Sunday, January 14, 2018

The Fascinating Psychology of Blowoff Tops

Central banks have guaranteed a bubble collapse is the only possible output of the system they've created.
The psychology of blowoff tops in asset bubbles is fascinating: let's start with the first requirement of a move qualifying as a blowoff top, which is the vast majority of participants deny the move is a blowoff top.
Exhibit 1: a chart of the Dow Jones Industrial Average (DJ-30):
Is there any other description of this parabolic ascent other than "blowoff top" that isn't absurdly misleading? Can anyone claim this is just a typical Bull market? There is nothing even remotely typical about the record RSI (relative strength index), record Bull-Bear ratio, and so on, especially after a near-record run of 9 years.
The few who do grudgingly acknowledge this parabolic move might be a blowoff top are positive that it has many more months to run. This is the second requirement of qualifying as a blowoff top: the widespread confidence that the Bull advance has years more to run, and if not years, then many months.
In the 1999 dot-com blowoff top, participants believed the Internet would grow at phenomenal rates for years to come, and thus the parabolic move higher was fully rational.
In the housing bubble's 2006-07 blowoff top, a variety of justifications of soaring valuations and frantic flipping were accepted as self-evident.
In the present blowoff top, the received wisdom holds that global growth is just getting started, and corporate profits will soar in 2018. Therefore current sky-high valuations are not just rational, they clearly have plenty of room to rise much higher.
Skeptics are derided as perma-bears who've been wrong for 9 long years. This is the third requirement of qualifying as a blowoff top: Bears and other skeptics are mocked and/or dismissed as irrelevant.
Meanwhile, observers who haven't drunk the punch recognize this as the final leg of a 9-year orgy of central bank stimulus. Pump $14 trillion into global financial assets and all sorts of wonderful things happen, especially if the central banks make it clear in public statements that they will "do whatever it takes," i.e. assets will not be allowed to decline.
Consider the psychology in play: central bankers have sought to convince private-sector players that central banks will never let markets decline, and so the smart strategy was to buy the dips, and buy every new high--in essence buy, buy, buy and don't bother hedging long positions, as there was no need to squander money on hedges against declines that would never happen.
Now the central banks are facing runaway asset bubbles that are the direct consequence of their promoting the belief that "central banks will never let markets go down."
So how do central banks deflate the bubbles gently? How do they change the market psychology without triggering a crash? If central banks cut off the stimulus, and send messages that "now we will let markets decline," then what's the rational response?Sell, and sell everything now rather than ride the bubble collapse down.
As I've noted before, "We live in a system of human emotions that masquerades as a science (economics)." Central bankers are deluding themselves if they think they can calibrate and fine-tune human emotions. When the Bullish certainty that "central banks have our backs" erodes, the switch to bearish impulses to sell before everyone else sells will be sudden and irreversible.
In other words, the central banks have guaranteed a bubble collapse is the only possible output of the system they've created.


