Friday, May 29, 2020

First the Deflationary Deluge of Assets Crashing, Then the Tsunami of Inflation

Once the pool of greater fools dries up, stocks crash regardless of what the Fed does or bleats.
The conventional view is the Federal Reserve creating trillions of dollars out of thin air will trigger inflation. Not so fast. Yes, creating trillions of dollars out of thin air will eventually devalue the purchasing power of each dollar--what we call inflation--but first all the unprecedented asset bubbles will pop and valuations will crash.
Let's call this a deflationary deluge as unsustainable asset prices are eroded by a hard rain of reality. To understand the enormity of the current bubbles, please glance at the charts below. The first chart depicts recent stock market bubbles; note the extreme height of the current bubble.
The next chart shows the S&P 500, and the extraordinary amplification of the bubble that reached its apex in February 2020. Note that each ramp higher takes less time to reach its peak. The most recent snapback rally gained about 870 points in a mere two months--a move that took roughly 5 years in the early 2000s.
Real estate and other assets have also soared in unprecedented bubbles. Old bungalows that sold for $150,000 less than 20 years ago are now supposedly worth over $1 million.
What made this possible? An equivalent bubble in debt. Every sector--household, corporate and government--has borrowed astronomical sums of money to keep the bubble economy glued together. In this rising tide of currency and capital, whatever had scarcity value--real estate, art, stocks--was purchased with the borrowed money as a store of value and / or as a source of income in a world starved of low-risk yields by central banks that dropped interest rates to near zero.
Assets don't have to rise, but the interest and principal on debt has to be paid. That's the rub with buying assets with borrowed money.
The price of assets is set on the margins. In a neighborhood of 100 houses, the price of all the houses is set by the most recent handful of sales. If each house was valued at $1 million, and three houses sell for $800,000, the value of the other 97 houses falls to $800,000 each.
All bubbles rely on a greater fool willing to pay a higher price than the previous somewhat lesser fool. The problem is the supply of greater fools quickly drops to zero when euphoria is replaced by fear and the marginal buyers are no longer willing to pay outlandish sums for houses, stocks, boats, etc.
Every greater fool who abandons a market sticks a pin in the bubble. As prices start eroding, those who bought the over-valued assets with borrowed money start realizing they have to make the interest payments even if the asset is losing value. The only rational choice is to run to the exit and sell the asset.
But since so many recent buyers bought with borrowed money, the exit is quickly jammed with desperate sellers. This triggers market crashes as marginal buyers desperate to sell will drop their price, while the delusional herd still believes the bubble valuations are not just fair but "under-valued."
This is why the majority refuses to sell until it's too late. They believed the fairy tales that "real estate never drops," Apple is a bargain at $300 (see chart below), etc., and are unwilling to suspend those beliefs even as the deflationary deluge washes away their wealth.
By the time they realize the impossibility of getting their wealth back, it's too late to do anything other than salvage what's left by selling now rather than later.
Bubbles tend to rise and drop in rough symmetry, meaning they tend to retrace the entire bubble, though the descent is often much faster than the ascent.
The greatest fairy tale of them all is the Fed has our back. The belief here is that all the dollars created out of thin air by the Fed will flow into stocks. But there is no actual causal mechanism in this belief; the Fed can create dollars out of thin air but they don't have to flow into the stock market; they can go elsewhere. They only flow into stocks because the financiers, banks and other parasites and predators are counting on greater fools to pay ever higher prices for stocks based on their erroneous faith that the Fed's new money magically goes straight into stocks.
Once the pool of greater fools dries up, stocks crash regardless of what the Fed does or bleats, up to the point that the Fed is given the legal go-ahead to buy stocks directly. That's when the inflation everyone anticipates will begin. But inflation is just as unruly a beast as an asset bubble, and control is never quite as complete as the Fed claims.
First the deflationary deluge, then the tsunami of inflation. Both destroy the wealth of believers in fairy tales.
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Posted by Charles Hugh Smith at 9:05 AM

