Friday, July 31, 2020

Memo from Insiders: Dear Bagholders, Thanks for Buying Our Shares at the Top

The self-sustaining recovery is a fantasy that's evaporated.


What looks like a powerful, can't-lose rally to newbies is recognized as distribution by old hands. In low-volume markets (as in the past few months), insiders holding large positions can't dump all their shares at once or the price of the stock would plummet due to the thinness of the bid.


The only way to get top-dollar for one's overvalued shares is to play distribution games: sell a little each day on the upticks, and buy back shares when they threaten to drop below the key support levels followed by trading algos.


When insiders have finished distributing their shares to naive and trusting bagholders at the top, then the price can flush lower with a velocity that shocks the complacent bagholders who saw only the inevitability of an endless rally rather than the inevitability of a collapse of bubble valuations.


Stocks are priced for a V-shaped recovery and/or $1 trillion in federal giveaways per month. Neither is possible. The V-shaped recovery hopes were based on $6 trillion in federal/Federal Reserve stimulus washing over the nation, boosting household incomes and opening spigots of cash for enterprises and local governments.


The basic idea was to give the economy a needed shot of adrenaline to get to to the point where a recovery would be self-sustaining: companies would hire back laid-off workers, people would start borrowing and over-consuming again, sales and income tax revenues would return to pre-pandemic levels, etc.


The self-sustaining recovery is a fantasy that's evaporated. The spike in activity was all the giveaways being spent. Now that most of the free-money programs are expiring, there's no more stimulus to spend.


As for budgeting another trillion or two for future infrastructure projects: what few proponents of infrastructure spending realize is the number of companies and skilled workers capable of getting this work done is limited. You can create the cash out of thin air but you can't conjure up experienced welders, crane operators, etc. to get the work done or the complex operational skills required to manage these large, complicated projects.


Also overlooked is the fact that most of these companies and workers are already busy, and it takes years to train new workers with the requisite skills.


So what's left to support the can't-lose rally? The promise of trillions of dollars more given directly to households and enterprises and local governments, at a run-rate of a trillion a month. Anything less won't be enough.


And then there's the line of dominoes that are toppling:

Distribution isn't a rally.


Recent Podcasts:

AxisOfEasy Salon #14: Jobageddon and the Coming Education Revolts

Charles Hugh Smith on the disconnect between the Markets and the Economy (51 min)

My COVID-19 Pandemic Posts


My recent books:

Audiobook edition now available:
Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World ($13)
(Kindle $6.95, print $11.95) Read the first section for free (PDF).

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 (Kindle), $12 (print), $13.08 ( audiobook): Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake $1.29 (Kindle), $8.95 (print); read the first chapters for free (PDF)

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


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


NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Kevin S. ($50), for your outrageously generous contribution to this site -- I am greatly honored by your support and readership.

 

Thank you, Michael R. ($5), for your most generous contribution to this site -- I am greatly honored by your support and readership.

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Thursday, July 30, 2020

The Next Leg Down: The Top 10% Are About to Take a Hit

No federal bailout or stimulus can reverse these three dynamics, and no amount of legerdemain can replace the spending of the top 10%.


Few of those anxiously seeking a rebound in consumer spending take into account the top 10% of households account for almost 50% of consumption, and that top 10% skews heavily to the older, wealthier top tier whose free-spending ways have been built on the enormous wealth effect as their stocks, bonds and real estate assets have soared in value over the past 12 years.


The top 10% has largely escaped the significant financial hits cutting a swath through the bottom 90%, but that's about to change. Few of the top 10% have seen their pensions cut, their portfolios of stocks and bonds shredded, their home value in free-fall or their managerial / technocrat position eliminated. Most are watching the financial devastation from the security of owning 85% of the nation's assets, and from positions in the protected-class with access to federal money, either directly or indirectly.


Three factors could materially suppress the future consumption of those responsible for 50% of all consumer spending.


