic evidence for this assertion, but I hear it all the time, mainly from ideologically-oriented talking heads. To take this argument to it's natural conclusion, why not just decrease tax rates to zero, the ultimate stimulus. How much money would flow into the Treasury. Exactly ZERO!
Monday, February 1, 2010
2010 Global Financial Market Prediction
I. US Markets
US stock markets in 2010 will be hostage to three forces: inflation, Federal Reserve policy, and the economy. The economy is almost guaranteed to be weak, which means unemployment will remain high (>9 %). In spite of rampant money supply growth around the world, the weak US economy will keep inflation in check this year. That means the main driver will be the Fed. The Fed has acknowledged that it is preparing to remove some of the exceptional quantitative monetary easing of the past 1.5 years. This will create a choppy stock and bond market, but it appears that this will happen gradually and with plenty of warning so as not to upset markets too much. Hence the economy’s fragile recovery should remain intact. This should lead to high single-digit returns in the US stock market in 2010. One exciting secular investment area for the next few years is in the area of water resources. Fresh, clean water will only grow in importance and scarcity over the next decade and beyond as the world population increases, and rivers, lakes, rainfall, aquifers, etc. become depleted or polluted.
Corporate earnings will continue to grow slowly in a weak economy in 2010, although they will have favorable comparisons to last year’s weak numbers. The stock markets snapback from last year’s panic lows is now over. Further gains in 2010 will be predicated on accommodative Fed policy that renders safe alternative investments such as money market funds, CD’s, and treasury bonds unattractive. Bankruptcies are still growing in the corporate sector, but the junk bond market discounted a depression in 2008, and it turned out to be “only” a Great Recession. This “upgrade” accounted for sterling junk bond returns in 2009, but will not be repeated. One can expect to collect the coupon from junk bonds in 2010 (~9% depending on the credit risk) at best, with minimal appreciation. Treasury bond investments are only be for the most risk-averse in 2010. The monster rally in Treasuries in 2008 and early 2009 was a pure flight-to-quality, and has left yields at historically low levels (3.6% for a ten years).
Economic growth will be inhibited by weakness in real estate markets, including both commercial and residential. Foreclosures in both markets are still growing. Residential foreclosures have migrated from sub-prime where they started to prime markets. Residential markets are closer to healing because the market crashed remarkably quickly in 2008. Commercial real estate markets are experiencing a slow-motion meltdown, mainly due to the nature of long-term leases and the reluctance of banks to take big write-downs. It is a bit early to invest in commercial real-estate, but the time may be getting close to start picking through some of the carnage. Publicly-traded REIT’s actually are faring pretty well, all things considered, because they were restricted by securities laws from over-leveraging like some of the private companies. Therefore this year may be a good time to begin accumulating commercial real-estate investments on weakness.
The world economic pie will continue to grow over the long-term, but it will be driven mainly by emerging markets and the desire of 4 billion poor people to achieve a higher standard of living for themselves and their children. The US’s percentage of the world economy will continue to shrink in the long-term as will all developed markets. This is an unstoppable secular trend and the US will adapt one way or the other. It is very important to understand that the US economy can still grow over the long-term at 2.0 %, but the relative size of the US economy compared to the rest of the world will shrink as the world economic pie gets bigger at rate significantly faster than 2.0%. Education will be a critical element for the US to ameliorate the effects of declining economic might, as well as sound economic management. The excessive borrowing of the past decade was a symptom of US citizens, corporations, governments, etc. desperately trying to maintain past standards of living and economic power. The two huge bubbles that we witnessed over the past decade in technology stocks and real-estate markets is another symptom of the same over-reaching to maintain dwindling economic power. One way or another the US will adapt to these secular trends and cede relative economic power to China, India, Brazil, and the many, many new economies with very high growth potential. This adjustment will include more competitive wages and technologies, more savings, and probably less dependence on the consumer to drive the economy. The US consumer accounted for around 70% in recent years, which is unsustainable. If the US doesn’t adapt quickly enough, world markets will impose discipline on the US through currency depreciation and the pain of market dislocation like we witnessed in 2008-09. Of course these secular trends do not bode particularly well for US stock markets over the next decade. Valuations are still not particularly cheap even after the meltdown in 2008-09. Over the next decade we can therefore expect single digit returns on average from US stocks.
II. Foreign Markets
Expect slow economic growth in developed markets of Japan and Europe over the next few years as these economies heal from the shock of financial meltdown in 2008-09. Japan’s declining population, persistent deflation, and huge budget deficit make Japan an unlikely place to make money in 2010. Europe is not a cohesive market, but a fragmented collection of individual markets. Countries such and Germany and France have manageable budget deficits, while Greece, Ireland, Spain, and Portugal have huge government debt problems. The UK is much like the US in terms of its banking problems as well as excessive government budget deficits. Since developed international markets represent approximately 45% of world stock market capitalization, portfolios should be exposed to these markets, but at a lower percentage.
Canada and Australia are similar in that they are both largely natural resource economies, with relatively sound banking systems. These countries have some of the best economic prospects amongst developed countries in 2010. Of course markets have already discounted these positive outlooks. However, these countries should be over-weighted relative to other developed markets in 2010.