Thursday, May 28, 2020

Social Media's Plantation of the Mind

The Company Store is open, buy whatever you want on easy credit, and don't forget to take an approved narrative with you.
I've been discussing the neocolonial-plantation structure of the U.S. economy since 2008, and now this model has reached perfection in social media's Plantation of the Mind. Once you're firmly enmeshed in this social media Plantation, you lose sight of the fact that there's a larger world outside the plantation: social media platforms aren't exploitive plantations in the World Wide Web/Internet, they are the Internet as far as their users are concerned.
Since I spent some of my youth in a classic Plantation town (and worked on the plantation as a laborer in summer), the concept of a Plantation Economy is not an abstraction to me, but a living analogy of the way our economy works.
In the classic Plantation, everything is managed by those in charge to benefit the owners. Workers are forced to buy their necessities at The Company Store, and since the entire town and plantation is owned by the corporation, there's no private ownership of land or housing; everyone is a serf, beholden to the owners, and since costs are artificially high at The Company Store (due to the lack of competition), the serfs have to go into debt to survive: they become debt-serfs.
In the Plantation Economy, the Company suppresses any innovation that threatens its monopoly and the state enforces whatever means the Corporation deploys: buying up patents and small companies, predatory pricing to bankrupt competitors, etc.
The Plantation Economy is a mono-culture of large corporations and their partner in rentier skimming, the state. Our economy is a state-cartel finance-debt system; it's only capitalist on the margins, that is, in the fringes that aren't profitable enough for corporations to control.
The core feature of this Plantation Economy is the privileges of accumulating capital are all in the hands of the state-cartel elites. The foundation of classical capitalism is the accumulation of capital, which in our era is not just cash, factories, mines, etc.--financial and industrial capital-- but knowledge capital: intellectual property, knowledge of processes, creation and control of content, research and development, control of information streams (that is, maintaining information asymmetry) and so on.
One of the key concepts in the Survival+ critique is the politics of experience. This is an elusive concept because what we take for granted is invisible to us, and we have to go back in time, so to speak, to rediscover a history in which the experience of daily life was quite different from the present.
Today, we accept it as "normal" that marketing worms into every once-private area of our lives. Not that long ago, adverts and marketing were limited to print media (newspapers and magazines) and TV--fundamentally passive media that you could opt out of by setting the paper aside or turning off the TV.
The key concept in all marketing now is supremely pernicious: any advert or campaign which reaches deep into the last refuges of privacy is considered highly valuable. This is of course the raison d'etre of social media: to weave highly profitable marketing into every process we consider essential.
To perfect this colonization of the mind, social media has persuaded users that they no longer need unfettered access to the entire World Wide Web/Internet: we'll give you everything you want right here on our Plantation of the Mind.
Including, of course, what you should think, feel and buy. Since Google dominates "search," and since Google has complete control over what is "found" in searches and what is buried and rendered invisible, i.e. whatever is "not found," then our access to the entire Web is limited in ways we cannot see or understand, because the process and filters are invisible to us.
Once you control the politics of experience, the user isn't even aware that what they now consider "obvious" has been molded by the plantation owners to maximize their private profits. In social media's Plantation of the Mind, users are assured they have complete access to everything that is "fact" and "safe," when in reality everything they see has been filtered to the benefit of the Plantation owners and their political allies in the state hierarchy.
In a democracy, voters must be trusted to make assessments and judgments on their own, i.e. as adults. They must be trusted to realize that marketers are everywhere, attempting to sell something or other, not just goods and services but narratives, which benefit those in power or threaten those in power.
They must be trusted to understand the difference between their own private stake in political decisions and the broader public good.
Alas, the voters are no longer trusted by the elites. They are chattel on the plantation, and have to be managed and coerced for their own good. Enter the perfect tool to do so, social media's Plantation of the Mind.
The entire purpose of social media's Plantation of the Mind is to maximize profits by limiting user's experience and awareness to what is unthreatening to the corporate-state elites. Rather than the old model in which the Web was a free-for-all which included all sorts of content which required users to sort the wheat from the chaff, social media's Plantation of the Mind seeks to sanitize all that chaos into "approved content" which users aren't even aware has been carefully selected for their consumption by hidden processes and filters.
The intent of those filters are also hidden, as is the selection process of those filters.
Who gets to decide what's filtered out "for our own good"? Who gets to decide what is "our own good"?
Welcome to social media's Plantation of the Mind. The Company Store is open, buy whatever you want on easy credit, and don't forget to take an approved narrative with you. Don't worry, we've planted that in your mind without you even realizing it--for your own good, of course.
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Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Posted by Charles Hugh Smith at 10:42 AM

