REACTION: A MODEL FOR PREDICTING FINANCIAL COLLAPSE

Rickards’ REACTION: A Model For

Predicting Financial Collapse
REACTION: The New Model to Predict Financial Collapse
JIM RICKARDS
James G. Rickards is the edi-
We have invented an entirely new model that will teach
tor of Strategic Intelligence,
the latest newsletter from you identify an impending financial collapse. With this
Agora Financial. He is an
American lawyer, econo- model, you will never be caught off guard.
mist, and investment
banker with 35 years of ex-
perience working in capital Dear Daily Reckoning Reader, In my book The Road to Ruin: The Global Elites’ Secret
markets on Wall Street. His Plan for the Next Financial Crisis I reveal exactly what
work is regularly featured The cycle of monetary collapse has happened the crash will look like. I also offer analysis on how
in the Financial Times, Eve- three different times over the past century. Each
ning Standard, New York you can best position your wealth and hard-earned
Times, The Telegraph, and collapse has been worse than the one before. The money before it is wiped out forever.
Washington Post, and he is central banks have done bailouts before but their
frequently a guest on BBC, balance sheets are extremely bloated. We have gone ahead and reserved a copy for you.
RTE Irish National Radio,
CNN, NPR, CSPAN, CNBC, Click right here to learn how to claim your free
We are now at the point where the ability of central
Bloomberg, Fox, and The copy now.
Wall Street Journal. He has banks to reliquify the system is in doubt because
contributed as an advisor they’re heavily stretched. As a reader of the Daily Reckoning I want to give you
on capital markets to the
U.S. intelligence commu- Central banks have printed so much money exclusive access to my formula for avoiding a crash
nity, and at the Office of already, it’s not obvious that they can do it again and hitting rock bottom when the dollar collapses.
the Secretary of Defense
in the Pentagon. Rickards from the current levels without destroying confi-
This is a revolutionary way of looking at the financial
is the author of three New dence in the dollar, and all major currencies.
York Times best sellers, The system and stock markets. It’s unlike anything
Death of Money (2014), The question is, where will the liquidity come from you’ve ever seen.
Currency Wars (2011), The in the next financial crisis if it can’t come from the
Road to Ruin (2016) from Understanding the risks and the state of the in-
Penguin Random House. central banks?
ternational monetary system will leave you better
In the face of such a crisis we have a looming total prepared for the immenent currency collapse and
monetary lockdown of the financial system. the death of the dollar.

What Every Investor Must Understand — REACTION

A 5-Part framework will make sure you’re never caught off guard by
financial crisis

As an economist and economic theorist, I favor a of the magnitude and timing of financial collapses
rigorous analytical approach to risk management and panics?
over glib talk and clichés about market collapse.
Those predicting doom-and-gloom are on every By using a more rigorous approach, we can come
closer to the Holy Grail of risk management — en-
street corner. But, what good does that do inves-
joying good times while they last, but avoiding the
tors if the prediction is not backed up with hard
crashes that periodically wipe out hard-earned gains.
facts, good science and sound analysis?
The goal of analysis is not to yell doom-and-gloom
Markets actually do collapse periodically. If you
[Link]

all the time, but to yell it just in time to avoid real

yell, “the sky is falling” you will be right eventually. panics. That’s what we do at Strategic Intelligence
As the saying goes, “Even a broken clock is right and the Daily Reckoning with a blend of analytic
twice a day.” tools including complexity theory, causal inference,
behavioral psychology, and historical perspective.
The challenge for analysts is, “Can we do better?”
Can we produce models and analysis that have pre- Advanced practitioners in many intellectual en-
dictive value and that provide accurate estimates deavors have recently embraced team science.

