Thursday, September 20, 2018

When Does This Travesty of a Mockery of a Sham Finally End?

Credit bubbles are not engines of sustainable employment, they are only engines of malinvestment and wealth destruction on a grand scale.
We all know the Status Quo's response to the global financial meltdown of 2008 has been a travesty of a mockery of a sham--smoke and mirrors, flimsy facades of "recovery," simulacrum "reforms," serial bubble-blowing and politically expedient can-kicking, all based on borrowing and printing trillions of dollars, yen, euros and yuan, quatloos, etc.
So when will the travesty of a mockery of a sham finally come to an end? Probably around 2022-25, with a few global crises and "saves" along the way to break up the monotony of devolution. The foundation of this forecast is this chart I prepared back in 2008 (below).
This is of course only a selection of cycles; many more may be active but these four give us a flavor of the confluence of crises ahead.
Cycles are not laws of Nature, of course; they are only records of previous periods of growth/excess/depletion/collapse, not predictions per se. Nonetheless their repetition reflects the systemic dynamic of growth, crisis and collapse, and so the study of cycles is instructive even though we stipulate they are not predictive.
What is predictable is the way systems tend to follow an S-curve of rapid growth with then tops out in excess, stagnates in depletion and then devolves or implodes. We can see all sorts of things topping out and entering depletion/collapse: financialization, the Savior State, Chinese credit expansion, oil production, student loan debt and so on.
Since each mechanism that burns out or implodes tends to be replaced with some other mechanism, this creates the recurring cycle of expansion / excess / depletion / collapse.
I plotted four long-wave cycles in the first chart:
1. The credit expansion/renunciation cycle. a.k.a. the Kondratieff cycle. Credit expands when credit is costly and invested in productive assets. Credit reaches excess when it is cheap and it's malinvested in speculation and stock buybacks, and as collateral vanishes then credit is renunciated/written off.
This is inexact, but obviously the organic postwar cycle of expansion has been extended by the central bank money-printing / credit orgy.
2. The generational cycle of four generations/80 years described in the seminal bookThe Fourth Turning. American history uncannily tracks an 80-year cycle of crises and profound transformation: 1860 (Civil War), 1940 (world war and global Empire) and next up to bat, 2020, the implosion of the debt-based Savior State and the financialized economy.
3. The 100-year cycle of inflation-deflation described in the masterful book The Great Wave: Price Revolutions and the Rhythm of History. The price of bread remained almost constant in Britain throughout the 19th century. In contrast, the 20th century has been characterized by inflation--the U.S. dollar has lost approximately 96% of its value since the early 20th century.
Another characteristic of this cycle is wage stagnation: people earn less even as costs of essentials rise, a dynamic that inevitably leads to political crisis and upheaval.
The end-game for inflation is destruction of fiat currencies, i.e. rising inflation or complete loss of faith in paper money. This is of course "impossible," just like World War I, the Titanic sinking, the global meltdown of 2008, etc. Impossible things happen with alarming regularity.
4. Peak oil, which does not mean the world runs out of oil, it simply means oil production no longer rises to meet demand and eventually declines even as new fields are brought online. It can also mean that the price of energy rises to the point that consumers can either buy energy or tey can keep the consumer economy afloat, but they are no longer able to do both.
Many observers are confident that fracking and other technologies will enable current energy proligacy to continue unabated as the U.S. production of oil and natural gas soar.
All this surplus energy in North America sounds wonderful, but that doesn't mean the world as a whole has escaped Peak Oil. Even if fracked wells didn't deplete in a year or two (they do), that expansion of production will not replace the loss of production as supergiant fields in Mexico, the North Sea and the Mideast enter the depletion phase. Yes, technology can extract more oil, but technology is costly. The days of cheap natural gas may have arrived, but the days of cheap oil are numbered.
How all this plays out is unknown, but even raising U.S. production might not be enough to maintain current production levels. Since several billion more people desire the U.S.-type lifestyle of energy profligacy, then what are the consequences of the mismatch between global demand and supply?
We can also posit that "good-paying jobs" in developed economies are also tracking an S-curve. The post-industrial decline in labor has many causes, but the Internet is a key factor going forward as the Web, AI, BIg Data and mobile telephony leverage all sorts of productivity gains without the pesky overhead, costs and trouble of employees.
This reality was masked by the initial boom in Web infrastructure that topped out in 2000, and again by the credit-fueled global malinvestment in real estate that topped out in 2007 and soon by the topping out of the social media/mobile app tech boom, the third stock market bubble and Housing Bubble #2.
Once these bubbles have popped, the reality of long-term employment stagnation can no longer be masked.
Credit bubbles are not engines of sustainable employment, they are only engines of malinvestment and wealth destruction on a grand scale.
A number of other questions arise as we ponder these dynamics. How "cheap" will all that energy be to those without full-time jobs? How will 100 million workers support 100 million retirees, welfare recipients and parasitic Elites plus Universal Basic Income as costs rise, taxes soar and wages stagnate?
The Status Quo is unsustainable on a number of fundamental fronts. How long it can maintain the facade of stability and sustainability is unknown, but the global willingness to squander additional years on artifice and propaganda suggests that another four years will fly by and the end-game will be at hand whether we approve of it or not.
Travesty of a Mockery of a Sham Book Sale: (September only) Why Our Status Quo Failed and Is Beyond Reform is now $2.99 for the Kindle ebook, a 25% savings, and $6.95 for the print edition, a 22% savings.
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Wednesday, September 19, 2018

