Thursday, April 23, 2020

Here's Why the Economy Won't Recover--and No, It's Not Covid-19 or the Lockdown

When reality and truth become the sworn enemies of society's political and economic elites, the society is well and truly doomed.
The risks of Covid-19 and the lockdown have been explored across a wide spectrum of opinion. To hit just a few of too many to count:
-- Permanent loss of civil liberties under the guise of "pandemic controls."
-- Failure of control measures to limit the pandemic in any sort of economically manageable manner.
-- Schemes for ID Cards identifying those with antibodies may fail as immunity might be fleeting, or low antibody counts may not confer immunity.
These visible risks arise directly from the pandemic and efforts to control it, but the reasons why the economy won't recover were in force long before the pandemic:
1. Unsustainable dependence on expanding debt to fund consumption as earned income stagnated.
2. Unsustainably high costs imposed by cartels, monopolies, insider-skims/scams, institutionalized fraud, hyper-financialization, exploitation, etc. (Please see What's Collapsing Can't Be Saved: Our Fraudulent Economy)
3. The economy-wide creation of self-serving simulations of trust, credibility, transparency and accountability as substitutes for actual trust, credibility, transparency and accountability.
This ceaseless spew of simulacra to cloak self-serving corruption is hidden from view lest the truth--that authentic trust, credibility, transparency and accountability have been dismantled because they inhibit the profiteering and exploitation of insiders and elites-- undermine the entire status quo.
And so "success" (as in maximizing profits) in America is now a game of creating believable facsimiles of what was once authentic. Like all mammals, humans retain a sixth sense--commonly referred to as the "sniff test", i.e. something doesn't feel right--and so the simulacra are only partially successful in making us believe institutions are trustworthy, credible, transparently operated and governed in a way that enforces accountability.
As a result, the more all our dominant institutions press their claims of legitimacy, the more they erode their legitimacy.
We sense all of these facsimiles are false, but are powerless to uncover the actual machinery of corruption. We are forced to rely on insiders who release the actual processes to the public, and these whistleblowers are hunted to the ends of the Earth (Assange, Snowden, et al.) because their revealing how the status quo actually functions is the most dangerous force the status quo faces.
This requirement to hide the truth lest it collapse all the skims, scams, frauds, rackets and insider plundering and pillaging is the Monster Id of America. The more the insiders and institutional technocrat machinery attempt to censor and suppress critical inquiry, the greater the erosion of public trust in the credibility and legitimacy of the dominant institutions.
When reality and truth become the sworn enemies of society's political and economic elites, the society is well and truly doomed. We have reached the "let them eat cake" moment in which our self-serving insiders have lost touch with the reality of their own dissonance and disconnect from the real world.
The hollowed-out brittle shell of the global economy has shattered, and no amount of simulations and bogus reassurances can restore what's broken. Authoritarian overkill only speeds the collapse of legitimacy, trust and credibility.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Posted by Charles Hugh Smith at 11:18 AM