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 REACTION: A MODEL FOR PREDICTING FINANCIAL COLLAPSE

The idea is that the best solutions to hard prob- Our five-stage model is structured along the same
lems come not from a single super-expert in one lines as the well-known Kübler-Ross model of the
discipline, but from an interdisciplinary approach five stages of grief.
involving experts from a number of subject-matter
domains who both contribute to and learn from the The Kübler-Ross model was introduced by Elisabeth
pool of knowledge residing in the team as a whole. Kübler-Ross, a Swiss psychologist. It is a behavioral
model of how human beings respond to grief. Such
grief may be induced by death of a loved one, divorce,
severe disability, loss of a job or other emotional
setback. In Kübler-Ross, the five stages are Denial,
Anger, Bargaining, Depression and Acceptance. The
acronym for these fives stages is DABDA.

In denial, individuals learn of the bad news but

believe the news is mistaken and cling to some false
reality. In anger, the denial fades, but the new reality
is met with frustration and claims such as “It’s not
fair!” In the bargaining phase, the individual hopes to
avoid the unpleasant outcome by offering something
Jim Rickards during a visit to the floor of the New York Stock in return. You might tell your boss, “If you don’t fire
Exchange in lower Manhattan. To the right is Steven Guil- me, I promise to do a better job,” etc. In depression,
foyle, known as “Sarge,” Director of floor operations for NYSE. the individual finally accepts the adverse result, but
In any future market panic or meltdown, the NYSE floor will becomes withdrawn, reclusive or sullen. Finally, in
be ground zero.
the acceptance phase, the individual adjusts to the
Effective team science takes humility and open- new reality and decides to move on with a sense that,
“This is going to work out OK.”
mindedness, two qualities not found in abundance
among economists. Still, for those able to listen to Importantly, Kübler-Ross noted that this was not a
and share ideas, the team approach can be both liner, deterministic model. Not all individuals would
fruitful and exhilarating. be affected in the same way. Some individuals might
experience none of these phases; others might
There are numerous examples of good team sci-
experience only some. In some cases, the experience
ence. Complexity theory began with an accidental might occur in a different order than she presented.
discovery by a lone meteorologist, but is now applied For example, bargaining might come before anger,
in countless dynamic systems including seismology, and so on. Notwithstanding these variations, the
urban planning, forest management, and economics. model is a robust and useful way to understand
Causal inference (based on Bayes Theorem) has been human behavior in the face of adversity. The model is
used to find missing aircraft, hunt enemy submarines, also useful for those who are supporting or counseling
and crack the super-secure ENIGMA code used by the victims of adversity as a way to help them adjust and
Nazis in World War II. reach acceptance.

Behavioral psychology began with simple experiments Our model of the five stages of financial collapse
that showed a subject preferred a $3.00 guaranteed is called REACTION for Repricing, Acceleration,
return over a $3.20 expected return (because the $3.00 Transmission, Irrationality and Oblivion.
was a “sure thing”). It has gone on to revolutionize
economics by overturning stale dogma about efficient Like Kübler-Ross, the REACTION model allows some
markets and rational expectation. Strategic Intelligence flexibility in its use and interpretation. Not every
is on the cutting edge of these and other intellectual adverse market development will go through all
five stages. In fact, many market moves will stop at
developments.
repricing or acceleration and not proceed to irratio-
Yet we don’t just follow new techniques — we help nality or oblivion.
invent them. In this special report featured to Daily
Yet it is critical to understand that any market ad-
Reckoning readers that was exclusively featured in
[Link]

versity that starts with repricing has the potential to

Strategic Intelligence, we present an entirely new
go all the way to oblivion. It all depends on the exact
five-part model for analyzing financial distress. With
initial specifications of the dynamic market as the
this model, you’ll be able to determine the difference process begins.
between market adversity that is temporary and
reversible, and when it is heading into an abyss that This is the essence of complexity theory. Every
will wipeout your accumulated wealth before you avalanche starts with a snowflake, but not every
know what hit you. snowflake causes an avalanche. Some do and some