Digging into Wealth and Income Inequality

That changes our perspective on the wonderfulness of ever-expanding household wealth.
The assets of U.S. households recently topped $100 trillion, yet another sign that everything is going swimmingly in the U.S. economy. Let's take a look at the Federal Reserve's Household Balance Sheet, which lists the assets and liabilities of all U.S. households in very big buckets (real estate: $25 trillion). (For reasons unknown, the Fed lumps non-profit assets and liabilities with households, but these modest sums are easily subtracted.)
If we look at the numbers with a reasonably skeptical view, we start wondering about aspects that might have previously been taken as "facts" that were above questioning.
For example, households hold $11.6 trillion in cash (deposits). That's unambiguous. So is the $29.3 trillion in stocks (owned directly and indirectly, i.e. retirement funds, etc.).
But what about the $16 trillion in "other financial assets"? This isn't cash, stocks, bonds, retirement funds or noncorporate businesses--then what is it? Offshore banking?
That $16 trillion is equal to all homeowners' equity (real estate minus mortgages). It's a non-trivial chunk of the $100 trillion in net assets everyone is crowing about.
I also wonder about the valuation of noncorporate businesses--small family businesses, LLCs, sole proprietorships, etc.-- $11.9 trillion. How do you value a business that's hanging on by a thread? Or one that's a tax shelter?
We know from other sources that roughly 85% of all this wealth is held by the top 10% of households. This isn't included in this balance sheet, but without those statistics, these numbers lack critical context: if household wealth is soaring, that sounds wonderful. But what if 95% the gains are flowing to the top 5%, and within the top 5%, mostly to the top .1%?
That changes our perspective on the wonderfulness of ever-expanding household wealth.
IRS data from tax returns are one of the most reliable sources of financial data because there are stiff penalties for not filing accurate returns, and there are no "adjustments" or massaging of the statistics: they are what they are.
Here's the primary page with numerous Excel spreadsheets for download: Individual Statistical Tables by Size of Adjusted Gross Income.
Adjusted Gross Income is reported on line 37 on Form 1040, income after major deductions such as moving expenses, self-employed health insurance, etc.
Each spreadsheet is a trove of information on wealth and income--distribution, inequality, sources of income, etc.
Consider Returns with Income or Loss from Sales of Capital Assets Reported on Form1040, Schedule D. This spreadsheet consolidates all tax returns that reported capital gains or losses.
Out of 150 million total individual tax returns, 11 million reported capital gains/losses, and 9.3 million were taxable returns.
1.26 million taxpayers reporting adjusted gross income of between $50,000 and $75,000 (middle-middle class) reported average capital gains of $6,187.
3 million taxpayers reporting adjusted gross income of between $100,000 and $200,000 (upper-middle class) reported average capital gains of $16,000.
250,000 taxpayers reporting adjusted gross income of $1 million or more reported average capital gains of $1,600,000.
So those earning 10 times a middle-class income of $100,000 reaped (on average) 100 times the middle class average of capital gains.
It's worth noting that only 6% of tax returns reported taxable capital gains, and of these 9 million returns, the lion's share of the capital gains flowed to the top 0.0016% of all returns--the 250,000 reporting incomes of $1 million and higher.
If we want to understand wealth and income inequality, we can start with the data point that 63% of all capital gains flows to the top (those earning $1 million and up).



