"Minsky's financial instability hypothesis depends critically on what amounts to a sociological insight. People change
their minds about taking risks. They don't make a one-time rational judgment about debt use and stock market exposure and stick
to it. Instead, they change their minds over time. And history is quite clear about how they change their minds.
The longer the good times endure, the more people begin to see wisdom in risky strategies."
The Cost of Capitalism: Understanding Market Mayhem and Stabilizing our Economic Future, by
Robert Barbera
The flaw with Capitalism is that it creates its own positive feedback loop, snowballing to the point where the accumulation
of wealth and power hurts people — eventually even those at the top of the food chain. ”
Banks are a clear case of market failure and their employees at the senior level have basically become the biggest bank
robbers of all time. As for basing pay on current revenues and not profits over extended periods of time, then that is
a clear case of market failure --
The banksters have been able to sell the “talent” myth to justify their outsized pay because they are the only ones
able to deliver the type of GDP growth the U.S. economy needs in the short term, even if that kills the U.S. economy in the long
term. You’ll be gone, I’ll be gone.
Unfortunately, many countries go broke pursuing war, if not financially, then morally (are the two different? – this post
suggests otherwise).
I occurs to me that the U.S. is also in that flock; interventions justified by grand cause built on fallacy,
the alpha and omega of failure. Is the financial apparatchik (or Nomenklatura, a term I like which, as many from the Soviet era,
succinctly describes aspects of our situation today) fated also to the trash heap, despite the best efforts of the Man of the
hour, Ben Bernanke?
Minsky moment is the synonym of financial crisis -- the moment when excessive leverage that was inevitably created by the financial
system during the boom phase of the cycle, starts collapsing and financial system enter the state of deep crisis with many banks becoming
insolvent due to the level of leverage they accumulated.
The cornerstone of Hyman Minsky's work is the concept of systemic instability. This notions is well researched in the
theory of autoregulation in the context of the stability of systems with the positive and negative feedback loop. Minsky
argued that system dynamics inherent to capitalism breed fragility and crisis, as stability stimulate the emergence and success of
more risky behaviors of financial players, and such risky behavior eventually leads to the financial crash. In this sense as he put
it: "stability is destabilizing" (Minsky 1985).
Instability is typical for any system with the positive feedback loop. And investment banks and other financial
institutions provide positive feedback loop for financial system in general and stock market in particular making periodic crashes
inevitable, just a side effect of their existence.
But like in
any complex system financial system has its share of nuances which general theory of auto regulation does not address and
Minsky theory addresses. The key idea of Minsky theory is that the behavior of key players in the market after the crash
gradually changes from cautious to
reckless. He introduced the three stages of this transformation which he called hedge finance, speculative finance, and
Ponzi finance. Those stages can be compared to a fully amortizing mortgage, an interest only mortgage, and a negative amortization
mortgage. They indicate the relative difficulties that economic units have in repaying their debt. Minsky defines them as
following:
Hedge finance. Sound phase of the cycle, where “cash flows are expected to exceed the cash flow commitments on
liabilities for every period.” Debts can be paid.
Speculative finance. Less sound “speculative finance” - where cash flows, although inadequate to fully service debt in
the short-run, are generally sufficient over the longer-term.
Ponzi finance. “The economics of euphoria”: unsound, manic prize chasing phase with excessive leverage and
corresponding inability to pay the debt, immediately preceding the crash. At this stage as Minsky pointed out “political
leaders and official economists announced that the economic system had entered upon a new era that was to be characterized by the
end of the business cycle…" Importantly, “a ‘Ponzi’ finance unit must increase its outstanding debt in order to meet
its financial obligations.” New money and credit are a necessity for perpetuating the game, so the collapse comes due to
excessive leverage, when further attempts to increase the debt fail (which for companies often results in margin call):
“The shift toward speculative and even Ponzi finance is evident in the financial statistics of the United States as
collected in the Flow of Funds accounts. The movement to ”bought money” by large multinational banks throughout the world is
evidence that there are degrees of speculative finance: all banks engage in speculative finance but some banks are more
speculative than others. Only a thorough cash flow analysis of an economy can indicate the extent to which finance is
speculative and where the critical point at which the ability to meet contractual commitments can break down is located.”
“The theory developed here argues that the structural characteristics of the financial system change during periods of
prolonged expansion and economic boom and that these changes cumulate to decrease the domain of stability of the system. Thus,
after an expansion has been in progress for some time, an event that is not of unusual size or duration can trigger a sharp
financial reaction. Displacements may be the result of system behavior or human error. Once the sharp financial reaction
occurs, institutional deficiencies will be evident.”
“Financial institutions are simultaneously demanders in one and suppliers in another set of financial markets. Once
euphoria sets in, they accept liability structures – their own and those of borrowers – that, in a more sober expectational
climate, they would have rejected…The shift to euphoria increases the willingness of financial institutions to acquire assets
by engaging in liquidity-decreasing portfolio transformations…The result is a combination of cash flow commitments inherited
from the burst of euphoria and of cash flow receipts based upon lower-than-expected income.”
Minsky suggested that if hedge financing dominates, then the economy may well behave close to an equilibrium-seeking system
typical for systems with negative feedback loop. Conversely, the greater the weight of speculative and Ponzi finance, the greater
the likelihood that the economy enters a "deviation-amplifying" mode (which means the system with positive feedback loop). This was
a new discovery different from Marx analysis of the sources of instability in capitalist economics, and Minsky deserves full credit for this discovery.
Often bursting of the bubble happens due to the sudden rise of long term interest rates. Quoting Minsky,
“the rise in long term interest rates and the decline in expected profits play particular havoc with Ponzi units, for the
present value of the hoped for future bonanza falls sharply.”
“It can be shown that if hedge financing dominates, then the economy may well be an equilibrium seeking and containing system.
In contrast, the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy is a deviation
amplifying system…Over a protracted period of good times, capitalist economies tend to move from a financial structure dominated
by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance.”
At the end financial crisis strikes wiping a lot of capital. Government bailout of financial institutions under neoliberalism follows
(because as Senator Durbin noted "banks own the place" -- the Congress) and then overhand of excessive debt depress the economy
and it enters
the stage of prolonged stagnation. Which in modern USA was smoothed by the status dollar as the world reserve currency which allow the USA export inflation. Still stagnation is what we have after 2008. And events of 2020-2021
(coronavirus recession and subsequent stock bubble, which reminds dot-com bubble and which might or might not burst in 2021-2022) are just continuation, the second or
even the third act of the same drama.
The view developed in this volume identifies both real and financial causes for the Great Recession, including the real income
stagnation suffered by households across most of the income distribution on one hand, and deregulation and institutional change in
the financial sector on the other.
The interplay of these factors led to massive debt accumulation, particularly by U.S. households seeking to supplement stagnant
incomes in their pursuit of increasing consumption aspirations. Household borrowing was spurred on by a financial sector rendered
ever freer of inter- and postwar financial regulations. These regulations came to be seen as unnecessary fetters on an inherently
self-regulating “free market,” an idealized notion in which financiers and policy makers placed increasing trust and confidence.
Ultimately, the self-reinforcing developments in the real and financial sectors proved deadly.
Minsky should be the most admired economist in the second half of the 21st. Century. His views are now partially accepted even by
neoclassical economists with their stochastic equilibrium of supply and demand nonsense. This is mainly because they have
no other choice. But Minsky was more than an astute researcher of business cycle and the Great Depression. Perhaps his writings on eradicating
poverty will earn the respect that it may deserve with time as well.
Financialization is inherent in capitalism and is the key to its instability. Minsk considered the rising of private
debt to GDP ratio an immanent feature of capitalism that lead to financial crisis. The idea of Minsky moment is related to the
fact that the fractional reserve banking periodically causes credit collapse when the leveraged credit expansion goes into
reverse.
In any case he was one of the first researchers who understood (after Keynes) that financialization is inherent in capitalism and
is the key to its instability:
“Capitalism is essentially a financial system, and the peculiar behavioral attributes of a capitalist economy center around
the impact of finance upon system behavior.” Minsky (1967)
Fifty years ago, Minsky, following Marx, viewed instability as the central flaw of the financial system under capitalism, as its
inherent flaw. But unlike Marx, who thought that the periodic crisis of overproduction is the source of instability (as well as
impoverishment of workers), Minsky assumed that the key source of that instability is continued in the cycles of business borrowing and fractional
bank lending, when "good times" lead to excessive borrowing and overproduction as well as rampant and increasing
until the financial crash financial speculation, fueled by the stability of the previous period and growing leverage,
which such stability makes possible (The
Alternative To Neoliberalism )
Minsky on capitalism:
He followed Marx stating that "capitalism is inherently flawed, being prone to booms, crises and depressions.
This instability is due to characteristics the financial system must possess and will inevitably acquire, if it is to
be consistent with full-blown capitalism.
Such a financial system will be capable of both generating signals that induce an accelerating desire to invest and of financing
that accelerating investment." (Minsky 1969b: 224)
“The natural starting place for analyzing the relation between debt and income is to take an economy with a cyclical past
that is now doing well.
The inherited debt reflects the history of the economy, which includes a period in the not too distant past in which the economy
did not do well.
Acceptable liability structures are based upon some margin of safety so that expected cash flows, even in periods when the
economy is not doing well, will cover contractual debt payments.
As the period over which the economy does well lengthens, two things become evident in board rooms. Existing debts are easily
validated and units that were heavily in debt prospered; it paid to lever." (65)
It becomes apparent that the margins of safety built into debt structures were too great. and should be reduced...
As a result, over a period in which the economy does well, views about acceptable debt structure change. In the dealmaking
that goes on between banks, investment bankers, and businessmen, the acceptable amount of debt to use in financing various
types of activity and positions increases.
This increase in the weight of debt financing raises the market once of capital assets and increases investment. As this continues
the economy is transformed into a boom economy... ” (65)
This transforms a period of tranquil growth into a period of speculative excess
“Stable growth is inconsistent with the manner in which investment is determined in an economy in which debt-financed ownership
of capital assets exists, and the extent to which such debt financing can be carried is market determined.
It follows that the fundamental instability of a capitalist economy is upward.
The tendency to transform doing well into a speculative investment boom is the basic instability in a capitalist economy."
(65)
He called his model the "Financial Instability Hypothesis". More boldly we can talk about Minsky model of economic
activity. According to Steve Keen, Minsky model boils down to three statements:
The employment rate will rise if economic growth exceeds the sum of population growth and growth in labor productivity;
The wages share of output will rise if money wage demands exceed the sum of inflation and growth in labor productivity; and
The private debt to GDP ratio will rise if the rate of growth of private debt exceeds the sum of inflation plus the rate of economic
growth.
He considered the rising of private debt to GDP ratio to be an immanent feature of capitalism that lead to financial
crisis. While the ultimate feature of neoliberalism is redistribution of wealth up (rising inequality) it can continue only while private debt
can compensate that sliding share of labor wages in GDP. After that the crisis of neoliberalism became a reality,
the reality the US faces today. Which gave rise of Russophobia as a primitive attempt to find a scapegoat for the current
problems of the US society and growing delegitimization of the US neoliberal elite. In this sense Minsky was more astute
critic of capitalism and by extension of neoliberalism, then Marx.
Several other source of financial instability were pointed out by others:
The logic of markets gets extended to “fictitious commodities” – land, labor, and money.Polanyi (1944) famously
zeroed in on the way that today, arguably, it is the logic of finance that has been
so extended, turning everything it touches into an asset with a speculative price.
Excessive accumulations of financial wealth and emergences of the class of billionaires, large part of which
constitutes of financial moguls speculating with "other people's money" (via 401K funds, hedge funds, high frequency
trading etc) – tend to undermine democratic institutions and lead
to the gradual shift to inverted totalitarism, and later to neofascism. Brandeis (1914) thought that excessive accumulations of financial wealth – “other people’s money” – tend to
undermine democratic institutions (among other problems). Today, arguably TBTF financial institution are the
most serious threat for the remnants of the democracy in the USA.
The idea of Minsky moment is related to the fact that the fractional reserve banking periodically causes credit collapse
when the
leveraged credit expansion goes into reverse. And mainstream economists do not want to talk about the fact that increasing confidence
breeds increased leverage. So financial stability breeds instability and subsequent financial crisis. All actions to guarantee a market
rise, ultimately guarantee it's destruction because greed will always take advantage of a "sure thing" and push it beyond reasonable
boundaries.
In other words, market players are not rational and assume that it would be foolish not to maximize leverage in
a market which is going up. So the fractional reserve banking mechanisms ultimately and ironically lead to over lending and guarantee
the subsequent crisis and the market's destruction. Stability breed instability.
Fractional reserve banking based economic system with private players (aka capitalism) is inherently unstable.