Emerging markets are where the economic growth will be in 2010. China and India are projected to grow at around 9%, while Brazil, Indonesia, and Malaysia are projected to grow at around 5%. Eastern Europe is an interesting place because long-term prospects are good based on their proximity to the huge Eurozone, but excessive borrowing couple with last year falling currencies really put the clamps on near-term prospects. Russia falls into this same camp, with the additional plus of abundant natural resources, and the additional minus of excessive state control in the economy. One exciting area for investment in 2010 and beyond is in “frontier” markets, or markets a tier below “emerging,” since some of the emerging markets such as Brazil, China, South Korea, Taiwan, Hong Kong, and Singapore are becoming pretty large and well established. Frontier markets with high growth prospects include Vietnam, Thailand, some Middle-Eastern, South American, and African countries, as well as some of the better-managed Eastern European countries. Of course these countries carry high risk as well as the potential for high returns, and must therefore be managed appropriately.
III. Commodities
The world population is over 4.5 billion and growing. The vast majority of these people are poor, and have not had the opportunities that we take for granted in America. The introduction of capitalism and consumer economies to huge swaths of these folks will continue to fuel demand for natural resources for many years to come. Therefore commodities will continue to see increased demand in 2010 and beyond. This increased demand will not result in a boom period this year because of sub-par world economic growth, but will entail a gradual increase. Of course demand is only one side of the pricing mechanism. As long as producers can increase supply at a comparable rate, then prices will remain flat or even drop. A good example of this is illustrated by the natural gas market. Natural gas is positioned to be the energy source of the future. It is relatively clean-burning, especially compared to coal. Recent drilling advances in horizontal fracturing technologies have resulted in increased supplies for natural gas and much lower prices over the past year in spite of the rosy long-term outlook. This provides an attractive long-term investment thesis because of the environmental and energy advantages of natural gas. The price ratio of oil/natural gas is at an all-time high which should favor increased usage of natural gas relative to other energy sources over the next decade. Natural gas prices should stabilize or increase slightly in 2010, and continue to head higher in future years.
Gold and gold mining stocks had a stellar 2009, and have come under some pressure of late. This is a good buying opportunity due to three reasons: people are distrustful of financial assets due to the many excesses of the past few years, excessive money supply growth world-wide may lead to inflation if and when economic growth gets back on track, and commodities in general are likely to be in demand for the next decade.
IV. Currencies
What a wild ride for currencies in 2008 and 2009! The dollar was viewed as a safe-haven and therefore soared higher against practically all currencies during the panic of late 2008 and early 2009, then reversed and went into a huge slide as world markets stabilized during the last three quarters of 2009. In early 2010 the dollar is rising slowly once again and appears to be stabilizing at an equilibrium level. This pattern basically reflects similar patterns followed by most markets throughout the world followed over the past two years. Risk-based assets such as stocks, corporate bonds, real estate, sovereign debt and currencies from small or economically-weak countries cratered, while safe US treasury securities and the US dollar soared in a panic-driven flight-to-quality. All this in spite of the fact that the epicenter of the global financial meltdown was right here in the US! Now markets are reaching an equilibrium where future movements will be driven by fundamentals.
Currency movements are driven primarily by perceived economic management, relative interest rates, and balance of trade. The dollar should appreciate against the euro, the pound, and the yen in 2010. The Eurozone is such a fractured place economically with relatively well-managed economies like France and Germany commingled with basket cases like Greece, Spain, Portugal, and Ireland. The European Union cannot discipline wayward members easily, which puts the European Central Bank in a very precarious position. Britain has many of the same problems as the US, but the financial sector there accounts for a bigger portion of Britain’s GDP than in the US. And Japan has the biggest debt-to-GDP ratio of any developed country, a new left-leaning government, stagnant population growth, and a historical propensity to solve their economic problems with currency depreciation. The Canadian and Australian dollars were quite strong versus the US currency in 2009. They should hold onto those gains and possibly appreciate some more due to their well-managed banking systems, relatively low debt, and natural resource economies.
US stock markets in 2010 will be hostage to three forces: inflation, Federal Reserve policy, and the economy. The economy is almost guaranteed to be weak, which means unemployment will remain high (>9 %). In spite of rampant money supply growth around the world, the weak US economy will keep inflation in check this year. That means the main driver will be the Fed. The Fed has acknowledged that it is preparing to remove some of the exceptional quantitative monetary easing of the past 1.5 years. This will create a choppy stock and bond market, but it appears that this will happen gradually and with plenty of warning so as not to upset markets too much. Hence the economy’s fragile recovery should remain intact. This should lead to high single-digit returns in the US stock market in 2010. One exciting secular investment area for the next few years is in the area of water resources. Fresh, clean water will only grow in importance and scarcity over the next decade and beyond as the world population increases, and rivers, lakes, rainfall, aquifers, etc. become depleted or polluted.
Corporate earnings will continue to grow slowly in a weak economy in 2010, although they will have favorable comparisons to last year’s weak numbers. The stock markets snapback from last year’s panic lows is now over. Further gains in 2010 will be predicated on accommodative Fed policy that renders safe alternative investments such as money market funds, CD’s, and treasury bonds unattractive. Bankruptcies are still growing in the corporate sector, but the junk bond market discounted a depression in 2008, and it turned out to be “only” a Great Recession. This “upgrade” accounted for sterling junk bond returns in 2009, but will not be repeated. One can expect to collect the coupon from junk bonds in 2010 (~9% depending on the credit risk) at best, with minimal appreciation. Treasury bond investments are only be for the most risk-averse in 2010. The monster rally in Treasuries in 2008 and early 2009 was a pure flight-to-quality, and has left yields at historically low levels (3.6% for a ten years).
