Sunday, November 17, 2019

If Not-QE Is QE, then is Not-a-Blowoff-Top a Blowoff Top?

Can $300 billion, or $600 billion, or even $1 trillion continue to prop up an increasingly risk-riddled, fragile $330 trillion global bubble in overvalued assets?
When is "Not-QE" QE? When Federal Reserve Chairperson Jerome Powell declares QE is not QE. We can constructively recall the story that Abraham Lincoln famously recounted in 1862: 'If I should call a sheep's tail a leg, how many legs would it have?'
'Five.'
'No, only four; for my calling the tail a leg would not make it so.'
Calling QE not-QE doesn't make it different than QE, but it does communicate the Fed's panicky desire to mask its stupendous injection of financial cocaine into the financial system. The Fed's level of panic is noteworthy, as is the absurd transparency of its laughable attempt to conceal its panic.
In the same fashion, the financial media is loudly declaring the current blowoff top in stocks is not a blowoff top. The delicious irony here is these denials are reliable markers of blowoff tops: the louder the denials, the greater the odds that this is in fact the blowoff top that many pundits have been expecting for some time, but always in the future.
Garsh darn it, maybe the future has arrived. The financial media denied the Q4 1999 - Q1 2000 blowoff top was a blowoff top, and it repeated its denial of a blowoff top in housing in 2006-2007. The pundits of 1929 also denied the Q3 blowoff top in stocks was a blowoff top.
If you want a reliable signal that the blowoff top has peaked, listen to the screechy adamance of the deniers. The list of reasons why blowoff tops can't be blowoff tops is practically endless: sentiment isn't bullish enough, there's a Wall of Worry for stocks to climb (overlooking the inconvenient reality that there is always a Wall of Worry), the consumer is still looking good, corporate earnings will rebound, the soft patch is behind us, the Internet will grow for decades to come, they're not making any more land, capital flows favor higher asset prices, we owe it to ourselves (paging Paul Krugman--the Keynesian Cargo Cult is about to dance the humba-humba around the campfire and you're needed...), debt doesn't matter (it never matters until it does), price-earning ratios have plenty of room to move higher, and everyone's favorite, don't fight the all-powerful Fed (and we command you not to look behind the curtain while we worship false gods and wave dead chickens).
But nonetheless, blowoff tops in asset bubbles remain a feature of asset overvaluation, which by the way has once again reached historic extremes (GDP to equity valuation, etc.)
This introduces the other reliable indicator of blowoff tops: this time it's different. It's always different at blowoff tops, but not in the way that proponents of eternally rising asset valuations imagine.
Even geniuses misread blowoff tops. Popular culture has it that Isaac Newton made money in the South Sea Company bubble, sold for a handsome profit and then re-entered at a much higher price, losing a fortune when the blowoff top collapsed. Some historians have argued that this account is not accurate, but new research verifies that Newton did miscalculate and lose a fortune: Newton's financial misadventures in the South Sea Bubble:
This paper presents extensive new evidence that while Newton was a successful investor before this event, the folk tale about his making large gains but then being drawn back into that mania and suffering large losses is almost certainly correct. It probably even understates the extent of his financial miscalculations.
