Wednesday, February 19, 2020

Omens, Portents, Karma and the Mandate of Heaven

The question of legitimacy isn't limited to China.
what makes humans unique among social mammals? Some say humor, I would nominate superstition: regardless of how hard we promote our rationality and logic, humanity continues to sense portents and omens in events and feel the intangible tug of karma: the consequences of past actions that we arrogantly thought we'd escaped forever.
Michael Snyder recently compiled a list of peculiarities that are raising eyebrows around the globe: One, sure, two, not that unusual, three, well things happen in threes, but ten disturbances and we're only six weeks into 2020? 10 'Plagues' That Are Hitting Our Planet Simultaneously (Zero Hedge)
As the saying has it, Nature Bats Last, and maybe arrogant, destructive humanity's war on Nature is about to get its comeuppance. Maybe overdosing hundreds of millions of chickens and pigs to knock down bacteria in overcrowded conditions has finally generated a karmic blowback via bird and swine viruses.
As for karma in human society: maybe the disruption of the supply chain in China is a karmic response to offshoring production to fatten Corporate America's profits at the expense of all else in America's society and economy.
Then there's the celestial right to rule, a.k.a. The Mandate of Heaven, the concept rooted in Chinese culture that political leadership which fails the people invites divine retribution in the form of withdrawing the support of Heaven. This withdrawal of support manifests in the tangible world as natural disasters: earthquakes, floods, droughts, plagues, etc.
Though it's not politically correct to discuss The Mandate of Heaven in any serious way, the reading of omens goes back in Chinese history to oracle bones, the process of heating bones until they crack and then interpreting the patterns as portents to the future.
With human and domestic animal epidemics devastating China in a novel cluster of natural disasters, The Mandate of Heaven is in play even if no one dares speak of it openly. The regime is well aware that these parallel plagues are understood as manifestations that question the legitimacy of the current regime.
The question of legitimacy isn't limited to China. Soaring wealth inequality, the dependence on debt to fund "growth" and the political disenfranchisement of the masses are global manifestations of political-financial systems that invite divine retribution for their excesses of corruption, self-aggrandizement, and exploitation of the planet and its human workforce.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Tuesday, February 18, 2020

The World Is Awash in Oil, False Assurances, Magical Thinking and Complacency as Global Demand Careens Toward a Cliff

This collapse of price will manifest in all sorts of markets that are based on debt-funded purchases of desires rather than a warily prudent priority on needs.
Since markets are supposed to discover the price of excesses and scarcities, it's a mystery why everything that is in oversupply is still grossly overpriced as global demand slides off a cliff: oil, semiconductors, Uber rides, AirBNB listings and many other risk-on / global growth stories are still priced as if pre-Covid-19 demand was still guaranteed.
Punters are still buying semiconductor stocks based on out-of-touch projections that are the equivalent to counting the number of fairies on the head of a pin, ignoring the fundamental reality that very few people actually need a new mobile phone, vehicle, laptop, refrigerator, etc.
It boils down to confidence and certainty. People pursue what they desire but don't need when they're brimming with confidence in the future, bolstered by an animal-spirits euphoria that their income and wealth will continue rising--a sense of certainty anchored by a belief that their economic world is essentially without risk.
When confidence dissipates and is replaced by fear and uncertainty, desires lose their luster and needs take precedence. When you're afraid of getting a deadly virus or losing your livelihood, status symbols and frivolous spending no longer top the agenda.
Yet the entire risk-on / global growth story is based entirely on desires not needs. The vast majority of demand isn't for a pressing need, it's for euphoric aspirational consumption, spending intended to make the buyer larger than they really are, in their own self-image and in the image they present to the world in the brands they display, the cafes they dine in, etc. etc.
Since the world is awash in false assurances, magical thinking and complacency, we might ask: what's the market value of these disconnected-from-reality fantasies? There's no pricing mechanism for such intangibles, of course, but should counting the number of fairies on the head of a pin give way to a new appreciation of risk and a pervasive awareness of uncertainty, then global demand will fall off a cliff as desires are set aside indefinitely.
In a world of bogus projections and rigged statistics, plunging demand for oil is one of the few reality-based measures available. One of the games being played is whenever a reality-based measure is discovered--electricity consumption, satellite images of empty parking lots, etc.--authorities immediately limit access to the measures and/or unleash a tsunami of counter-narratives to discredit the real-world evidence that global demand is cratering.
Since oil is the master resource for the industrialized, interconnected global economy, it's tough to argue that declining consumption of oil doesn't matter.
When demand craters, producers must restrict supply or price will crater, too. The problem with oil and everything else that's now in over-supply / over-production is that producers can't survive either a sustained drop in price or a sustained drop in production. Since both are equally fatal, producers have every incentive to keep producing and hope that somebody else lowers their production to keep prices high.
Alas, no producer is willing to fall on their sword to keep prices unnaturally elevated. And so excess production continues apace until price collapses.
This collapse of price will manifest in all sorts of markets that are based on debt-funded purchases of desires rather than a warily prudent priority on needs.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Monday, February 17, 2020