Economic growth will be inhibited by weakness in real estate markets, including both commercial and residential. Foreclosures in both markets are still growing. Residential foreclosures have migrated from sub-prime where they started to prime markets. Residential markets are closer to healing because the market crashed remarkably quickly in 2008. Commercial real estate markets are experiencing a slow-motion meltdown, mainly due to the nature of long-term leases and the reluctance of banks to take big write-downs. It is a bit early to invest in commercial real-estate, but the time may be getting close to start picking through some of the carnage. Publicly-traded REIT’s actually are faring pretty well, all things considered, because they were restricted by securities laws from over-leveraging like some of the private companies. Therefore this year may be a good time to begin accumulating commercial real-estate investments on weakness.
The world economic pie will continue to grow over the long-term, but it will be driven mainly by emerging markets and the desire of 4 billion poor people to achieve a higher standard of living for themselves and their children. The US’s percentage of the world economy will continue to shrink in the long-term as will all developed markets. This is an unstoppable secular trend and the US will adapt one way or the other. It is very important to understand that the US economy can still grow over the long-term at 2.0 %, but the relative size of the US economy compared to the rest of the world will shrink as the world economic pie gets bigger at rate significantly faster than 2.0%. Education will be a critical element for the US to ameliorate the effects of declining economic might, as well as sound economic management. The excessive borrowing of the past decade was a symptom of US citizens, corporations, governments, etc. desperately trying to maintain past standards of living and economic power. The two huge bubbles that we witnessed over the past decade in technology stocks and real-estate markets is another symptom of the same over-reaching to maintain dwindling economic power. One way or another the US will adapt to these secular trends and cede relative economic power to China, India, Brazil, and the many, many new economies with very high growth potential. This adjustment will include more competitive wages and technologies, more savings, and probably less dependence on the consumer to drive the economy. The US consumer accounted for around 70% in recent years, which is unsustainable. If the US doesn’t adapt quickly enough, world markets will impose discipline on the US through currency depreciation and the pain of market dislocation like we witnessed in 2008-09. Of course these secular trends do not bode particularly well for US stock markets over the next decade. Valuations are still not particularly cheap even after the meltdown in 2008-09. Over the next decade we can therefore expect single digit returns on average from US stocks.
II. Foreign Markets
Expect slow economic growth in developed markets of Japan and Europe over the next few years as these economies heal from the shock of financial meltdown in 2008-09. Japan’s declining population, persistent deflation, and huge budget deficit make Japan an unlikely place to make money in 2010. Europe is not a cohesive market, but a fragmented collection of individual markets. Countries such and Germany and France have manageable budget deficits, while Greece, Ireland, Spain, and Portugal have huge government debt problems. The UK is much like the US in terms of its banking problems as well as excessive government budget deficits. Since developed international markets represent approximately 45% of world stock market capitalization, portfolios should be exposed to these markets, but at a lower percentage.
Canada and Australia are similar in that they are both largely natural resource economies, with relatively sound banking systems. These countries have some of the best economic prospects amongst developed countries in 2010. Of course markets have already discounted these positive outlooks. However, these countries should be over-weighted relative to other developed markets in 2010.
Emerging markets are where the economic growth will be in 2010. China and India are projected to grow at around 9%, while Brazil, Indonesia, and Malaysia are projected to grow at around 5%. Eastern Europe is an interesting place because long-term prospects are good based on their proximity to the huge Eurozone, but excessive borrowing couple with last year falling currencies really put the clamps on near-term prospects. Russia falls into this same camp, with the additional plus of abundant natural resources, and the additional minus of excessive state control in the economy. One exciting area for investment in 2010 and beyond is in “frontier” markets, or markets a tier below “emerging,” since some of the emerging markets such as Brazil, China, South Korea, Taiwan, Hong Kong, and Singapore are becoming pretty large and well established. Frontier markets with high growth prospects include Vietnam, Thailand, some Middle-Eastern, South American, and African countries, as well as some of the better-managed Eastern European countries. Of course these countries carry high risk as well as the potential for high returns, and must therefore be managed appropriately.
III. Commodities
The world population is over 4.5 billion and growing. The vast majority of these people are poor, and have not had the opportunities that we take for granted in America. The introduction of capitalism and consumer economies to huge swaths of these folks will continue to fuel demand for natural resources for many years to come. Therefore commodities will continue to see increased demand in 2010 and beyond. This increased demand will not result in a boom period this year because of sub-par world economic growth, but will entail a gradual increase. Of course demand is only one side of the pricing mechanism. As long as producers can increase supply at a comparable rate, then prices will remain flat or even drop. A good example of this is illustrated by the natural gas market. Natural gas is positioned to be the energy source of the future. It is relatively clean-burning, especially compared to coal. Recent drilling advances in horizontal fracturing technologies have resulted in increased supplies for natural gas and much lower prices over the past year in spite of the rosy long-term outlook. This provides an attractive long-term investment thesis because of the environmental and energy advantages of natural gas. The price ratio of oil/natural gas is at an all-time high which should favor increased usage of natural gas relative to other energy sources over the next decade. Natural gas prices should stabilize or increase slightly in 2010, and continue to head higher in future years.