Which brings us to the present blowoff top that is widely presented as not-a-blowoff-top because of XYZ, with XYZ boiling down to the omnipotence and omniscience of the Federal Reserve. The implicit belief currently holding sway (just as various implicit beliefs enabled the South Sea Bubble in 1720 and the bubbles in 1929, 2000 and 2008, to name but a few of a rogue's gallery of blowoff tops) is the Fed has complete control of interest rates and the stock and bond markets, and the evidence for this belief is the Fed's unparalleled success in inflating asset bubbles in stocks, bonds and real estate for a decade, a managerial feat now in its 11th year.
The possibilities that the Fed's manipulation--oops, management--of markets might suffer from diminishing returns, or that markets might still be prone to nonlinear events generated by emergent properties of complex systems are dismissed as so unlikely that there's no point in even discussing them.
All of which brings us to the Fed's painfully obvious panic and pathetic attempt to conceal their panic, factors that are illustrated on this chart of the Fed balance sheet, which has suddenly exploded higher by $300 billion.
If everything's just peachy in global banking and the U.S. economy, why the sudden mainlining of $300 billion of financial cocaine into the collapsing veins of the financial system?
Just for context, that $300 billion is more than the entire GDP of Chile and a host of other nations. While the Fed's $4 trillion balance sheet (up from a mere $800 billion prior to the Global Financial Meltdown in 2008) has jaded us to large numbers, $300 billion is still a monumental sum of "money" (i.e. currency created out of thin air by the Fed to distribute to banks, financiers, the super-wealthy and corporations.)
We might want to recall here that the global asset bubble the Fed is attempting to keep inflating is several orders of magnitude larger: well north of $300 trillion in 2018. (It's also worth recalling here that the Fed is not just the central bank of the USA, it's also the central bank of last resort for the entire global economy. Much of the $23 trillion in loans, guarantees and backstops the Fed issued in 2008-2009 propped up non-U.S. banks and institutions.)
Can $300 billion, or $600 billion, or even $1 trillion continue to prop up an increasingly risk-riddled, fragile $330 trillion global bubble in overvalued assets? Just as a matter of scale, the answer is "not likely." The key variable here the belief of participants in the omnipotence and omniscience of the Fed.
If the Fed can no longer keep the global bubbles inflating, then the bubble-sustaining belief that the Fed is in effect a new god will lose its self-predictive feedback loop: stocks go up because we believe the Fed will push them higher, so we buy stocks and our buying pushes stocks higher, doing the Fed's work for it.
Blowoff tops are rarely identified in the present. Even geniuses get fooled. But if we look at one simple indicator--the number of financial types denying this is a blowoff top and the number calling this the blowoff top of the entire 11-year Fed-induced frenzy of over-valuation-- we have to conclude that the odds favor this being the blowoff top nobody expected until some far-off moment in the future. Well just maybe the future has arrived, but nobody noticed.