Tuesday, April 21, 2020

What's Collapsing Can't Be Saved: Our Fraudulent Economy

Pulling the sleeve down to hide the tracks doesn't mean the addict is cured.
Just for a change of pace, can we be bluntly honest about the U.S. economy? It's difficult to do because we've chosen to ignore all the realities, much like a family that hides all the addictions, drunkenness and lies in a dysfunctional household to maintain the outward illusion of a happy functioning family.
It's extraordinarily costly to maintain such a demanding masquerade. The psychological toll is immense, and the financial ruin that's always threatening to collapse the flimsy facade feeds the most destructive coping strategies.
Please don't claim that Daddy and Mommy aren't really addicts, addicted to lies, cheating and stealing to fund their corruption and maintain the absurdly threadbare happy-story facade of normalcy.
Being honest is painful but freeing. Once all the ugliness is exposed to sunlight, then healing becomes possible. As long as reality is cloaked, hidden, explained away, etc., the destruction only deepens until complete collapse of the masquerade is the only possible outcome.
We've reached that point: we can no longer deny the U.S. economy is little more than a grab-bag of skims, scams, fraud and corruption. Even if Covid-19 vanished from the Earth tomorrow, or the entire economy opened tomorrow, the collapsing of the fraud bubble cannot be reversed, any more than the addict can be "cured" with some makeup to mask the devastation and clean clothing to hide all the tracks.
Let's start with the most risible fraud: "value." Every skim and scam claims to be "creating value" for shareholders, customers, the planet, etc. But it's all fraud and lies. No value is being created; what's really happening is entrenched insiders have established corrupt relationships that funnel income streams into their own pockets at the expense of everyone else, who must be kept in the dark about how the skim/scam actually works.
"Value" is now defined as private gains skimmed under the false claim of "value to customers." Behind the bogus PR, product quality is ruthlessly slashed, quantity reductions are hidden by larger packaging, planned obsolescence is the Prime Directive of every corporation because all these frauds increase profits, which flow to an increasingly thin slice of America's financial elites.
The entire stock market rally of the past 20 years is nothing but a gigantic fraud based on stock buybacks funded by debt. Stocks go up because the majority owners of the stock borrow money from a banking sector that gives nearly free money to financiers and corporations. The corporate insiders buy back shares with the borrowed money, and the company services the loan.
The company's income is devoted to paying the debt taken on to boost the personal wealth of insiders. That's fraud. Or if you prefer, embezzlement.
Take away the stock buyback scam and the U.S. stock market collapses. Take away a Federal Reserve devoted to lavishing nearly free money on financiers and corporations and the buyback scam collapses.
Consider WeWork, all the scooter start-ups, Netflix and Tesla. WeWork was a scam from the start, but there was so much money to be skimmed in selling the fraud to the public that everyone in Wall Street and the corporate media promoted the scam by refusing to look at the actual business.
The same dynamic fueled the absurd explosion of scooter start-ups, as if the business model could ever be profitable. No, the business could never be profitable, but unloading worthless shares in multiple rounds of venture capital was extremely profitable--for insiders.
As for Netflix and Tesla, the more money they lose, the more valuable they become. The key fraud here is "disruption." If a company can be promoted as a "disruptor," the sky's the limit, Baby, because "disruptors", well, disrupt, and presto-magico, somewhere down the road they become immensely profitable because, um, they disrupted something or other.
The greater the emotional pull of the scam, the easier it is to promote. Garsh, isn't it wunnerful how a college degree guarantees a lifetime of high earnings and financial security. Except that isn't guaranteed at all. What's guaranteed is insiders are skimming fortunes in the higher education cartel and its fraudulent handmaiden, the student loan industry.
Then there's sickcare, Corporate America's rip-off skimming operation masquerading as "healthcare." Caring has nothing to do with it; the driver is greed, maximizing profits by establishing corrupt relationships with politicos and regulators to insure staggering sums of federal monies are sluiced into sickcare's insatiable maw.
National defense is another emotional cover for boondoggles and insider profiteering. We won World War II, doggonnit, so just ignore the $1,000 hammers and the $100 billion over-runs.
Every institution in America is little more than a cover for insider profiteering via skims, scams, rackets, fraud and embezzling schemes, all sanctified as "legal" via a thoroughly corrupted legal system and judiciary.
Debt-serfdom is packaged and sold as a "middle class lifestyle." Political neutering, i.e. powerlessness, is sold as "party loyalty." And so on, in an endless parade of skims and scams packaged and sold to cloak the ugly ascendancy of greed, fraud and lies.
We live in a constantly distorted house of mirrors devoted to maintaining useful illusions of "democracy," "free markets" and other fairy tales we tell ourselves to reduce the pain of living a vast, all-encompassing fraud in which everyone who isn't a grifting insider is the loser.
We don't just have financial bubbles that are popping; we have bubbles in trust and credibility that are popping, too. All the lies, skims, scams, excuses, frauds, bezzles, artifices, profiteering, promotional schemes and rackets are unraveling, not because the virus shut down the economy but because the enormity of all the corruption, lies and fraud is now so great that the entire status quo is collapsing under its own weight.
Pulling the sleeve down to hide the tracks doesn't mean the addict is cured. The illusion, the facade, the masquerading of normalcy, are no longer sustainable. The Monster Id can no longer be hidden, and simulacra no longer substitute for reality.
Trust, credibility, transparency and accountability have all been sacrificed for personal gain, at the expense of the stability of the entire system.
Once the system collapses, we all lose, even the insiders who have traded every shred of their soul for financial gains, at the expense of everything that was once held dear.
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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Posted by Charles Hugh Smith at 8:32 PM

Monday, April 20, 2020

False Reading: The Fed's Equities Light Is "Green" But the Economy Is Crashing

Sadly, as markets stall and crash, participants will still be in their seats thinking all is well.
The tragic 2009 crash of Air France Flight 447 offers an apt analogy for the global economy and central bank-driven false signals. Flight 447 entered an area of frigid turbulence over the Atlantic which caused the air-speed sensors (pitot tubes) to ice up. A few minutes later, the autopilot disengaged, and the co-pilot flying the aircraft over-corrected in the turbulence.
Deprived of accurate airspeed readings, the co-pilot misjudged the situation and attempted to climb, causing the aircraft to stall. Unable to recover, it crashed into the Atlantic, killing all on board.
The co-pilot's last recorded words are haunting: "We're going to crash! This can't be true. But what's happening?"
The Federal Reserve's massive pimping of the stock market has frozen free-market feedback, generating wildly inaccurate readings which are leading participants to their doom. Stripped of price discovery and accurate readings of risk, participants are attempting to recover recent highs, a misreading of reality that will cause the stock market to stall and crash.
In effect, the Fed is jamming the equities market light on"green" when it should be flashing red and a stall alarm should be sounding. Participants in the current manic rally are looking at the indicator light--a steady green, indicating A-OK--when in reality the global economy has stalled out and is crashing.
Thanks to the Fed's pimping, the indicators no longer reflect the realities of price discovery or risk, and so participants are making a fatal error: they are assuming that the indicator light is accurate and that the stock market is "safe" and "stable," when in fact it is unstable and stalling.
Having inflated a high-risk, unsustainable bubble from September 2019 to February 2020, the Fed's response to the stock market stall in March has been to create false readings of stability, risk and altitude. While punters and money managers are acting on the panel of green lights ("The Fed has our backs, stocks will rise, there's no risk"), the market is actually stalling out so severely that the warning sensors have shut down.
Sadly, as markets stall and crash, participants will still be in their seats thinking all is well because the Fed has jury-rigged all the readings to be bright green and disabled the stall alarm.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Posted by Charles Hugh Smith at 9:33 PM