Gold and gold mining stocks had a stellar 2009, and have come under some pressure of late. This is a good buying opportunity due to three reasons: people are distrustful of financial assets due to the many excesses of the past few years, excessive money supply growth world-wide may lead to inflation if and when economic growth gets back on track, and commodities in general are likely to be in demand for the next decade.
IV. Currencies
What a wild ride for currencies in 2008 and 2009! The dollar was viewed as a safe-haven and therefore soared higher against practically all currencies during the panic of late 2008 and early 2009, then reversed and went into a huge slide as world markets stabilized during the last three quarters of 2009. In early 2010 the dollar is rising slowly once again and appears to be stabilizing at an equilibrium level. This pattern basically reflects similar patterns followed by most markets throughout the world followed over the past two years. Risk-based assets such as stocks, corporate bonds, real estate, sovereign debt and currencies from small or economically-weak countries cratered, while safe US treasury securities and the US dollar soared in a panic-driven flight-to-quality. All this in spite of the fact that the epicenter of the global financial meltdown was right here in the US! Now markets are reaching an equilibrium where future movements will be driven by fundamentals.
Currency movements are driven primarily by perceived economic management, relative interest rates, and balance of trade. The dollar should appreciate against the euro, the pound, and the yen in 2010. The Eurozone is such a fractured place economically with relatively well-managed economies like France and Germany commingled with basket cases like Greece, Spain, Portugal, and Ireland. The European Union cannot discipline wayward members easily, which puts the European Central Bank in a very precarious position. Britain has many of the same problems as the US, but the financial sector there accounts for a bigger portion of Britain’s GDP than in the US. And Japan has the biggest debt-to-GDP ratio of any developed country, a new left-leaning government, stagnant population growth, and a historical propensity to solve their economic problems with currency depreciation. The Canadian and Australian dollars were quite strong versus the US currency in 2009. They should hold onto those gains and possibly appreciate some more due to their well-managed banking systems, relatively low debt, and natural resource economies.
Saturday, December 26, 2009
The Elephant in the Room
It's amazing that two crucially important aspects of health care reform in the U.S. have barely gotten notice in the recent debate. The first elephant in the room is that our society is unhealthy and getting worse. Is it a wonder that health care delivery costs are going up when 35% of the populace is overweight? It's perfectly predictable!
We live in a free society. No one should be forced to do anything. However, unhealthy eating habits, smoking, excessive alcohol intake etc, burden the nation’s healthcare system and our society at-large. A person leading an unhealthy lifestyle should pay a higher insurance premium. Conversely, a person leading a healthy lifestyle (such as ideal weight, no smoking), should get a rebate or a lower premium. This would present a powerful incentive for people to lead healthy lifestyles, resulting in a lower health care cost burden for society. A car insurance analogy would be the case of a 16 year-old driver paying 3x the premium because they represent 3x the financial risk. The exact same logic applies for an obese person, particularly a smoker.
Additinally, companies that produce unhealthy products such as energy drinks (full of sugar), tobacco, alcohol, fatty-foods, etc. should pay an excise tax. Come on people! Childhood obesity is rampant. What kind of example are we setting for our kids! Recent non-partisan studies conclude that obesity costs our nation $120B (that’s with a B) a year from heart disease, cancer, diabetes, and lost productivity. This plan goes directly at the heart of healthcare reform and not just insurance reform, and would save huge costs because this is where huge costs originate. We live in a free country, but those freedoms should not be allowed to hurt others or burden society at-large. Health decisions tied to financial incentives are guaranteed to resonate with Americans. These initiatives could realistically be expected to save $100B per year, and result in a much healthier populace.
The second elephant in the room is out-of-control legal costs burdening our health and legal systems. Tort reform, such as mandating that lawsuit losers must pay the winners’ court costs, or capping awards for pain and suffering will not only reduce the number of trial lawyers trolling for clients, but will reduce the practice of defensive medicine. Medical practitioners use defensive medicine to prescribe unnecessary procedures in order to avoid lawsuits, not to enhance health. Estimates are that reducing the practice of defensive medicine along with lower malpractice premiums and excessive court judgments should realistically save $50B per year in unnecessary outlays.
These two elephants taken together save approximately $150B per year, enough money to expand coverage AND pay down the federal budget deficit.
We live in a free society. No one should be forced to do anything. However, unhealthy eating habits, smoking, excessive alcohol intake etc, burden the nation’s healthcare system and our society at-large. A person leading an unhealthy lifestyle should pay a higher insurance premium. Conversely, a person leading a healthy lifestyle (such as ideal weight, no smoking), should get a rebate or a lower premium. This would present a powerful incentive for people to lead healthy lifestyles, resulting in a lower health care cost burden for society. A car insurance analogy would be the case of a 16 year-old driver paying 3x the premium because they represent 3x the financial risk. The exact same logic applies for an obese person, particularly a smoker.
Additinally, companies that produce unhealthy products such as energy drinks (full of sugar), tobacco, alcohol, fatty-foods, etc. should pay an excise tax. Come on people! Childhood obesity is rampant. What kind of example are we setting for our kids! Recent non-partisan studies conclude that obesity costs our nation $120B (that’s with a B) a year from heart disease, cancer, diabetes, and lost productivity. This plan goes directly at the heart of healthcare reform and not just insurance reform, and would save huge costs because this is where huge costs originate. We live in a free country, but those freedoms should not be allowed to hurt others or burden society at-large. Health decisions tied to financial incentives are guaranteed to resonate with Americans. These initiatives could realistically be expected to save $100B per year, and result in a much healthier populace.