It periodically causes credit collapse when the
leveraged credit expansion goes into reverse. In other words, market players are not rational and assume that it would be foolish not to maximize leverage in
a market which is going up.
That means that fractional reserve banking based economic system with private players (aka capitalism) is inherently unstable. And
first of all because fractional reserve banking is debt based. In order to have growth it must create debt. Eventually the pyramid
of debt crushes and crisis hit. When the credit expansion fuels asset price bubbles, the dangers for the financial sector and the real
economy are substantial because this way the credit boom bubble is inflated which eventually burst. The damage done to the economy by
the bursting of credit boom bubbles is significant and long lasting.
Blissex said...
«When credit growth fuels asset price bubbles, the dangers for the financial sector and the real economy are much more
substantial.»
So M Minsky 50 years ago and M Pettis 15 years ago (in his "The volatility machine") had it right? Who could have imagined!
:-)
«In the past decades, central banks typically have taken a hands-off approach to asset price bubbles and credit booms.»
If only! They have been feeding credit-based asset price bubbles by at the same time weakening regulations to push up allowed
capital-leverage ratios, and boosting the quantity of credit as high as possible, but specifically most for leveraged speculation
on assets, by allowing vast-overvaluations on those assets.
Central banks have worked hard in most Anglo-American countries to redistribute income and wealth from "inflationary" worker
incomes to "non-inflationary" rentier incomes via hyper-subsidizing with endless cheap credit the excesses of financial speculation
in driving up asset prices.
Not very hands-off at all.
Steve Keen clearly understands this mechanism. See http://www.debtdeflation.com/blogs/manifesto/ John Kay in his January 5 2010 FT column very aptly explained the systemic instability of financial sector hypothesis:
The credit crunch of 2007-08 was the third phase of a larger and longer financial crisis. The first phase was the emerging market
defaults of the 1990s. The second was the new economy boom and bust at the turn of the century. The third was the collapse of markets
for structured debt products, which had grown so rapidly in the five years up to 2007.
The manifestation of the problem in each phase was different – first emerging markets, then stock markets, then debt. But the
mechanics were essentially the same. Financial institutions identified a genuine economic change – the assimilation of some
poor countries into the global economy, the opportunities offered to business by new information technology, and the development
of opportunities to manage risk and maturity mismatch more effectively through markets. Competition to sell products led to
wild exaggeration of the pace and scope of these trends. The resulting herd enthusiasm led to mispricing – particularly in asset
markets, which yielded large, and largely illusory, profits, of which a substantial fraction was paid to employees.
Eventually, at the end of each phase, reality impinged. The activities that once seemed so profitable – funding the financial systems
of emerging economies, promoting start-up internet businesses, trading in structured debt products – turned out, in fact, to have
been a source of losses. Lenders had to make write-offs, most of the new economy stocks proved valueless and many structured products
became unmarketable. Governments, and particularly the US government, reacted on each occasion by pumping money into the financial
system in the hope of staving off wider collapse, with some degree of success. At the end of each phase, regulators and financial
institutions declared that lessons had been learnt. While measures were implemented which, if they had been introduced five years
earlier, might have prevented the most recent crisis from taking the particular form it did, these responses addressed the particular
problem that had just occurred, rather than the underlying generic problems of skewed incentives and dysfunctional institutional
structures.
The public support of markets provided on each occasion the fuel needed to stoke the next crisis. Each boom and bust is larger than
the last. Since the alleviating action is also larger, the pattern is one of cycles of increasing amplitude.
I do not know what the epicenter of the next crisis will be, except that it is unlikely to involve structured debt products. I do
know that unless human nature changes or there is fundamental change in the structure of the financial services industry – equally
improbable – there will be another manifestation once again based on naive extrapolation and collective magical thinking. The recent
crisis taxed to the full – the word tax is used deliberately – the resources of world governments and their citizens. Even if there
is will to respond to the next crisis, the capacity to do so may not be there.
The citizens of that most placid of countries, Iceland, now backed by their president, have found a characteristically polite
and restrained way of disputing an obligation to stump up large sums of cash to pay for the arrogance and greed of other people.
They are right. We should listen to them before the same message is conveyed in much more violent form, in another place and at another
time. But it seems unlikely that we will.
We made a mistake in the closing decades of the 20th century. We removed restrictions that had imposed functional separation
on financial institutions. This led to businesses riddled with conflicts of interest and culture, controlled by warring groups
of their own senior employees. The scale of resources such businesses commanded enabled them to wield influence to create a – for
them – virtuous circle of growing economic and political power. That mistake will not be easily remedied, and that is why I view
the new decade with great apprehension. In the name of free markets, we created a monster that threatens to destroy the very free
markets we extol.
While Hyman Minsky was the first clearly formulate the financial instability hypothesis I think Keynes understood
the same dynamic pretty well. He postulated that a world with a large financial sector and an excessive emphasis on the production of investment
products creates instability both in terms of output and prices. In other words it automatically tends to generate credit and asset
bubbles. The key driver of taking excessive risk is the fact that financial professionals generally risk other people’s money and due to this fact have
asymmetrical incentives:
They get big rewards when bets go right
They don’t have to pay when bets go wrong.
The key driver of taking excessive risk is the fact that financial professionals generally risk other people’s money and due to this fact have
asymmetrical incentives:
They get big rewards when bets go right
They don’t have to pay when bets go wrong.
This asymmetrical incentives ensure that the financial system is structurally biased toward taking on more risk than what should
be taken.
This asymmetry is not a new observation of this systemic problem. Andrew Jackson noted it in much more polemic way long ago:
“Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate
in the breadstuffs of the country.When you won, you divided the profits amongst you, and when you lost, you charged
it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families.
That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would
be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the grace of the Eternal God, will rout you out.”
This asymmetrical incentives ensure that the financial system is structurally biased toward taking on more risk than what should
be taken. In other words it naturally tend to slide to the casino model, the with omnipresent reckless gambling as the primary
and the most profitable mode of operation while an opportunities last. The only way to counter this is to throw sand into the
wheels of financial mechanism: enforce strict regulations, limit money supplies and periodically jail too enthusiastic bankers.
The latter is as important or even more important as the other two because bankers tend to abuse "limited liability" status like no
other sector.
Asset inflation over the past 10 years and the subsequent catastrophe incurred is a way classic behavior of dynamic system with strong
positive feedback loop. Such behavior does not depends of personalities of bankers or policymakers, but is an immanent property
of this class of dynamic systems. And the main driving force here was deregulation. So its important that new regulation has safety
feature which make removal of it more complicated and requiring bigger majority like is the case with constitutional issues.
Another fact was the fact that due to perverted incentives, accounting in the banks was fraudulent from the very beginning
and it was fraudulent on purpose. Essentially accounting in banks automatically become as bad as law enforcement permits. This
is a classic case of control fraud and from prevention standpoint is make sense to establish huge penalties for auditors, which might
hurt healthy institutions but help to ensure that the most fraudulent institution lose these bank charter before affecting the whole
system. With the anti-regulatory zeal of Bush II administration the level of auditing became too superficial, almost non-existent.
I remember perverted dances with Sarbanes–Oxley when it
was clear from the very beginning that the real goal is not to strengthen accounting but to earn fees and to create as much profitable
red tape as possible, in perfect Soviet bureaucracy style.
Deregulation also increases systemic risk by influencing the real goals of financial organizations. At some point of
deregulation process the goal of higher remuneration for the top brass becomes self-sustainable trend and replaces all other goals
of the financial organization. This is the essence of Martin Taylor’s, the former chief executive of Barclays, article
FT.com - Innumerate bankers were ripe
for a reckoning in the Financial Times (Dec 15, 2009), which is worth reading in its entirety:
City people have always been paid well relative to others, but megabonuses are quite new. From my own experience,
in the mid-1990s no more than four or five employees of Barclays’ then investment bank were paid more than £1m, and no one
got near £2m. Around the turn of the millennium across the market things began to take off, and accelerated rapidly – after
a pause in 2001-03 – so that exceptionally high remuneration, not just individually, but in total, was paid out between 2004 and
2007.
Observers of financial services saw unbelievable prosperity and apparently immense value added. Yet two years later the
whole industry was bankrupt. A simple reason underlies this: any industry that pays out in cash colossal accounting profits
that are largely imaginary will go bust quickly. Not only has the industry – and by extension societies that depend on it –
been spending money that is no longer there, it has been giving away money that it only imagined it had in the first place. Worse,
it seems to want to do it all again.
What were the sources of this imaginary wealth?
First, spreads on credit that took no account of default probabilities (bankers have been doing this for centuries, but not
on this scale).
Second, unrealised mark-to-market profits on the trading book, especially in illiquid instruments.
Third, profits conjured up by taking the net present value of streams of income stretching into the future, on derivative
issuance for example.
In the last two of these the bank was not receiving any income, merely “booking revenues”. How could they pay this
non-existent wealth out in cash to their employees? Because they had no measure of cash flow to tell them they were idiots,
and because everyone else was doing it. Paying out 50 per cent of revenues to staff had become the rule, even when the “revenues”
did not actually consist of money.
In the next phase instability is amplified by the way governments and central banks respond to crises caused by credit bubble: the
state has powerful means to end a recession, but the policies it uses give rise to the next phase of instability, the next bubble….
When money is virtually free – or, at least, at 0.5 per cent – traders feel stupid if they don’t leverage up to the hilt. Thus previous
bubble and crash become a dress rehearsal for the next.
Resulting self-sustaining "boom-bust" cycle is very close how electronic systems with positive feedback loop behave and
cannot be explained by neo-classical macroeconomic models. Like with electronic devices the financial institution in this mode are unable
to provide the services that are needed.
As Minsky noted long ago (sited from Stephen Mihm
Why capitalism fails
Boston Globe):
Modern finance, he argued, was far from the stabilizing force that mainstream economics portrayed: rather, it was a system
that created the illusion of stability while simultaneously creating the conditions for an inevitable and dramatic collapse.
...our whole financial system contains the seeds of its own destruction. “Instability,” he wrote, “is an inherent and inescapable
flaw of capitalism.”
Minsky’s vision might have been dark, but he was not a fatalist; he believed it was possible to craft policies that could blunt
the collateral damage caused by financial crises. But with a growing number of economists eager to declare the recession over, and
the crisis itself apparently behind us, these policies may prove as discomforting as the theories that prompted them in the first
place. Indeed, as economists re-embrace Minsky’s prophetic insights, it is far from clear that they’re ready to reckon with the full
implications of what he saw.
And he understood the roots of the current credit bubble much better that neoclassical economists like Bernanke:
As people forget that failure is a possibility, a “euphoric economy” eventually develops, fueled by the rise of far riskier borrowers
- what [Minsky] called speculative borrowers, those whose income would cover interest payments but not the principal;
and those he called “Ponzi borrowers,” those whose income could cover neither, and could only pay their bills by borrowing
still further.
As these latter categories grew, the overall economy would shift from a conservative but profitable environment to a much more
freewheeling system dominated by players whose survival depended not on sound business plans, but on borrowed money and freely available
credit.
Minsky’s financial instability hypothesis suggests that when optimism is high and ample funds are available for investment,
investors tend to migrate from the safe hedge end of the Minsky spectrum to the risky speculative and Ponzi end. Indeed, in the current
crisis, investors tried to raise returns by increasing leverage and switching to financing via short-term — sometimes overnight — borrowing
(Too late to learn?):
In the church of Friedman, inflation was the ol' devil tempting the good folk; the 1980s seemed to prove that, let loose, it would
cause untold havoc on the populace. But, as Barbera notes:
The last five major global cyclical events were the early 1990s recession - largely occasioned by the US Savings & Loan crisis,
the collapse of Japan Inc after the stock market crash of 1990, the Asian crisis of the mid-1990s, the fabulous technology boom/bust
cycle at the turn of the millennium, and the unprecedented rise and then collapse for US residential real estate in 2007-2008.
All five episodes delivered recessions, either global or regional. In no case was there a significant prior acceleration of wages
and general prices. In each case, an investment boom and an associated asset market ran to improbable heights and then collapsed.
From 1945 to 1985, there was no recession caused by the instability of investment prompted by financial speculation - and since
1985 there has been no recession that has not been caused by these factors.
Thus, meet the devil in Minsky's paradise - "an investment boom and an associated asset market [that] ran to improbable heights and
then collapsed".
According the Barbera, "Minsky's financial instability hypothesis depends critically on what amounts to a sociological insight.
People change their minds about taking risks. They don't make a one-time rational judgment about debt use and stock market exposure
and stick to it. Instead, they change their minds over time. And history is quite clear about how they change their minds. The longer
the good times endure, the more people begin to see wisdom in risky strategies."
Current economy state can be called following Paul McCulley a "stable disequilibrium" very similar to a state a sand pile.
