Tuesday, September 17, 2019

Markets That Live by the Fed, Die by the Fed

The "everything bubble" is not permanent.
All eyes are again on the Federal Reserve, as everyone understands that the Fed is the market-- the stock market, the bond market, the art market, the housing market, etc. All markets have been driven higher by one force: central bank money creation and distribution to the financial sector of financiers and corporations, the richest of the rich.
What few seem to grasp (because they're paid not to?) is the Fed is powerless over what actually matters in a healthy economy:
1. The Fed is powerless to create productive, profitable ventures for capital to invest in. Productivity has gone nowhere in the Fed's reign while speculative profits leveraged by the Fed's free money for financiers have soared.
2. The Fed is powerless to raise wages. Despite ginned-up claims that wages are finally rising 3% a year after a decade of stagnation, wages are still losing purchasing power once real-world inflation is factored in.
3. The Fed cannot force creditworthy households and enterprises to borrow more money, nor can they stop banks from lending to the only people who want to borrow more money, those who are credit risks, i.e. borrowers who will default at the first spot of bother.
4. The Fed is powerless to stop the New Gilded Age consequences of their policies via The Cantillon Effect: it's not just how the money is created, but how it's distributed. Those who get the Fed's nearly free money can use it to buy productive assets and pursue speculations such as stock buy-backs, while everyone else who didn't get a single dollar of the Fed's trillions experiences a loss of purchasing power as the Fed's new money expands the money supply without actually expanding the real economy.
The only power the Fed has is to incentivize profiteering via stock buy-backs and speculations of the super-wealthy--the power, in other words, to create a New Gilded Age of obscene wealth inequality.
The Fed's New Gilded Age is generating political blowback, and eventually the masses will awaken to the fact that the Fed is the enemy of the people because it is the sole enabler of the unproductive, parasitic, predatory corporate/insider class that's skimmed something like 87% of all the "wealth" "created" by the Fed's policies.
The Fed has created an economy in which capital has been stripped of low-risk yield. All capital must become gambling chips in the casino to earn a return, but gambling is intrinsically risky, and the asymmetry between the risk--rising--and the return--increasingly paltry--is setting the markets up for a fall the Fed is powerless to stop, and a political blowback to the Fed's New Gilded Age that is it equally powerless to stop.
Markets that live by the Fed also die by the Fed. The Fed's abject, pathetic powerlessness over what actually matters will be revealed in the years ahead, and everyone will look back on the decades in which the Fed was viewed as god-like as a form of mass delusion.
The "everything bubble" is not permanent. Gambling is risky, and the Fed has rigged the world's larget casino to benefit its banking / financier / corporate cronies. But bubbles burst for reasons outside the control of the Fed, a reality that's about to become undeniable.
My 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.


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. New benefit for subscribers/patrons: a monthly Q&A where I respond to your questions/topics.