The second elephant in the room is out-of-control legal costs burdening our health and legal systems. Tort reform, such as mandating that lawsuit losers must pay the winners’ court costs, or capping awards for pain and suffering will not only reduce the number of trial lawyers trolling for clients, but will reduce the practice of defensive medicine. Medical practitioners use defensive medicine to prescribe unnecessary procedures in order to avoid lawsuits, not to enhance health. Estimates are that reducing the practice of defensive medicine along with lower malpractice premiums and excessive court judgments should realistically save $50B per year in unnecessary outlays.
These two elephants taken together save approximately $150B per year, enough money to expand coverage AND pay down the federal budget deficit.
Friday, December 25, 2009
Treatise on an Entropic, Infinitely-Dimensional Continuum, and the Origin of Our Universe
I. INTRODUCTION
What existed before the “Big Bang?” How did the physical laws of the universe come to be? Everyone has asked themselves these questions at one time or another. This treatise proposes answers to these questions and more. It is consistent with current state-of-the-art knowledge in physics, specifically in the areas of dark matter, dark energy, and the origin of our universe. Although not mathematically robust, it presents qualitative solutions to many of the most baffling questions. Of course these hypotheses raise questions while at the same time proposing solutions. This will continue to be the case for the next 200-2000 years (if the human species survives that long) until humans can overcome limited intellectual and natural resources to scientifically prove these theories. The hypotheses promulgated in this document arose from observations on the evolution of physics, knowledge of natural laws, and extrapolation.
II. CONTINUUM AND EVOLUTION OF UNIVERSES
An infinitely-dimensional Continuum spawned our universe 14 billion years ago. This event corrected instabilities created by entanglement of dimensions, and has occurred countless times before and after. Continuum drives everything, everywhere, and every-when. It is not composed of matter or energy, but of infinitely-dimensional entropy. Entropy is the propensity for matter and energy to randomly dissipate without doing work, or it can be thought of as a natural, random conspiracy against organization. The infinite dimensions within Continuum are not anchored, and therefore can become entangled as ripples of instability propagate within. These ripples of instability are in the form of waves, which are the “language” of Continuum, and therefore the “language” of all universes and all creation. Instabilities originate from entropic dimensional interactions, and also are influenced by feedback loops from the evolution and aging of existing universes. These feedback loops are specifically the result of vacuum energy, sometimes referred to as dark energy. Current M superstring theory mathematically predicts that eleven dimensions exist in our universe. If this state-of-the-art theory is correct, it was the result of eleven dimensions becoming entangled within Continuum somewhere around 14 billion years ago. This tension was relieved with the creation of countless strings of energy that were embedded in the event horizon of our budding universe. New instabilities are continually experienced in the Continuum again and again as inherent dynamism exerts itself. Since universes are in other dimensions, they cannot experience one another directly, but are under constant influence by Continuum and visa-versa, and thereby can influence other universes indirectly. Since the inherent state of Continuum is entropy and the dimensions are not anchored, there is propensity for reduced entanglement after tension and instability are relieved through the universe creation process. However, feedback loops created from universe(s) evolving and dying results in new dimensional entanglement and instability within Continuum. Our universe, for example, is predicted to expand into oblivion in 100 billion years or so. This process will cause ripples of instability in Continuum, thereby resulting in the spawning of new universes.
Initial conditions are specifically mapped by the tension and dimensional instability in Continuum into a new universe. The specific initial conditions needed to relieve tension and instability within Continuum are critically important because these conditions determine the number of dimensions, the number and type of strings created in a new universe, and the amount of vacuum energy. Initial conditions thereby irrevocably contain the blueprint for all subsequent physical laws. Initial conditions also contain perturbations or tiny non-uniformities that result in granularity. Granularity is the non-uniform expansion of a universe which eventually results in coalescence into galaxies, stars, solar systems and other structures as the universe expands and cools. Granularity allows a spawning universe to temporarily overcome entropy in order to produce structure. Of course this is only temporary because as universes evolve, age, and eventually die, entropy wins out.
Time has no meaning within Continuum, but entropy requires at least one time dimension in a budding universe. Since at least two dimensions must become entangled in order to spawn universe creation, one is always a time dimension, and the rest are space dimensions, although there is no reason there cannot be multiple time dimensions. Time is the first dimension to appear in a spawning universe because it is the dimension that imparts dynamism to a universe. Without time, a universe would be static and could not evolve and allow entropy to work its magic. The number of space dimensions is determined by the initial conditions at universe creation, and therefore could result in wildly different physical laws. This implies that many universes are bizarre, even hostile places that may relieve inter-dimensional stress in Continuum, but never spawn life of any sort. Entropy ensures that universe creation is a purely random event, and may or may not be conducive to intelligent life, or life of any sort. The number of dimensions and the initial conditions of a budding universe determines all physical laws, and thereby how the universe will age. Some universes could be short-lived. Others could be unimaginably long-lived. Our universe is purportedly around 14 billion years old, but since spacetime was so warped in the event horizon of our budding universe, time had little meaning. Our universe could be much, much, older. Even eternally old! Time has zero meaning within Continuum. It obtains meaning sometime after universe creation.