All this pile of stocks, debt instruments, derivatives, credit default swaps and God know corresponds to a pile of sand
that is on the verse of losing stability. Each financial player works hard to maximize their own personal outcome but the "invisible
hand" effect in adding sand to the pile that is increasing systemic instability. According to Minsky, the longer such situation continues
the more likely and violent an "avalanche".
The late Hunt Taylor wrote, in 2006:
"Let us start with what we know. First, these markets look nothing like anything I've ever encountered before. Their stunning
complexity, the staggering number of tradable instruments and their interconnectedness, the light-speed at which information moves,
the degree to which the movement of one instrument triggers nonlinear reactions along chains of related derivatives, and the requisite
level of mathematics necessary to price them speak to the reality that we are now sailing in uncharted waters.
"... I've had 30-plus years of learning experiences in markets, all of which tell me that technology and telecommunications
will not do away with human greed and ignorance. I think we will drive the car faster and faster until something bad happens.
And I think it will come, like a comet, from that part of the night sky where we least expect it."
This is a gold age for bankers. As Peter Boone Simon Johnson wrote in New Republic (The
Next Financial Crisis ):
Banking was once a dangerous profession. In Britain, for instance, bankers faced “unlimited liability”--that is,
if you ran a bank, and the bank couldn’t repay depositors or other creditors, those people had the right to confiscate all your personal
assets and income until you repaid. It wasn’t until the second half of the nineteenth century that Britain established limited
liability for bank owners. From that point on, British bankers no longer assumed much financial risk themselves.
In the United States, there was great experimentation with banking during the 1800s, but those involved in the enterprise typically
made a substantial commitment of their own capital. For example, there was a well-established tradition of “double liability,”
in which stockholders were responsible for twice the original value of their shares in a bank. This encouraged stockholders
to carefully monitor bank executives and employees. And, in turn, it placed a lot of pressure on those who managed banks. If they
fared poorly, they typically faced personal and professional ruin. The idea that a bank executive would retain wealth and social
status in the event of a self-induced calamity would have struck everyone--including bank executives themselves--as ludicrous.
Enter, in the early part of the twentieth century, the Federal Reserve. The Fed was founded in 1913, but discussion about whether
to create a central bank had swirled for years. “No one can carefully study the experience of the other great commercial nations,”
argued Republican Senator Nelson Aldrich in an influential 1909 speech, “without being convinced that disastrous results of recurring
financial crises have been successfully prevented by a proper organization of capital and by the adoption of wise methods of banking
and of currency”--in other words, a central bank. In November 1910, Aldrich and a small group of top financiers met on an isolated
island off the coast of Georgia. There, they hammered out a draft plan to create a strong central bank that would be owned by banks
themselves.
What these bankers essentially wanted was a bailout mechanism for the aftermath of speculative crashes--something
more durable than J.P. Morgan, who saved the day in the Panic of 1907 but couldn’t be counted on to live forever. While they sought
informal government backing and substantial government financial support for their new venture, the bankers also wanted it to remain
free of government interference, oversight, or control.
Another destabilizing fact is so called myth of invisible hand which is closely related to the myth about market self-regulation.
The misunderstood argument of Adam Smith [1776], the founder of modern economics, that free markets led to efficient outcomes, “as if
by an invisible hand” has played a central role in these debates: it suggested that we could, by and large, rely on markets without
government intervention. About "invisible hand" deification, see
The Invisible Hand, Trumped by
Darwin - NYTimes.com. One of the most important counterargument against financial market self-regulation is existence of so called
“Minsky moments”:
“Minsky” was shorthand for Hyman Minsky, an American macroeconomist who died over a decade ago. He predicted almost exactly
the kind of meltdown that recently hammered the global economy. He believed in capitalism, but also believed it had almost a genetic
weakness. Modern finance, he argued, was far from the stabilizing force that mainstream economics portrayed: rather, it was a system
that created the illusion of stability while simultaneously creating the conditions for an inevitable and dramatic collapse.
In other words, the one person who foresaw the crisis also believed that our whole financial system contains the seeds of its
own destruction. “Instability,” he wrote, “is an inherent and inescapable flaw of capitalism.”
Minsky believed it was possible to craft policies that could blunt the collateral damage caused by financial crises. As economists
re-embrace Minsky’s prophetic insights, it is far from clear that they’re ready to reckon with the full implications of what he saw.
Minsky theory was not well received due to powerful orthodoxy, born in the years after World War II, known as the neoclassical
synthesis. The older belief in a self-regulating, self-stabilizing free market had selectively absorbed a few insights from John
Maynard Keynes, the great economist of the 1930s who wrote extensively of the ways that capitalism might fail to maintain full employment.
Most economists still believed that free-market capitalism was a fundamentally stable basis for an economy, though thanks to Keynes,
some now acknowledged that government might under certain circumstances play a role in keeping the economy - and employment - on
an even keel.
Economists like Paul Samuelson became the public face of the new establishment; he and others at a handful of top universities
became deeply influential in Washington. In theory, Minsky could have been an academic star in this new establishment: Like Samuelson,
he earned his doctorate in economics at Harvard University, where he studied with legendary Austrian economist Joseph Schumpeter,
as well as future Nobel laureate Wassily Leontief.
But Minsky was cut from different cloth than many of the other big names. The descendent of immigrants from Minsk, in modern-day
Belarus, Minsky was a red-diaper baby, the son of Menshevik socialists. While most economists spent the 1950s and 1960s toiling over
mathematical models, Minsky pursued research on poverty, hardly the hottest subfield of economics. With long, wild, white hair, Minsky
was closer to the counterculture than to mainstream economics. He was, recalls the economist L. Randall Wray, a former student, a
“character.”
So while his colleagues from graduate school went on to win Nobel prizes and rise to the top of academia, Minsky languished. He
drifted from Brown to Berkeley and eventually to Washington University. Indeed, many economists weren’t even aware of his work. One
assessment of Minsky published in 1997 simply noted that his “work has not had a major influence in the macroeconomic discussions
of the last thirty years.”
Yet he was busy. In addition to poverty, Minsky began to delve into the field of finance, which despite its seeming importance
had no place in the theories formulated by Samuelson and others. He also began to ask a simple, if disturbing question: “Can ‘it’
happen again?” - where “it” was, like Harry Potter’s nemesis Voldemort, the thing that could not be named: the Great Depression.
In his writings, Minsky looked to his intellectual hero, Keynes, arguably the greatest economist of the 20th century. But where
most economists drew a single, simplistic lesson from Keynes - that government could step in and micromanage the economy, smooth
out the business cycle, and keep things on an even keel - Minsky had no interest in what he and a handful of other dissident economists
came to call “bastard Keynesianism.”
Instead, Minsky drew his own, far darker, lessons from Keynes’s landmark writings, which dealt not only with the problem of unemployment,
but with money and banking. Although Keynes had never stated this explicitly, Minsky argued that Keynes’s collective work amounted
to a powerful argument that capitalism was by its very nature unstable and prone to collapse. Far from trending toward some magical
state of equilibrium, capitalism would inevitably do the opposite. It would lurch over a cliff.
This insight bore the stamp of his advisor Joseph Schumpeter, the noted Austrian economist now famous for documenting capitalism’s
ceaseless process of “creative destruction.” But Minsky spent more time thinking about destruction than creation. In doing so, he
formulated an intriguing theory: not only was capitalism prone to collapse, he argued, it was precisely its periods of economic stability
that would set the stage for monumental crises.
Minsky called his idea the “Financial Instability Hypothesis.” In the wake of a depression, he noted, financial institutions are
extraordinarily conservative, as are businesses. With the borrowers and the lenders who fuel the economy all steering clear of high-risk
deals, things go smoothly: loans are almost always paid on time, businesses generally succeed, and everyone does well. That success,
however, inevitably encourages borrowers and lenders to take on more risk in the reasonable hope of making more money. As Minsky
observed, “Success breeds a disregard of the possibility of failure.”
As people forget that failure is a possibility, a “euphoric economy” eventually develops, fueled by the rise of far riskier borrowers
- what he called speculative borrowers, those whose income would cover interest payments but not the principal; and those he called
“Ponzi borrowers,” those whose income could cover neither, and could only pay their bills by borrowing still further. As these latter
categories grew, the overall economy would shift from a conservative but profitable environment to a much more freewheeling system
dominated by players whose survival depended not on sound business plans, but on borrowed money and freely available credit.
Once that kind of economy had developed, any panic could wreck the market. The failure of a single firm, for example, or the revelation
of a staggering fraud could trigger fear and a sudden, economy-wide attempt to shed debt. This watershed moment - what was later
dubbed the “Minsky moment” - would create an environment deeply inhospitable to all borrowers. The speculators and Ponzi borrowers
would collapse first, as they lost access to the credit they needed to survive. Even the more stable players might find themselves
unable to pay their debt without selling off assets; their forced sales would send asset prices spiraling downward, and inevitably,
the entire rickety financial edifice would start to collapse. Businesses would falter, and the crisis would spill over to the “real”
economy that depended on the now-collapsing financial system.
From the 1960s onward, Minsky elaborated on this hypothesis. At the time he believed that this shift was already underway: postwar
stability, financial innovation, and the receding memory of the Great Depression were gradually setting the stage for a crisis of
epic proportions. Most of what he had to say fell on deaf ears. The 1960s were an era of solid growth, and although the economic
stagnation of the 1970s was a blow to mainstream neo-Keynesian economics, it did not send policymakers scurrying to Minsky. Instead,
a new free market fundamentalism took root: government was the problem, not the solution.
Moreover, the new dogma coincided with a remarkable era of stability. The period from the late 1980s onward has been dubbed the
“Great Moderation,” a time of shallow recessions and great resilience among most major industrial economies. Things had never been
more stable. The likelihood that “it” could happen again now seemed laughable.
Yet throughout this period, the financial system - not the economy, but finance as an industry - was growing by leaps and bounds.
Minsky spent the last years of his life, in the early 1990s, warning of the dangers of securitization and other forms of financial
innovation, but few economists listened. Nor did they pay attention to consumers’ and companies’ growing dependence on debt, and
the growing use of leverage within the financial system.
By the end of the 20th century, the financial system that Minsky had warned about had materialized, complete with speculative
borrowers, Ponzi borrowers, and precious few of the conservative borrowers who were the bedrock of a truly stable economy. Over decades,
we really had forgotten the meaning of risk. When storied financial firms started to fall, sending shockwaves through the “real”
economy, his predictions started to look a lot like a road map.
“This wasn’t a Minsky moment,” explains Randall Wray. “It was a Minsky half-century.”
Minsky is now all the rage. A year ago, an influential Financial Times columnist confided to readers that rereading Minsky’s 1986
“masterpiece” - “Stabilizing an Unstable Economy” - “helped clear my mind on this crisis.” Others joined the chorus. Earlier this
year, two economic heavyweights - Paul Krugman and Brad DeLong - both tipped their hats to him in public forums. Indeed, the Nobel
Prize-winning Krugman titled one of the Robbins lectures at the London School of Economics “The Night They Re-read Minsky.”
Today most economists, it’s safe to say, are probably reading Minsky for the first time, trying to fit his unconventional insights
into the theoretical scaffolding of their profession. If Minsky were alive today, he would no doubt applaud this belated acknowledgment,
even if it has come at a terrible cost. As he once wryly observed, “There is nothing wrong with macroeconomics that another depression
[won’t] cure.”
But does Minsky’s work offer us any practical help? If capitalism is inherently self-destructive and unstable - never mind that
it produces inequality and unemployment, as Keynes had observed - now what?
After spending his life warning of the perils of the complacency that comes with stability - and having it fall on deaf ears -
Minsky was understandably pessimistic about the ability to short-circuit the tragic cycle of boom and bust. But he did believe that
much could be done to ameliorate the damage.
To prevent the Minsky moment from becoming a national calamity, part of his solution (which was shared with other economists)
was to have the Federal Reserve - what he liked to call the “Big Bank” - step into the breach and act as a lender of last resort
to firms under siege. By throwing lines of liquidity to foundering firms, the Federal Reserve could break the cycle and stabilize
the financial system. It failed to do so during the Great Depression, when it stood by and let a banking crisis spiral out of control.
This time, under the leadership of Ben Bernanke - like Minsky, a scholar of the Depression - it took a very different approach, becoming
a lender of last resort to everything from hedge funds to investment banks to money market funds.
Minsky’s other solution, however, was considerably more radical and less palatable politically. The preferred mainstream tactic
for pulling the economy out of a crisis was - and is - based on the Keynesian notion of “priming the pump” by sending money that
will employ lots of high-skilled, unionized labor - by building a new high-speed train line, for example.