COVID-19 Pandemic: The Complacent Are Clueless

The eventual price of substituting magical thinking and survivorship bias for actual evidence will be far higher than the complacent realize.
Here's a sampling of complacent assertions being made about the COVID-19 virus as if they were certitudes:
It's no worse than a bad cold.
It's less deadly than a normal flu.
You can't catch it unless you're in sustained close contact with a carrier.
Carriers are only contagious for 14 days. After that, you're home free.
A vaccine is just around the corner.
The Chinese government has it under control.
Only 2,000 people have died, it's no big deal.
The few cases in other countries are being managed, and it will soon disappear.
The pandemic will fade away by April due to rising temperatures.
China's GDP will only take a 1% hit, and global growth will only drop 0.25%.
Interestingly, there is no large-scale, credible data to support any of these claims. But the complacent are not just falling for false claims being passed off as "facts" rather than what they really are--magical thinking--they're making a much larger error known as Survivorship Bias.
The complacent are focusing on the few who have been tested for the virus, not the millions who haven't been tested.
The complacent are focusing on the accurate tests, not the many carriers who tested negative or the healthy people incorrectly tagged by false positive tests. The complacent are overlooking the fact that multiple tests are needed to confirm and even multiple tests can fail.
The complacent are focusing on the few who went to the hospital to get tested and treated, not the multitudes who did not go to a doctor or hospital (for a variety of reasons).
The complacent are focusing on the few carriers who have been forcibly hauled off by Chinese police and not the many who have wisely hidden away from prying eyes.
The complacent are focusing on the few facilities with test kits, not on the multitude of clinics which do not have test kits.
The complacent are focusing on the few who have been identified as carriers in other nations, not the asymptomatic carriers who have not been identified because 1) they have no symptoms and thus no reason to get tested and 2) they chose not to go to a doctor or hospital despite having symptoms.
In effect, the complacent are focusing solely on the few carriers who are symptomatic and have been tested, not on the much larger number of asymptomatic carriers who have not been tested. The complacent are ignoring the highly contagious nature of COVID-19, and the impossibility of controlling a virus that can be spread by asymptomatic carriers for up to 24 days.
The complacent are assuming 100% of all carriers outside China have come forward and been identified as carriers via tests, when the reality is asymptomatic carriers don't even know they are infected and contagious.
The complacent are assuming every healthcare facility in China has test kits in such abundance that they can test suspected carriers three times to confirm the diagnosis, when the reality is test kits are scarce and one test is not enough to make a reliable assessment. Carriers can test negative, positive and then negative.
The complacent are assuming casual contact isn't enough to catch the virus while a rising tide of cases confirm that brief, casual contact is enough to get the virus.
The complacent are assuming 100% of symptomatic carriers will go to the hospital to be tested and treated, when an unknown but consequential number of symptomatic carriers are fearful of what will be done to them and their families by authorities, so they hide from prying neighbors and authorities.
The complacent are assuming that asking people if they recently visited China or hosted a visitor from China will identify 100% of the asymptomatic carriers, when there is already proof that asymptomatic carriers have caught the virus from others: they did not visit China or have any known contact with anyone who came from China. They caught the virus from an intermediary who didn't even know they were infected.
The complacent are looking at cases and carriers that are known, not the cases and carriers which are unknown. Since asymptomatic carriers can spread the pathogen, the majority of carriers remain unknown. Since not every symptomatic carrier chooses to go to the hospital, many cases remain unknown.
In sum, the complacent are clueless. The eventual price of substituting magical thinking and survivorship bias for actual evidence will be far higher than the complacent realize. Playing games with statistics and high finance will not limit the spread of the virus or limit its profound economic impact.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Sunday, February 16, 2020