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Sunday, September 15, 2019

The Black Swan Is a Drone

What was "possible" yesterday is now a low-cost proven capability, and the consequences are far from predictable.
Predictably, the mainstream media is serving up heaping portions of reassurances that the drone attacks on Saudi oil facilities are no big deal and full production will resume shortly. The obvious goal is to placate global markets fearful of an energy disruption that could tip a precarious global economy into recession.
The real impact isn't on short-term oil prices, it's on asymmetric warfare: the coordinated drone attack on Saudi oil facilities is a Black Swan event that is reverberating around the world, awakening copycats and exposing the impossibility of defending against low-cost drones of the sort anyone can buy.
(Some published estimates place the total cost of the 10 drones deployed in the strike at $15,000. Highly capable commercially available drones cost around $1,200 each.)
The attack's success should be a wake-up call to everyone tasked with defending highly flammable critical infrastructure: there really isn't any reliable defense against a coordinated drone attack, nor is there any reliable way to distinguish between an Amazon drone delivering a package and a drone delivering a bomb.
Whatever authentication protocol that could be required of drones in the future--an ID beacon or equivalent--can be spoofed. For example: bring down an authenticated drone (using nets, etc.), swap out the guidance and payload, and away it goes. Or steal authentication beacons from suppliers, or hack an authenticated drone in flight, land it, swap out the payload--the list of spoofing workaround options is extensive.
This is asymmetric warfare on a new scale: $20,000 of drones can wreak $20 million in damage and financial losses of $200 million--or $2 billion or $20 billion, if global markets are upended.
If it's impossible to defend against coordinated drone attacks, and impossible to differentiate "good" drones from "bad" drones, then the only reliable defense is to ban drones entirely from wide swaths of territory.
So much for the lightly regulated commercialization of drones.
What sort of light bulbs are going off in the minds of copycats? It doesn't take much imagination to see the potential for mayhem--and without sacrificing your own life. I won't elaborate on the possibilities here, but they're obvious to us all.
The range and payload of low-cost drones is limited. The big drones can fly hundreds of miles and carry hundreds of pounds of weaponry, but these can be targeted by radar and conventional ground-to-air missiles. So-called hobby drones skimming over the rooftops (or deserts or forests) are difficult to shoot down, especially if the attack is coordinated to arrive from multiple directions.
Small hobby drones may only carry 3 KG (roughly 6 pounds), but how much damage can 3 KG of high explosives cause? The answer is "considerable" if the target is flammable, or lightly shielded electronics.
Larger commercially available drones can carry up to 20 KG or 40 pounds--more than enough explosive capacity to take out any number of targets.
Defense and intelligence agencies have no doubt war-gamed the potential for coordinated drone attacks, and the world's advanced militaries are already exploring the potential for self-organizing "drone hordes" of hundreds or even thousands of drones overwhelming defenders with sheer numbers. The success of the oil facilities attack proves the effectiveness of much smaller scale drone attacks.
Put yourself in the shoes of those tasked with securing hundreds of miles of pipelines carrying oil and natural gas around the world. What's your defense against drone attacks? A.I.-controlled or remote-operated gun towers every few hundred yards, along thousands of miles of pipelines? Human patrols covering the entire pipeline 24/7? The cost of such defenses would burden the defenders with enormous costs without providing 100% reliable security. (Guards can be bribed, remotely operated guns can be overwhelmed by an initial wave of cheap unarmed hobby drones, etc.)
It's obvious there are no low-cost, effective defenses of thousands of miles of pipelines. (Recall that the Saudis depend on seawater being piped hundreds of kilometers into the desert to inject into oil wells to maintain production. Taking out these water lines and pumps would cripple production, too.)
The only effective way to limit drone attacks is to ban all drones and institute a shoot-on-sight policy in restricted areas. But that will not negate the potential for coordinated drone strikes or drone attacks on remote facilities.
The mainstream media will be under permanent pressure to downplay the consequences of this attack, but the cat is out of the bag: the Black Swan is a drone. What was "possible" yesterday is now a low-cost proven capability, and the consequences are far from predictable.
This unpredictability alone should unsettle markets, as the risk of future asymmetric warfare drone strikes just increased to a degree that is difficult to measure or hedge.
My 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.


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. New benefit for subscribers/patrons: a monthly Q&A where I respond to your questions/topics.

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Friday, September 13, 2019

What a Relief that the U.S. and Global Economies Are Booming

Doing more of what's failed for ten years will finally fail spectacularly..
It was a huge relief to see the charts of the Baltic Dry Index (BDI) and the U.S. retail sector ETF (RTH): both have soared to the moon, signaling that both the U.S. and global economies are booming: the BDI is widely regarded as a proxy for global shipping, which is a proxy for global trade and economic activity.
Amazon is 18% of the RTH basket of retail stocks, but the rest are conventional bricks and mortar chains with online sales: Walmart, Home Depot, Lowes, Costco, CVS, etc.
The American consumer must be ready, willing and able to spend freely since the retail sector is hitting new heights.
OK, now let's change channels from soaring market valuations to the real-world economy. What planet are buyers of BDI and RTH on? Maybe the shipping and retail sectors are incredibly robust on Sirius B, but here on Planet Earth the global economy is weakening, trade is stagnating, shipping is in recession, and retail sales and profits are stagnating.
Lumping all American households in one basket gives a false signal of financial health. If we look at averages, debt levels are reasonable, incomes are notching higher and so expectations of rising household debt and spending are reasonable.
But this radically distorts reality: only the top 10% are creditworthy and have rising incomes; the bottom 90% are over-indebted, poor credit risks and their income is stagnant and/or precarious.
The top 10% of households--a mere 12 million households--are also precarious, as much of their wealth and income is based on insanely overvalued asset bubbles in stocks, bonds and real estate. The wealth effect fuels their free-spending ways (recall that the top 10% collect roughly half of all income and account for almost half of all consumer spending).
As all the asset bubbles pop, the reverse wealth effect kicks in. Once households feel poorer, they tighten their borrowing and spending.
Another under-appreciated reality is the top 10% of households have much lower levels of debt (relative to their income) than the average middle-class household. This has several sources:
1. The top 10% hasn't needed to borrow as much for college, healthcare, vehicles, vacations, etc. because their higher income enables saving and paying cash.
2. The top 10%, especially the self-employed and small-business owners, tend to be debt-averse. They understand that debt is always a noose around the neck. As a result, the desire to take on more debt, even at near-zero rates of interest, is near-zero for many top 10% households.
3. The wealth effect is real for 10% households which have sold off bubble-valuation stocks, bonds, real estate, art, vintage autos, etc. The smart money has been selling these assets and pocketing the gains. The bottom 90% don't own enough bubble-valuation assets to move the needle on their overall wealth, income and financial security.
Globally, those who want to borrow more are poor credit risks while those who are creditworthy don't want more debt, regardless of how low interest rates fall. If we set aside the top 10% of households and enterprises, and focus on the creditworthiness and precariousness of the bottom 90%, we get a much more accurate picture of global debt exhaustion, a.k.a. debt saturation.
As I've written here recently, the recession that's unfolding isn't one triggered by crisis such as higher oil prices or a financial panic. It's a recession of debt exhaustion and diminishing returns as doing more of what's failed for ten years will finally fail spectacularly.