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Friday, November 15, 2019

Medicare-for-All "Socialism" Is Just Another Racket

The entire system of health needs to be re-organized from the ground up, and funding the rackets will only speed the collapse of the system.
The core problem with "socialist" proposals such as Medicare-for-All is that they don't actually fix what's broken--they just expand existing rackets such as the healthcare/sickcare racket, the higher education racket, and so on.
Let's start by separating "real socialism" (state ownership of the means of production) from "faux socialism" (the state borrows trillions of dollars to fund self-serving public-private rackets).
The basic idea of classic socialism is that state ownership of the means of production enables the state to harvest the surplus production and invest it in the public good. If the state is organized as a democracy, then the public gets a say in defining "the public good" and changing course if the national surplus is being mal-invested or diverted into the hands of the few under the guise of "the public good."
What's being labeled "socialist" in present-day U.S.A. is nothing more than the state borrowing from future generations to fund profiteering rackets today. It's hardly a secret that the U.S. spends twice as much per person on healthcare but trails the pack of other developed nations in actual health. (See infographic below for the facts, which I have discussed here for 14 years.)
Problem #1 is robust health isn't profitable, while managing chronic lifestyle diseases and pushing needless/harmful medications and procedures are immensely profitable.
Problem #2 is the external costs of destructive but oh-so-profitable products are not paid by either producers or consumers at the point of purchase. The tobacco industry offers an example of this decoupling of "price discovery" and externalities that manifest years or decades later.
Selling tobacco was and is an enormously profitable venture, but only because the full costs of tobacco use manifest many years after the products are purchased and consumed, and these costs do not fall on the tobacco producers but on the consumers (who suffer terrible health consequences and early death), and on the healthcare system and society at large, which must absorb the staggering direct cost of dealing with the diseases caused by tobacco addiction and the indirect costs of lost productivity and early death.
For every $1 of profit the tobacco companies earned, $100 of future external costs were imposed on the consumers of tobacco and society at large. If the full external costs were levied at the point of sale, tobacco would be extremely expensive, and if the true risks had been advertised as heavily as the products themselves, the tobacco companies' liability exposure would have made the packaging and selling of tobacco an unprofitable business.
To maintain profitability, the tobacco companies engaged in a decades-long campaign to mask the real-world health consequences of using their products. The goal was three-fold: hide the well-known consequences of tobacco addiction, maintain that tobacco wasn't addictive, and maintain that it wasn't unhealthy, decoupling the sale of tobacco from the eventual costs.
The same dynamic is in play with America's food industry. Garbage in, garbage out: garbage "food" in, garbage health out.
This plays perfectly into sickcare's PR, which is that there is a magic handful of oh-so-profitable pills one can swallow to "fix" all the disorders caused by a garbage diet and near-zero fitness. And in case your doctor didn't adequately explain the wunnerful benefits of the magic handful of oh-so-profitable pills, Big Pharma helpfully spends billions of dollars on ads to promote a magical-thinking belief that some new med or procedure will "fix" complex, inter-connected metabolic disorders created by poor diet and an absence of fitness.
Medicare-for-All is simply a way to fund the racket as painlessly as possible, which is to borrow from future generations to fund profiteering rackets in Big Ag, Big Pharma, Big Packaged Food/Fast Food, and so on--the equivalents of Big Tobacco.
Just as smokers were encouraged to kill themselves without being aware of the eventual consequences of tobacco addiction, consumers of highly processed foods are killing themselves without being aware of the eventual consequences.
The promoters of Medicare-for-All offer a Band-Aid to fund the racketeering nature of U.S. healthcare: we're gonna tax the billionaires and they'll pay for the racket. It would be comical if it wasn't so painfully obvious that in our pay-to-play political circus, any new tax bill will be larded with exceptions and loopholes.
Let's say the "tax the rich" proposals raise $50 billion -- woohoo. But this is a drop in the bucket of additional costs incurred by Medicare-for-All, which could easily top $500 billion a year.
Nobody pushing Medicare-for-All dares connect the dots between garbage in, garbage out lifestyles and an unsustainably costly healthcare system of gargantuan waste, fraud, shameless profiteering, needless/harmful med and procedures, etc., a system which consumes twice as much money per person as our developed-world competitors for a measure of national health that is, if we're honest with ourselves (gasp), actually declining.
The entire system of health needs to be re-organized from the ground up, and funding the rackets will only speed the collapse of the system.
U.S. Healthcare Spending
U.S. Healthcare Spending, courtesy of Peter G. Peterson Foundation



My recent books:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Wednesday, November 13, 2019

Corporate America Is an Anti-Social Black Plague: Negative Network Effects Run Amok