Minsky, however, argued for a “bubble-up” approach, sending money to the poor and unskilled first. The government - or what
he liked to call “Big Government” - should become the “employer of last resort,” he said, offering a job to anyone who wanted one
at a set minimum wage. It would be paid to workers who would supply child care, clean streets, and provide services that
would give taxpayers a visible return on their dollars. In being available to everyone, it would be even more ambitious than the
New Deal, sharply reducing the welfare rolls by guaranteeing a job for anyone who was able to work. Such a program would not only
help the poor and unskilled, he believed, but would put a floor beneath everyone else’s wages too, preventing salaries of more skilled
workers from falling too precipitously, and sending benefits up the socioeconomic ladder.
While economists may be acknowledging some of Minsky’s points on financial instability, it’s safe to say that even liberal policymakers
are still a long way from thinking about such an expanded role for the American government. If nothing else, an expensive full-employment
program would veer far too close to socialism for the comfort of politicians. For his part, Wray thinks that the critics are apt
to misunderstand Minsky. “He saw these ideas as perfectly consistent with capitalism,” says Wray. “They would make capitalism better.”
But not perfect. Indeed, if there’s anything to be drawn from Minsky’s collected work, it’s that perfection, like stability and
equilibrium, are mirages. Minsky did not share his profession’s quaint belief that everything could be reduced to a tidy model, or
a pat theory. His was a kind of existential economics: capitalism, like life itself, is difficult, even tragic. “There is no simple
answer to the problems of our capitalism,” wrote Minsky. “There is no solution that can be transformed into a catchy phrase and carried
on banners.”
It’s a sentiment that may limit the extent to which Minsky becomes part of any new orthodoxy. But that’s probably how he would
have preferred it, believes liberal economist James Galbraith. “I think he would resist being domesticated,” says Galbraith. “He
spent his career in professional isolation.”
The conclusion to "Leveraged bubbles," by Òscar Jordà,
Moritz Schularick, and Alan Taylor:
... In this column, we turned to economic history for the first comprehensive assessment of the economic risks of asset price
bubbles. We provide evidence about which types of bubbles matter and how their economic costs differ. Our historical analysis
shows that not all bubbles are created equal. When credit growth fuels asset price bubbles, the dangers for the financial
sector and the real economy are much more substantial. The damage done to the economy by the bursting of credit boom bubbles is
significant and long lasting.
In the past decades, central banks typically have taken a hands-off approach to asset price bubbles and credit booms. This way
of thinking has been criticised by some institutions, such as the BIS, that took a less rosy view of the self-equilibrating tendencies
of financial markets and warned of the potentially grave consequences of leveraged asset price bubbles. The findings presented
here can inform ongoing efforts to devise better macro-financial theory and real-world applications at a time when policymakers
are still searching for new approaches in the aftermath of the Great Recession.
"bursting of credit boom bubbles is significant and long lasting.
In the past decades, central banks typically have taken" ~~Òscar Jordà, Moritz Schularick, and Alan Taylor:~
Did Kurt Vonnegut once quip
"Each fed governor likes to live on the edge, further out on a limb where she can see more then hope against hope that limb
will not break until she leaves office." ?
Imprecisely, yet left us with a memorable hint of both his genius and fed governor's stupidity.
djb said...
of course if wages kept up with productivity, there would not have been as much of a bubble because people could have paid more,
and borrowed less
but I doubt BIS was worried about that particular issue
Peter K. -> djb...
"This way of thinking has been criticised by some institutions, such as the BIS, that took a less rosy view of the self-equilibrating
tendencies of financial markets and warned of the potentially grave consequences of leveraged asset price bubbles."
Likewise I don't the believe the BIS is big on tighter regulation of the banks. As Krugman and others have pointed out, the BIS
is always for raising rates but switches rationals. Sometimes it's about inflation, sometimes bubbles.
We need a Fed that sets as policy buying long term debt that funds new infrastructure projects that are required by Federal regulation
to pay prevailing aka higher wages.
If in 2010, the Fed had bought $3 trillion in bonds for such projects as building the NE HSR, for all the cities fixing their
century old water and sewer systems, California's HSR, bonds for replacement bridges with tunnels as option, rerouting rail to eliminate
grade crossings to speed for freight and truck traffic, then the Fed could have done what Republicans have done up until the Republicans
decided to punish all the We the People for electing Obama.
Any debt issued that does not build new capital assets requiring American labor, ie, debt paying labor costs, is totally worthless
to the economy.
Other than for some existing constant wealth redistribution purposes - during 2008-2011 savers were protected against having their
wealth taken from them and given to the borrowers who had long ago spent it.
Arne said...
Is there some data on the extent to which asset price rises are credit fueled or not. My memory (which does not qualify as a data
source) says that the housing bubble was much more so than the dot-com bubble.
Blissex said...
«When credit growth fuels asset price bubbles, the dangers for the financial sector and the real economy are much more
substantial.»
So M Minsky 50 years ago and M Pettis 15 years ago (in his "The volatility machine") had it right? Who could have imagined!
:-)
«In the past decades, central banks typically have taken a hands-off approach to asset price bubbles and credit booms.»
If only! They have been feeding credit-based asset price bubbles by at the same time weakening regulations to push up allowed
capital-leverage ratios, and boosting the quantity of credit as high as possible, but specifically most for leveraged speculation
on assets, by allowing vast-overvaluations on those assets.
Central banks have worked hard in most Anglo-American countries to redistribute income and wealth from "inflationary" worker
incomes to "non-inflationary" rentier incomes via hyper-subsidizing with endless cheap credit the excesses of financial speculation
in driving up asset prices.
Are you questioning creating wealth by price inflation of decaying asset which are churned in pump and dump?
Do you believe selling and reselling the same fixed quantity of assets creates jobs through the wealth effect of workers spending
money they don't have to buy things on credit they can't pay back to keep up with the rich?
Wealth. Creating wealth. Wealth effect. Capital gains. Money in your pocket. Signs of free lunch economic smoke and mirrors.
Wealth is created by paid labor or hard labor by the owner of the created wealth. But paying labor costs as a virtue is not
something an economist is allowed to say in the post Reagan victory world.
Listen to this article 6 minutes 00:00 / 06:06 1x Earnings, valuation and rampant speculation have all played a role in the extraordinary bull market that began a year ago this week. The latest combination of the three has a troubling reliance on the speculative element. A broad framework for thinking about stocks can be derived from the late economist Hyman Minsky's three stages of debt. In the first stage, borrowers take on only what they can afford to repay in full from their earnings by the time the debt matures; a standard mortgage works like this. Earnings, valuation and rampant speculation have all played a role in the extraordinary bull market that began a year ago this week. The latest combination of the three has a troubling reliance on the speculative element. A broad framework for thinking about stocks can be derived from the late economist Hyman Minsky's three stages of debt. In the first stage, borrowers take on only what they can afford to repay in full from their earnings by the time the debt matures; a standard mortgage works like this. A broad framework for thinking about stocks can be derived from the late economist Hyman Minsky's three stages of debt. In the first stage, borrowers take on only what they can afford to repay in full from their earnings by the time the debt matures; a standard mortgage works like this. A broad framework for thinking about stocks can be derived from the late economist Hyman Minsky's three stages of debt. In the first stage, borrowers take on only what they can afford to repay in full from their earnings by the time the debt matures; a standard mortgage works like this. U.S. 10-year Treasury yield Source: Tullett Prebon As of March 24 % Pre-pandemic peak of S&P 500 2020 '21 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 S&P 500 forward price/earnings ratio Source: Refinitiv Note: Weekly data S&P 500 peak 2020 '21 12 14 16 18 20 22 24 The parallel in the stock market is stocks going up when earnings -- or rather the expectation of earnings, since the market looks ahead -- go up. There is a risk of course, just as there is with debt: The earnings might not appear, and the stock goes back down. But earnings offer the least risky form of gains, and one that we should welcome as obviously justified. From the low in the summer, 2020 earnings forecasts jumped more than 10%, and expectations for this year rose more than 8%. Stocks responded. In Minsky's second stage, borrowers plan only to repay the interest, and refinance when the main debt is due to be repaid; much company debt works like this. It is taken out with a plan to roll it over indefinitely. Interest rates matter a lot: If they go down when the company needs to refinance, it will pay less. The equity parallel is to gains in valuation due to lower long-term rates. As with corporate debt, this is entirely justified and sustainable so long as rates stay low, because future earnings are now more appealing. The danger is that rates rise, in which case the stock might be hit no matter how earnings pan out. A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the The parallel in the stock market is stocks going up when earnings -- or rather the expectation of earnings, since the market looks ahead -- go up. There is a risk of course, just as there is with debt: The earnings might not appear, and the stock goes back down. But earnings offer the least risky form of gains, and one that we should welcome as obviously justified. From the low in the summer, 2020 earnings forecasts jumped more than 10%, and expectations for this year rose more than 8%. Stocks responded. In Minsky's second stage, borrowers plan only to repay the interest, and refinance when the main debt is due to be repaid; much company debt works like this. It is taken out with a plan to roll it over indefinitely. Interest rates matter a lot: If they go down when the company needs to refinance, it will pay less. The equity parallel is to gains in valuation due to lower long-term rates. As with corporate debt, this is entirely justified and sustainable so long as rates stay low, because future earnings are now more appealing. The danger is that rates rise, in which case the stock might be hit no matter how earnings pan out. A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the In Minsky's second stage, borrowers plan only to repay the interest, and refinance when the main debt is due to be repaid; much company debt works like this. It is taken out with a plan to roll it over indefinitely. Interest rates matter a lot: If they go down when the company needs to refinance, it will pay less. The equity parallel is to gains in valuation due to lower long-term rates. As with corporate debt, this is entirely justified and sustainable so long as rates stay low, because future earnings are now more appealing. The danger is that rates rise, in which case the stock might be hit no matter how earnings pan out. A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the In Minsky's second stage, borrowers plan only to repay the interest, and refinance when the main debt is due to be repaid; much company debt works like this. It is taken out with a plan to roll it over indefinitely. Interest rates matter a lot: If they go down when the company needs to refinance, it will pay less. The equity parallel is to gains in valuation due to lower long-term rates. As with corporate debt, this is entirely justified and sustainable so long as rates stay low, because future earnings are now more appealing. The danger is that rates rise, in which case the stock might be hit no matter how earnings pan out. A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the The equity parallel is to gains in valuation due to lower long-term rates. As with corporate debt, this is entirely justified and sustainable so long as rates stay low, because future earnings are now more appealing. The danger is that rates rise, in which case the stock might be hit no matter how earnings pan out. A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the The equity parallel is to gains in valuation due to lower long-term rates. As with corporate debt, this is entirely justified and sustainable so long as rates stay low, because future earnings are now more appealing. The danger is that rates rise, in which case the stock might be hit no matter how earnings pan out. A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the The parallel in the stock market is the The parallel in the stock market is the hunt for the greater fool . Sure, GameStop < shares bear no relation to the reality < of the company, but I can make money from buying an overpriced stock if I can find someone willing to pay even more because they "like the stock." Wild bets became obvious this year, as newcomers armed with stimulus, or "stimmy," checks Wild bets became obvious this year, as newcomers armed with stimulus, or "stimmy," checks Wild bets became obvious this year, as newcomers armed with stimulus, or "stimmy," checks drove up the price of many tiny stocks, penny shares and those popular on Reddit discussion boards. Speculative bets such as the solar and ARK ETFs rallied up until mid-February, long after growth stocks peaked in August Price performance Source: FactSet *Russell 1000 indexes As of March 25, 7:02 p.m. ET % Invesco Solar Value* ARK Innovation Growth* Sept. 2020 '21 -25 0 25 50 75 100 125 The concern for investors: How much of the market's gain is thanks to this pure speculation, and how much to the justifiable gains of the improving economy and low rates? If too much comes from speculation, the danger is that we run out of greater fools and prices quickly drop back. The concern for investors: How much of the market's gain is thanks to this pure speculation, and how much to the justifiable gains of the improving economy and low rates? If too much comes from speculation, the danger is that we run out of greater fools and prices quickly drop back. me title= A look at how stocks moved through the pandemic suggests earnings and bond yields are still much more important than the gambling element for the market as a whole, but is still troubling. From the S&P peak in mid-February to the end of June, the story was of cratering earnings partly offset by higher valuations. The S&P was down 8%. Earnings forecasts for 12 months ahead fell 20%, while with 10-year yields down almost a full percentage point, valuations were up from a precrisis high of 19 times forecast earnings (itself the highest since the aftermath of the dot-com bubble) to 21 times. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. A look at how stocks moved through the pandemic suggests earnings and bond yields are still much more important than the gambling element for the market as a whole, but is still troubling. From the S&P peak in mid-February to the end of June, the story was of cratering earnings partly offset by higher valuations. The S&P was down 8%. Earnings forecasts for 12 months ahead fell 20%, while with 10-year yields down almost a full percentage point, valuations were up from a precrisis high of 19 times forecast earnings (itself the highest since the aftermath of the dot-com bubble) to 21 times. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. A look at how stocks moved through the pandemic suggests earnings and bond yields are still much more important than the gambling element for the market as a whole, but is still troubling. From the S&P peak in mid-February to the end of June, the story was of cratering earnings partly offset by higher valuations. The S&P was down 8%. Earnings forecasts for 12 months ahead fell 20%, while with 10-year yields down almost a full percentage point, valuations were up from a precrisis high of 19 times forecast earnings (itself the highest since the aftermath of the dot-com bubble) to 21 times. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. From the S&P peak in mid-February to the end of June, the story was of cratering earnings partly offset by higher valuations. The S&P was down 8%. Earnings forecasts for 12 months ahead fell 20%, while with 10-year yields down almost a full percentage point, valuations were up from a precrisis high of 19 times forecast earnings (itself the highest since the aftermath of the dot-com bubble) to 21 times. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. From the S&P peak in mid-February to the end of June, the story was of cratering earnings partly offset by higher valuations. The S&P was down 8%. Earnings forecasts for 12 months ahead fell 20%, while with 10-year yields down almost a full percentage point, valuations were up from a precrisis high of 19 times forecast earnings (itself the highest since the aftermath of the dot-com bubble) to 21 times. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. NEWSLETTER SIGN-UP ( Mar 26, 2021 , www.wsj.com )
NEW YORK (Reuters) - In this manic era of meme stocks, cryptocurrencies and real-estate
bidding wars, studying the history of financial markets might seem a little dry and
old-fashioned.