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 REACTION: A MODEL FOR PREDICTING FINANCIAL COLLAPSE

don’t. The key is to understand the dynamic forces at Nevertheless, markets, betting odds, and elite com-
work and look for the indications and warnings that mentary all favored Remain to win. This delusion
tell you in advance when the process is going through (relative to objective data such as polls) was reflected
a phase transition from one stage to the next. in the markets. Sterling rallied to $1.49 the day of the
vote, its highest level in months. Likewise, gold fell to
With that as background, here is a more detailed ex- $1,255 per ounce on the day of the vote after trading
planation of the five-phase REACTION model of mar- near $1,300 per ounce in mid-June. In effect, cable
ket collapse: Repricing, Acceleration, Transmission, and gold were both fully “priced” for a Remain vic-
Irrationality and Oblivion. We begin with repricing. tory despite powerful evidence that the vote would
be close.
STAGE 1: Repricing
What happened next was that reality intruded on the
A market meltdown begins with the rapid repricing market’s delusion. This is shown in the chart below:
of a particular instrument or asset class. This typically
occurs when the market has valued an asset using USD/GBP Cross-Rate
“Repricing” Based on Changed Expectations
unrealistic or incorrect assumptions. The wrong valu-
ation can persist and reach extreme levels — as long 1.48
as reality does not intrude on the market’s wishful 1.46 GBP falls 13% against USD in
1.44 hours as results of Brexit vote
thinking. But, eventually, reality always intrudes. 1.42 are reported on June 23, 2016

Price USD
1.40
Inevitability some definitive event occurs that makes 1.38
1.36
it impossible for the market to indulge in its alternative
1.34
reality. A classic illustration of this phenomenon is 1.32
the 1837 Hans Christian Andersen tale, The Emper- 1.30

or’s New Clothes. In that story, two tailors convince April May June July August
the Emperor that the new suit of clothes they have Source: Thomson Reuters Eikon

made for him is invisible to those who are stupid,

unfit or incompetent. When the Emperor goes on Within hours of the polls closing (at 5:00 pm New
parade naked, everyone in the crowd pretends to York Time with markets just opening in Asia), it be-
“see” the new clothes so they will not be regarded came apparent that Leave would win a substantial
as stupid. Finally a child yells “But, he isn’t wearing victory. The market’s wishful thinking crashed into
anything at all.” Suddenly everyone in the crowd the reality of hard facts. The Emperor had no clothes.
takes up the cry, and the Emperor is understood to
GBP/USD plunged 13% from $1.49 to $1.30 within
be naked in full view.
minutes (it rallied back a bit before the close, but
Something similar happens in markets. A stock like fell further in following days). Gold rallied from
Tesla (TSLA) can have a lofty valuation for years based $1,255 per ounce to $1,315 per ounce in one day
on grandiose promises by Elon Musk, all the while (and was even higher on an intra-day basis).
running on unpayable debt, and losing billions of Considering that dollars, pounds, and gold are all
dollars of shareholder money. Someday, a prominent highly liquid major country reserve assets, these
Wall Street analyst will yell, “Hey, this company is de- types of price moves are extraordinary. The market
stroying value and heading to bankruptcy!” Then the had suddenly and violently “repriced” assets for a
stock will crash suddenly and dramatically. Until then, new reality, or a new perception of an existing reality.
the belief that Tesla is wearing a fine suit of clothes
will persist. There are many examples of such extreme repricing
based on news or new perceptions. The devaluation
The intrusion of reality into a collective delusion of the Thai baht in June 1997 led to an immediate
can also come from a definitive event, such as an reevaluation of emerging markets’ currencies in
election result or a criminal complaint. A recent ex- Malaysia, Indonesia, South Korea and later Russia
ample of this is the exchange rate between pounds and Brazil. The entire landscape of emerging mar-
sterling (GBP) and U.S. dollars (USD), (GBP/USD or kets changed overnight based on one confrontation
“cable”) prior to the Brexit vote on June 23, 2016. with reality by one overvalued local currency and
an overheated local property market.
[Link]