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


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 (PDF)
My 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.


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. New benefit for subscribers/patrons: a monthly Q&A where I respond to your questions/topics.

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, Daniel C. ($5/month), for your wondrously generous subscription to this site-- I am greatly honored by your longstanding support and readership.
 

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Wednesday, September 11, 2019

The Inevitable Bursting of Our Bubble Economy

All of America's bubbles will pop, and sooner rather than later.
Financial bubbles manifest three dynamics: the one we're most familiar with is human greed, the desire to exploit a windfall and catch a work-free ride to riches.
The second dynamic gets much less attention: financial manias arise when there is no other more productive, profitable use for capital, and these periods occur when there is an abundance of credit available to inflate the bubbles.
Humans respond to the incentives the system presents: if dealing illegal drugs can net $20,000 a month compared to $2,000 a month from a regular job, then a certain percentage of the work force is going to pursue that asymmetry.
In our current economy, corporations have sunk $2.5 trillion in buying back their own stocks because this generates the highest work-free return. This reflects two realities:
1. Corporations can't find any other more productive, profitable use for their capital than buying back their own shares (enriching the managers via stock options and the 10% of American households who own 93% of the stocks)
2. Thanks to the Federal Reserve and other central banks injecting trillions of dollars of nearly-free credit into the financial sector, corporations can borrow billions of dollars to play with at near-zero rates that are historically unprecedented.
So borrow billions at 2.5%, pour it all into buying back your own stock and reap the gains as your stock rises 10%. Recall the basic mechanism of stock buy-backs: by reducing the number of shares outstanding, sales and profits go up on a per share basis--not because the company generated more revenues and profits, but because the number of shares has been reduced by the buy-backs.
(Note to New Green Deal advocates: if corporations reckoned they could earn more by investing the $2.5 trillion in alternative energy projects rather than stock buy-backs, they would have done so.)
As various sources have outlined, corporate stock buy-backs have been the primary driver of higher stock prices. This is driving the third dynamic of bubbles:
As the bubble continues inflating beyond any rational valuation, rational investors throw in the towel and join the frenzy. Once again, this willingness to abandon rationality is partly fueled by greed and also by a dearth of other more attractive investments.
A bubble economy is a sick economy, for bubbles are proof there is too much capital chasing too few productive uses for that capital. The Fed and other central banks have created trillions of dollars, yuan, euros and yen for corporations and financiers to play with, and to a lesser degree, for home buyers to play with via low mortgage rates and federal guarantees on mortgages.
As a result, the housing bubble is the one regular folks can play. And despite claims that it's not a bubble because of organic demand, housing is definitely in a bubble, along with stocks and bonds, art, etc.
When you create trillions of dollars, yuan, euros and yen out of thin air, you create the incentives to inflate bubbles. When your real economy is sick and offers few productive uses for all this excess capital, that only adds fuel to the speculative fire.
Here's the problem: all bubbles burst, regardless of other conditions. Creating more trillions won't change this, adding more gamblers to the casino won't change this, claiming a bubble economy is healthy won't change this and promising a trade deal with China won't change this.
All of America's bubbles will pop, and sooner rather than later. The stock market moves a bit faster than the housing and bond markets, but the bubbles that are visible in every market will all burst, much to everyone's dismay.
We can add a fourth dynamic of bubbles: nobody believes bubbles can burst until it's too late to get out unscathed.
My 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.