Except to Jeremy Grantham.
The chairman of the board of famed asset managers GMO is a certified bubble-ologist,
fascinated by how and why bubbles emerge. Grantham studies classic ones like 1929, but - now in
his eighties - he has also lived through (and called) numerous modern booms and busts,
including the dot-com wreckage in 2000, the bull market peak in 2008 and the bear market low in
2009.
In case you did not know where this is headed: He says we are in a bubble right now.
In January Grantham wrote an investor letter, "Waiting For the Last Dance," about an
inflating bubble that "could well be the most important event of your investing lives."
Six months later, the stock market is starting to show some cracks. Grantham spoke with
Reuters about this moment of market history.
Q: When your letter of warning came out, what was the response like?
A: I got a lot of pushback. Waves of Bitcoin freaks attacked me in every way possible. They
said my ears were too big, and that I needed to be locked up in an old-folks home.
Q: So if we were already in a bubble then, where do things stand right now?
A: Bubbles are unbelievably easy to see; it's knowing when the bust will come that is
trickier. You see it when the markets are on the front pages instead of the financial
pages, when the news is full of stories of people getting cheated, when new coins are being
created every month. The scale of these things is so much bigger than in 1929 or in 2000.
Q: What is your take on equity valuations now?
A: Looking at most measures, the market is more expensive than in 2000, which was more
expensive than anything that preceded it.
My favorite metric is price-to-sales: What you find is that even the cheapest parts of the
market are way more expensive than in 2000.
Q: What might bring an end to this bubble?
A: Markets peak when you are as happy as you can get, and a near-perfect economy is
extrapolated into the indefinite future. But around the corner are lurking serious issues like
interest rates, inflation, labor and commodity prices. All of those are beginning to look less
optimistic than they did just a week or two ago.
Q: How long until a bust?
A: A bust might take a few more months, and, in fact, I hope it does, because it will give
us the opportunity to warn more people. The probabilities are that this will go into the fall:
The stimulus, the economic recovery, and vaccinations have all allowed this thing to go on a
few months longer than I would have initially guessed.
What pricks the bubble could be a virus problem, it could be an inflation problem, or it
could be the most important category of all, which is everything else that is unexpected. One
of 20 different things that you haven't even thought of will come out of the woodwork, and you
had no idea it was even there.
Q: What might a bust look like?
A: There will be an enormous negative wealth effect, broader than it has ever been, compared
to any other previous bubble breaking. It's the first time we have bubbled in so many different
areas "" interest rates, stocks, housing, non-energy commodities. On the way up, it gave us all
a positive wealth effect, and on the way down it will retract, painfully.
Q: Are there any asset classes which are relatively attractive?
A: You could always own cash, or you could do what the institutions do, which is buy heavily
into the asset classes that are least bad. The least overpriced are value stocks and emerging
markets. Those are the two arbitrages. With value and emerging, you should make some positive
return over the next 10 years.
Q: It is difficult to be bearish right now?
A: Not for me, because I don't have career risk anymore. But every big company has lots of
risk: They facilitate a bubble until it bursts, and then they change their tune as fast as they
can, and make money on the downside.
But this bubble is the real thing, and everyone can see it. It's as obvious as the nose on
your face.
NEW YORK (Reuters) - In this manic era of meme stocks, cryptocurrencies and real-estate
bidding wars, studying the history of financial markets might seem a little dry and
old-fashioned.
Except to Jeremy Grantham.
The chairman of the board of famed asset managers GMO is a certified bubble-ologist,
fascinated by how and why bubbles emerge. Grantham studies classic ones like 1929, but - now in
his eighties - he has also lived through (and called) numerous modern booms and busts,
including the dot-com wreckage in 2000, the bull market peak in 2008 and the bear market low in
2009.
In case you did not know where this is headed: He says we are in a bubble right now.
In January Grantham wrote an investor letter, "Waiting For the Last Dance," about an
inflating bubble that "could well be the most important event of your investing lives."
Six months later, the stock market is starting to show some cracks. Grantham spoke with
Reuters about this moment of market history.
Q: When your letter of warning came out, what was the response like?
A: I got a lot of pushback. Waves of Bitcoin freaks attacked me in every way possible. They
said my ears were too big, and that I needed to be locked up in an old-folks home.
Q: So if we were already in a bubble then, where do things stand right now?
A: Bubbles are unbelievably easy to see; it's knowing when the bust will come that is
trickier. You see it when the markets are on the front pages instead of the financial
pages, when the news is full of stories of people getting cheated, when new coins are being
created every month. The scale of these things is so much bigger than in 1929 or in 2000.
Q: What is your take on equity valuations now?
A: Looking at most measures, the market is more expensive than in 2000, which was more
expensive than anything that preceded it.
My favorite metric is price-to-sales: What you find is that even the cheapest parts of the
market are way more expensive than in 2000.
Q: What might bring an end to this bubble?
A: Markets peak when you are as happy as you can get, and a near-perfect economy is
extrapolated into the indefinite future. But around the corner are lurking serious issues like
interest rates, inflation, labor and commodity prices. All of those are beginning to look less
optimistic than they did just a week or two ago.
Q: How long until a bust?
A: A bust might take a few more months, and, in fact, I hope it does, because it will give
us the opportunity to warn more people. The probabilities are that this will go into the fall:
The stimulus, the economic recovery, and vaccinations have all allowed this thing to go on a
few months longer than I would have initially guessed.
What pricks the bubble could be a virus problem, it could be an inflation problem, or it
could be the most important category of all, which is everything else that is unexpected. One
of 20 different things that you haven't even thought of will come out of the woodwork, and you
had no idea it was even there.
Q: What might a bust look like?
A: There will be an enormous negative wealth effect, broader than it has ever been, compared
to any other previous bubble breaking. It's the first time we have bubbled in so many different
areas "" interest rates, stocks, housing, non-energy commodities. On the way up, it gave us all
a positive wealth effect, and on the way down it will retract, painfully.
Q: Are there any asset classes which are relatively attractive?
A: You could always own cash, or you could do what the institutions do, which is buy heavily
into the asset classes that are least bad. The least overpriced are value stocks and emerging
markets. Those are the two arbitrages. With value and emerging, you should make some positive
return over the next 10 years.
Q: It is difficult to be bearish right now?
A: Not for me, because I don't have career risk anymore. But every big company has lots of
risk: They facilitate a bubble until it bursts, and then they change their tune as fast as they
can, and make money on the downside.
But this bubble is the real thing, and everyone can see it. It's as obvious as the nose on
your face.
"... Here are the other ominous signs of froth in the IPO market. ..."
"... Tech leads the way: It dominates the IPO market again, just as in 1999. ..."
"... Frothy first-day gains: The average first-day pop for IPOs in the second quarter was 42% ..."
"... Historically high valuations ..."
"... Retail investors in the mix ..."
"... "I think it says more about general liquidity than it does about where the stock market is going next," says Kevin Landis of the Firsthand Technology Opportunities TEFQX, -3.24% , referring to the IPO frenzy. "There is so much money sloshing around. The capital markets look like the rich guy from out of town who just got off the cruise ship, and we are all coming out of the woodwork to sell him stuff," he says. ..."
"... "Things are going up simply because of liquidity, which means eventually there will be a top," says Landis. "But not necessarily an impending top right around the corner." Landis is worth listening to because his fund outperforms his technology category by 9.6 percentage points annualized over the five years, according to Morningstar. ..."
"... Market calls are always a matter of what intelligence spies call "the mosaic." Each bit of information is a piece of an overall mosaic. While the IPO market froth is disturbing, you should consider this cautionary signal as just one among many. ..."
A frothy market for initial public offerings suggests stocks are overvalued
Oatly, which produces oat milk products, went public in May. (Photo Illustration by Scott Olson/Getty Images)
I hear more money managers say it's starting to feel like 1999" the bubble year followed by an epic market crash.
They may be on to something.
The initial public offering (IPO) market now shows the froth that foreshadows big stock market corrections.
Consider these troubling signals from the IPO market.
1. Ominous volume:
Second-quarter IPO proceeds were the biggest since" get this" the fourth quarter of 1999. The huge
tech selloff that scarred a generation of investors started in March 2000 and then spread to the entire market.
Some details: A total of 115 IPOs raised $40.7 billion in the second quarter. That follows a busy first quarter when 100 IPOs
raised $39.1 billion. Both quarters saw the largest amount of capital raised since the fourth quarter of 1999, when IPOs raised
$46.5 billion. These numbers come from the IPO experts at Renaissance Capital, which manages the IPO exchange traded fund, Renaissance
IPO ETF
IPO,
-3.43%
.
Of course, adjusted for inflation, the 2021 numbers shrink relative to the fourth quarter of 1999. But this doesn't get us off
the hook. The 2021 IPO figures, above, exclude the $12.2 billion and $87 billion raised by special purpose acquisition companies
(SPACs) in the second and first quarters.
This spike in IPO volume is troubling for a simple reason. Investment bankers and companies know the most opportune time to sell
stock is around market highs. They bring companies public at their convenience, not ours. This tells us they may be selling a
top now.
Here are the other ominous signs of froth in the IPO market.
2.
Tech leads the way:
It dominates the IPO market again, just as in 1999.
The tech sector raised the majority
of second-quarter proceeds and posted its busiest quarter in at least two decades with 42 IPOs, says Renaissance Capital. This
included the quarter's largest IPO, DiDi Global
DIDI,
+1.61%
,
the Chinese ride-hailing app. The large U.S.-based tech names were Applovin
APP,
-5.54%
in app software, the robotics company UiPath
PATH,
-3.68%
,
and the payments platform Marqeta
MQ,
-4.93%
.
3. We can expect more of the same:
A robust IPO pipeline sets the stage for a booming third quarter, says Renaissance
Capital. The IPO pipeline has over a hundred companies. Tech dominates.
4.
Frothy first-day gains:
The average first-day pop for IPOs in the second quarter was 42%
. That's well above
the range of 31%-37% for the prior four quarters.
5.
Historically high valuations
:
Typically, tech companies have come public with enterprise-value-(EV)-to-sales
ratios of around 10. Now many are coming public with EV/sales ratios in the 20-30 range or more, points out Avery Spears, an IPO
analyst at Renaissance Capital. For example, the cybersecurity company SentinelOne
S,
-6.14%
came public with an EV/sales ratio of 81, says Spears.
6.
Retail investors in the mix
:
They're big participants in IPO trading" often driving IPOs up by crazy amounts
in first-day trading. "In the second quarter there were a lot of small deals with low floats and absolutely insane trading, popping
well over 100% and in one case over 1,000%," says Spears. Pop Culture Group
CPOP,
-12.38%
rose over 400% on its first day of trading, and E-Home Household Service
EJH,
-3.67%
advanced 1,100%. "This demonstrates presence of retail investors in the market," she says. Both
names have since fallen.
Keep in mind that the 2000 selloff was not the only one foreshadowed by IPO froth. The selloffs during mid-2015 to early 2016
and the second half 2018 were both preceded by high-water marks for IPO deal volume.
IPO-froth pushback
"It's different this time" are maybe the most dangerous words in investing. But market experts say several factors suggest the
robust IPO market isn't such a negative signal.