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Monday, September 17, 2018

We're All Speculators Now

When the herd thunders off the cliff, most participants are trapped in the stampede..
One of the most perverse consequences of the central banks "saving the world" (i.e. saving banks and the super-wealthy) is the destruction of low-risk investments: we're all speculators now, whether we know it or acknowledge it.
The problem is very few of us have the expertise and experience to be successful speculators, i.e. successfully manage treacherously high-risk markets. Here's the choice facing money managers of pension funds and individuals alike: either invest in a safe low-risk asset such as Treasury bonds and lose money every year, as the yield doesn't even match inflation, or accept the extraordinarily high risks of boom-bust bubble assets such as junk bonds, stocks, real estate, etc.
The core middle-class asset is the family home. Back in the pre-financialization era (pre-1982), buying a house and paying down the mortgage to build home equity was the equivalent of a savings account, with the added bonus of the potential for modest appreciation if you happened to buy in a desirable region.
In the late 1990s, the stable, boring market for mortgages was fully financialized and globalized, turning a relatively safe investment and debt market into a speculative commodity. We all know the results: with the explosion of easy access to unlimited credit via HELOCs (home equity lines of credit), liar loans (no-document mortgages), re-financing, etc., the hot credit-money pouring into housing inflated a stupendous bubble that subsequently popped, as all credit-asset bubbles eventually do, with devastating consequences for everyone who reckoned their success in a rising market was a permanent feature of the era and / or evidence of their financial genius.
Highly volatile speculative bubbles are notoriously humbling, even for experienced traders. Buy low and sell high sound easy, but when the herd is running and animal spirits are euphoric, only the most disciplined speculators and the lucky few who have to sell exit near the top of the bubble.
The "safety" of investments in housing, commercial real estate, stocks, corporate bonds, emerging markets, etc., is illusory: these are now inherently risky markets, and it's difficult to hedge these risks. (Not many participants knpw how to hedge housing, commercial real estate, etc.)
In an environment in which participants have been richly rewarded for believing that "the Fed has our backs," i.e. central banks will never let risk-assets drop because they understand pension funds, insurers, banks, etc. will implode if the risk-asset bubbles pop, few see the need to bother with hedges, as hedges cost money and reduce yields.
As a result, few participants are fully hedged. Most participants are buck-naked in terms of exposure to risk, and once the tide goes out we'll find out how few are hedged against bubbles popping.
Financial markets are not linear by nature, so predictably rising markets are atypical. Financial markets are intrinsically non-linear, meaning that the dynamics are inter-connected and prone to asymmetric events in which a small input triggers an outsized output such as a crash.
In the fantasy world conjured by central bank stimulus, markets never go down and economies never slide into recession. Financial engineering has eradicated risk. But the dynamics interact in ways that can't be controlled. As inflation heats up globally, central banks are being forced to "normalize" interest rates and yields, and political pressure to stop saving banks and the super-wealthy is mounting.
All speculative markets deflate, slowly or suddenly, depending on the marginal buyers and sellers. The shakier the marginal participants, the greater the likelihood that the speculative bubble will pop with a suddenness that surprises the vast majority of participants.
Take a look at stock valuations as a percentage of GDP, i.e. the real economy: stocks are clearly in a bubble.
The national Case-Shiller housing price index: bubble.
The Seattle Case-Shiller housing price index: super-bubble.
The Dallas Case-Shiller housing price index: super-duper-bubble.
You get the point: virtually every supposedly low-risk asset class is actually a super-risky, super-dangerous bubble. Speculation drives valuations far beyond financial rationality because we're herd animals and unearned gains supercharge our greed, especially when we see all sorts of undeserving people making fortunes for doing nothing but running with the herd.
So when the herd thunders off the cliff, most participants are trapped in the stampede. Very few exited far from the cliff, and even fewer will wait patiently for the dust to settle before moving cash into assets.
Risk has a knack for hiding in plain sight. Few people look for it, and even fewer recognize it. Only a handful act on it.


My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free in PDF format.
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Friday, September 14, 2018

