Three Crazy Things We Now Accept as "Normal"

How can central banks "retrain" participants while maintaining their extreme policies of stimulus?

Human habituate very easily to new circumstances, even extreme ones. What we accept as "normal" now may have been considered bizarre, extreme or unstable a few short years ago.

Three economic examples come to mind:

1. Near-zero interest rates. If someone had announced to a room of economists and financial journalists in 2006 that interest rates would be near-zero for the foreseeable future, few would have considered it possible or healthy. Yet now the Federal Reserve and other central banks have kept interest rates/bond yields near-zero for almost nine years.

The Fed has raised rates a mere .75% in three cautious baby-steps, clearly fearful of collapsing the "recovery."

What would happen if mortgages returned to their previously "normal" level around 7% from the current 4%? What would happen to auto sales if people with average credit had to pay more than 0% or 1% for a auto loan?

Those in charge of setting rates and yields are clearly fearful that "normalized" interest rates would kill the recovery and the stock bubble.

2. Massive money-creation hasn't generated inflation. In classic economics, massive money-printing (injecting trillions of dollars, yuan, yen and euros into the financial system) would be expected to spark inflation.

As many of us have observed, "official" inflation of less than 2% does not align with "real-world" inflation in big-ticket items such as rent, healthcare and college tuition/fees. A more realistic inflation rate is 7%-8% annually, especially in the higher-cost regions of the US.

But setting that aside, there is a puzzling asymmetry between low official inflation and the unprecedented expansion of money supply, debt and monetary stimulus (credit and liquidity). To date, most of this new money appears to be inflating assets rather than the real world. But can this asymmetry continue for another 9 years?

3. Stock markets are soaring but sales and profits are stagnant. Everyone knows central banks are still pumping billions of dollars per month into the financial system, and this (coupled with central bank purchases of stocks and bonds) has been pushing stocks sharply higher for the past 9 years, with only a few hiccups along the way.

This is pushing valuations out of alignment with traditional metrics of valuing assets such as sales and profits--a process known as "price discovery." In essence, traders and investors have habituated to central banks driving private-sector markets higher, not because the assets are generating more value or profits. but simply as a function of centralized money creation and asset purchases.

All of these extremes generate mal-investment, diminishing returns and perverse incentives for ramping up unproductive and risky speculation, leverage and debt. Yet the central banks have trapped themselves in this risky trajectory because they've pushed the accelerator to the floorboard for 9 years. Any extreme held in place for 9 years has long slipped from "temporary" to permanent.

Participants have now habituated fully to central banks extreme stimulus of financial markets, and in a sense they've forgotten how to price assets based on real-world private-sector measures.

How can central banks "retrain" participants while maintaining their extreme policies of stimulus? The only possible answer is: they can't.

This essay was drawn from Musings Report 2018:1. The Musings Reports are emailed weekl to constributors, subscribers and patrons. Than you for your financial support of my work.


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Before You "Buy the Dip," Look at This One Chart

Hello reverse wealth effect.

There's a place for fancy technical interpretations, but sometimes a basic chart tells us quite a lot. Here is a basic chart of the Dow Jones Industrial Average, the DJIA. It displays basic information: price candlesticks, volume, the 50-week and 200-week moving averages, RSI (relative strength), MACD (moving average convergence-divergence), stochastics and the MACD histogram. These kinds of charts are free (in this case, from StockCharts.com).

This is an ugly chart.It's ugly because the decline to date is still far above support levels (the 50-week and 200-week moving averages) and the indicators have only just started registering sell signals. This means that price will have to decline a lot more to test previous support and send the indicators to levels that signal reasonably low-risk entries.

In other words, there's nothing suggesting this is a buying opportunity in this chart. Rather, it suggests a decline of another couple thousand points would be perfectly normal in a weekly chart with a big fat MACD sell cross and sinking RSI and stochastics.

Even a decline of 6,000 points to 18,900 would be technically very typical of an over-stretched asset snapping back to long-term support.

Buying the dip is a good way to experience churning whipsaws. Up 350 points, then down 450. Nice if you can second-guess the trading bots, not so nice if you assume every dip should be bought because the market always rallies from every dip. Maybe, maybe not.

Something changed, and no, it isn't just the easy-money sell-volatility trade blew up. All the other easy-money sure-thing momentum plays are now in doubt: the buy the FAANG stocks sure-thing, the buy the DJIA sure-thing, the buy the New Nifty 50 (Boeing et al.) sure-thing, the buy emerging bonds, stocks and and FX sure-thing, the buy bonds because interest rates will continue drifting lower forever sure-thing, the buy utilities sure-thing (the 15% drop since December 1 put a dent in that sure-thing), the buy REITs sure-thing, and so on.