III. THE EVOLUTION OF OUR UNIVERSE AND PHYSICAL LAWS
Our universe was created in an infinitely small, energetic event horizon packed with strings of energy that began spontaneously expanding around 14 billion years ago with a specific set of initial conditions in order to relieve stress or instability within Continuum, specifically within eleven entangled dimensions if current M superstring theory is correct. These initial conditions laid out the blueprint for all physical laws in our universe, and contained tiny perturbations that led to subsequent granularity. After our universe began to expand and cool, granularity resulted in coalescence of galaxies, stars, solar systems, and all structures. Without these tiny perturbations emanating from the Continuum, our universe would expand uniformly and be devoid of structure. The effects of entropy are manifest throughout our universe. It is predicted to rip itself apart and disappear in 100 billion years or so. Entropy at work! The Heisenberg Uncertainty Principle states that we can only know probabilities for location of an electron if we are simultaneously measuring its angular momentum, and visa-versa. The very foundations of quantum mechanics are based on uncertainty and randomness. If you try to measure something at the quantum scale, you inherently change it so you can’t measure it! That uncertainty and randomness is entropy at work! String theory is the epitome of entropy at work. If state-of-the-art string theory is correct, our universe is seething with unimaginably small (around 10-33 cm) strings of energy moving about randomly, vibrating at various harmonic frequencies, thereby imparting all mass and force in the process.
One of the most important physical laws in our universe is the speed of light. Why does light always travel at 186,000 miles per second and no faster or slower in a vacuum? Why does an atomic mass unit always weight 1.6605 * 10-24 g? Why is the acceleration of gravity exactly 9.84 m/s2 at the surface of the earth? We are so used to these immutable laws that we mostly don’t question why? It’s because 14 billion years ago the initial conditions that resulted in these physical laws were precisely required to alleviate inter-dimensional tension and instability within Continuum.
Our universe is wonderfully and delicately balanced, with all physical laws interacting in a symphony that results in everything we see and experience. Our universe evolved from the moment of the “Big Bang” to harmonize all physical laws. Hypothetically if one important physical law was changed, it would upset the balance of all forces and require a new harmony to be achieved, possibly resulting in a dramatically different place. Therefore a universe with different initial conditions, different numbers of dimensions, amount of vacuum energy, etc. would be expected to have different physical laws, and through the harmony imposed through universe evolution, could be a radically different place than our universe. Can you imagine light traveling at 10 m/s, or radically different matter because protons and electrons have different structures, or gravity much stronger or weaker? Of course life may have never evolved in some of these universes, or it would be so foreign that we could not comprehend it, just as humans cannot understand multi-dimensionality. We have four dimensions that we experience every day: three in space and one in time. Current M superstring theory predicts a total of eleven dimensions, of which we can experience only four. The others operate at the quantum scale, and are required to unify the four force categories in our universe (strong, weak, electromagnetic, and gravity). It is conceivable that some universes have only one space dimensions (an infinitely long string), or more than eleven space dimensions, but all universes have at least one time dimension because time is required for dynamism to exist. One time dimension is required for an unknown number of space dimensions.
The fact that our universe ended up being conducive to development of life-forms was completely a random happenstance event. Just as life in our universe requires random events to come together and produce conditions for primitive bacteria to get a foothold, universe creation is a purely random event that may or may not produce conditions that allow life to spawn. Short-lived hostile universes may not produce intelligent life or any life at all, while universes such as ours contain favorable conditions for life to get a foothold, although prevalence is still a question.
Humans cannot easily comprehend dimensions greater than four. It may be that a second time dimension would allow a hypothetical person to “see” all history throughout the time course of a universe. The second time dimension contains all information about every event that ever happened to everything and/or everyone. Don’t bother lying! Another possibility is the existence of a greater than 11 space dimensions that are currently predicted by state-of-the-art physics in our universe, or more than 4 spacetime dimensions that could be experienced by intelligent beings. It’s possible that some universes contain orthogonal space containing interacting dimensions. If a person existed in this hypothetical universe, in addition to “seeing” normal three-dimensional space, they may “see” flat cross-sections of first-order orthogonal beings and structures. If another orthogonal space dimension existed, a hypothetical person might only “see” a straight string component of a second-order orthogonal being. It’s also conceivable that time dimensions are created for every so-many space dimensions, so that a universe that has 15 dimensions would require 2 time dimensions due to entropic constraints. A very strange place indeed, but maybe not strange at all for being that evolved there!
IV. DARK ENERGY AND IT”S LINK TO CONTINUUM
Dark energy currently represents a huge gap in current understanding of our universe. It is sometimes referred to a vacuum energy. It was imparted to our universe as a result of the initial conditions required to alleviate tensional instability within Continuum around 14 billion years ago. “Dark” simply means humans do not understand it. Dark energy is the force that is causing our universe to accelerate its expansion beyond what state-of-the-art physics predicts. Hence in 100 billion years or so our universe is predicted to accelerate to the point that every galaxy, star, planet, human being, molecule, and quark will be stretched and torn apart, a process that has happened many times already in many universes. Dark energy represents the link between our universe and Continuum. It represents the influence or pull of Continuum on our universe, and thereby is the link or our universe to countless others.