First, decent quality companies are coming public. "Because companies stay private longer, you are seeing far more mature companies
coming public," says Todd Skacan, equity capital markets manager at T. Rowe Price. These aren't like the speculative Internet
companies of 1999. "It would be more of a signal of froth if more borderline companies were coming public like in the fourth quarter
of 1999," he says.
We saw some of this with the SPACs, says Skacan, but the SPAC craze has cooled off. Second-quarter SPAC issuance fell 79% compared
to the first quarter, muted by "investor fatigue and regulatory scrutiny," says a Renaissance Capital report on the IPO market.
In the second quarter, 63 SPACs raised $12.2 billion, compared to the 298 SPACs that raised $87 billion in the first quarter.
Next, the type of company coming public might also calm fears. Alongside all the tech names, there are many industrial and consumer-facing
companies" not the kinds of businesses that indicate froth. The latter category includes public national brands like Mister Car
Wash
MCW,
-1.82%
and Krispy Kreme
DNUT,
-2.16%
,
and the high-growth oat milk brand Oatly
OTLY,
-2.79%
.
Third, IPOs are only floating 10%-15% of their overall value, and many post-IPO valuations are not that much higher than valuations
implied by pre-IPO capital raises. That's different, compared to 1999. "It is not like they are selling a high number of shares
at inflated prices," says Skacan. This makes sense, because companies that are more mature when they do an IPO don't need as much
money.
Liquidity flood
"I think it says more about general liquidity than it does about where the stock market is going next," says Kevin Landis
of the Firsthand Technology Opportunities
TEFQX,
-3.24%
,
referring to the IPO frenzy. "There is so much money sloshing around. The capital markets look like the rich guy from out of town
who just got off the cruise ship, and we are all coming out of the woodwork to sell him stuff," he says.
"Things are going up simply because of liquidity, which means eventually there will be a top," says Landis. "But not necessarily
an impending top right around the corner." Landis is worth listening to because his fund outperforms his technology category by
9.6 percentage points annualized over the five years, according to Morningstar.
The bottom line
Market calls are always a matter of what intelligence spies call "the mosaic." Each bit of information is a piece of an overall
mosaic. While the IPO market froth is disturbing, you should consider this cautionary signal as just one among many.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned APP. Brush has suggested APP in his stock
newsletter,
Brush Up on Stocks
. Follow him on Twitter @mbrushstocks,
"... For now, loose monetary and fiscal policies will continue to fuel asset and credit bubbles, propelling a slow-motion train wreck. The warning signs are already apparent in today's high price-to-earnings ratios SPX , low equity risk premiums, inflated housing and tech assets COMP , and the irrational exuberance surrounding special purpose acquisition companies (SPACs), the crypto sector BTCUSD, , high-yield corporate debt , collateralized loan obligations, private equity, meme stocks AMC, and runaway retail day trading. ..."
"... But meanwhile, the same loose policies that are feeding asset bubbles will continue to drive consumer price inflation, creating the conditions for stagflation whenever the next negative supply shocks arrive. Such shocks could follow from renewed protectionism; demographic aging in advanced and emerging economies; immigration restrictions in advanced economies; the reshoring of manufacturing to high-cost regions; or the balkanization of global supply chains. ..."
"... More broadly, the Sino-American decoupling threatens to fragment the global economy at a time when climate change and the COVID-19 pandemic are pushing national governments toward deeper self-reliance. ..."
"... Making matters worse, central banks have effectively lost their independence, because they have been given little choice but to monetize massive fiscal deficits to forestall a debt crisis. With both public and private debts having soared, they are in a debt trap. Central banks will be damned if they do and damned if they don't, and many governments will be semi-insolvent and thus unable to bail out banks, corporations, and households. The doom loop of sovereigns and banks in the eurozone after the global financial crisis will be repeated world-wide ..."
"... When former Fed Chair Paul Volcker hiked rates to tackle inflation in 1980-82, the result was a severe double-dip recession in the United States and a debt crisis and lost decade for Latin America. But now that global debt ratios are almost three times higher than in the early 1970s, any anti-inflationary policy would lead to a depression, rather than a severe recession. The question is not if but when. ..."
Roubini warns: After 'the Minsky Moment' crashes overheated speculative markets, 'the
Volcker Moment' will will arrive to crash the debt-burdened global economy
( Project Syndicate ) -- In
April, I
warned that today's extremely loose monetary and fiscal policies, when combined with a
number of negative supply shocks, could result in 1970s-style stagflation (high inflation
alongside a recession). In fact, the risk today is even bigger than it was then.
After all, debt ratios in advanced economies and most emerging markets were much lower in
the 1970s, which is why stagflation has not been associated with debt crises historically. If
anything, unexpected inflation in the 1970s wiped out the real value of nominal debts at fixed
rates, thus reducing many advanced economies' public-debt burdens.
The warning signs are already apparent in today's high price-to-earnings ratios, low
equity risk premiums, inflated housing and tech assets, and the irrational exuberance
surrounding special purpose acquisition companies (SPACs), the crypto sector, high-yield
corporate debt, collateralized loan obligations, private equity, meme stocks, and runaway
retail day trading.
Conversely, during the 2007-08 financial crisis, high debt ratios (private and public)
caused a severe debt crisis -- as housing bubbles burst -- but the ensuing recession led to low
inflation, if not outright deflation. Owing to the credit crunch, there was a macro shock to
aggregate demand, whereas the risks today are on the supply side.
Worst of both
worlds
We are thus left with the worst of both the stagflationary 1970s and the 2007-10 period.
Debt ratios are much higher than in the 1970s, and a mix of loose economic policies and
negative supply shocks threatens to fuel inflation rather than deflation, setting the stage for
the mother of stagflationary debt crises over the next few years.
For now, loose monetary and fiscal policies will continue to fuel asset and credit
bubbles, propelling a slow-motion train wreck. The warning signs are already apparent in
today's high price-to-earnings ratios SPX , low equity risk
premiums, inflated housing and tech assets COMP , and the
irrational exuberance surrounding special purpose acquisition companies (SPACs), the crypto
sector BTCUSD, ,
high-yield corporate debt , collateralized loan obligations, private equity, meme stocks
AMC, and runaway
retail day trading.
But meanwhile, the same loose policies that are feeding asset bubbles will continue to
drive consumer price inflation, creating the conditions for stagflation whenever the next
negative supply shocks arrive. Such shocks could follow from renewed protectionism; demographic
aging in advanced and emerging economies; immigration restrictions in advanced economies; the
reshoring of manufacturing to high-cost regions; or the balkanization of global supply
chains.
Recipe for macroeconomic disruption
More broadly, the Sino-American decoupling threatens to fragment the global economy at a
time when climate change and the COVID-19 pandemic are pushing national governments toward
deeper self-reliance. Add to this the impact on production of increasingly frequent
cyberattacks on critical infrastructure and the social and political backlash against
inequality, and the recipe for macroeconomic disruption is complete.
Making matters worse, central banks have effectively lost their independence, because
they have been given little choice but to monetize massive fiscal deficits to forestall a debt
crisis. With both public and private debts having soared, they are in a debt trap. Central
banks will be damned if they do and damned if they don't, and many governments will be
semi-insolvent and thus unable to bail out banks, corporations, and households. The doom loop
of sovereigns and banks in the eurozone after the global financial crisis will be repeated
world-wide
As inflation rises over the next few years, central banks will face a dilemma. If they start
phasing out unconventional policies and raising policy rates to fight inflation, they will risk
triggering a massive debt crisis and severe recession; but if they maintain a loose monetary
policy, they will risk double-digit inflation -- and deep stagflation when the next negative
supply shocks emerge.
But even in the second scenario, policy makers would not be able to prevent a debt crisis.
While nominal government fixed-rate debt in advanced economies can be partly wiped out by
unexpected inflation (as happened in the 1970s), emerging-market debts denominated in foreign
currency would not be. Many of these governments would need to default and restructure their
debts.
At the same time, private debts in advanced economies would become unsustainable (as they
did after the global financial crisis), and their spreads relative to safer government bonds
would spike, triggering a chain reaction of defaults. Highly leveraged corporations and their
reckless shadow-bank creditors would be the first to fall, soon followed by indebted households
and the banks that financed them.
The Volcker Moment
To be sure, real long-term borrowing costs may initially fall if inflation rises
unexpectedly and central banks are still behind the curve. But, over time, these costs will be
pushed up by three factors. First, higher public and private debts will widen sovereign and
private interest-rate spreads. Second, rising inflation and deepening uncertainty will drive up
inflation risk premiums. And, third, a rising misery index -- the sum of the inflation and
unemployment rate -- eventually will demand a "Volcker Moment."
When former Fed Chair Paul Volcker hiked rates to
tackle inflation in 1980-82, the result was a severe double-dip recession in the United States
and a debt crisis and lost decade for Latin America. But now that global debt ratios are almost
three times higher than in the early 1970s, any anti-inflationary policy would lead to a
depression, rather than a severe recession. The question is not if but when.
Under these conditions, central banks will be damned if they do and damned if they don't,
and many governments will be semi-insolvent and thus unable to bail out banks, corporations,
and households. The doom loop of sovereigns and banks in the eurozone after the global
financial crisis will be repeated world-wide, sucking in households, corporations, and shadow
banks as well.
As matters stand, this slow-motion train wreck looks unavoidable. The Fed's recent pivot
from an ultra-dovish to a mostly dovish stance changes nothing. The Fed has been in a debt trap
at least since December 2018, when a stock- and credit-market crash forced it to reverse its
policy tightening a full year before COVID-19 struck. With inflation rising and stagflationary
shocks looming, it is now even more ensnared.
So, too, are the European Central Bank, the Bank of Japan, and the Bank of England. The
stagflation of the 1970s will soon meet the debt crises of the post-2008 period. The question
is not if but when.
Nouriel Roubini is CEO of Roubini Macro Associates and chief economist at Atlas Capital
Team.
"... This is not the first time Summers has predicted that the firehose of fiscal and monetary stimulus will unleash soaring inflation. While career economists at the White House and Fed - who have peasants doing their purchases for them - urge Americans to ignore the current hyperinflation episode, saying that the recent inflation surge will soon pass, Summers has been unique among his fellow Democrats in predicting that massive monetary and fiscal stimulus alongside the reopening of the economy would spark considerable price pressures. ..."
"... Asked how financial markets may behave in the rest of 2021, Summers said "there will probably be more turbulence" as traders react to faster inflation by pushing up bond yields. "We've got a lot of processing ahead of us in markets," he said. ..."
It may not be quite hyperinflation - loosely defined as pricing rising at a double-digit
clip or higher - but if former Treasury Secretary and erstwhile democrat Larry Summers is
right, it will be halfway there in about six months.
One day after Bank of America warned that the coming "hyperinflation" will last at least 2
and as much as 4 years - whether or not one defines that as transitory depends on whether one
has a Federal Reserve charge card to fund all purchases in the next 4 years - Larry Summers,
who is this close from being excommunicated from the Democrat party, predicted inflation will
be running "pretty close" to 5% at the end of this year and that bond yields will rise as a
result over the rest of 2021.
Considering that consumer prices already jumped 5% in May from the previous year, his
forecast is not much of a shock.
Speaking on Bloomberg TV, Summers said that "my guess is that at the end of the year
inflation will, for this year, come out pretty close to 5%," adding that "it would surprise me
if we had 5% inflation with no effect on inflation expectations." If he is right, the recent
reversal in one-year inflation expectations which dipped from 4.6% to 4.2% according to the
latest UMich consumer sentiment survey, is about to surge to new secular highs.
This is not the first time Summers has predicted that the firehose of fiscal and monetary
stimulus will unleash soaring inflation. While career economists at the White House and Fed -
who have peasants doing their purchases for them - urge Americans to ignore the current
hyperinflation episode, saying that the recent inflation surge will soon pass, Summers has been
unique among his fellow Democrats in predicting that massive monetary and fiscal stimulus
alongside the reopening of the economy would spark considerable price pressures.
Asked how financial markets may behave in the rest of 2021, Summers said "there will
probably be more turbulence" as traders react to faster inflation by pushing up bond yields.
"We've got a lot of processing ahead of us in markets," he said.
Ironically, Summers - who now teaches at Harvard University whose president he was not too
long ago when he hung out with his buddy Jeffrey Epstein...
Plus Size Model 5 hours ago (Edited)
Exactly!! Not only that, it's not just the FED that is contributing to inflation. We can
also blame the SEC and the DOJ. I've never seen a Zero Hedge article blaming stock price
appreciation or buybacks for causing inflation or increasing the money supply. The DOJ
never enforces antitrust laws. The FBI never investigates money laundering from overseas
that creates artificial real estate appreciation that inflates the money supply when people
take out HELOC. There are other oversight bodies that, in a sane world, would not allow
foreign investment in real estate. Bitcoin and others are a new tool that is being used to
manipulate the money supply. It's comical how coins always go down when the little guys are
holding the bag and go up when Coinbase executives want to cash out.