The Fed Has Created a Monster Bubble It Can No Longer Control

The Fed must now accept responsibility for what happens in the end-game of the Moral-Hazard Monster Bubble it created.
Contrary to popular opinion, the Federal Reserve didn't set out to create a Monster Bubble that has escaped its control. Also contrary to popular opinion, the Fed will be unable to "never let stocks fall ever again--ever!" for the simple reason that the monster it has created-- a monster mania of moral hazard in which all risk has vanished because the Fed will never let stocks fall ever again--ever!--is now beyond its control.
And that's a problem for the Fed, which above all else needs control of interest rates, financial markets and the economy.
The problem is that bubbles always pop, and they pop regardless of what central banks do. This is contrary to the popular opinion that if only the Fed had saved Lehman Brothers, the Global Financial Meltdown of 2008 would never have happened.
Wrong. Bubbles pop when too much risky debt unbacked by collateral is issued to marginal borrowers who inevitably default, triggering massive losses in the financial sector, an equally massive unwind of speculative debt and risky gambles and a deep recession as all the debt-fueled malinvestment dries up and blows away.
The 2008 Global Financial Meltdown was the inevitable result of subprime and other debt bubbles bursting which then triggered a panic to unwind trillions of dollars in high-risk speculative gambles in stocks, real estate, junk bonds, etc.
The Fed has another problem which it hasn't been able to solve despite 12 years of trying: to save the financial system from collapse, the Fed has to re-inflate the debt-fueled speculative mania that just popped from unstable excesses of debt, leverage and moral-hazard speculative fever, all piled on a diminishing foundation of actual collateral.
We can see the manic progression of each Fed rescue in this chart: note the compression of time as the periods between each Fed rescue shrink and the spectacular rocket-ship ride of debt, leverage and moral-hazard speculative fever adds another 1,000 points to the S&P 500 in ever shorter manic stampedes of front-running the next the Fed will never let stocks fall ever again--ever! bubble.
Advances that recently took years now take months. The 700 point advance that required 4.5 years back in the previous bubble of 2003-2007 now required only 4.5 months. The next iteration is 700 points in 4.5 weeks, then in 4.5 days, and then the oblivion of collapse.
The Fed's balance sheet has gone nowhere for eight weeks while the bubble in stocks gathered the manic momentum of the Fed will never let stocks fall ever again--ever!:
12/25/19 $4.165 trillion
1/1/20 $4.173 trillion
1/8/20 $4.149 trillion
1/15/20 $4.175 trillion
1/22/20 $4.145 trillion
1/29/20 $4.151 trillion
2/5/20 $4.166 trillion
2/12/20 $4.182 trillion
That's a total range of $0.017 trillion--essentially signal noise. This strongly suggests that the Fed is hoping--foolishly, of course, as it stumbles around in a hubris-soaked fantasy that it can really, really, really control the moral-hazard monster it created--to keep stocks on a "permanently high plateau" which somehow avoids the two disasters that history records as inevitable: either an immediate collapse of the bubble or a Fed-fueled "rescue" that adds another 1,000 points in six months, and then another 1,000 points in three months, and then a collapse that cannot be rescued, as the entire financial system implodes.
The Fed managers are foolish but not stupid. They realize they cannot let the moral-hazard mania move into the phase where an irretrievable collapse becomes inevitable.
The problem here is history has never recorded a bubble which settled magically onto a "permanently high plateau" and stayed there for months or years. So the Fed has finally reached the point of no return: either it accepts a painful bursting of the monster moral-hazard bubble it has created or it lets the monster lead the stampede over the cliff to a financial collapse that the Fed can't rescue with the usual tools of lowering interest rates and bailing out banks.
It's worth recalling that the Fed can't actually force insolvent lenders to lend more money to insolvent borrowers. It also can't squeeze blood from stones; insolvent borrowers default, period. The losses can be buried in the Fed balance sheet but that doesn't create income for shuttered enterprises or laid-off workers, or generates taxes for local governments watching their tax base melt away.
Even the hubris-soaked fools in the Fed realize this bubble has disconnected from financial realities. One glance at the operating income of Apple shows that everyone's favorite stock has soared even as operating income has been essentially flat for years. There's a phrase for this: disconnect from reality, all driven by the manic certitude that the Fed will never let stocks fall ever again--ever!
After 12 long years of ever-riskier bubble-blowing, the Fed is now boxed in. Instead of reassuring markets that the next 1,000 points are guaranteed and all in only a few more months of mania, the Fed will either have to offer false assurances while it attempts an impossible "soft landing", i.e. a controlled deflation of the Monster Bubble, or it grimly accepts that a 1,000 point decline in the S&P 500 now is a better choice than an implosion later if the Monster Bubble breaks completely free and rampages higher even as the Fed pulls the plug.
Moral-Hazard Monster Bubbles cannot be controlled. Human greed guarantees that the Fed will never let stocks fall ever again--ever! will generate self-reinforcing stampedes of speculative mania that no long respond to the signals of the Fed balance sheet.
At this point, the Fed will be hoist on its own petard: by claiming god-like control of interest rates, financial markets and the economy, the Fed must now accept responsibility for what happens in the end-game of the Moral-Hazard Monster Bubble it created: either allow a 25% to 30% wipeout of speculative excess now or feed the final stampede to financial collapse.
It's not a happy choice, but if we're honest (gasp), there really is no choice: the Fed cannot let the moral-hazard mania run to complete collapse, which is now only one iteration away.


My recent books:
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.

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