Dark matter may also represent the influence of Continuum on our universe. Matter that we can see by definition is creating or reflecting light. Dark matter causes excess gravity such that stars with such velocity that they should be spinning out of galaxies into the open void of space are instead held within galaxies. This excess unknown matter creates extra gravity that holds the outer stars in place. Galaxies generally are thought to have a black hole at their core. These are the ultimate arbiter of entropy. They randomly “disappear” any matter or energy that comes within range of their enormous gravity. They are one of the enforcers of Continuum’s entropic state. They also give off a wisp of Hawking radiation so that even the mightiest black holes will they themselves dissolve eventually through the effects of entropy. Black holes are strong enough to interact with Continuum, and thereby create excess gravity, and an explanation for dark matter.
What existed before the “Big Bang?” How did the physical laws of the universe come to be? Everyone has asked themselves these questions at one time or another. This treatise proposes answers to these questions and more. It is consistent with current state-of-the-art knowledge in physics, specifically in the areas of dark matter, dark energy, and the origin of our universe. Although not mathematically robust, it presents qualitative solutions to many of the most baffling questions. Of course these hypotheses raise questions while at the same time proposing solutions. This will continue to be the case for the next 200-2000 years (if the human species survives that long) until humans can overcome limited intellectual and natural resources to scientifically prove these theories. The hypotheses promulgated in this document arose from observations on the evolution of physics, knowledge of natural laws, and extrapolation.
II. CONTINUUM AND EVOLUTION OF UNIVERSES
An infinitely-dimensional Continuum spawned our universe 14 billion years ago. This event corrected instabilities created by entanglement of dimensions, and has occurred countless times before and after. Continuum drives everything, everywhere, and every-when. It is not composed of matter or energy, but of infinitely-dimensional entropy. Entropy is the propensity for matter and energy to randomly dissipate without doing work, or it can be thought of as a natural, random conspiracy against organization. The infinite dimensions within Continuum are not anchored, and therefore can become entangled as ripples of instability propagate within. These ripples of instability are in the form of waves, which are the “language” of Continuum, and therefore the “language” of all universes and all creation. Instabilities originate from entropic dimensional interactions, and also are influenced by feedback loops from the evolution and aging of existing universes. These feedback loops are specifically the result of vacuum energy, sometimes referred to as dark energy. Current M superstring theory mathematically predicts that eleven dimensions exist in our universe. If this state-of-the-art theory is correct, it was the result of eleven dimensions becoming entangled within Continuum somewhere around 14 billion years ago. This tension was relieved with the creation of countless strings of energy that were embedded in the event horizon of our budding universe. New instabilities are continually experienced in the Continuum again and again as inherent dynamism exerts itself. Since universes are in other dimensions, they cannot experience one another directly, but are under constant influence by Continuum and visa-versa, and thereby can influence other universes indirectly. Since the inherent state of Continuum is entropy and the dimensions are not anchored, there is propensity for reduced entanglement after tension and instability are relieved through the universe creation process. However, feedback loops created from universe(s) evolving and dying results in new dimensional entanglement and instability within Continuum. Our universe, for example, is predicted to expand into oblivion in 100 billion years or so. This process will cause ripples of instability in Continuum, thereby resulting in the spawning of new universes.
Initial conditions are specifically mapped by the tension and dimensional instability in Continuum into a new universe. The specific initial conditions needed to relieve tension and instability within Continuum are critically important because these conditions determine the number of dimensions, the number and type of strings created in a new universe, and the amount of vacuum energy. Initial conditions thereby irrevocably contain the blueprint for all subsequent physical laws. Initial conditions also contain perturbations or tiny non-uniformities that result in granularity. Granularity is the non-uniform expansion of a universe which eventually results in coalescence into galaxies, stars, solar systems and other structures as the universe expands and cools. Granularity allows a spawning universe to temporarily overcome entropy in order to produce structure. Of course this is only temporary because as universes evolve, age, and eventually die, entropy wins out.
Time has no meaning within Continuum, but entropy requires at least one time dimension in a budding universe. Since at least two dimensions must become entangled in order to spawn universe creation, one is always a time dimension, and the rest are space dimensions, although there is no reason there cannot be multiple time dimensions. Time is the first dimension to appear in a spawning universe because it is the dimension that imparts dynamism to a universe. Without time, a universe would be static and could not evolve and allow entropy to work its magic. The number of space dimensions is determined by the initial conditions at universe creation, and therefore could result in wildly different physical laws. This implies that many universes are bizarre, even hostile places that may relieve inter-dimensional stress in Continuum, but never spawn life of any sort. Entropy ensures that universe creation is a purely random event, and may or may not be conducive to intelligent life, or life of any sort. The number of dimensions and the initial conditions of a budding universe determines all physical laws, and thereby how the universe will age. Some universes could be short-lived. Others could be unimaginably long-lived. Our universe is purportedly around 14 billion years old, but since spacetime was so warped in the event horizon of our budding universe, time had little meaning. Our universe could be much, much, older. Even eternally old! Time has zero meaning within Continuum. It obtains meaning sometime after universe creation.