Brexit was a UK referendum on whether to leave the

Another more recent example is the sudden change
European Union or not. The two sides called them-
in perception in the value of subprime mortgages
selves “Remain” and “Leave.” In the weeks leading
in July 2007. From 2004 to 2007 the subprime mort-
up to the vote, the polls were close. Most showed
gage market expanded exponentially.
a slight edge for Remain, but certain polls showed
Leave ahead. An objective observer would conclude This was based on Alan Greenspan’s “too low for
the vote would be close and the outcome uncertain. too long” rate policy, and the exertions of corrupt

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 REACTION: A MODEL FOR PREDICTING FINANCIAL COLLAPSE

investment bankers who dumped junk mortgages counterparty desires, through the use of contracts
into structured products and obtained “AAA” ratings that specify the gross notional size of the bet. No
from incompetent ratings agencies while regulators money or securities change hands except when the
turned a blind eye. A few objective analysts and in- profit or loss on the bet is settled up.
vestors could see through this (as portrayed in the
recent film “The Big Short,” and the Michael Lewis Simply put, leverage of any kind amplifies what-
book of the same name) but most did not. ever non-leveraged gain or loss is happening in the
markets. If a currency position drops 5% and your
Again, reality intruded in the form of weak earnings position is leveraged 3-to1, then you will lose 15%
reports by major banks in the spring of 2007, and on your position. This creates a much more painful
the collapse of two Bear Stearns hedge funds that experience than what the non-leveraged market
had made leveraged bets on junk mortgage-backed participant would have.
securities in July 2007. Analysts suddenly looked at
these securities and yelled, “But, he isn’t wearing Once large losses arise in leveraged positions, the
anything at all!” counterparty (typically a bank) worries that the
losing party might not be able to cover its losses
The collapse of mortgage valuations and real estate and might actually go bankrupt. This leaves the
continued in stages from August 2007 to March 2009. counterparty bank unable to collect its winnings.
When the market hit bottom, many of the securities
and underlying properties had lost 80% of their value. That bank will demand immediate collateral to
In truth, the securities and properties were never protect itself from possible credit losses in case the
worth face value to begin with, but that market delu- losing trader goes out of business. This demand
sion persisted until reality set in. is a margin call and can be for an amount even
greater that the loss if the bank deems it necessary
Such repricings represent more than just normal to protect its paper profits.
market movements based on preferences of buy-
ers and sellers. They represent an entirely new Margin calls can only be met with the highest quality
perception of a particular asset or asset class. The collateral, such as cash or Treasury bills. A losing trader
new perception quickly becomes ingrained and who gets a margin call at 9:00 am may only have an
becomes the anchor on which future expectations hour to two to provide the margin before the bank
are based. The old perception is gone forever. terminates the position. This would lock in the loss
and eliminate any chance for the losing trader to
Some repricings are just that — one time repricings. recoup the loss if the market turns around. You can’t
Losers lick their wounds, winners count their gains, meet a margin call with the same junk securities you
and life goes on. But some repricings don’t stop there. are betting on. You must provide cash or cash equiv-
They gather momentum and continue into stage two alents to avoid getting blown out of the trade.
of the REACTION model: acceleration.
Given this toxic combination of leverage and mar-
gin calls, the leveraged trader protects himself with
STAGE 2: Acceleration
“stop loss” provisions. A stop loss is a pre-arranged
Acceleration happens when a repricing overshoots sale with a broker that will automatically close out
the new reality and continues based on momentum a losing position once the losses reach a certain
and market dynamics that are independent of the threshold. The idea is to make sure the position is
original shock. In military terms, acceleration is a closed out before too much bleeding has occurred.
“force multiplier” to the original repricing — it takes
what is going on already, and makes it more violent Stops can be extremely “tight” depending on the
and powerful. trading position. Examples of tight stops would be,
say, a 1% loss on a foreign exchange position, a 2%
The main reasons that repricing continues into the ac- loss on a stock position and a 5% loss on a relative
celeration stage are margin, leverage, and stop losses. value position or spread trade.