Another thing, this artificial chip shortage, punitive tariffs, and new tax laws are
also adding to price increases.
Totally_Disillusioned 1 hour ago
Speculative investments have NEVER been included in the forumulation of CPI that
determines inflation rate.
Revolution_starts_now 6 hours ago
Larry Summers is a tool.
gregga777 5 hours ago (Edited) remove link
Banksters in 2010's: We've got to revise how we calculate inflation again to conceal it
from the Rubes.
Banksters in 2020: Ho Lee Fuk! Gun the QE engine! Pedal to the metal! Monetize all of
the Federal government's debt! Keep those stonks zooming upwards!
Banksters in 2021: Ho Lee Fuk! The Rubes have caught onto our game! Gun the QE engine!
Keep that pedal to the metal! Maybe the Rubes won't notice housing prices going up 20% per
year?
Summer 2021: Ho Lee Fuk! They are noticing Inflation! We'd better revise how we
calculate inflation again to conceal it from the Rubes.
When and how another housing bubble will burst? This is the question.
The author forget that the current movement out of the cities into the suburb can lead to the
collapse of prices in overpriced areas of big cities like NYC. Also the retain space collapse is
evident even to untrained observers. So people moving out of big cities like NYC and cities
devastated by riots need to sell their current condos and apartments. To whom?
There are
many reports of homebuyers getting into bidding wars and many cities where home prices have
appreciated
by well more than 10% over the past year. This naturally leads to a concern about market
volatility: Must what goes up come down ? Are we
repeating the excesses of the early 2000s, when housing prices surged before the market
crashed?
Some analysts
argue that this time, it's even less likely that prices will fall. Inventories
of new homes for sale are very low, and lending standards are much tighter than in 2005. This
is true. In fact, the ground is even firmer than it seems.
New home inventories were very high before the Great Recession. Today, they are closer to
the level that has been common for decades. The portion of inventory built and ready for move-in is
especially low because of supply chain interruptions combined with a sudden boost of demand
during the coronavirus pandemic. We shouldn't worry much about a crash when buyers are eagerly
snapping up the available homes.
... ... ...
At the June 2006 Federal
Reserve meeting, Ben Bernanke said, "It is a good thing that housing is cooling. If we could
wave a magic wand and reinstate 2005, we wouldn't want to do that." It's notable that Jerome
Powell, who today holds Bernanke's former position as Fed chair, isn't openly pining for a
"cooler" housing market.
There is a common belief that before the Great Recession, homebuyers were taken in by the
myth that home prices never go down, and they became complacent. Those buyers turned out to
be wrong. Yet, even when a concerted effort to kill housing markets succeeded, we had to beat
them into submission for three full years before prices relented. Home prices can go down, but
we have to work very hard, together, for a long time, to make them fall.
If you are a buyer in a hot market where home prices are 30% higher than they were a year
ago, you're getting a 30% worse deal than you could have had back then. Nothing can be done
about that. That said, the main things to be concerned with are the factors federal
policymakers are in control of. There is little reason to expect housing demand to collapse. If
it does, it will require communal intention""federal monetary and credit policies meant to
create or accept a sharp drop in demand. And even if federal officials intend for housing
construction to collapse, history suggests that a market contraction would push new sales
down deeply for an extended period of time before prices relent.
Guest commentaries like this one are written by authors outside the Barron's and
MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit
commentary proposals and other feedback to [email protected] .
Kevin
Erdmannis a visiting research fellow with the Mercatus Center at George Mason
University and author of Shut Out: How A Housing Shortage Caused the Great Recession and
Crippled Our Economy.
Meme-based investing 'is a totally nihilistic parody of actual investing,' says Jeremy Grantham, who called 3 stock-market
bubbles
Last Updated: June 24, 2021 at 7:18 p.m. ET
First
Published: June 24, 2021 at 3:16 p.m. ET
By
Mark DeCambre
18
'This is it guys, the biggest U.S. fantasy trip of all time,' says Grantham
Jeremy Grantham, founder of GMO, speaks in 2012 in Oxford, England
GETTY
IMAGES
"'Meme' investing -- the idea that something is worth investing in, or rather gambling on, simply because it is funny --
has become commonplace. It's a totally nihilistic parody of actual investing. This is it guys, the biggest U.S. fantasy
trip of all time."
That's Jeremy Grantham, co-founder and chief investment strategist at Boston-based money manager Grantham, Mayo, Van Otterloo
& Co., in a recent interview with
Bloomberg
News
, lamenting the state of an investment world that has prominently featured the emergence of meme-linked trading in
stocks like GameStop Corp.
GME,
-1.32%
,
AMC
Entertainment Holdings
AMC,
-4.66%
and
BlackBerry Ltd.
BB,
-4.42%
,
among
others.
Grantham noted that the meme cryptocurrency dogecoin
DOGEUSD,
-1.74%
is
"worth billions in the market and not even pretending to be [a] serious [investment]."
"Dogecoin was created as a joke to make fun of cryptocurrencies being worthless, and, not only has it taken off, but it's
such a success that second-level joke cryptocurrencies making fun of dogecoin have gone to multibillion-dollar valuations,"
he said.
Indeed, AMC Entertainment is up over 2,500% in 2021 thus far; GameStop has gained over 1,000% in the year to date; dogecoin
is up by about 5,000%, despite a precipitous drop; and BlackBerry shares are up over 90% so far this year.
By comparison, traditional assets have seen more mundane returns. The Dow Jones Industrial Average
DJIA,
+0.69%
is
up a more than respectable 12% so far in 2021, while the S&P 500
SPX,
+0.33%
has
returned over 13% in the year to date and the Nasdaq Composite
COMP,
-0.06%
has
made a powerful comeback in June to achieve a gain of nearly 12% in the first six months of the year.
Grantham views the social-media-driven meme-stock moves as concerning and indicative of bubbles percolating in financial
markets that will ultimately need to be contended with.
Grantham is worth paying attention to due to his prescient calls over the years. He said that stocks were overvalued in
2000 and again in 2007, anticipating subsequent market downturns,
the
Wall Street Journal reports
. Grantham also signaled that elements of the financial market had become unmoored from
reality leading up to the 2008–09 financial crisis.
However, his bearishness thus far hasn't helped his core investment strategies, amid a relentless run-up in stocks, be they
traditional or meme. The Nasdaq Composite has already put in back-to-back record closes this week and was aiming for a 17th
record finish on Thursday, while the S&P 500 index was eyeing a record of its own.
(cointelegraph.com)
45BeauHD on Monday June 21,
2021 @05:20PM from the not-dog-friendly dept. The president of the Federal Reserve Bank of
Minneapolis, Neel Kashkari, took a jab at Dogecoin (DOGE) last week by referring
to the memecoin as a Ponzi scheme , upping his rhetoric against cryptocurrencies.
Cointelegraph reports: Kashkari's comments were in response to a LinkedIn poll by Paul
Grewal, the chief legal officer and corporate secretary of Coinbase, who
asked his connections about the proper way to pronounce "Doge." "The right pronunciation is
pon-zi," Kashkari quipped.
This isn't the first time Kashkari has taken aim at cryptocurrencies. In February 2020,
he said digital assets like Bitcoin (BTC) lack the basic tenants of a stable currency and
praised the Securities and Exchange Commission for "cracking down" on initial coin offerings.
Kashkari is not a member of this year's Federal Open Market Committee, the group responsible
for setting United States monetary policy. The Minneapolis branch of the Fed will serve as an
alternate FOMC member in 2022 before rotating back onto the committee as a voting member in
2023.
While Alphabet Class A and Facebook shares are up 37% and 21%, respectively, other members
of the group have weighed on the market. Amazon shares are up 7.1% in 2021, lagging behind the
11% rise in the benchmark S&P 500. Apple and Netflix have fared even worse, down 1.7% and
7.4% for the year.
... ... ...
For much of 2020, a badly constricted economy pushed investors toward stocks -- like the
FAANG names -- whose businesses were less affected and whose future growth became even more
alluring with the drop in interest rates. The Russell 1000 Growth Index advanced 37% for the
year, while the Russell 1000 Value Index eked out a 0.1% gain -- the largest annual performance
gap between the two style benchmarks in FactSet data going back to 1979.
Big tech stocks were among the leaders of that rally. Apple shares climbed 81% in 2020 --
last August becoming the first U.S. public company to
surpass $2 trillion in market value -- while Amazon rose 76% and Netflix gained 67%.
Facebook added 33% for the year, and Alphabet 31%.
These companies are too big and too powerful. I hope for anti-trust legislation that cuts
them down to size. The tech oligarchs have too much influence on what Americans think and do.
They are a direct threat to our democracy. I hope more Americans will decide to support
smaller companies (especially local stores), putting conviction ahead of convenience.
J Pate
Google and Amazon has no near peer competitors. Netflix and Apple do. My family got rid of
Netflix last year and now have Hulu. There is a ton of free steaming sites also. We never
missed Netflix.
Jay Urbain
"While Alphabet Class A and Facebook shares are up 37% and 21%, respectively, other members
of the group have weighed on the market. Amazon shares are up 7.1% in 2021, lagging behind
the 11% rise in the benchmark S&P 500. Apple and Netflix have fared even worse, down 1.7%
and 7.4% for the year."
Time to take another look at AMZN and AAPL.
Jon Tannen
Gasp! So after breathtaking rises for Apple and Netflix stocks, they're merely flat these
days? Not up 30% this month? Uh-oh! Sound the alarms! Someone please tell the writer that
stocks are not a straight diagonal to the sky. [She's actually wrong about Apple's valuation
being down this year, according to WSJ's very charts! The price is 130 now vs. 129 on Jan 4.
But hey, she's obliged to come up with an article this week.]
This all reminds me of analyst Dan Niles coming on CNBC for years and proclaiming he's
shorting Apple. Every few months: "I'm shorting Apple." "I'm shorting Apple." Again and again
and again. The guy must be broke. [Of course, no one calls him out about it.]
Marshall Dillon
Amazon? Not for me. I have switched most of my online buying to Walmart and local stores.
Amazon needs to get out of politics and stop suppressing free speech, much like the WSJ
moderators.
SACHIN SHARMA
This entire article is misleading. Choosing 2020 as a base year to compare this group of
stocks leaves out the important context of what happened the prior ten years, when FB and
GOOGL underperformed vs APPL, NFLX, AMZN. A mean reversion within this group because money
managers need to justify their existence could be the simple explanation. Also, how much of
the Russel growth fund performance came from AMC and GME, those bell weather companies?
"... As bubbles peak, they combine objective signs of excess" prices rising much faster than earnings can justify" with subjective signs of mania, such as frenzied trading and borrowing. ..."
"... My research on the 10 biggest bubbles of the past century, from the US stock market in 1929 to Chinese shares in 2015, shows that prices typically rise 100 per cent in the year before the peak, with much of the gain packed into the climactic last months. That finding is closely in line with bubble studies from academics at Harvard and others. ..."
"... By those standards, there are at least five current bubblets. They include the cryptocurrency market for bitcoin and ethereum; clean energy stocks, including some of the biggest names in electric vehicles; small cap stocks, including many of the hottest pandemic stories; a basket of tech stocks that lack earnings, which is also chock-a-block with famous brands; and special purpose acquisition companies (Spacs) , which allow investors a new way to buy into private firms before they go public. ..."
"... The historical bubbles in my study did suffer midcourse setbacks on the way up, but typically those corrections were around 25 per cent and never more than 35 per cent. Beyond that point" a 35 per cent drop" the bubbles in my sample became monophasic, or stuck on a one-way downhill path. ..."
"... It is important to remember that a bubble is often a good idea gone too far. In the early 2000s, the conventional wisdom was that the dotcom bubble had fuelled mainly junk companies with business plans barely worth the napkins they were written on. Later, researchers found that, compared with other bubbles, those in the tech sector produce many start-ups that fail but also help launch major innovations. For every few dozen dotcom flame-outs, there was a giant survivor such as Google or Amazon that would go on to make the economy more productive. ..."
As bubbles peak,
they combine objective signs of excess" prices rising much faster than earnings can justify"
with subjective signs of mania, such as frenzied trading and borrowing.
To some the entire US
stock market looks bubbly given its dizzying run-up, but earnings growth has also been
extraordinarily strong through the pandemic. Beneath the surface, however, sectors of the
market from green tech to cryptocurrency show tell-tale bubble signs.
My research on the 10 biggest bubbles of the past century, from the US stock market in 1929
to Chinese shares in 2015, shows that prices typically rise 100 per cent in the year before the
peak, with much of the gain packed into the climactic last months. That finding is closely in
line with bubble studies from academics at Harvard and others.