Massive Deficit Spending Greenlights Waste, Fraud, Profiteering and Dysfunction

America's problem isn't a lack of deficit spending/consumption. America's problems are profoundly structural.
The nice thing about free to me money from any source is the recipients don't have to change anything. Free money is the ultimate free-pass from consequence and adaptation: instead of having to make difficult trade-offs or suffer the consequences of profligacy, the recipients of free money are saved: they can continue on their merry way, ignoring the monumental dysfunction of their lifestyle.
This explains the appeal of Modern Monetary Theory (MMT), which holds that deficit spending is the "solution" to all our problems because governments can't go broke--they can always emit whatever currency they need via printing or borrowing.
The problem with government deficit spending is it's free money to the recipients: there are no feedback mechanisms to enforce any consequences for spending that's wasteful, fraudulent or inefficient/ineffective.
Deficit spending simply enables the wasteful, corrupt, rewarding-insiders profiteering state-cartel kleptocracy to continue gorging on public spending.So what desperately needed efficiencies and improvements are imposed on the higher education cartel by handing the cartel another trillion dollars of public spending? None.
What desperately needed efficiencies and improvements are imposed on the healthcare cartel by handing the cartel trillions of dollars in publicly funded "Medicare for all"? None.
What desperately needed efficiencies and improvements are imposed on the national defense cartel by handing the cartel additional trillions of public spending? None.
What kind of sense does it make to encourage wasteful consumption on a finite planet with limited resources? The entire rationale of Modern Monetary Theory (MMT) is that the productive capacity of the economy isn't being maxed out because we're not consuming enough.
This is the insane ideology of endless growth on a finite planet. Consumption funded by free to me deficit spending has no mechanisms to recognize the wasteful, dysfunctional insanity of planned obsolescence and growth-for-growth's-sake wasteful consumption.
Everybody supports spending trillions on infrastructure but has anyone noticed that the system for building infrastructure is completely broken in the U.S.? It takes a decade or two to rebuild a bridge (for example, the Bay Bridge connecting Oakland and San Francisco) and every project that is budgeted to cost $1 billion ends up costing $4 billion.
China would have cleared the political/permit process in weeks and rebuilt the Bay Bridge in six months. In the politically dysfunctional, over-regulated, insider-oligarchy of the U.S., the process takes 17 years, and costs quadruple. That is the acme of dysfunction on all levels.
Increasing deficit spending in this system simply rewards insiders and elites.Look, the U.S. has already borrowed and blown $16 trillion in federal deficit spending and trillions more in state and local deficit spending, i.e. the sale of bonds to repave streets, reroof schools, build affordable housing, etc.
Somebody benefits from all the deficit spending on cartels and all the financing of the debt: the top .1%. And why are you surprised? This is the only possible output of a state-cartel kleptocracy/oligarchy.
Deficit spending isn't just public. Corporations and households have been deficit-spending as well. Total credit outstanding in the U.S. has far outpaced the expansion of GDP, the real economy. We're borrowing more and getting less, overwhelming evidence that printing/borrowing money is generating less output.
Here's federal debt. The government doesn't "print" currency in our system, it borrows it into existence. The central state issues bonds and the central bank buys the bonds with newly created currency. Or pension funds, insurers, etc. buy the bonds, so "we owe it to ourselves." Regardless, debt accrues interest and eventually this generates consequences.
But not everyone owns debt, which is of course an asset. The benefits of deficit spending are as asymmetrical as all other spending/debt in our system.
Deficit spending is simply doing more of what's failed. We have two examples to study: Venezuela, which has supported its free to me public welfare spending and its corrupt ruling elites by printing currency with abandon.
It's simply not true that "governments can't go broke because they can print money": they can print currency but the currency has no purchasing power. I've read all sorts of excuses for Venezuela's debasement of its currency, but the reality is: they printed as much as they needed to keep the status quo afloat and this profligate issuance of currency destroyed the purchasing power of their currency.
Then there's Japan, which has been deficit spending on a colossal scale for almost 30 years. They've played the game of "we owe it to ourselves" and the wink-wink cycle of the central bank buying government bonds (to fund deficit spending) with newly created currency.
Japan's problem isn't a lack of government spending. Its problem is a dysfunctional, sclerotic state-cartel structure of self-serving corrupt insiders. Beneath the glossy surface of the trains running on time, Japan's social order has been hollowed out by the dysfunction, a dysfunction that's been propped up by deficit spending on bridges to nowhere and other redundant or even pointless infrastructure.
Japan's younger generations have stopped getting married and stopped having children because they can no longer afford such luxuries. The elites are still immensely wealthy and politically powerful but the economy and society have been hollowed out. Nobody will speak freely about it because it reflects poorly on Japan.
In a similar fashion, we cling to the fantasy that a few trillion more in wasteful consumption will save our dysfunctional, sclerotic state-cartel system from well-earned collapse.
America's problem isn't a lack of deficit spending/consumption: America's problem isn't a lack of free to me money. America's problems are profoundly structural: a sclerotic, toxic political system of self-serving oligarchic elites propped up by a class of self-serving professional technocrats, and an insiders-take-most economy in which virtually all the income gains (and 85% of the wealth gains) flow to the very top and the 5% technocrat class that owns enough of the assets that have been inflated to bubble heights to enjoy the illusion of security and wealth.
There is no such thing as free to me money: the cost is simply being hidden in the deep, pervasive structural rot of our economy, politics and society.


My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free in PDF format.
My new book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition.
Read the first section for free in PDF format.