1. Age-related caution about exposure to the virus. Not only are many of the top 10% older, many of these households are caring for parents in their 70s, 80s or 90s. Given the heightened risks for these demographics, is it really worth it to go into crowds for entertainment? The short answer is no. Furthermore, these older, wealthier households have been there and done that-- foregoing cruises, air travel, fine dining, live music, etc. is not that much of a sacrifice, as they've enjoyed all these niceties for decades.


2. As corporate revenues and profits continue sliding, the managerial / tech class will start getting culled. All sorts of positions that looked "essential" before the pandemic are suddenly on the chopping block.


3. The wealth effect is about to reverse as the Everything Bubble finally pops. With the Nasdaq at record highs, bonds rising in value as yields plummet and the real estate market bubbling along on 3% mortgage rates, such a reversal is widely viewed as "impossible." Of course it is--until it isn't. All bubbles pop.


All the bright spots of consumption fueled by top 10% spending--rising sales of second homes, RVs, home remodeling, etc.--are based on the incomes and wealth of the top 10% never materially declining. But how realistic is it to reckon a rotten-to-the-core economy dominated by greedy monopolies and cartels and looted by financier skims that is finally in an inevitable free-fall would magically leave the top 10% untouched?


How realistic is it to reckon that the Everything Bubble would magically continue inflating forever when history is conclusive that all bubbles pop?


No federal bailout or stimulus can reverse these three dynamics, and no amount of legerdemain can replace the spending of the top 10%.

Recent Podcasts:

AxisOfEasy Salon #14: Jobageddon and the Coming Education Revolts

Charles Hugh Smith on the disconnect between the Markets and the Economy (51 min)

My COVID-19 Pandemic Posts


My recent books:

Audiobook edition now available:
Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World ($13)
(Kindle $6.95, print $11.95) Read the first section for free (PDF).

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 (Kindle), $12 (print), $13.08 ( audiobook): Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake $1.29 (Kindle), $8.95 (print); read the first chapters for free (PDF)

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


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


NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Egon V.G. ($10/month), for your outrageously generous pledge to this site -- I am greatly honored by your support and readership.

 

Thank you, Shawn K. ($10), for your most generous contribution to this site -- I am greatly honored by your support and readership.

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Wednesday, July 29, 2020

Our Slide into Social Psychosis and Breakdown

Not only is our lifestyle on back-order, so is our sanity.
Yesterday I mentioned our collective inability to make sense of the contradictory messages of the status quo and our own experience. This inability to reconcile completely contradictory messages generates psychosis, an internal breakdown that manifests as a disconnect from reality.
To take one example: we're constantly bombarded with the message that a four-year college diploma is the essential key to a secure middle-class lifestyle, yet our experience is that millions of college grads are living precariously, burdened by extremes of student loan debt.
Here's another I discussed yesterday: the status quo hypes the stock market's near-record highs as "proof" all is well and everything's getting back to "normal" but our experience is the real economy is in a stumbling free-fall.
And what is that "old normal" everyone is so anxious to return to anyway? How about too busy to be healthy, too addicted to social media to have agency? Or as the writer of Small Family Farms Aren't the Answer wrote: "In short, we've done the most modern-American thing possible: bartered away our quality of life for the freedom to be miserable."
As for the "new normal," it's Extremes of Neofeudalism, Incompetence and Authoritarianism (June 30, 2020).
In other words, to keep us in thrall to an unsustainable status quo, what's been normalized and institutionalized is social psychosis, breakdown and burnout.
Our experience is shaped by what psychiatrist R.D. Laing identified as the Politics of Experience. While Laing's initial focus was on family dynamics (Sanity, Madness and the Family: Families of Schizophrenics) and how conflicting demands (contradictory political "necessities") within a family can trigger a breakdown in children, his insights also apply to society at large.
Laing explores the way our internalized interpretation of experience can be shaped to create uniform beliefs about our society and economy that then lead to norms of behavior that support the political/economic status quo.
Here's how Laing described the social ramifications in Chapter Four Politics of Experience:
"All those people who seek to control the behavior of large numbers of other people work on the experiences of those other people. Once people can be induced to experience a situation in a similar way, they can be expected to behave in similar ways. Induce people all to want the same thing, hate the same things, feel the same threat, then their behavior is already captive - you have acquired your consumers or your cannon-fodder."
For Laing, the politics of experience is not just about influencing social behavior; it has an individual, inner consequence as well:
"Our behavior is a function of our experience. We act according to the way we see things. If our experience is destroyed, our behavior will be destructive. If our experience is destroyed, we have lost our own selves."
One manifestation of this destruction is the shunting of systemic failure onto the individual. The system itself cannot be seen as a failure, so all failure must be pinned on the individual.
Those of you who have read Survival+ will gain a new perspective on opting outprotected fiefdomswhen belief in the system fades, profound political disunityplantation-like structuresderealizationradical self-relianceasymmetric stakes in the gameinduced amnesia and other ideas I have presented on the politics of experience over the years.
Contradictory political "necessities" are destroying our internal coherence, our social order and our economy. Not only is our lifestyle on back-order, so is our sanity.
Recent Podcasts:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
Thank you, Lisa P. ($100), for your outrageously generous contribution to this site -- I am greatly honored by your steadfast support and readership.
 