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Wednesday, January 10, 2018

Social Change Will Upend the Status Quo

The nation is fragmenting because the Status Quo is failing the majority of the citizenry.
The core narrative of the Status Quo is that nothing fundamental needs to be changed: all the problems can be solved with more "free money" (borrowed from the future at low rates of interest) and a few policy tweaks such as Universal Basic Income (UBI) (the topic of my new book Money and Work Unchained).
This core narrative is false: everything needs to change, from the bottom up.And that of course terrifies those gorging at the trough of status quo wealth and power.
The power structure can manipulate financial metrics, but it can't manipulate rising wealth/power inequality or social discord. Whatever you think of President Trump, his election is a symptom of profound social discord--discord which author Peter Turchin explains is cyclical and cannot be squashed with phony reforms like UBI or police-state repression.
The nation is fragmenting because the Status Quo is failing the majority of the citizenry. The protected few are reaping all the benefits of the Status Quo, at the expense of the unprotected many.
As I have outlined many times, this unsustainable asymmetry is the only possible outcome of our socio-economic system, which is dominated by these forces:
1. Globalization--free flow of capital, labor arbitrage (workers must compete with the lowest-cost labor around the world).
2. Nearly free money from central banks for bankers, financiers and corporations.
3. Pay-to-play "democracy"-- wealth casts the only votes that count.
4. State protected cartels that privatize gains and socialize losses.
5. A political system stripped of self-correcting feedback and accountability.
Once you understand the inputs and structure, you realize there is no other possible output other than unsustainably expanding debt and wealth/income inequality. Policy tweaks cannot change the output; all they do is provide an illusion of reform that serves the need of those at the top to obscure the systemic injustices and unsustainability of the extractive, exploitive, predatory, parasitic system that's enriching them.
What do people do when centralized systems fail to deliver what was promised? They fragment into smaller "tribes" and find fewer reasons to cooperate in centralized systems. As historian-economist Turchin explained in his 2016 book Ages of Discord, human history manifests cycles of social disintegration and integration in which the impulse to cooperate in large social structures waxes and wanes.
Turchin identified 25-year cycles that combine into roughly 50-year cycles, comparable (though not identical with) Kondratieff's proposed economic cycles.
These 50-year cycles are part of longer 150 to 200-year cycles that move from cooperation through an age of discord and disintegration to a new era of cooperation.
These long cycles parallel the cyclical analysis of David Hackett Fischer, whose masterwork The Great Wave: Price Revolutions and the Rhythm of History I've referenced many times over the years, most recently in We've Entered an Era of Rising Instability and Uncertainty (July 18, 2016).
Turchin's model identifies three primary forces in these cycles:
1. An over-supply of labor that suppresses real (inflation-adjusted) wages
2. An overproduction of essentially parasitic Elites
3. A deterioration in central state finances (over-indebtedness, decline in tax revenues, increase in state dependents, fiscal burdens of war, etc.)
These combine to influence the social order, which is characterized in eras of discord by declining loyalty to self-serving special interests (disintegration) and in eras of cooperation by a willingness to compromise for the good of the entire society (integration).
Gordon Long and I discuss 2018: Year of Accelerating Social Change (Part 1)(15 minutes) in our latest program:



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Sunday, January 07, 2018

Yes, But at What Cost?

This is how our entire status quo maintains the illusion of normalcy: by avoiding a full accounting of the costs.
The economy's going great--but at what cost? "Normalcy" has been restored, but at what cost? Profits are soaring, but at what cost? Our pain is being reduced--but at what cost?
The status quo delights in celebrating gains, but the costs required to generate those gains are ignored for one simple reason: the costs exceed the gains by a wide margin. As long as the costs can be hidden, diluted, minimized and rationalized, then phantom gains can be presented as real.
Exhibit One: the US public debt. If you borrow and blow enough money, it's not too difficult to generate a bit of "growth"--but at what cost?
Exhibit Two: opioid deaths. One of the few metrics that's climbing as fast as the national debt is the death rate from prescription and synthetic opioids:
Exhibit Three: student loan debt. Here's a chart of debt that is federally originated but paid by individual students: the infamous student loan debt that has shot up over $1 trillion in a few years.
You see the point: the cost are skyrocketing but the gains are diminishing. The costs of maintaining the illusion of "normalcy"--for example, that going to college is "still affordable"-- are soaring, while the gains of a college education are declining as credentials and diplomas are is oversupply. (What's scarce are the real-world skillsets employers actually need.)
Americans are in pain, and the cartel-sickcare "solution"--"non-addictive opioids"--is reaping a horrendous toll on all who trusted the sickcare system to deliver non-addictive painkillers. Should the newly addicted sufferer no longer be able to get the synthetic opioid prescribed, the option of choice is street smack (heroin), and this is why heroin deaths are soaring along with deaths caused by synthetic opioids.
Pain has been relieved--but at what cost?
The elites within the Big Pharma and higher education cartels are reaping enormous salaries, bonuses and benefits while these cartels wreak havoc on America's vulnerable underclass (i.e. the bottom 90%). Monumental sums of cash are flowing from the many to the few while the many become addicted to opioids or enslaved to student loan debt.
The financial media is euphoric over the billions of dollars of profits reaped by smart phone manufacturers--every kid needs one, right? But at what cost, not just the financial cost, but the cost in addictive behaviors spawned by smart phones?
iPhones and Children Are a Toxic Pair, Say Two Big Apple Investors (WSJ.com) The iPhone has made Apple Inc. and Wall Street hundreds of billions of dollars. Now some big shareholders are asking at what cost.
This is how our entire status quo maintains the illusion of normalcy: by avoiding a full accounting of the costs of a system set to maximizing profits by any means available, a system of public-private pillage overseen by the protected few at the expense of the vulnerable many.
It's as if we've forgotten that debt accrues interest, i.e. claims on future income. Debt is easy to ignore in the initial euphoria of spending the "free money," but once the depreciated value of what was purchased and the interest starts weighing on the borrower, the borrowed money is revealed as anything but "free."


