Saturday, April 06, 2019

Here's What It's Like To Be a Bear in a Rigged Market

Central bankers and media handlers must be laughing at how easy it is to slaughter the Bears and doubters with another fake-news round of trade-deal rumors and another Fed parrot being prompted to repeat some dovish mumbo-jumbo.
It's not just tough being a Bear in a market rigged by trade deal rumors, Federal Reserve dovishness, a tsunami of Chinese liquidity and $270 billion in stock buy-backs in the first quarter--it's impossible. Even "smarter than the average Bear" Yogi couldn't beat the market, and so he ended up taking one for the Jellystone team so other Bears might live to fight another day:
Perhaps the best way to describe the impossibility of being a Bear in a rigged market is to employ an analogy. (Not that a rigged market is actually a market; it's been transformed into a simulacrum "market" that's the one signifier of economic well-being: if the "market" continues lofting higher, all is well with the economy and indeed, the entire status quo.)
Let's start with a sports analogy.
Imagine you're on a basketball court.
You're being guarded by Myles Turner, the NBA's leader in blocked shots.
You make it to the half court line and find a chain-link fence blocks the court a few feet from the line, meaning your only shot is from half court.
When you manage to release a Hail Mary shot, a steel plate slams down on top of the rim, blocking any ball that might have lucked into the net.
That's what being a Bear in a rigged market is like.
Here's another analog, courtesy of my friend and colleague Adam T.:
You are David, armed only with a sling and a projectile, entering the arena to face the fearsome Goliath.
Instead of a rock, you're given a foam ball.
Meanwhile Goliath has a bazooka.
Let the contest begin!
You get the idea. Bears don't have a prayer in a market this rigged.
Now by all rights, declaring the Death of Bears should top-tick the rally and trigger a reversal, much like the infamous magazine cover curse or the hubris of constructing the tallest-building-in-the-world ushers in a massive global reversal of fortune.
But even black magic and portents appear powerless against a market completely rigged to melt up regardless of external realities, especially economic-financial data that isn't itself fully rigged.
Pretty much the only factors that could give Bears a tiny sliver of hope that the rigged market might collapse under its own weight are:
1. an invasion organized by the Central Bank of Mars to take control of Earth's resources and assets, or
2. Goldman Sachs has built a massive short position and is poised to flush the market lower to reap some quick profits from the panic-stricken decline.
Absent a miracle, the steel plate will block any Bear's lucky half-court shot, just as David's foam projectile will bounce right off Goliath's forehead.
Central bankers and media handlers must be laughing at how easy it is to slaughter the Bears and doubters with another fake-news round of trade-deal rumors and another Fed parrot being prompted to squawk some dovish mumbo-jumbo.
Recent interviews:
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.


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Posted by Charles Hugh Smith at 5:54 AM