Thank you, Dave M. ($5/month), for your marvelously generous pledge to this site -- I am greatly honored by your support and readership.

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Tuesday, July 28, 2020

The Nation Is Falling Into the Abyss Between Wall Street and Main Street

The abyss between the Fed's illusion of phantom wealth for Wall Street and the collapse of Main Street is bottomless, and our descent into the abyss is accelerating.
I know this runs counter to every dominant narrative, but a vaccine doesn't really matter, opening up doesn't really matter, and the size of the "free money" stimulus checks doesn't matter.
What matters is that the nation is falling into the abyss that's opened between Wall Street and Main Street, and nothing will stave off the collapse of the social order other than a fundamental re-ordering of the way we create and distribute money and political power, as money buys political influence.
The last economic tide with widespread benefits to Main Street was 30 years ago. Since then, the Federal Reserve and other central banks have incentivized globalization and financialization, two dynamics that favor mobile capital and financier skims amd scams.
There are a number of factors behind the widening canyon of economic inequality, but the primary driver is financialization. Financialization has given those with access to central bank credit ways to skim great wealth from the system without creating any value whatsoever.
Financialization isn't a consequence of having capital: it's the consequence of having access to unlimited central bank credit, leverage and low-risk, low-tax skimming operations (for example, tax codes enable hedge funds to declare income as low-tax long-term capital gains).
Leveraging phantom collateral is another feature of financialization. Commoners were allowed a taste of this when subprime lenders were offering no-document, no-down payment mortgages back in 2004-2007. Phantom income was posted as collateral for the nothing-but-leverage loan.
Financialization is not about investing in productive enterprises; it's all about skimming wealth while providing no value to the real economy or society.
The hidden toxin in financialization is the resulting concentration of wealth can buy concentrations of political power. Financialization is thus self-perpetuating: once the skimming operations generate billions of dollars in profit, it only takes a relatively small piece of these profits to buy/influence the political class. Once the politicos are in your pocket, the regulators and judiciary fall into line or are marginalized by new statutes or gutted budgets.
Financialization is the disease eating away what's left of democracy.
Financialization is the exploitation of assets/income that were previously safe from predation by central bank funded financiers. While definitions vary, mine is:
Financialization is the commoditization of debt collaterized by previously unsecuritized assets, a pyramiding of risk and speculation that is only possible in a massive expansion of low-cost credit and leverage for those at the top of the wealth-power pyramid: financiers, banks and corporations.
One example is the student loan "industry," which prior to financialization did not exist. A previously safe from predation asset/source of income--college degrees--has been securitized so that loans issued to students for largely worthless diplomas can be sold globally as "secure assets with guaranteed yields."
That the exploited class of students have little to no income and no guarantee of income doesn't matter. What matters is a previously unexploited asset can be turned into debt that can be sold at an immense profit.
And so student loan debt has skyrocketed from near-zero to $1.6 trillion in less than a generation. This rapacious, ruthless exploitation would not have been possible without the central bank (Federal Reserve) and federal government enabling and enforcing the supremacy of private capital and the predation of the higher-education cartel.
Globalization and financialization have been the two engines of soaring wealth inequality. Globalization can mean many things, but its beating heart is the arbitraging of the labor of the powerless and commodity, environmental and tax costs by the powerful to increase their profits and wealth.