Leverage is the use of explicit or implicit borrowed The stop loss process can be automated. No human
money to place a bet in markets. Explicit leverage judgment is necessarily involved in whether an initial
[Link]

appears on a balance sheet in the form of bank loans, repricing has achieved its purpose of rationalizing
repurchase agreements, or securities lending agree- the old price to the new reality. The computers will
ments. Implicit leverage exists off balance sheet in the sell the position automatically even if cooler heads
form of derivatives such as futures, options, or swaps. might conclude that the position was now reason-
ably valued.
With derivatives, there is no need to borrow money
to hold a large trading position. The position itself The potential for market devastation from tight
is synthesized out of thin air, in whatever size the stops and automation can be seen in this simplified

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 REACTION: A MODEL FOR PREDICTING FINANCIAL COLLAPSE

example. Assume a certain asset is valued at 100. Once a market disruption passes the repricing and
Further assume five hedge funds have stop losses set at acceleration stages, the next stage in the REACTION
five different levels. Fund A is set at 99 (down 1%), Fund model is transmission.
B at 98 (down 2%), Fund C at 97 (down 3%), Fund D at
96 (down 4%) and Fund E at 95 (down 5%) respectively. STAGE 3: Transmission
Now a market shock emerges and the asset is instan-
taneously repriced down 1% in the market. Transmission occurs when disruptions in one market
spread to other markets which seem unrelated or
Once the price hits 99, the stop loss of Fund A is uncorrelated with the initial market. Other names for
triggered and it automatically sells the asset in a transmission are “contagion” and “spillovers.”
falling market. This selling causes the market to fall
further to 98, at which point the stop loss for Fund The usual unforeseen consequence of contagion is
B is triggered and it too sells into a falling market. that “correlations go to 1.” What this means is that two
This second sale pushes the market lower until it or more market indices that are normally uncorrelated
hits 97 at which point Fund C automatically sells, suddenly and unexpectedly become correlated. My
and so on all the way down to Fund E at 95. former partner, Myron Scholes, winner of the Nobel
Prize in Economics, called this “conditional correla-
Examples such as this are much more complicated tion.” In other words, this unexpected correlation
in the real world and momentum can be much more results from a certain conditional circumstance.
extreme than described here. It is also true that some
funds are on the prowl for bargains even as the weak The chart below is a classic example of transmission
hands are selling. Some strong hands may step in as and so-called conditional correlation. The red line
buyers and markets may eventually stabilize on is the Dow Jones Industrial Average. The gray line is
their own. the Japanese Nikkei 225 index.

The point in this example is that a 1% market re- Nikkei 225 vs. Down Jones Index
pricing (due to news) is converted into a 5% market Correlations go to 1 as Contagion and Spillovers are Transmitted

fall due to the acceleration and momentum from 18,000

Perfect correlation (1.0) between Nikkei 225 and
Down Jones Index at the high of the 2008–09 panic
14,000
13,000
automated stop loss trading. 16,000
12,000
Price JPY

Price USD
14,000 11,000
12,000 10,000
The most famous example of this kind of robo-panic 9,000
10,000
was the October 19, 1987 stock market crash called 8,000 DJI N225
8,000
7,000
“Black Monday.” On that day, the Dow Jones In- CORRELATION
1.0
dustrial Average fell 22.6%. As later detailed in the 0.5