Thursday, April 04, 2019

The Japanification of the World

Zombification / Japanification is not success; it is only the last desperate defense of a failing, brittle status quo by doing more of what's failed.
A recent theme in the financial media is the Japanification of Europe.Japanification refers to a set of economic and financial conditions that have come to characterize Japan's economy over the past 28 years: persistent stagnation and deflation, a low-growth and low-inflation economy, very loose monetary policy, a central bank that is actively monetizing debt, i.e. creating currency out of thin air to buy government debt and a government which funds "bridges to nowhere" and other stimulus spending to keep the economy from crashing into outright contraction.
The parallels with Europe are obvious, but they don't stop there: the entire world is veering into a zombified financial, economic, social and political status quo that is the core of Japanification.
While most commentators focus on the economic characteristics of Japanification, social and political stagnation are equally consequential. If we only measure economic/financial stagnation, it appears as if Japan and Europe are holding their own, i.e.maintaining the status quo via near-zero growth and near-zero interest rates.
But if we measure social and political decay, the erosion is undeniable. Here's one example. Few Americans have access to or watch Japanese TV, so they are unaware of the emergence of the homeless as a permanent feature of urban Japan. The central state propaganda media is focused on encouraging tourism, a rare bright spot in Japan's moribund economy, and so you won't find much media coverage of homelessness or other systemic signs of social breakdown.
If you watch Japanese detective / police procedural dramas, however, you'll find constant references to homeless people and homeless encampments: detectives seek witnesses to a crime in the nearby homeless encampment; a homeless man living in an abandoned warehouse is found murdered, etc.
Here's the core dynamic of zombification / Japanification: the top 25% are doing whatever is necessary to maintain the status quo because it works well for them, but the system is failing the bottom 75%, who must be politically, socially and economically neutered so they can't upset the apple cart.
Depending on the economy/society in question, one could argue that it's the top 40% defending the status quo and disenfranchising the bottom 60%, or it's the top 20% disenfranchising the bottom 80%. The exact ratio doesn't matter; what matters is the status quo no longer works for the majority, but they are powerless to change the system because it's controlled by the minority who benefit so greatly from it being locked in its present setting.
The other dynamic of zombification / Japanification is: past success shackles the power elites to a failed model. The greater the past glory, the stronger its hold on the national identity and the power elites.
And so the power elites do more of what's failed in increasingly extreme doses. If lowering interest rates sparked secular growth, then the power elites will lower interest rates to zero. When that fails to move the needle, they lower rates below zero, i.e. negative interest rates.
When this too fails to move the needle, they rig statistics to make it appear that all is well. In the immortal words of Mr. Junker, when it becomes serious you have to lie, and it's now serious all the time.
The necessity of neutering the majority politically, socially and economically manifests in two destructive ways: young people who opt out (or are frozen out) of the failed status quo do not mate and have children, do not buy houses, new cars, etc. This sets off a demographic time bomb that guarantees the implosion of the financial promises made by the self-serving status quo.
This is social depression, and once it is embedded it is essentially impossible to reverse.
Needless to say, if young people no longer have kids and no longer make enough money to buy houses, cars, etc., the economy is doomed to stagnation and decline as old people don't spend much. That leaves the entire economy's spending and borrowing on the top 10% who are doing splendidly. But the top 10% cannot hold up the entire economy for long. That fragility is exposed once one of the many rotten props holding up the status quo collapses.
The second option is political upheaval, i.e. populism. When the losers in the winner-take-most economies of the world (and every economy is now winner-take-most once you scrape away the PR and propaganda) have had enough, they take to the streets.
Beating them, shooting them, vilifying them and so on only hardens their resolve to bring the status quo crashing down, regardless of the damage.
Either way, the brittle status quo collapses from either political rebellion or social depression or the fragility that arises from pursuing ever more extreme measures of defending the status quo's winners at the expense of the many losers.
Zombification / Japanification is not success; it is only the last desperate defense of a failing, brittle status quo by doing more of what's failed. Japan has perfected the art of managing decline while maintaining the illusion that the status quo is solid and permanent.
In this, the entire global status quo is embracing Zombification / Japanification. By all the usual economic measures--growth, national debt, percentage of tax revenues devoted to interest on the debt, and so on--the status quo can continue to maintain the facade of solidity essentially forever.
Beneath the surface solidity, however, all the buffers are thinning. The great irony of zombification / Japanification is that the success of maintaining the illusions of permanence only masks the increasing fragility of the status quo; it doesn't actually fix what's broken or obsolete.
Recent interviews:
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.


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Posted by Charles Hugh Smith at 7:27 PM

Wednesday, April 03, 2019

Are the Rise of Social Media and the Decline of Social Mobility Related?