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Wednesday, January 03, 2018

It's Not About Democracy: Control Fraud Is the Core of our Political System

The many are finally calling out the abusers of power because there's no longer any need to pay the corrupting costs of centralization.
If we strip away the pretense of democracy, what is the core of our political System? Answer: control fraud, which I define as those with control/ power in centralized institutions enriching themselves at the expense of the citizenry by selectively modifying what's permissible, and doing so in a fully legally compliant process, i.e. within the letter of the law if not the intent of the law.
I addressed control fraud a bit in The Hidden-in-Plain-Sight Mechanism of the Super-Wealthy: Money-Laundering 2.0 (December 29, 2017), in which I quoted Correspondent JD.
Here are JD's additional comments on Money Laundering 2.0, control fraud and the political process:
Money Laundering 1.0: You make a bunch of dirty money and you have to find a way to make it legit. How can you turn a bunch of drug money into proper investments? This was a problem for bootleggers and persists into current times. With control fraud, you co-opt the legal machinery and use it to steal. The system protects the deceit. In 2008 we bailed the jerks out. The two are often used together.
I think Money Laundering 2.0 is the second part of this equation and the big global trend. With 2.0, the holder of wealth uses the wheels of the world system to offshore gains (legit or not) to safe places where they cannot be taxed or clawed back. The concept is simple, but the mechanisms are by nature complex to conceal the deal. Think Cayman Islands, Paradise Papers, shell companies, etc, etc. etc. Dump money into crazy cars, homes, etc. If physical goods aren't easy, give to a key foundation or politician and you will be rewarded with complicity at a later date.
Suddenly, pieces fall together. The Russians were not colluding to throw an election; they were as surprised Nov. 2nd as everyone else. The collusion was not about politics, but about Money Laundering 2.0.
Money Laundering 2.0 uses the wheels of accounting and government to allow offshoring of wealth, often passing off losses to the taxpayers in the form of debt.
Thank you, JD. I would add that once oligarchs, kleptocrats, corrupt officials, corporations and politically powerful plutocrats (i.e. the elite few) park their wealth in overseas havens, protected from taxation, they force the many (i.e. those left behind whose income and wealth is exposed to taxation) to shoulder more of the burdens of taxation, that is, pay higher taxes.
The important point here isn't that control fraud is enabled by centralized institutions; it's that control fraud is the only possible output of centralization.I discussed this dynamic in my books Why Things Are Falling Apart and What We Can Do About It and Resistance, Revolution, Liberation: centralization concentrates the power needed for insiders to benefit themselves at the expense of everyone outside the ring of power.
Here is centralized power at work: the mechanism to further enrich wealthy elites and political insiders isn't an unfortunate accident of centralized power, it's the only possible outcome of centralized power.
We're told that centralized power is the only possible way to organize human society, that it is as inevitable as the tides. But this is no longer true. This claim serves insiders well, as it makes their self-serving abuses of power seem if not legitimate then unavoidable.
But centralized organizations can now be replaced by decentralized networks. We no longer require moguls, empires or emperors, or their modern equivalent (Eurozone, Politburo and Federal enforcers, etc.) or even centrally controlled currencies, which are the ultimate form of control fraud.
The many are finally calling out the abusers of power because there's no longer any need to pay the corrupting costs of centralization. The benefits of centralization were exhausted in the 20th century, and now the negative consequences are piling up, suffocating the planet and its people. We are sliding down the S-curve of centralization, gathering momentum:
Centralized power is never about democracy or the consent of the governed;those are mere props to hide the core function of centralized power: control fraud that benefits the few at the expense of the many.