official Brady Commission Report, much of the 2007 2008 2009 2010 2011
Source: Thomson Reuters Eikon
selling pressure came from automated “portfolio
insurance” programs. The black dotted line at the bottom of the chart is
a measure of correlation between the two indices,
These programs sold stock futures automatically
which can range from zero (completely uncorre-
once stocks had fallen a certain amount. The sell-
lated) to one (perfect correlation). Technically this
ing pressure ricocheted back and forth between
measure is called “r-squared.’ Generally, statisticians
the stock market and the futures market, and the
regard an r-squared of 0.70 or higher to exhibit a
crash continued as new sell programs kept getting
strong degree of correlation. An r-squared of 0.30 or
triggered by prior sales.
lower is considered weak correlation.
An equivalent crash today would take the Dow Jones
index down over 4,000 points in one day, from the Some correlation between U.S. and Japanese stocks
current level of about 18,200 to just over 14,000. is unsurprising, but it should not necessarily be high.
There are many factors (including demographics,
Don’t think it can’t happen again. It probably will. We exchange rates, structural impediments, etc.) that
have seen various “flash crashes” in stocks (May 6, could cause Japanese and U.S. stocks to take diver-
2010), bonds (October 15, 2014), Euro v. Swiss franc gent paths.
(January 15, 2015), and sterling (October 6, 2016).
What we see is revealing. Shortly before the panic
[Link]

What these crashes have in common is that they are of 2008 the correlation between Japanese and U.S.
not merely repricings, but are accelerations of initial stocks was 0.37, which is quite low. At the height
repricings based on automated stop loss momentum. of the 2008 panic and in the early months of 2009
Those algorithms are still in place and the market when the U.S. stock market bottomed, the correla-
leverage is still huge. More such crashes should be tion soared and came close to 1.0, which is perfect
expected with even more dire consequences than we correlation. In effect, market panic was a condition
have seen so far. that took correlation from low to almost perfect.

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 REACTION: A MODEL FOR PREDICTING FINANCIAL COLLAPSE

Correlation did soar in the panic, but most condi- drives prices lower, which causes more panic selling in
tional correlation analysis is nonsense. It begins with a feedback loop that can end in market oblivion.
a belief in normally distributed risk, equilibrium
systems, efficient markets, and mean reverting In the irrational stage, the only thing that matters
behavior in markets. None of those assumptions is is cash. Investors don’t care about relative value,
a good reflection of the real world. long-term prospects, “bargains,” or high-yields.
They just want their money back.
A better way to understand this phenomenon is
to think of capital markets as a densely connected In recent panics (1994, 1998, 2008), regulators and
web of nodes (the individual markets) and edges central banks responded to a demand for money by
(the connections between markets). Market forces giving investors what they wanted. In 2008, regula-
can move along one edge or another, and from one tors guaranteed bank deposits and money market
node to another, based on specific events that have funds in an effort to make these assets more like
their own dynamic and have nothing to do with “money.” Central banks printed money and made it
normal distributions or efficient markets. available through asset purchases and swap lines.

Specifically, the transmission mechanism between In short, when everyone wants their money, gov-
the U.S. and Japan had to do with liquidity and ernments find a way to give it to them.
margin calls, as discussed above. The panic in the
U.S. was caused by subprime mortgages, which Such massive provision of liquidity tends to truncate
had nothing to do with Japanese stocks. But, when the panic. Certain crises that have proceeded through
U.S. hedge funds suffered losses on mortgages, they repricing, acceleration, transmission and into irra-
needed cash to meet margin calls. They would have tionality have been truncated (before reaching the
preferred to sell the bad mortgages but they couldn’t; oblivion stage) by massive infusions of liquidity by
mortgages went “no bid.” central banks.

So they sold Japanese stocks, not because they The problem today is that the liquidity is still there
wanted to, but because they had to in order to raise in the form of bloated central bank balance sheets.
cash to meet margin calls on the bad mortgages. This It would be one thing if the Federal Reserve had ex-
transmitted the illiquidity from the U.S. markets to panded its balance sheet from $800 billion to $4.2
Japanese markets. The latter began to exhibit the trillion (which it did) to deal with a crisis, and then
same selling pressure and loss of liquidity that had somehow normalized the balance sheet at the $1
already infected the former. billion level. But that’s not what happened.