Social media offers hope of achieving higher online social status without having to succeed financially in a winner-take-most economy.
I've often addressed the decline of social mobility and the addictive nature of social media, and recently I've entertained the crazy notion that the two dynamics are related. Why Is Social Media So Toxic?
I have long held that the decline of social mobility--broad-based opportunities to get ahead financially and socially--is part of a larger dynamic I call social depression: the social decay resulting from economic stagnation and the decline of social mobility and financial security. America's Social Depression Is Accelerating
Japan offers a real-world 29-year lab experiment in the negative social consequences of economic stagnation, a top I addressed back in 2010: The Non-Financial Cost of Stagnation: "Social Recession" and Japan's "Lost Generations"
The conventional explanation of social media's addictive hold is that it activates the human brain's reward circuits much like an addictive drug: in effect, we become addicted to being "liked" and to checking our phones hundreds of times a day to see if we received any "likes".
This phenomenon is known as FOMO, fear of missing out: fear of missing out on some emotion-stimulating "news" or a "like" from someone in our network.
The innate addictive appeal of social media is pretty clear, but is that all that's at work here?
Being social animals, humans naturally seek to identify their status in the pecking order and improve their position by whatever means are available as a way of increasing their reproductive success and their relative share of resources.
Traditional societies were bifurcated into a small elite and a much larger mass of commoners. As a general rule, social mobility was limited to those extraordinary commoners who were especially valuable to the ruling elite as soldiers, scribes, etc.
From its inception in the early 1800s, the American Dream was to acquire the "good life" via mass produced luxury goods. This has been the mainstay of the modern consumer economy, a consumption-based economy that became dependent on credit in the 20th century.
The downside of mass-produced luxury items (status symbols) is that in a credit-based economy, just about everyone can afford to own them. Thus just about anyone can qualify for a mobile phone plan that offers a status-symbol iPhone as part of the multi-year contract.
As a result, the upper classes have been forced to greater extremes in cost and scarcity to differentiate themselves from the masses. For example, now that exotic travel is a affordable to anyone with credit, travel has little status value, unless it's extremely costly or difficult to duplicate.
The same is true of the arts and other cultural status markers, along with the traditional markers such as yachts and homes.
As the underlying economy has stagnated, access to the upper class via earned income has decayed, and so commoners have been forced to find some other non-financial means to improve their social status.
Social media fits the bill perfectly: it's essentially free (since everyone has to pay for Internet service anyway) and the only "investment" is in time: time snapping and posting photos on Instagram and Facebook, time posting comments and links designed to attract tribal "likes" and so on.
A commoner with essentially zero social status economically can with enough effort become a "big shot" in some social media platform.
The bar is low enough to attract millions of players: a few dozen "likes" is still a potent reward to most people, as are having a couple hundred followers / readers.
Social media superstars with millions of followers on YouTube have cult-like groupies and all the other social status rewards of recognition and fame.
Social media offers hope of achieving higher online social status without having to succeed financially in a winner-take-most economy or having any of the conventional attributes of becoming famous: physical beauty, extraordinary talent, etc. These attributes are of course helpful in attracting a social media following, but thet are not essential.
As a result, everyone wonders "how did so-and-so get hundreds of thousands of followers?" The answer varies, of course: a viral video, a high level of marketing moxie, an engaging style, charismatic presence on camera, a knack for something others admire, etc.
If we understand social media as a new and accessible way to improve our unremarkable social status, its tremendous grip becomes less of a mystery.
Of related interest:
This essay was drawn from Musings Report 13. The Musings Reports are emailed weekly to major contributors, subscribers and patrons.
Recent interviews:
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.


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Posted by Charles Hugh Smith at 10:15 PM