If the momo trends that enabled every trading bot to make money by buying the dip and selling volatility go away, how will everyone make money? The short answer is that it suddenly becomes much more difficult to make money and keep it.

God forbid that money managers and punters would have to actually do their homework and pick stocks based on fundamentals. And what happens when those fundamentals start deteriorating as "growth" slides into "stagnation"?

Hello reverse wealth effect. As everyone feels poorer (because their phantom "wealth" evaporated), then they're less inclined to borrow and blow tons of money that's not actually theirs.

In the meantime, check out the cool correlation of bat guano, the yen pushed forward 6 months, lumber futures, the Big Mac Index, and the LIBOR/bitcoin pair... the quatloo is a screaming buy.


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Is the 9-Year Long Dead Cat Bounce Finally Ending?

Ignoring or downplaying these fundamental forces has greatly increased the fragility of the status quo.

The term dead cat bounce is market lingo for a "recovery" after markets decline due to fundamental reversals. Markets tend to bounce back after sharp declines as participants (human and digital) who have been trained to "buy the dips" once again buy the decline, and the financial media rushes to reassure everyone that nothing has actually changed, everything is still peachy-keen wonderfulness.

I submit that the past 9 years of market "recovery" is nothing but an oversized dead cat bounce that is finally ending. Here is a chart that depicts the final blow-off top phase of the over-extended dead cat bounce:

Why are the past 9 years nothing but an extended dead cat bounce? Nothing that's fundamentally broken has been fixed, and none of the dynamics that are undermining the status quo have been addressed.

The past 9 years have been one long dead cat bounce of extend and pretend, i.e. do more of what's failed because to even admit the status quo is being undermined by fundamental forces would panic those gorging at the trough of the status quo's lopsided rewards.

This 9-year dead cat bounce was pure speculation driven by cheap central bank credit and liquidity. Demographics, environmental degradation, the decline of middle class security, the erosion of paid work, the bankruptcy of public and private pension plans, the global debt bubble, soaring wealth and income inequality, the corruption of democracy into a pay-to-play bidding war, the destruction of price discovery via market manipulation by those who have turned markets into signaling devices that all is well, the laughable distortion of statistics to mask the real world decline in our purchasing power (inflation is near-zero--really really really), the perverse incentives to leverage up bets in financial instruments that have no connection to the real-world economy--none of these have been addressed in the market melt-up.

Rather, ignoring or downplaying these fundamental forces has greatly increased the fragility of the status quo. Gordon T. Long and I discuss these fundamental forces in our latest half-hour video program, 2018 Themes (29:46 min):

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

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Is Congress Finally Pushing Back Against Security Agencies' Over-Reach?

The last time the U.S. Congress pushed back against the Imperial Presidency and the over-reach of the nation's Security Agencies was 43 years ago, in 1975.

The last time the U.S. Congress pushed back against the Imperial Presidency and the over-reach of the nation's Security Agencies was 43 years ago, in 1975. In response to the criminal over-reach of the Imperial Presidency (Watergate) and to the criminal over-reach of the security agencies (FBI, CIA, et al.), the Church Committee finally resusitated the constitutional powers of the Congress to serve the interests of the citizenry rather than the interests of political elites and the rogue agencies of the federal government.

The erosion of congressional power (or more correctly, the surrender of power by Congress) long pre-dates 9/11. The rise of the Imperial Presidency and the Shadow State of "national security" agencies dates back to World War II. Those interested in tracing this long-term and troubling decline of the constitutional powers of the elected representatives may find value in these two books: The Imperial Presidency(Arthur M. Schlesinger, Jr.) and Takeover: The Return of the Imperial Presidency and the Subversion of American Democracy

The constitution grants the greatest powers to the elected representatives of the citizenry. The power to declare war, for example, has been eroded to the point that the Imperial Executive can wage essentially unlimited wars with little actual oversight by Congress.

There is a bitter irony in the Democrats' rush to "defend" the indefensible over-reach of the FBI and CIA to those whose rights were abused by the FBI and the CIA in the blatantly illegal COINTELPRO programs aimed at destroying the anti-war/ anti-civil rights movements in the 1960s and early 1970s.