Sunday, April 19, 2020

Here We Go Again: When Bubbles Pop, Only the First Sellers Avoid Destruction

Bubbles always burst, and the confidence that "this isn't a bubble" and "the Fed has our back" are counter-indicators.
Here we go again: stocks have once again reached nosebleed valuations completely disconnected from reality--in other words a repeat of the speculative-frenzy bubble that reached its peak on February 19. Once again, stocks are sporting delusional GDP-to-valuation and P-E (price-earnings) ratios, all based (again) on the belief that nothing--certainly not revenues, profits, debt levels, etc.--matters; the only thing that matters is the Fed pimping stocks.
What might observant punters have learned from the February 19 bubble popping? For one thing, the complacent belief that every technician's target is guaranteed is suspect: at this writing, the vast majority of technical-analysis targets are much higher.
What's the basis for these higher targets? Nothing but the implicit quasi-religious faith in the Fed.
For another, the belief that the market will give every punter an ample opportunity to sell once those targets are reached is equally suspect. Wouldn't it be nice if every punter that sees a target for the 61.8% Fibonacci level, etc. can wait for that target and then cash out, as if nobody else (or ten thousand trading bots) aren't planning to sell at the same target?
One often overlooked characteristic of stock market bubbles is the extremely small exit for sellers trying to avoid becoming impoverished bagholders. Bubbles always present small exits because once sentiment turns, buyers vanish and so price goes over the waterfall and crashes on the rocks below (accompanied by the screams of all the punters who reckoned they'd exit at the top).
For an example, please review a chart of stock market action between March 1 and March 23.
But modern markets have characteristics which have further diminished the exit to a tiny pinhole. These include (but are not limited to):
1. The dominance of index funds. When shares of the index are sold, every constituent stock gets sold. This triggers cascades of selling that overwhelm "buy the dip" buying.
2. Computers do most of the trading, and the algorithms are set to follow trends with extreme ferocity. Once the trend is "sell," the program selling will self-reinforce the cascade.
3. Central banks have generated a mesmerizing moral-hazard propaganda field that implicitly suggests "we'll never stocks go down again, ever!" Yet the only way central banks can causally intervene is to buy stocks directly in size, i.e. in the trillions of dollars. (Recall U.S. stocks are around $30 trillion, global stock markets about $80 trillion. Yes, buying futures contracts through proxies works in stable markets, but not so much in panic cascades of selling.)
Beneath the illusory stability, modern markets are extremely illiquid, meaning that when the bubble pops and punters/money managers try to sell, there are no buyers at any price.
Liquidity in a crash depends on "buy the dip" bagholders. Once they've been destroyed, there are no more buyers at any price. The "buy the dip" crowd will be wiped out after the first spike higher fails, and then nobody will be left who's willing to catch the falling knife.
It's illuminating to go back to to former Federal Reserve chairman Alan Greenspan's 2014 belated bleatings in Foreign Affairs, Why I Didn't See the Crisis Coming. Greenspan presented one primary reason: the Fed's models failed to accurately account for "tail risk," (otherwise known as things that supposedly happen only rarely but when they do happen, they're a doozy), because guess what--they happen more often than statistical models predict.
"Tail risk" is a fancy way of saying that bagholders willing to buy the dip and be destroyed as the crash gathers momentum are too scarce to stop the waterfall of selling. That leaves everyone with a long position in stocks with a binary choice: either grasp the fleeting advantage of selling out in the first wave of selling--and by the way, there's no advantage unless every single share is sold--or become a hapless bagholder.
Bubbles always burst, and the confidence that "this isn't a bubble" and "the Fed has our back" are counter-indicators of just how crushing the pop will be: the greater the confidence/euphoria, the greater the crash.
Sober up, people. All bubbles pop, and the higher the extreme, the greater the crash. Only the first sellers will escape; everyone who hesitates or "buys the dip" will be crushed at the bottom of the waterfall.
If you want to sell your shares to bagholders, issue technical targets way above current levels and year-end targets at nonsensically lofty levels, then sell, sell, sell as the over-confident bagholders buy, buy, buy. ("But Mr. Pundit said the S&P 500 was gonna go higher, he promised!")
Who goes into the market planning to buy at technical levels where everybody else is selling? How many "dumb money bagholders" does everyone reckon will be anxious to buy their shares at the top of the craziest overvalued bubble ever?
Here we go again: only two months after "buy the dip" and "the Fed has our backs" failed, the pundits and money managers are falling over themselves to declare "the bottom is in," "there's now light at the end of the tunnel," and all the other reasons to complacently hold on and become a bagholder so the smart money can sell to you before the anointed TA targets are reached.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Posted by Charles Hugh Smith at 6:59 PM
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