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. New benefit for subscribers/patrons: a monthly Q&A where I respond to your questions/topics.

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, Ross B. ($10/month), for your outrageously generous subscription to this site-- I am greatly honored by your longstanding support and readership.
 

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Sunday, September 08, 2019

How Deep Is the Rot in America's Institutions?

Either we root out every last source of rot by investigating, indicting and jailing every wrong-doer and everyone who conspired to protect the guilty in the Epstein case, or America will have sealed its final fall.
When you discover rot in an apparently sound structure, the first question is: how far has the rot penetrated? If the rot has reached the foundation and turned it to mush, the structure is one wind-storm from collapse.
How deep has the rot of corruption, fraud, abuse of power, betrayal of the public trust, blatant criminality and insiders protecting the guilty penetrated America's key public and private institutions? It's difficult to tell, as the law-enforcement and security agencies are themselves hopelessly compromised.
If you doubt this, then please explain how 1) the NSA, CIA and FBI didn't know what Jeffrey Epstein was up to, and with whom; 2) Epstein was free to pursue his sexual exploitation of minors for years prior to his wrist-slap conviction and for years afterward; 3) Epstein, the highest profile and most at-risk prisoner in the nation, was left alone and the security cameras recording his cell and surroundings were "broken."
If this all strikes you as evidence that America's security and law-enforcement institutions are functioning at a level that's above reproach, then 1) you're a well-paid shill who's protecting the guilty lest your own misdeeds come to light or 2) your consumption of mind-bending meds is off the charts.
How deep has the rot gone in America's ruling elite? One way to measure the depth of the rot is to ask how whistleblowers who've exposed the ugly realities of insider dealing, malfeasance, tax evasion, cover-ups, etc. have fared.
America's ruling class has crucified whistleblowers, especially those uncovering fraud in the defense (military-industrial-security) and financial (tax evasion) sectors and blatant violations of public trust, civil liberties and privacy.
Needless to say, a factual accounting of corruption, cronyism, incompetence, self-serving exploitation of the many by the few, etc. is not welcome in America. Look at the dearth of investigative resources America's corporate media is devoting to digging down to the deepest levels of rot in the Epstein case.
The closer wrong-doing and wrong-doers are to protected power-elites, the less attention the mass media devotes to them.
As for Corporate America's fraud and corruption: No Wrongdoing Here, Just 6,300 Corporate Fines and Settlements (May 2015). Prosecutors no longer indict bankers, CEOs or top executives. Wrist-slap fines are deemed adequate punishment, even when corporate managers have reaped billions of dollars in profits selling highly addictive and dangerous drugs while claiming they're safe and non-addictive.
The tens of thousands of Americans who've died from these drugs suggest this was never true.
All this rot--corruption, fraud, abuse of power, betrayal of the public trust, tax evasion, blatant criminality and insiders protecting the guilty--has consequences. As I explained in Crony Capitalism Is Kryptonite to Democracy and the Real Economy (October 6, 2014), When the machinery of governance is ruled by the highest bidders, democracy is dead. (Hmm, why is Facebook suddenly spending $100 million on lobbying?)
Or as correspondent Simons C. recently put it: "The ethical dimension underpinning the whole system is this: what's moral is what's legal and what's legal is for sale."
Here are America's media, law enforcement/security agencies and "leadership" class: they speak no evil, see no evil and hear no evil, in the misguided belief that their misdirection, self-service and protection of the guilty will make us buy the narrative that America's ruling elite and all the core institutions they manage aren't rotten to the foundations.
Either we root out every last source of rot by investigating, indicting and jailing every wrong-doer and everyone who conspired to protect the guilty in the Epstein case, or America will have sealed its final fall.


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


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 (PDF)
My 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.


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. New benefit for subscribers/patrons: a monthly Q&A where I respond to your questions/topics.

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, Julie O. ($10/month), for your outrageously generous subscription to this site-- I am greatly honored by your support and readership.
 

Read more...

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