Tuesday, May 26, 2020

Re-Opening the Economy Won't Fix What's Broken

Re-opening a fragile, brittle, bankrupt, hopelessly perverse and corrupt "normal" won't fix what's broken.
The stock market is in a frenzy of euphoria at the re-opening of the economy. Too bad the re-opening won't fix what's broken. As I've been noting recently, the real problem is the systemic fragility of the U.S. economy, which has lurched from one new extreme to the next to maintain a thin, brittle veneer of normalcy.
Fragile economies cannot survive any impact with reality that disrupts the distortions that are keeping the illusion of "growth" from shattering. For the past two decades, every collision with reality cracked the illusion, and the "fix" was to duct-tape the pieces together with new extremes of money-creation, debt, risk and speculative excess.
While the stock market has soared, the real world falls apart. If your region needs a new bridge built, count on about 20 years to get all the "stakeholders" to agree and get the thing actually built. Count on the cost quintupling from $500 million to $2.5 billion. Count on corners being cut as costs skyrocket, so those cheap steel bolts from China that are already rusting before the bridge is even finished? Oops. Replacing them will add millions to the already bloated budget.
Want to add a passenger stop on an existing railroad line? Count on 20 years to get it done. The complexity thicket of every regulatory agency with the power to say "no" basically guarantees the project will never get approved, because every one of these bureaucracies justifies its existence by saying "no." Sorry, you need another study, another environmental review, and so on.
Need a new landfill? I hope you started the process 15 years ago, so you'll get approval in only five more years. Every agency with the power to say "no" will stretch out the approval, so they have guaranteed "work" for another decade or two.
Did your subway fares double? Was the excuse repairing a crumbling system? Did the work get done on budget and on time? You must be joking, right? All the fare increase did was cover the costs of skyrocketing salaries, pensions and administrative costs. Repairs to the tracks and cars-- that's extra. Let's float a $1 billion bond so nobody have to tighten their belts, and have riders pay for it indirectly, through higher taxes to pay the exorbitant costs of 20 years of interest on the bond.
Have you been thrown off your bicycle by the giant potholes in the city's "bike lanes"? The city reluctantly admits that these streets that haven't been maintained for decades--yes, decades. The city once paid for street maintenance out of its general budget, but alas, that's been eaten up by skyrocketing salaries, pensions and administrative costs, so now we need to float $100 million bond to fund filling potholes. If all goes according to plan (ha-ha), we should be able to re-pave the streets that have been crumbling for 20 years in... the next 20 years.
These real-world examples are just four of thousands of manifestations of a broken system. Rather than make tough choices that drain power and wealth from vested interests, we simply borrow more money, in ever increasing amounts, to keep the entrenched interests and elites happy.
There are two "solutions" in the status quo: dump the debt on taxpayers or on powerless debt-serfs--for example, college students. (See chart below of the $1.6 trillion that's stripmining student debt-serfs.) Who benefits from selling all the municipal bonds, bundled student loans, etc. to investors starving for a yield above 0.1%? Wall Street, of course.
The problem is that while debt has soared, productivity and earned income have stagnated. The statistical narrative has been ruthlessly gamed to hide the erosion of living standards, but even with the bogus "low inflation" of official statistics, wages for the bottom 95% have stagnated for decades.
Measures of productivity have also been gamed to mask the ugly reality that the vast majority of the U.S. economy is stagnating under the weight of interest payments on debt, mal-investments in speculative gambles, higher junk fees and taxes, crushing regulatory compliance, high costs imposed by monopolies and cartels and a well-cloaked decline in the quality of just about everything the bottom 95% uses or owns.
What little productivity gains have been made have been skimmed by the top 5%. Coupled with the Federal Reserve's single-minded goosing of the one signaling device it controls, the stock market, the top 0.1% in America own more wealth than the bottom 80%.
If productivity stagnates and winners take all, the wages of the bottom 95% cannot rise. Real wealth is only created by increases in the productivity of labor and capital; everything else is phantom wealth.
The only way stagnant incomes can support more debt is if interest rates decline. Presto, the Fed dropped interest rates to near-zero a decade ago. Of course you and I can't actually borrow millions for 0.1%; that privilege is reserved for financiers and other financial parasites and predators.
Debt-serfs were able to refinance their crushing mortgages to save a few bucks, and so they can afford to 1) take on more debt and 2) pay higher taxes to fund the ballooning public debt.
Every one of these extremes has increased the systemic fragility of the American economy. This fragility is reflected in the impoverishment of the bottom 95%, the thin line between solvency and bankruptcy, the decay of public trust in institutions run for the benefit of entrenched interests, and the quickening erosion of America's social contract.
Re-opening a fragile, brittle, bankrupt, hopelessly perverse and corrupt "normal" won't fix what's broken.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Posted by Charles Hugh Smith at 8:50 PM