Tuesday, April 02, 2019

The Hidden Cost of Losing Local Mom and Pop Businesses

What cannot be replaced by corporate chains is neighborhood character and variety.
There is much more to this article than first meets the eye: In a Tokyo neighborhood's last sushi restaurant, a sense of loss
"Eiraku is the last surviving sushi bar in this cluttered neighborhood of steep cobblestoned hills and cherry trees unseen on most tourist maps of Tokyo. Caught between the rarified world of $300 omakase dinners and the brutal efficiency of chain-restaurant fish, mom-and-pop shops like it are fast disappearing.
Chef Masatoshi Fukutsuna and his wife, Mitsue, smile without a word. In the 35 years since they opened up shop, the couple has seen many of their friends move away for a job or family, only to return decades later, often without the job or the family, their absence unspoken.
Absence is a part of life here on what remains of the Medaka shopping street, a road so narrow that cars have to drive up onto the sidewalk to let another vehicle pass.
Once the sky turns pink and the sun sets, the street descends into shadow, save for the faintest glow from halogen lamp posts.
It's a neighborhood in twilight. More like it are scattered across this city, their corner cafes and stores far from the neon blare of the famous shopping districts. The number of independent, family-owned sushi bars in Tokyo has halved to 750 in the last decade, a trade association says, driven out of business by fast-food joints and a younger generation that doesn't want to inherit them.
"People would rather pay 100 yen for a plate of sushi at a really cheap place or they'd shell out tens of thousands of yen to go to a famous sushi restaurant in Ginza that they heard about on television," says the chef, absentmindedly changing the channel of the TV. "But places like ours, shops that are right in the middle, we just can't seem to survive."
In the U.S., and presumably elsewhere, there are other financial pressures on small businesses: the complexity of compliance with the ever-increasing thicket of regulations is constantly increasing, as are taxes and fees as local government seeks to extract more revenue from the small-business tax donkeys.
These increases in costs while revenues sag as customers seek cheaper chain meals or simply stop going out at all are a double-whammy.
But look at what's lost in the demise of local small businesses:
-- The loss of neighborhood character and variety, replaced by homogenized chains and lifeless shuttered storefronts.
-- the loss of food that's been prepared by hand with real ingredients.
-- the loss of neighborhood cohesion and social circles; residents who were once recognized as individuals and who belonged to loose but important social circles are unknown in faceless chain outlets.
-- the loss of local employment. Employees in chain outlets commute from distant places, and their hours and locations may change, making it impossible to know local residents.
-- the loss of walkable, interesting neighborhoods. What's there to explore or provide interest in a string of steel and glass chain outlets?
-- the loss of local social gathering places. Once local neighborhood places are lost, people gravitate to McDonalds or similar chain outlets because McDonalds will not hurry customers away from its tables. In some cultures, the American fast-food outlets are attractive because they are clean, well-lit and class-neutral: they serve every customer with well-trained politeness: the service is as uniform as the food.
The 2013 book Food and Culture: A Reader has an interesting essay by Yungxiang Yan about the social and class structure of McDonalds in China: Of Hamburger and Social Space: Consuming McDonald's in Beijing.
The essay helps us understand why Western fast-food outlets have achieved such extraordinary popularity around the world: they provide inviting social spaces, not just uniform, consistent, reasonable-cost food.
Needless to say, American fast-food outlets are engineered to provide these social-space and class/gender-neutral assets as well as carefully engineered menu selections; in many cultures, McDonald's offers women and a safe and acceptable place to gather and socialize. fast-food outlets are popular with students for similar reasons.
My point here is not to say that fast-food outlets don't serve a positive social role; the point is what fast-food outlets provide is not a 100% replacement for what's lost as local Mom and Pop stores and cafes vanish.
What cannot be replaced by corporate chains is neighborhood character and variety: once locally owned and operated businesses wither and die, the neighborhood looks like other every other redeveloped, homogenized street around the world.
This is fine for those who want an anonymous, impersonal meal and table, but an anonymous, impersonal meal and table is now available from Beijing to Belfast in a monotonous uniformity of menus and spaces.
What's scarce and thus valuable are not fast-food outlets; what's scarce and valuable are walkable, diverse neighborhoods of locally owned and operated stores and cafes which offer social refreshment and bonds as well as home-cooked meals.
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.


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Posted by Charles Hugh Smith at 9:49 PM

Monday, April 01, 2019

Dear Stock Market: You Can't Have It Both Ways

Eventually reality will intrude in this pleasant madness.
OK, let me see if I have this right: the stock market is soaring because the economy is softening, so the Federal Reserve panicked and went from raising rates to considering cutting rates.
It seems markets are now assuming a rate cut is already locked in, given the Fed's commitment to cease trimming its balance sheet by September.
This dovish reversal means liquidity is flooding back into stocks and bonds, and so stocks are rising as once again "the Fed has our backs."
OK, I get it. But the market is also rising because punters and pundits are assuming the soft spot in economic expansion has ended, and growth is already resuming globally. The positive data out of China is taken as proof-positive of this resumption of expansion.
Now wait a minute--the market is rising because growth is softening and also because growth has resumed? Sorry Stock Market, you can't have it both ways. Either the global economy is stagnating, forcing central banks to flood the financial system with more liquidity, or growth is resuming, in which case raising interest rates are back on the table, especially if wage inflation kicks in.
If growth resumes, not only will the Fed have a green light to raise rates, it will also face pressure to resume trimming its bloated balance sheet.
Many observers have noted that the sharp decline in Treasury bond yields is signaling fear that the global economy is recessionary, and central bank goosing isn't going to reverse the slowdown. Meanwhile, stocks are schizophrenic: going up because growth is slowing and Fed rate cuts are now in the bag and going up because growth has resumed.
Central bank and financial authorities are keen to continue the schizophrenia because markets have no excuse to drop: if growth has stagnated, markets will continue soaring, and if growth has resumed, markets can continue in overdrive.
Eventually reality will intrude in this pleasant madness: either the global economy slips into recession and corporate profits tank, kicking out the props of high stock valuations, or global growth resumes, opening the door to stock-market-killing rate increases and balance sheet reductions.
Here's one way to visualize this moment in history: global financial markets are in the eye of a very large hurricane:
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.


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Posted by Charles Hugh Smith at 8:09 PM
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