Imagine this same phenomena happening not just Instead, the Federal Reserve balance sheet is still at
in two markets (the U.S. and Japan), but in scores $4 trillion. Other central banks are equally leveraged.
of markets all over the world. Picture illiquidity This limits the ability of central banks to deal effec-
spreading like the Ebola virus and you’ll have a tively with the next crisis.
pretty good mental model of how financial market
contagion works. The job of reliquifying the world will be handed over
to the IMF, which will print trillions of dollars worth
Once the transmission process moves financial stress of special drawing rights (SDRs) to get the job done.
from one market to many markets in our REACTION That response is likely to prove highly inflationary,
model, the stage is set for the next phase: irrationality and will certainly diminish the importance of the
in all markets. U.S. dollar as a global reserve currency.

STAGE 4: Irrationality Panic or irrationality is as much a behavioral response

as an economic one. Because of that, it is harder to
The best description of financial panic I’ve ever heard deal with than the other stages in the REACTION
is that “everybody wants his money back.” In normal five-stage model.
times, people think of stocks, bonds, real estate, and
other assets as forms of “money.” They say, “Oh, I have The official response function in the next panic
money in the stock market,” or “I have my money in will be to use the IMF for liquidity. If that response
[Link]

a money market account,” and so on. In fact, none of fails, or if there’s not enough time, the response
those things are money. The only real money is cash, will be to freeze all accounts at banks and brokers.
gold or silver. Everything else is just an asset.
In my latest book, The Road to Ruin, I go into greater
In a panic, this realization suddenly sinks in. Inves- detail about the likelihood of this response. This clos-
tors want to convert everything into money by selling ing of markets and freezing of accounts leads straight
their assets all at once. Of course, that irrational selling to the fifth and final stage or our model: oblivion.

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 REACTION: A MODEL FOR PREDICTING FINANCIAL COLLAPSE

STAGE 5: Oblivion Set against the dynamics of collapse is the policy

response function. When a collapse into oblivion
Oblivion is another name for complete systemic begins, the elites have the most to lose. This means
collapse. they will fight the hardest to prevent it. The elites
have powerful political, financial, and military
The notion of “oblivion” is necessarily subjective.
tools at their disposal and they will use those tools
It implies a situation in which markets are not only
in an effort to truncate the collapse.
crashing, but one in which markets cease to func-
tion at all. Oblivion occurs on different time scales Truncation is the expected elite response function
and physical scales. to collapse. Truncation is impossible with regard
to natural disasters (you can’t stop an earthquake
At the highest scale, scientists have identified five
once it begins), but it is possible in man-made sys-
mass extinctions. The first was 439 million years
tems (if there’s a run on the bank, you can close the
ago and the most recent mass extinction occurred
banks “temporarily”).
65 million years ago. This last one was called the
Cretaceous-Tertiary extinction. It wiped out 47% If the situation becomes more dire, and money riots
of all marine life and 22% of all land vertebrates, break out, elites will use the military and militarized
including the dinosaurs. local police forces to maintain order.
The next extinction scale refers to civilizations. The For everyday investors, there is not much practical
two most recent civilizational collapses are well difference between extreme collapse and an extreme
documented. In approximately 1200 BC, multiple policy response function in the form of truncation.
Bronze Age civilizations collapsed. These included What difference does it make if you can’t get your
the Hittites, Egyptians, Mycenaeans and Mesopo- money because the bank failed, or if you can’t get
tamians. Approximately 1,600 years later, in about your money because elites closed the banks? Either
400 AD, Roman civilization collapsed. way, you can’t get your money.
Both the Bronze Age collapse and the Roman col-
The solution, of course, is to have assets than cannot
lapse were followed by a “Dark Age.” Each Dark Age
be frozen, closed or hacked, such as physical gold
lasted several centuries (from 1000 BC to 700BC after
and silver, physical cash, land, fine art, or private in-
the Bronze Age, and from 500 AD to 800 AD after the
vestments in contractual form where you know the
Roman Empire) before civilization began another
entrepreneur personally.
ascent. Historians and anthropologists are uncertain
whether there was an earlier civilizational collapse Oblivion (defined as the end of markets) or trunca-
around 2100 BC with the decline of Old Kingdom tion (defined as the freezing of markets to halt a
Egypt, although something like that does seem to collapse) are equally disastrous for investors. This
have occurred. is the end stage extinction event of the five-stage
Based on Old Kingdom Egypt, Bronze Age, and REACTION model.
Roman Empire collapses, the tempo of major civi-
lizational collapse appears to be about every 1,300 Conclusion:
years. It has been 1,300 years since the end of the How You Can Apply the 5 Stages
last Dark Age. Are we due for another civilizational
collapse? That is certainly a possibility. This five-stage model — repricing, acceleration,
transmission, irrationality, and oblivion— what
An even smaller scale involves financial or capital we call REACTION — has powerful explanatory
markets collapse. There have been many complete power to aid in the understanding of financial
collapses in the past 150 years. In 1914, the New York shocks and panics.
Stock Exchange was closed for five months. In 1933,
every bank in the United States was closed for eight It is important to understand that not every finan-
days. These lock-downs are in addition to financial cial shock will automatically progress through all
panics and near total collapses in 1907, 1931, 1987, five stages. A shock can lead to a repricing, but the
1994, 1998, and 2008. process can end there with markets simply adjusting
to a new level.
The point is not that extreme collapses are inevi-
[Link]

