Oct. 2008

As current events get wilder with each passing day, a new realization hits home: The old world order is passing into twilight. It’s time to prepare and get ahead of the curve...

Every day things seem to get stranger. And wilder.

It’s like the world is walking through a nightmare version of Alice in Wonderland. All the old ways are slipping down the rabbit hole. It’s simply breathtaking to behold.

When we write to you in Taipan Daily, we try hard not just to report news. We try to give you the real story... the “news behind the news,” to help you put the puzzle pieces together. It’s not enough just to hear facts or receive general info. The important thing is making sense of it all.

In light of that mission I’m in Baltimore this week, engaging in a spirited “meeting of the minds” with the Taipan braintrust. After Tuesday’s wild events, and the vigorously animated discussion that followed around our conference table, it hit me (and in some sense, hit all of us): We simply have to start with a new paradigm. The old paradigm just doesn’t work anymore.

“Paradigm” is just a fancy word for a mental model or a pattern of ideas. The term is often used in reference to how a system or an order works... like a global financial system, or a cultural and political order.

When I say we need a new paradigm, I don’t mean we need to change the way we think about investing and trading. Market mechanics are the same... human psychology is the same... the iron laws of physics (and the key tenets of Austrian economics) are the same.

What I mean is, we need to change the way we think about the world now. We are witnessing the death and rebirth of a new world order, right before our very eyes.

And that’s why things seem to keep getting wilder and wilder, instead of calming down and going back to what we’re used to. We’ve all been expecting reversion to the mean, but the mean has evaporated. The global/ economic/ cultural/ geopolitical realities that you, me and every other thinking adult grew up with on this planet are passing into history. We are headed into something other.

Take the current structure of the global financial order. We have a fiat currency system, set in motion by Nixon’s closing of the gold window in 1971. We have a top- dog world reserve currency, the U.S. dollar, with the euro and the yen vying for second place. And we have gold as the perennial shadow currency, cycling in and out of favor depending on how badly the paper authorities are screwing things up.

It feels like things have always been this way. But in reality, the paper currency regime we’re all used to is actually less than 40 years old... and it may well not see its 40th birthday.

Is 40 years a long time? In some senses sure; but in other ways not at all. By the time 2011 rolls in, we could be adjusting to a whole new currency regime... something like a “Bretton Woods 2.0” perhaps. Or an ad hoc version of the old gold standard, with a mix of other hard assets backing various notes. The characteristics of currencies and asset-backed ETFs (exchange traded funds) could begin to merge in some weird symbiosis. We just don’t know.

The point is, we are headed in the direction of something other -- and we can’t be sure what it is. It probably won’t be at all like what we know today. It will draw roots from some of the old ways, but only in bits and pieces. (We could go back to some modified form of gold standard, for example, but those expecting it to look the way it did for 19th- century Britain will be deeply disappointed.)

The same is true on the cultural and political side of things. The reign of the U.S. as a dominant superpower is passing into twilight. Does that mean there will automatically be a new superpower? Does it mean that one country, possibly China, will get to have its turn striding the new century like a colossus?

Not necessarily. To ask the question “Who will be the next superpower?” is to wrongfully assumethe old paradigm continues. We are accustomed to thinking in terms of superpowers... so in pondering the possibility of the U.S. falling back, we naturally wonder who will step up. But that’s just plug-and-play thinking in context of the old model.

If the paradigm is wholly different, there won’t necessarily be one 21st- century superpower at all. Maybe we enter a multi-polar world in which there are a handful of dominant players, but none who rule the roost. Maybe the old political strongholds break up and new ones form. (Goodbye, EU; hello, Asia cooperative?) Maybe we see the rise of city-states at the ultimate expense of nation states.

This reality of accelerated change, I think, is why things seem so strange and frightening. Almost all of us, me included, have been working with the old models up to this point. We’ve all been implicitly wondering, “OK, when are things going to go back to normal (or some semblance of normal ).”

But what if there simply is no normal anymore? When you look back at the sweeping cycles of history, you see stretched- out periods of calm and punctuated periods of turmoil. The long periods of calm were the times when people could settle into entrenched ways of thinking... when conventional wisdom put down deep roots, standard patterns seemed set in stone, and whispers of change were just “crazy talk.”

But those steady periods of calm never lasted forever. They always gave way to clash, upheaval, turmoil... to major paradigm shifts that led to something new, something other, than what came before.

I think that’s where we are now. And that’s why the crazy quotient just seems to be rising and rising rather than falling back in line. An old world order is passing away, and a new one is being born.

It’s our job to get ahead of this tidal wave as rapidly as possible... and figure out how to surf it.

Warm regards,

JL

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