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Read the first section for free in PDF format.


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Tuesday, January 02, 2018

Why the Financial System Will Break: You Can't "Normalize" Markets that Depend on Extreme Monetary Stimulus

Central banks are now trapped.
In a nutshell, central banks are promising to "normalize" their monetary policy extremes in 2018. Nice, but there's a problem: you can't "normalize" markets that are now entirely dependent on extremes of monetary stimulus. Attempts to "normalize" will break the markets and the financial system.
Let's start with the core dynamic of the global economy and nosebleed-valuation markets: credit.
Modern finance has many complex moving parts, and this complexity masks its inner simplicity.
Let’s break down the core dynamics of the current financial system.
The Core Dynamic of the “Recovery” and Asset Bubbles: Credit
Credit is the foundation of the current financial system, for credit enables consumers to bring consumption forward, that is, buy more stuff today than they could buy with the cash they have on hand, in exchange for promising to pay principal and interest with their future income.
Credit also enables speculators to buy more assets than they otherwise could were they limited to cash on hand.
Buying goods, services and assets with credit appears to be a good thing: consumers get to enjoy more stuff without having to scrimp and save up income, and investors/speculators can reap more income from owning more assets.
But all goods/services and assets are not equal, and all credit is not equal.
There is an opportunity cost to any loan (i.e. credit), as the income that will be devoted to paying principal and interest in the future could have been devoted to some other use or investment.
So borrowing money to purchase a product or an asset now means foregoing some future purchase.
While all products have some sort of payoff, the payoffs are not equal. If I buy five bottles of $100/bottle champagne and throw a party, the payoff is in the heady moments of celebration.  If I buy a table saw for $500, that tool has the potential to help me make additional income for years or even decades to come.
If I’m making money with the table saw, I can pay the debt service out of my new earnings.
All assets are not equal, either. Some assets are riskier than others, with a less certain income stream or payoff.  Borrowing to buy assets with predictable returns is one thing, buying assets with highly speculative returns is another; regardless of the eventual result of the investment, the borrower still has to pay interest on the debt, even if the speculative investment goes bust.
The basic idea here is the loan is based on collateral, that there is something of value that is anchoring the loan above and beyond the borrower’s ability to pay principal and interest.
The classic example is a house: the lender issues a mortgage based on the market value of the house, i.e. what it can be sold for should the buyer default on the mortgage and the lender has to sell the collateral (the house) underpinning the loan.
The value of the collateral is obviously contingent on the market; the value of the house goes up and down depending on supply and demand, the availability and cost of credit, and so on.
If a lender loans me $500 to buy a new table saw, and I default on the loan, the table saw is the collateral. Unfortunately for the lender, the market value of the used tool is perhaps $250 at best.  So the lender loses $250 even after repossessing and selling the collateral.
If the lender loaned me $500 to buy champagne and I default, there is no collateral at all; the loan was based solely on my ability and willingness to pay principal and interest into the future.
When I say that all credit is not equal, I’m referring to the creditworthiness of the borrower.   
Lenders make money by issuing credit to borrowers.  The incentives are clear: the more credit they issue, the higher their income.
Given this incentive, it’s easy to convince oneself that a marginal borrower is creditworthy, and that a speculative investment is a safe bet.
This is especially true if the government guarantees the loan, for example, a home mortgage. With the government guarantee, there’s no reason not to take a chance on a marginal (risky) borrower buying a marginal (risky) house.
If we take some home mortgages and bundle them into a mortgage-backed security, we can sell the future income stream (i.e. the payments made by the borrowers in the future) as securities that can be sold worldwide to investors.  I can make risky loans, skim the fees and pass the risk onto global investors.
All this debt is now considered an asset to investors.