Monday, May 25, 2020

An Economy That Cannot Allow Stocks to Decline Is Too Fragile To Survive

The fragile ice shelf of speculative bets and debt clinging to the mountainside is making strange creaking sounds-- will you listen or will you ignore it because 'the Fed has our back'?
Feast your eyes on the chart below of the Nasdaq 100 stock market Index, which is dominated by the six FAAMNG (rhymes with "famine") stocks: Facebook, Apple, Amazon, Microsoft, Netflix and Google which now account for over 20% of the entire U.S. stock market's capitalization.
Notice that despite the global economy sliding into a debt-bust depression, the NDX is within kissing distance of new all-time highs. You're joking, right? Sales and profits won't slide as the depression steps on the neck of hundreds of millions of households?
As you've probably heard by now, sales don't matter, profits don't matter, costs don't matter, and indeed, nothing matters but the Fed has our back so buy stocks, never mind the valuations. In other words, the U.S. stock market has reached the spiritual level where the corporeal tangible world no longer matters: in a word, Nirvana, or Heaven if you prefer.
If we set aside the satire and the absurd justifications of the financial punditry ( "we see a V-shaped recovery of profits in 2023, or was it in 2032? Never mind, doesn't matter..."), we discern a reality that should worry us: America's economy and financial system cannot allow the stock market to decline because any sustained drop will pop the debt-bubble and bring the entire rickety, rotten, corrupt structure down.
Erecting $100 trillion of phantom capital on speculative bets and disconnected-from-reality valuations was always doomed: piling one layer of debt and speculative excess on top of another while the actual collateral supporting the first layer of debt didn't actually change steadily increases the fragility of the entire pyramid.
Now the system is too fragile and brittle to survive even a modest drop in the stock market. Since the Federal Reserve and other tools of the financial-political elites can't increase the productivity of the underlying collateral of the economy, they're forced to manipulate the one signaling device they can control, which is the stock market.
And since they can't actually improve the productivity or prospects of several thousand companies, they've poured their conjured trillions in six mega-stocks to drag the entire market higher. The more money they pour into the Big Tech Six, the greater the market capitalization of these companies and therefore the greater their influence in the stock indices: the Dow Jones Industrial Average, the S&P 500 and the Nasdaq / Nasdaq 100.
It's a self-reinforcing set-up: dump another trillion in the six mega-cap stocks and this pushes the entire market higher. The influence of the real world has been reduced to zero. Nirvana indeed.
The problem is that any system this fragile and brittle cannot survive the slightest contact with reality. The system's stability is an elaborate illusion maintained by the Big Con of the Federal Reserve: we can create as many trillions as we need to prop up the stock market.
This is the hubris and arrogance of mortals claiming god-like powers. As the Fed and other central banks buy every over-valued financial asset in sight to prop up over-valued markets, eventually they will own the majority of the markets (as per the Japanese bond market). At some point there won't be any assets left for private capital to own that actually earn a return. With interest rates at zero or lower, private capital has no way to earn a return--an outcome that collapses the entire rickety, rotten, corrupt structure anyway.
Extreme concentrations of wealth and power, extreme speculative risk, extreme over-valuation, extreme central bank manipulation--all increase fragility and brittleness. America's financial system is the classic tightly bound system with all the lines of dominoes intersecting each other: any one domino will take down the entire system because it's all tightly connected and dependent on extremes of risk, speculation, debt and manipulation (stock buybacks being Exhibit #1).
The Gods of Finance are chuckling as the Fed's trillions push the system ever closer to collapse. No matter what the Fed does, no matter how many billions Apple borrows and throws into the putrid sewage of its endless stock buybacks, the market, the financial system and the economy that has become dependent on those speculative pyramids of debt are doomed to collapse for profoundly systemic reasons.
The fragile ice shelf of speculative bets and debt clinging to the mountainside is making strange creaking sounds-- will you listen or will you ignore it because the Fed has our back? The avalanche will catch everyone by surprise when it finally breaks, and the consequences will be non-linear and therefore disruptive in ways few anticipate.
But in the meantime, please enjoy the cosmic joke of the Nasdaq 100 and Jay Powell's deadpan comedy routine. But be careful that the joke doesn't end up on you: an economy that cannot allow stocks to decline is too fragile to survive.
Of related interest:
Why Assets Will Crash May 4, 2020
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Posted by Charles Hugh Smith at 10:26 PM
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