table or happen like clockwork. The point is that Similarly, a shock may progress through the repricing
extreme collapse does happen. And it could happen and acceleration stages, which will take markets to
again tomorrow based on a wide variety of catalysts levels lower than repricing alone, but not exhibit signs
including social unrest, war, infrastructure failure, of transmission or irrationality.
or natural disaster. More likely, there will be some
combination of those events in which one collapse Sometimes market panics are confined to a single
cascades into another, causing a total collapse. market or country. They progress from acceleration

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 REAGAN CONFIDANT LAUNCHES URGENT ELECTION ANALYSIS

to irrationality without showing signs of transmission. highlight, when it hits the value value of your retire-
Developing markets sometimes perform in this way. ment accounts, stock portfolio, home and even your
Argentina exhibited repricing, acceleration, irratio- cash holdings could be swiftly cut. It is critical that you
nality and oblivion in 1999–2000, but there was no take steps to protect you and your family immediately.
transmission to the rest of the world. The panic was
confined to Argentina. That’s why I am sending any American willing to
listen a copy of my book. Every American deserves
While not every financial shock exhbits all five to know the truth about the imminent dangers fac-
stages of REACTION, it is important to understand ing their wealth. That’s why I have gone ahead and
that they could. When you see definite signs of a reserved a free copy of my new book in your name.
repricing, it is not prudent to let down your guard. It’s on hold, waiting for your response.

The market might stop at that, but it might not. You have now entered a true crossroads in your
financial life. You can either take the information
Once the dynamic begins it is impossible to say
given to you and hide, or you can get in depth anal-
where it will end. The important task is to observe
ysis and recommendations that could help prepare,
the phenomena and be prepared for the worst
protect and even grow your wealth in the coming
outcome, even if it does not actually materialize
financial lockdown.
in every case. Considering that your net worth is
at stake, it is far better to be prepared than to be Only you can choose the right path you want to
caught unaware. take. You have the power to decide what to do.
That’s why understanding the REACTION five-stage Click here if you want to learn how to take action.
model is critical to your financial health.
All the best,
My exclusive New York Times bestselling book The
Road to Ruin will alert you to the greatest financial
threat yet, and it is headed directly toward you and
your assets. This financial lockdown could very well Jim Rickards
separate you from everything you hold dear. As I Editor, Strategic Intelligence
[Link]

Copyright by Agora Financial, LLC. 808 St. Paul Street, Baltimore, MD 21202. All rights reserved. No part of this report may be reproduced by any means or for
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any reason without the consent of the publisher. The information contained herein is obtained from sources believed to be reliable; however, its accuracy cannot
be guaranteed.