In other words, globalization is the result of those at the top of the wealth-power pyramid shifting borrowed capital around the world to exploit lower costs of labor, commodities, environmental regulations and taxes.
This manifests as offshoring of jobs, the stripmining of forests, minerals, etc., the degradation of local ecosystems, the decline of tax revenues derived from capital and the explosive rise in stock market valuations as wages stagnate or decline.
A key element in globalization is the transfer of risk from the owners of capital to the workers and public resources. Examples of this transfer of risk abound: rather than pay workers benefits, corporations game part-time/full-time labor laws so workers' health insurance is paid by taxpayers (Medicaid). Corporations pay wages too low to survive so workers depend on public-sector assistance (food stamps, etc.)
Alas, all good predations end when the prey has been dragged to the ground and consumed. All the fruit of financialization and globalization have been plucked by the powerful, and now both the engines of "growth" are sputtering as the hollowed-out Main Street economy implodes.
Central bank free money for financiers doesn't create collateral or creditworthy borrowers, and without those foundations, the decayed, rotted shack of debt will collapse.
If we set aside the proximate causes of social disorder, we discern the salient cause: the socio-economic political system no longer works for anyone but those skimming wealth from globalization and financialization.
Main Street has been in slow-motion collapse for a generation, but this terminal decay was masked by hyper-financialization and debt-fueled spending by consumers who became accustomed to filling the widening gap between their income (stagnant) and the costs of their lifestyle (rising), as they chased the top 5% who benefited from globalization and financialization.
Debt creates the warm and fuzzy illusion of wealth, but at a cost: debt payments never disappear, but income and profits can slide effortlessly to zero.
We come now to the key dynamic of this era: socio-economic psychosis, as most people are incapable of making sense of the contradictory messages being given by the status quo. The next result is madness, as every attempt to reconcile the contradictory messages veers further way from reality.
The relentless rise of Wall Street is constantly presented as "proof" the status quo is "creating wealth" and is enormously successful. It is impossible to reconcile this claim with the decay and collapse visible in Main Street, and so people lash out at whatever they can identify as the proximate cause of their suffering and poor prospects.
Ask yourself these questions: What kind of system will we get if the vast majority of the trillions created out of thin air by central banks goes to financiers and corporations?
What kind of system will we get if these financiers and corporations use some of this free money to buy political influence?
What kind of system will we get if the really big money is skimmed by financial games that generate no goods or services, no jobs, and no productivity--in essence, they are completely worthless to the real economy and society?
What kind of system will we get if the stock market bubble is touted as "proof" the system is working splendidly and wealth is bubbling up without any limit thanks to the Fed's magic money machine?
The answer is a system that's crazy-making and doomed by its internal contradictions. The Fed can create dollars out of thin air and sluice it to the super-wealthy to feed their skims and scams, but it can't create jobs, oil, tools, collateral or productivity out of thin air,
The abyss between the Fed's illusion of phantom wealth for Wall Street and the collapse of Main Street is bottomless, and our descent into the abyss is accelerating.
Richard Bonugli and I discuss The disconnect between the Markets and the Economy (51 min) in our recent podcast. We also explore the silver linings for successful adaptation that are coming into focus.
Recent Podcasts:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
Thank you, James C. ($10/month), for your outrageously generous pledge to this site -- I am greatly honored by your support and readership.
 
Thank you, Gordon C. ($5/month), for your marvelously generous pledge to this site -- I am greatly honored by your support and readership.

Read more...

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