(It has been estimated that up to 80% of the FBI's resources were devoted to targeting a handful of draft resisters and civil rights groups in this era. While TV programs presented a propaganda facade of incorruptible crime fighters, in the real world FBI and CIA agents broke into private offices, hired thugs to beat up anti-war leaders, conducted illegal surveillance, and so on.)

The irony is that the agencies the Democrats are now rushing to defend were targeting the "progressives" who dared to resist the foreign policies and domestic oppression of the federal government.

(So much for the bona-fides of the current crop of self-proclaimed "progressives." Those of us hauled in for interrogation by the FBI for resisting state policies have a different definition of "progressive;" note to Democrats: rushing to defend the politicized American Stasi is the opposite of "progressive.")

We know from the Church Committee reports that the FBI and CIA broke numerous federal laws and violated every constitutional limit on their powers as a matter of daily policy. The abuses of power were not the work of rogue agents; they were the work of rogue agencies, from the top down.

For more on COINTELPRO, please read War at Home: Covert action against U.S. activists and what we can do about it and/or Cointelpro: The FBI's Secret War on Political Freedom.

And here we are again, with rogue security agencies abusing their powers. All that's changed is the political parties have switched places; where the Republicans were defending the status quo abuse of power then and the Democrats were pushing for a transparent investigation of the agencies' abuses of power, now it's the Democrats who are defending the agencies' abuses of power while the Republicans are pushing for a transparent investigation of the agencies' abuses of power.

I don't care which party is pushing for the unmasking of these undemocratic Shadow State agencies; I only care that Congress awakens from its decades of surrendering power to the out-of-control "security agencies" and the Imperial Presidency, which characterizes both Democrat and Republican presidents.

The task of uncovering security agencies' abuses of power is made more difficult by the rise of political polarization. Unmasking abuses of power shouldn't be a partisan issue, and the nation's best hope is the rise of independents who view both parties with revulsion born of the status quo's profound failures to defend the rights and livelihoods of the bottom 95%.

I've written extensively about state over-reach and illegal suppression of dissent: remember, the state exists to enforce the dominance of Elites: everything else is propaganda, misdirection and obfuscation.

We're in a Boiling-Point Crisis of Exploitive Elites (June 19, 2017)

Welcome to the United States of Orwell, Part 3: We had to Destroy Democracy in Order to Save It (March 28, 2012)

State Over-Reach: Stripmining the Citizenry for Fun and Profit (November 13, 2009)

When It Becomes Serious, First They Lie--When That Fails, They Arrest You (March 16, 2015)


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

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Political Correctness Serves the Ruling Elite

No wonder the Ruling Elites loves political correctness: all those furiously signaling their virtue are zero threat to the asymmetric plunder of the status quo.

The Ruling Elites loves political correctness, for it serves the Elite so well. What is political correctness? Political correctness is the public pressure to conform to "progressive" speech acts by uttering the expected code words and phrases in public.

Note that no actual action is required. This is why the Ruling Elite loves political correctness: conformity is so cheap. All a functionary of the Ruling Elite need do is utter the code words ("hope and change," "we honor diversity," "thank you for your service," etc.) and they get a free pass to continue their pillaging.

Those placated by politically correct utterances accept symbolic speech acts as substitutes for real changes in the power structure. This glorification of symbolic gestures--virtue signaling via social media, the parroting of progressive phrases, etc.--is as cheap as the mouthing of PC platitudes. Everybody gets to feel validated and respected at no cost to anyone: the progressives feel smugly superior because the Ruling Elite now feels compelled to parrot "progressive" speech acts in public, and the Ruling Elite is free to pillage without any demands for a radical restructuring of the incentives and distribution of the nation's wealth and income.

The rise of "progressive" speech acts and political correctness parallels the decline of the fortunes and incomes of the bottom 90%. While the "progressives" focus on cheap symbolism, the laboring classes are being gutted by the centralized financialization that rewards the few at the expense of the many.

Here's median family financial assets: back to the levels of 1995:

Here's civilian participation in the work force--back to the levels of 1975:

Here's the percentage of income going to the top 1% and the bottom 50%:

So while the "progressives" focus exclusively on their own ineffectual virtue-signaling and the empty "victories" of Ruling Elites mouthing the acceptable code words, our economy, society and the social contract are being shredded.No wonder the corporate media promotes empty gestures, virtue signaling and political correctness: all that phony compliance leaves the current wealth-power structure unchanged, and the Ruling Elite firmly in charge of the economy and governance.

No wonder the Ruling Elite loves political correctness: all those furiously signaling their virtue are zero threat to the asymmetric plunder of the status quo.


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

Read the first section for free in PDF format.


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.

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