There’s one last feature of credit: liquidity. Liquidity refers to the pool of credit available to refinance or roll over existing debt.  If I’m having trouble paying my credit card, for example, and there’s plenty of liquidity in the credit system, I can obtain a larger line of credit and borrow enough to pay my monthly principal and interest on the existing debt.
If I can refinance my existing debt at a lower interest rate, so much the better.
Credit can be issued by private-sector lenders to private-sector borrowers, or by public-sector central banks to private-sector lenders.  Central banks can buy public and private debt (government and corporate bonds, mortgages, etc.), effectively transferring debt from the private sector to the public sector.
These are the basic moving pieces of the credit expansion that has fueled both the “recovery” and the reflation of asset valuations, which have now reached historic extremes.
The Current (Flawed) Logic We're Pursuing
In response to the Global Financial Crisis (GFC) of 2008, central banks lowered interest rates to near-zero to boost private-sector lending, and increased liquidity to enable private-sector lenders and borrowers to refinance existing debt and generate new credit.
They also bought assets: government bonds, corporate bonds and in some cases, stocks via ETFs (exchange traded funds).
The goal here was to prop up the collateral underpinning all the debt.  If liquidity dried up, consumers and enterprises would default, handing lenders catastrophic losses, as the crisis had crushed the market value of the collateral that lenders would have to sell to recoup their losses.
And so central banks pursued heretofore unprecedented policies aimed at goosing private-sector lending and borrowing while boosting the markets for stocks, bonds and real estate—the collateral that supported all the debt that was at risk of default.
All this low-cost and easily available credit, coupled with the central banks’ public messages that they would “do whatever it takes” to restore credit mechanisms and reflate the private-sector markets for stocks, bonds and real estate, worked: credit expanded and markets recovered, and then soared to new highs.
While these policies accomplished the intended goals, boosting both new credit and asset valuations, they also generated less salutary consequences.
By lowering interest rates and bond yields to near-zero, central banks deprived institutional owners who rely on stable, high-yielding safe investment income—insurers, pension funds, individual retirement accounts, and so on—of exactly what they need: safe, stable, high-yield returns.
In this “do whatever it takes” environment, the only way to earn a high return is to buy risk assets—assets such as stocks and junk bonds that are intrinsically riskier than Treasury bonds and other low-risk investments.
The Stark Conundrum We Face
Central banks are now trapped. If they raise rates to provide low-risk, high-yield returns to institutional owners, they will stifle the “recovery” and the asset bubbles that are dependent on unlimited liquidity and super-low interest rates.
But if they keep yields low, the only way institutional investors can earn the gains they need to survive is to pile into risk assets and hope the current bubbles will loft higher.
This traps the central banks in a strategy of pushing risk assets—already at nose-bleed valuations—ever higher, as any decline would crush the value of the collateral underpinning the titanic mountain of debt the system has created in the past eight years and hand institutional owners losses rather than gains.
This conundrum has pushed the central banks into yet another policy extreme: to mask the rising systemic risk created by asset bubbles, central banks have taken to suppressing measures of volatility—measures than in previous eras would reflect the rising risks of extreme asset bubbles deflating.
In Part 2: So What Comes Next & How Can We Prepare For It?, we’ll ask: how does this resolve? Can central banks raise rates without popping the bubbles the system needs to remain solvent? Or can they keep yields near zero and keep pushing asset valuations higher for years or decades to come?
Or is this all much more likely to end in a massive financial/currency crisis? One characterized by default and liquidation of America's high-fixed-cost, heavily indebted households and enterprises that have only stayed afloat by borrowing more money?
This vast expansion of stimulus in year Eight of "expansion/recovery" is an unprecedented extreme: does anyone seriously believe you can stop this flood and markets will "normalize"?
This essay was first published on peakprosperity.com under the title The Inescapable Reason Why the Financial System Will Fail.
Click here to read Part 2 of this report (free executive summary, enrollment required for full access)


My new book Money and Work Unchained is $9.95 for the Kindle ebook and $20 for the print edition.
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