The anti-social carnage unleashed by Corporate America's "lock-in" / negative network effects has no real limits.
Here's the U.S.economy in a nutshell: Corporate America is an anti-social Black Plague, gorging on cartel-monopoly profits reaped from negative network effects running amok, enriching the few at the expense of the many and concentrating political power in the hands of the most rapacious, anti-democratic corporate sociopaths.
Let's start with network effects: the conventional definition is "When a network effect is present, the value of a product or service increases according to the number of others using it."
So for example, when telephone service was only available to a few users, its value was limited. As more people obtained telephone service, the value of the network increased to both its owners and to users, who could reach more people and conduct commerce more easily as a result of having telephone service.
In the conventional analysis, negative network effects occur from "congestion," i.e. the network is adding new users so quickly that "more users make a product less valuable."
But this superficial analysis misses the fatally anti-social consequences of corporate negative network effects, a dynamic described by analyst Simons Chase in this essay. Here is an excerpt:
Even the most imaginative and far-reaching narratives about non-obvious economic fragility and off balance sheet risks are mere rants without constructive ideas about causes and solutions.
Consider network effects, the popular economic construct applied to market concentration and increasing returns for strategies pursued by some leading tech companies. This dynamic economic agent is also known as demand side economies of scale.
W. Brian Arthur, the economist credited with first developing the theory, described the condition of increasing returns as a game of strategic positioning and building up a user base to the point where 'lock in' of dominant players occurs. Companies able to tap network effects have been rewarded with huge valuations and highly defensible businesses.
But what about negative network effects? What if the same dynamic applies to the U.S.'s pay-to-play political industry where the government promotes or approves of something through a policy, subsidy or financial guarantee due to private sector influence.
Benefits accrue only to the purchaser of the network effects, and consumers, induced by the false signal of large network size, ultimately suffer from asymmetric risk and experience what I'm calling a loss of intangible net worth for each additional member after the 'bandwagon' wares off.
If this were the case, then you would see companies experience rapid revenue growth (out of line with traditional asset leverage models), executives accumulating huge fortunes and political campaign coffers swelling.
But the most striking feature would be the anti-social outcomes, the ones not available without the instant critical mass of government-supported network effects, the ones that, at scale, monetize a society's intangible net worth.
Some products tied to these metrics include: prescriptions drugs, junk food targeting children, mortgages, diplomas, and social media. The list of industries that are likely to have gained through the purchasing of network effects in D.C. maps closely to the decay that is visible in U.S. society.
The loss of intangible capital and other manifestations of non-obvious economic fragility (to use Simons' apt phrase) is the subject of my latest book, Will You Be Richer or Poorer? Profit, Power and A.I. in a Traumatized World, in which I catalog the anti-social consequences of negative network effects and other forces eroding our nation's intangible capital.
Consider Facebook, a classic case of negative network effects running amok, creating immensely anti-social consequences while reaping billions in profits: Facebook isn't free speech, it's algorithmic amplification optimized for outrage (TechCrunch.com).
The full social cost of social media's negative network effects are difficult to tally, but studies have found that loneliness and alienation are correlated to how many hours a day individuals spend on social media. (An Internet search brings up dozens of reports such as NPR’s Feeling Lonely? Too Much Time On Social Media May Be Why.)
Facebook is trying to leverage its social media "lock-in" to issue its own global currency and both Facebook and Google are trying to offer banking services without any of the pesky regulations imposed on legitimate banks. (Will $10 million in lobbying do the trick? How about $100 million? We've got billions to "invest" in corrupting and controlling public agencies and political power.)
Once Corporate America locks in cartel-monopoly power, i.e. you have to use our services and products, the corporate sociopaths use their billions in market cap and profits to buy the sociopaths in government. Pay-to-play is the real political machinery; "democracy" is the PR fig-leaf to mask the private sector "lock-in" (monopoly) and the public-sector "lock-in" (regulatory influence, anti-competitive barriers to entry, the legalization of corporate fraud, cooking the books, embezzlement, etc.)
Consider Boeing, an effective monopoly which used $12 billion in profits to buy back its own shares and "invested" millions in buying political influence so it could minimize public-sector oversight.
Rather than spend the $12 billion designing a new safe aircraft, Boeing cobbled together a fatally flawed design dependent on software, as described in The Case Against Boeing (The New Yorker) to maximize the profitability of its "lock-in".
Google is running amok on so many levels, it's difficult to keep track of its anti-social "let's be evil, it's so incredibly profitable" agenda: Google's Secret 'Project Nightingale' Gathers Personal Health Data on Millions of Americans (Wall Street Journal). The goal, of course, is to reap more billions in profits for insiders and corporate sociopaths.
The anti-social carnage unleashed by Corporate America's "lock-in" / negative network effects has no real limits. Consider the essentially limitless private and social damage caused by Big Tech: Child Abusers Run Rampant as Tech Companies Look the Other Way (New York Times).
Then there's the opioid epidemic, whose casualties run into the hundreds of thousands, an epidemic that was entirely a creature of Corporate America seeking to maximize "lock-in" profits by buying regulatory approval and pushing false claims that the corporate products were safe and non-addictive.
Note the media sources of these reports: these are the top tier of American journalism, not some easily dismissed alt-media source.
What does this tell us? It tells us the anti-social consequences are now so extreme and so apparent that the corporate media cannot ignore them. Once Corporate America locks-in market, financial and political power, it acts as a virulent Black Plague on the social order, legitimate democracy, and an entire spectrum of intangible social capital including the rule of law.
As Simons put it: "The ethical dimension underpinning the whole system is this: what's moral is what's legal and what's legal is for sale." Where does this Black Plague pathology take us? To a collapse of the status quo which enabled it, cheered it, and so richly rewarded it.