III. THE EVOLUTION OF OUR UNIVERSE AND PHYSICAL LAWS
Our universe was created in an infinitely small, energetic event horizon packed with strings of energy that began spontaneously expanding around 14 billion years ago with a specific set of initial conditions in order to relieve stress or instability within Continuum, specifically within eleven entangled dimensions if current M superstring theory is correct. These initial conditions laid out the blueprint for all physical laws in our universe, and contained tiny perturbations that led to subsequent granularity. After our universe began to expand and cool, granularity resulted in coalescence of galaxies, stars, solar systems, and all structures. Without these tiny perturbations emanating from the Continuum, our universe would expand uniformly and be devoid of structure. The effects of entropy are manifest throughout our universe. It is predicted to rip itself apart and disappear in 100 billion years or so. Entropy at work! The Heisenberg Uncertainty Principle states that we can only know probabilities for location of an electron if we are simultaneously measuring its angular momentum, and visa-versa. The very foundations of quantum mechanics are based on uncertainty and randomness. If you try to measure something at the quantum scale, you inherently change it so you can’t measure it! That uncertainty and randomness is entropy at work! String theory is the epitome of entropy at work. If state-of-the-art string theory is correct, our universe is seething with unimaginably small (around 10-33 cm) strings of energy moving about randomly, vibrating at various harmonic frequencies, thereby imparting all mass and force in the process.
One of the most important physical laws in our universe is the speed of light. Why does light always travel at 186,000 miles per second and no faster or slower in a vacuum? Why does an atomic mass unit always weight 1.6605 * 10-24 g? Why is the acceleration of gravity exactly 9.84 m/s2 at the surface of the earth? We are so used to these immutable laws that we mostly don’t question why? It’s because 14 billion years ago the initial conditions that resulted in these physical laws were precisely required to alleviate inter-dimensional tension and instability within Continuum.
Our universe is wonderfully and delicately balanced, with all physical laws interacting in a symphony that results in everything we see and experience. Our universe evolved from the moment of the “Big Bang” to harmonize all physical laws. Hypothetically if one important physical law was changed, it would upset the balance of all forces and require a new harmony to be achieved, possibly resulting in a dramatically different place. Therefore a universe with different initial conditions, different numbers of dimensions, amount of vacuum energy, etc. would be expected to have different physical laws, and through the harmony imposed through universe evolution, could be a radically different place than our universe. Can you imagine light traveling at 10 m/s, or radically different matter because protons and electrons have different structures, or gravity much stronger or weaker? Of course life may have never evolved in some of these universes, or it would be so foreign that we could not comprehend it, just as humans cannot understand multi-dimensionality. We have four dimensions that we experience every day: three in space and one in time. Current M superstring theory predicts a total of eleven dimensions, of which we can experience only four. The others operate at the quantum scale, and are required to unify the four force categories in our universe (strong, weak, electromagnetic, and gravity). It is conceivable that some universes have only one space dimensions (an infinitely long string), or more than eleven space dimensions, but all universes have at least one time dimension because time is required for dynamism to exist. One time dimension is required for an unknown number of space dimensions.
The fact that our universe ended up being conducive to development of life-forms was completely a random happenstance event. Just as life in our universe requires random events to come together and produce conditions for primitive bacteria to get a foothold, universe creation is a purely random event that may or may not produce conditions that allow life to spawn. Short-lived hostile universes may not produce intelligent life or any life at all, while universes such as ours contain favorable conditions for life to get a foothold, although prevalence is still a question.
Humans cannot easily comprehend dimensions greater than four. It may be that a second time dimension would allow a hypothetical person to “see” all history throughout the time course of a universe. The second time dimension contains all information about every event that ever happened to everything and/or everyone. Don’t bother lying! Another possibility is the existence of a greater than 11 space dimensions that are currently predicted by state-of-the-art physics in our universe, or more than 4 spacetime dimensions that could be experienced by intelligent beings. It’s possible that some universes contain orthogonal space containing interacting dimensions. If a person existed in this hypothetical universe, in addition to “seeing” normal three-dimensional space, they may “see” flat cross-sections of first-order orthogonal beings and structures. If another orthogonal space dimension existed, a hypothetical person might only “see” a straight string component of a second-order orthogonal being. It’s also conceivable that time dimensions are created for every so-many space dimensions, so that a universe that has 15 dimensions would require 2 time dimensions due to entropic constraints. A very strange place indeed, but maybe not strange at all for being that evolved there!
IV. DARK ENERGY AND IT”S LINK TO CONTINUUM
Dark energy currently represents a huge gap in current understanding of our universe. It is sometimes referred to a vacuum energy. It was imparted to our universe as a result of the initial conditions required to alleviate tensional instability within Continuum around 14 billion years ago. “Dark” simply means humans do not understand it. Dark energy is the force that is causing our universe to accelerate its expansion beyond what state-of-the-art physics predicts. Hence in 100 billion years or so our universe is predicted to accelerate to the point that every galaxy, star, planet, human being, molecule, and quark will be stretched and torn apart, a process that has happened many times already in many universes. Dark energy represents the link between our universe and Continuum. It represents the influence or pull of Continuum on our universe, and thereby is the link or our universe to countless others.
Dark matter may also represent the influence of Continuum on our universe. Matter that we can see by definition is creating or reflecting light. Dark matter causes excess gravity such that stars with such velocity that they should be spinning out of galaxies into the open void of space are instead held within galaxies. This excess unknown matter creates extra gravity that holds the outer stars in place. Galaxies generally are thought to have a black hole at their core. These are the ultimate arbiter of entropy. They randomly “disappear” any matter or energy that comes within range of their enormous gravity. They are one of the enforcers of Continuum’s entropic state. They also give off a wisp of Hawking radiation so that even the mightiest black holes will they themselves dissolve eventually through the effects of entropy. Black holes are strong enough to interact with Continuum, and thereby create excess gravity, and an explanation for dark matter.
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