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Wednesday, September 12, 2018

The Next Financial Crisis Is Right on Schedule (2019)

Neither small business nor the bottom 90% of households can afford this "best economy ever."
After 10 years of unprecedented goosing, some of the real economy is finally overheating: costs are heating up, unemployment is at historic lows, small business optimism is high, and so on--all classic indicators that the top of this cycle is in.
Financial assets have been goosed to record highs in the everything bubble.Buy the dip has worked in stocks, bonds and real estate--what's not to like?
Beneath the surface, the frantic goosing has planted seeds of financial crisis which have sprouted and are about to blossom with devastating effect. There are two related systems-level concepts which illuminate the coming crisis: the S-Curve and non-linear effects.
The S-Curve (illustrated below) is visible in both natural and human systems.The boost phase of rapid growth/adoption is followed by a linear phase of maturity in which growth/adoption slows as the dynamic has reached into the far corners of the audience / market: everybody already caught the cold, bought Apple stock, etc.
The linear stage of maturity is followed by a decline phase that's non-linear.Linear means 1 unit of input yields 1 unit of output. Non-linear means 1 unit of input yields 100 unit of output. In the first case, moving 1 unit of snow clears a modest path. In the second case, moving 1 unit of snow unleashes an avalanche.
The previous two bubbles that topped/popped in 2000-01 and 2008-09 both exhibited non-linear dynamics that scared the bejabbers out of the central bank/state authorities accustomed to linear systems.
In a panic, former Fed chair Alan Greenspan pushed interest rates to historic lows to inflate another bubble, thus insuring the next bubble would manifest even greater non-linear devastation.
Ten years after the 2008-09 Global Financial Meltdown, analysts are still trying to understand what happened. For example, the new book Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze is an attempt to autopsy the meltdown and investigate the mindset and assumptions that led to the panicky bailouts and frantic goosing of a third credit/asset bubble--the bubble which is about to pop with even greater non-linear effects.
This is the nature of non-linear dynamics: everything is tightly tied to everything else. Tightly bound/connected systems are hyper-coherent, i.e. every component is tightly bound /correlated to other components.
This is how the relatively modest-sized subprime mortgage market ($500 billion) almost toppled the entire $200 trillion global financial market.
The vast imbalances created by 10 years of unceasing goosing will unleash a non-linear avalanche of reversions to the mean and rapid unwinding of extremes. Consider the impact on hedges, a necessary function of the financial system. With yields so low, the cost of hedging negatively impacts returns, so hedging has been abandoned, trimmed or distilled down to magical-thinking (shorting volatility as the "can't lose" hedge for all circumstances).
With shorting volatility being the one-size-fits-all hedge, the signaling value of volatility has been distorted. The same can be said of other measures: the information value of traditional financial signals have been lost due to manipulation and/or goosing.
The interconnectedness of global markets means a small blaze in a distant market can quickly become a conflagration. Put these two together and you get a perfect setup for crisis and crash: nobody really knows anything because the signals have been distorted, but everyone thinks they know everything-- sell volatility and buy the dip. It works great until it doesn't.
Meanwhile, beneath the "best economy ever" the rot is accelerating. This article on the empty storefronts proliferating throughout New York City's neighborhoods, This Space Available, mentions one dynamic in passing that is an example of the distortions that will be unwound in the next financial crisis.
Desperate for yield in the near-zero yield world engineered by central banks, investors have piled into commercial real estate and overpaid for buildings as the bubbles in rents and valuations expanded in tandem.
These owners are now trapped: their lenders demand long-term leases that lock in nosebleed rents, but back in the real world, no business can survive paying nosebleed rents, and agreeing to long-term leases in this environment is akin to committing financial suicide.
If you actually want to make a profit, it's impossible to do so paying current commercial rent rates. And if you want to retain the absolutely critical flexibility you'll need to adjust as conditions change, you can't sign a long-term lease. Everyone signing a long-term lease today will be declaring bankruptcy in 2019 when the recession trims sales but leaves expenses unchanged.
In other words, neither small business nor the bottom 90% of households can afford this "best economy ever." The financial markets have completely disconnected from reality, and the process of reconnection will unravel all the imbalances and extremes and deflate every interconnected bubble.
The current fantasy is that bubbles will never pop and recessions are a thing of the past; financial engineering can maintain bubbles and "growth" forever.Everything is distorted to the point that those wandering the hall of mirrors believe they know everything they need to know to continue reaping fat returns on capital.
Conventional thinking that performs well in linear eras is disastrously ill-prepared to navigate non-linear eras like the one we'll be entering in 2019--right on schedule.


My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free in PDF format.
My new book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition.
Read the first section for free in PDF format.


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