Bob Prechter is a very controversial economics analyst, not least because he has been both unsuccessful in missing the late 90's bull market and spectacularly successful, getting the 87 crash on the nail. He's now predicting the biggest bear in the world since the 1700's and turning his attention to the wider areas of emergent behaviour, including geopolitics and war. (He's not too positive their, except about being negative) There's an interesting story about him here and you can find his home page here.

Most interesting part of the story is this quote.

People like to believe in cause and effect, Prechter says, because they know it: Kick a stone, and it moves.

"As a result, most people think that economics, politics and war and peace affect people's moods, but it's the other way around," Prechter says. "Social moods shape events."

Enron didn't collapse because reports of scandals unsettled investors, he says. Rather, the psychological climate of the bull market encouraged companies to mislead investors. In other words, it was the investors who brought on the Enron scandal — not the other way around.

a panel of leading City experts polled by the Financial Times at the end of 2001predicted that the FTSE-100 share index would close 2002 somewhere between 5,350 and 6,200 points. The index closed the year at 3,940.4 points.

Now for the bad news. In 1997, they said shares were heading for a big fall. They rose by 20%. In 1998, only one of the five FT panellists got the rise in the FTSE-100 index roughly right - the rest underestimated the gains by up to 42%. In 1999, the average forecast was a small fall over the year, whereas shares rose by 18%. The panel was optimistic at the start of 2001 and 2000 when shares fell in both years.

There's been a lot written over the years about "Wealth Creation" which roughly translated means, "getting someone else to do the work and, using a financial tool, capturing the value they create". The simplest form is when I buy a house and you live in it, paying me enough in rent to cover at least the cost of the overheads and ideally, if I have another income, showing a small loss so I can reduce my tax "burden" (or slide out of my social obligation, put it anyway you like). After a given time, the mortgage is paid off and I now own the whole house, you have had your roof and four walls but you own nothing more than you did when you first started renting. Thanks and goodbye.

Similarly, buying shares, especially new issues of shares in already successful companies who hold some kind of market power, is a way of capturing through the dividends, the value created by the people who work for that company. My $1,000 may very well help start up the new business, but isn't it interesting that a share gives me a perpetual stake in the operation.

The important thing is that the percentage of owners in a society has some kind of dynamic upper limit. If suddenly everyone adopts the same strategy, the whole thing breaks down. If everyone saves for their retirement for example, as they do in Japan, the economy eventually freezes up, despite the fact that interest rates are zero, because there is no social provision for retirement, the Japanese sock it away and everything stops. [I just discovered that this is called "The Paradox of Thrift" and was first proposed by Keynes. Oddly, it turned up in a discussion on CNBC Squawkbox about the need to re-invigorate the Japanese economy. It seems pretty evident that unless the Japanese Government can find a way to allow some of its political paymasters to go broke while liquidating their malinvestments, the rational thing for individuals to do, save for a stormy day, will continue to paralyse the economy. More here] The Australian Government is now being pushed to get Aussies to increase their savings for retirement which makes sense up to a point, however, if everyone suddenly is forced to start saving "enough" for their retirement, those on the lowest incomes will starve in the meantime, but in any case, the money taken out of the economy will stall that economy in the first place, and has to be invested in something.

If the economy is slowed by the removal of funds, where would that be? And who would want it invested in the same places as everyone else, creating asset price inflation leading to bubbles leading to crashes leading to loss of savings. Oh, that's right, we've just been there.

In Australia over the last few years the cry has been own shares, then buy property. Tens of thousands of people have extended their mortgages not to consume as in the US, but to buy "investment properties". That process however has gone beyond the exploitable, now there are so many people trying to rent out property that it is becoming a renters market, driving down returns on the investment and, at the first sign of increased interest rates, mass bankruptcy.

The same applies to any strategy for anything, if everyone does it, for the most part the consequences will be bad in the medium and long term.

What we need to evolve is a strategy that enables a wide variety of strategies to be pursued with reasonable success, but the time for that may be past. As the media leaps joyfully on every new idea, as the Internet spreads them like viruses, the cycle from developing a new strategy top its universal, or at least critical mass adoption is getting shorter and shorter, pretty soon, any strategy that doesn't succeed within hours will have too long a horizon to be worth trying.

Since most such strategies require debt to enable them, the outlook for the banking business is bleak.