My recent books:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Tuesday, November 12, 2019

Stock Market Cheerleading: Why Do We Celebrate the Super-Rich Getting Richer?

It's not too difficult to predict a political rebellion against the machinery of soaring wealth and income inequality.
The one constant across the media-political spectrum is an unblinking focus on the stock market as a barometer of the national economy: every major media outlet from the New York Times to Fox News prominently displays stock market action, and TV news anchors' expressions reflect the media's emotional promotion of the market as the end all to be all: if stocks rose, the anchors are smiling and chirpy, and if the market fell then their expressions are downcast and dour.
This cheerleading of the stock market is based on an implicit assumption that the rising stock market raises all boats: a rising market is assumed to reflect an expansion of sales and profits that trickle down to the masses in higher wages, more jobs and rising 401K retirement accounts.
The reality is starkly different: the vast majority of the gains generated by a rising stock market flow to the top 10% households who own 93% of all financial assets, and the gains within the top 10% are highly concentrated in the top .01% of financiers, super-wealthy families and corporate managers who have reaped the vast majority of the past decade of stock market gains.
As my friend Adam T. recently observed: when we cheer the rising stock market, we're celebrating the super-rich getting even richer. Why are we celebrating an unprecedented widening of wealth inequality that erodes democracy (because the super-wealthy buy political influence) and the social contract (as the vast majority of wealth and power flow to the top .01%)?
Soaring wealth inequality is extremely destabilizing politically, socially and economically: much of the social unrest breaking out around the world can be traced to the political, social and financial disenfranchisement of the masses by super-wealthy elites.
Economically, soaring inequality concentrates and capital and power in the hands of the few, creating fertile ground for cartels and monopolies which raise costs without generating better services or more jobs. This dynamic is easily visible in the U.S.:
The U.S. Only Pretends to Have Free Markets: From plane tickets to cellphone bills, monopoly power costs American consumers billions of dollars a year.
Politically, the 90% who are losing ground seek political redress, generating tension in a political system dominated by the super-wealthy. Since the political machinery is controlled by the elite, the bottom 90%'s efforts to gain political redress will fail: Medicare for All (to take one example of many) is just an expansion of rapacious sickcare cartels that further concentrate wealth and power in the hands of the few at the expense of the many.
(Recall that 40% of Medicare spending is billing fraud, worthless or harmful meds and procedures and paper-pushing. All Medicare for All will accomplish is sickcare CEOs skimming $80 million a year in stock options will skim $160 million.)
In cheering advances in the stock market that benefit the financial and political elite, we're cheering the destabilization of our economy and society. Is that really something worth cheering?
At some point, people will awaken to the fact that the soaring stock market is the primary engine of soaring inequality, the erosion of democracy and the destabilization of the social order.
It's not too difficult to predict a political rebellion against the machinery of soaring wealth and income inequality, which will eventually lead to a severe reduction in the power of the Federal Reserve and its greed-driven dependent, Wall Street.
It's not just wealth that's concentrated in the hands of the top .01%--virtually all the income gains of the past decade of "recovery" have flowed to the top .01%: and the super-wealthy's response? Let them eat brioche, a response so disconnected from reality that it would be humorous were it not a reflection of a completely corrupt and rotten status quo.



My recent books:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
 
Thank you, Matt G. ($5/month), for your monumentally generous pledge to this site-- I am greatly honored by your support and readership.
 

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