By those standards, there are at least five current bubblets. They include the
cryptocurrency market for bitcoin and ethereum; clean energy stocks, including some of the
biggest names in electric vehicles; small cap stocks, including many of the hottest pandemic
stories; a basket of tech stocks that lack earnings, which is also chock-a-block with famous
brands; and special purpose acquisition
companies (Spacs) , which allow investors a new way to buy into private firms before they
go public.
Each of these bubblets is captured in an index that rose in the last year by around 100 per
cent, often much more, to a peak value between $500bn and $2.5tn. Day traders and other newbies
rushed in, a common symptom of late stage market manias. Now these bubbles are faltering, as
they so often do, in response to increases in long-term interest rates. What's next?
The historical bubbles in my study did suffer midcourse setbacks on the way up, but
typically those corrections were around 25 per cent and never more than 35 per cent. Beyond
that point" a 35 per cent drop" the bubbles in my sample became monophasic, or stuck on a
one-way downhill path.
For the median case, the bottom was found 70 per cent below the peak, and came just over two
years after the peak. Except for the index of small-cap pandemic stocks, the other four bubble
candidates have all experienced drops of at least 35 per cent, but also of no more than 50 per
cent (in the case of ethereum). In other words, they are not likely to resume inflating any
time soon, and they are still far from the typical bottom.
There is one new factor that could upset this historical pattern. Despite the rise in
long-term interest rates, there is plenty of liquidity sloshing around the markets, with
central banks committed to easy money as never before. The risks though are skewed to the
downside.
It is important to remember that a bubble is often a good idea gone too far. In the early
2000s, the conventional wisdom was that the dotcom bubble had fuelled mainly junk companies
with business plans barely worth the napkins they were written on. Later, researchers found
that, compared with other bubbles, those in the tech sector produce many start-ups that fail
but also help launch major innovations. For every few dozen dotcom flame-outs, there was a
giant survivor such as Google or Amazon that would go on to make the economy more
productive.
"Over the past five years, the S&P 500 stock index has more than doubled. For the past
10 years, it has nearly quadrupled," says Orman. "If you have left your portfolios on
autopilot, that could likely mean that you now own more stock than you intend to, or
should."
Left to their own devices, your increasingly valuable stocks may have started to account for
an even larger portion of your account
... ... ...
Orman cites a recent analysis from Fidelity Investments on the retirement plans the company
handles. Fidelity estimates about 20% of savers own more stock than they'd recommend for
someone of their age.
...Analysts at Goldman Sachs""in October""ran the numbers on the stock market impact of
previous capital-gains tax hikes. While there is only a modest impact on the stock market as a
whole, momentum stocks usually get socked before they are levied, they found. That makes
sense""investors logically are more motivated to sell the stocks where they would save the most
by avoiding higher capital-gains taxes.
The last time capital-gains taxes were hiked, in 2013, the wealthiest households sold 1% of
their equity assets, the Goldman analysts found. According to the
Federal Reserve's distributional financial account data , the top 1% held $17.79 trillion
of equities and mutual funds in the fourth quarter of 2020""so a 1% selling of stocks this time
would be $178 billion. (The most recent Internal Revenue Service breakdown, from 2018, found
that millionaires accounted for just over 500,000 filers or about 0.4% of the total.)
As bubbles peak,
they combine objective signs of excess" prices rising much faster than earnings can justify"
with subjective signs of mania, such as frenzied trading and borrowing. To some the entire US
stock market looks bubbly given its dizzying run-up, but earnings growth has also been
extraordinarily strong through the pandemic. Beneath the surface, however, sectors of the
market from green tech to cryptocurrency show tell-tale bubble signs.
My research on the 10 biggest bubbles of the past century, from the US stock market in 1929
to Chinese shares in 2015, shows that prices typically rise 100 per cent in the year before the
peak, with much of the gain packed into the climactic last months. That finding is closely in
line with bubble studies from academics at Harvard and others.
By those standards, there are at least five current bubblets. They include the
cryptocurrency market for bitcoin and ethereum; clean energy stocks, including some of the
biggest names in electric vehicles; small cap stocks, including many of the hottest pandemic
stories; a basket of tech stocks that lack earnings, which is also chock-a-block with famous
brands; and special purpose acquisition
companies (Spacs) , which allow investors a new way to buy into private firms before they
go public.
Each of these bubblets is captured in an index that rose in the last year by around 100 per
cent, often much more, to a peak value between $500bn and $2.5tn. Day traders and other newbies
rushed in, a common symptom of late stage market manias. Now these bubbles are faltering, as
they so often do, in response to increases in long-term interest rates. What's next?
The historical bubbles in my study did suffer midcourse setbacks on the way up, but
typically those corrections were around 25 per cent and never more than 35 per cent. Beyond
that point" a 35 per cent drop" the bubbles in my sample became monophasic, or stuck on a
one-way downhill path.
For the median case, the bottom was found 70 per cent below the peak, and came just over two
years after the peak. Except for the index of small-cap pandemic stocks, the other four bubble
candidates have all experienced drops of at least 35 per cent, but also of no more than 50 per
cent (in the case of ethereum). In other words, they are not likely to resume inflating any
time soon, and they are still far from the typical bottom.
There is one new factor that could upset this historical pattern. Despite the rise in
long-term interest rates, there is plenty of liquidity sloshing around the markets, with
central banks committed to easy money as never before. The risks though are skewed to the
downside.
It is important to remember that a bubble is often a good idea gone too far. In the early
2000s, the conventional wisdom was that the dotcom bubble had fuelled mainly junk companies
with business plans barely worth the napkins they were written on. Later, researchers found
that, compared with other bubbles, those in the tech sector produce many start-ups that fail
but also help launch major innovations. For every few dozen dotcom flame-outs, there was a
giant survivor such as Google or Amazon that would go on to make the economy more
productive.
...Analysts at Goldman Sachs""in October""ran the numbers on the stock market impact of
previous capital-gains tax hikes. While there is only a modest impact on the stock market as a
whole, momentum stocks usually get socked before they are levied, they found. That makes
sense""investors logically are more motivated to sell the stocks where they would save the most
by avoiding higher capital-gains taxes.
The last time capital-gains taxes were hiked, in 2013, the wealthiest households sold 1% of
their equity assets, the Goldman analysts found. According to the
Federal Reserve's distributional financial account data , the top 1% held $17.79 trillion
of equities and mutual funds in the fourth quarter of 2020""so a 1% selling of stocks this time
would be $178 billion. (The most recent Internal Revenue Service breakdown, from 2018, found
that millionaires accounted for just over 500,000 filers or about 0.4% of the total.)
This quick jumping onto and off of the bullish and bearish bandwagons has become the new
normal, as you can see from the table below.
... ... ...
As I argued three weeks ago, this sentiment pattern suggests that the market may remain
in a fairly narrow range for the next several months. The contrarian bet is that the market
will finally break out of that trading range whenever the market timers stubbornly hold onto
their sentiment beliefs in the face of the market moving in the opposite direction. That is, be
on the lookout for when the market timers remain bullish in the face of declines, or bearish in
the wake of rallies. That will indicate that a bigger decline or rally is in store.
In the meantime, the market timers' behavior suggests both market rallies and declines
will be subdued. That's good news to the extent you were worried that a major new bear market
is about to begin, but bad news if you were hoping for a more sustained rally.
... ... ...
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks
investment newsletters that pay a flat fee to be audited. He can be reached at [email protected] .Continue
Reading
For the past several months, Morgan Stanley's fundamental analysts have been turning
increasingly bearish on stocks, with the pessimistic sentiment plateauing
earlier this week when chief equity strategist Michael Wilson said that there is far too
much optimism in the market, and that while earnings are slowly rising, forward PE multiples
are far too high and are set to slide, with "the de-rating about 75% to go or an approximate
15% decline in P/Es from here." As a result, in Wilson's view - which is rapidly emerging as
the most bearish on Wall Street - " earnings revisions will not be able to offset that
de-rating, leaving the overall market vulnerable to a 10-15 % correction over the next 6
months."
It now appears that Morgan Stanley's fundamental bearishness has spilled over into the
bank's technical analyst team and as the bank's chief Euro equity Strategist Matthew Garman
writes, for only the fifth time in over 30 years, each of Morgan Stanley's five market timing
indicators are giving a sell signal at the same time.
Not only that, but the bank's Combined Market Timing Indicator - which has been in sell
territory since March - just hit a new all time high of 1.19, surpassing the previous record
high seen in June-2007, right around the time of the first great quant crash and before the
market collapsed.
According to Garman, the only time equities have risen after a "Full House" Sell Signal was
in Feb 17, shortly after the Shanghai Accord kicked in to prevent a global recession. The other
previous occasions where there was a "Full House" Sell Signal were Mar-90, May-92, Jun-07.
According to MS, "in the 6M post the initial Full House Sell Signal, MSCI Europe has fallen on
average 6% ."
So with every in house risk indicator screaming sell, does that mean that Morgan Stanley
will have the balls to tell its clients to sell? Why of course not, because in this market
where stuff like the AMC, GameStop and Bed Bath squeezes force analysts to admit they no longer
have any idea what's going on...
... Morgan Stanley is keeping the hope and assuming that the current period will be similar
to 2017 - the only other time when a massive sell signal did not result in a market plunge.
Back in 2017, we remained constructive despite the signal given i) strong EPS growth, ii)
an early cycle environment, iii) EU inflows, iv) low sentiment and v) a rise in M&A.
Sentiment metrics may look more elevated than in 2017, but many of those factors remain in
place today. While we see a trickier risk-reward for equities globally, we maintain our view
that there is a compelling case for Europe to outperform global peers.
Yet even Morgan Stanley is forced to admit that while Defensives may just scrape by after a
record sell signal, cyclicals are about to be hammered. The next chart shows the relative
performance of Cyclicals versus Defensives after a Full House Sell Signal on. As MS notes,
"perhaps unsurprisingly, given the poor performance at the market level, Cyclicals have
struggled. In the 6M post the four initial Full House Sell Signals, Cyclicals have
underperformed Defensives on average 12%, and this drops to -15% looking at any day
when the MTIs have all said sell at the same time."
This was true even in 2017 when equity markets rose: "we previously cited similarities with
the 2017 Full House Sell Signal as reasons to not get overly cautious on equity markets in
aggregate at this moment in time. After the February-2017 Full House Sell Signal, MSCI Europe
continued to rise pretty consistently through the rest of the year. However, despite strong
performance from the market in aggregate, the performance of Cyclicals versus Defensives was
much poorer. Between February and June 2017 Cyclicals underperformed Defensives by 6%."
It's not just the bank's sell signal that is prompting concerns about the future returns of
cyclicals: Borrowing a page from our own warnings (see "
China's Credit Impulse Just Turned Negative, Unleashing Global Deflationary Shockwave "),
Morgan Stanley looks at "a number of China data points which are giving warning signs" first
and foremost the collapse in China's credit impulse, to wit:
While credit tightening has been front-loaded in 1H21, as outlined here, our economists
remain constructive on China's growth recovery. Having said that, a number of Chinese data
points do suggest the Cyclical bounce looks overextended. China's credit impulse has just
turned negative, and historically this has provided a lead indicator for the year-on-year
performance of European Cyclicals (Exhibit 5). Similarly, the relative performance of Cyclicals
versus Defensives has closely tracked moves in Chinese 10Y bond yields, which are now at their
lowest levels since September 2020, standing in sharp contrast to the performance of
Cyclicals.
Putting it all together, readers have to ask themselves if what is coming will be an analog
of the one and only episode on history when the market did not plunge after all Morgan Stanley
market timing indicators hit a sell (and were at an all time high), or will this case be
similar to Mar-90, May-92, Jun-07 when the outcome was anything but a happy ending.
the OMB expects slower growth in the long run. It projects gross domestic product growth
running slightly over 2% on average annually between fiscal 2022 and 2031, while the
nonpartisan Congressional Budget Office pegs growth at less than 2% on average over the same
window. Either growth rate is anemic, making more "broadly shared prosperity" unlikely as
well.
...
It may be that raising federal spending turns out to be a winning formula for Democrats in
2022. Then again, it may not. Especially since Mr. Biden would hike taxes high enough to eat up
more GDP than in any 10-year period in American history, according
to the American Action Forum's Gordon Gray. The spending binge would also increase the nation's
public debt to 117% of GDP""greater than the previous record GDP percentage that Washington
clocked in the year after World War II.
Recent polling suggests the Democrats' approach may not help them in the midterms.
... Democrats may be counting on Republicans to emphasize "culture war" issues rather than
deliver a focused, principled attack on the president's orgy of spending and tax increases.
This isn't to suggest issues like defunding the police, critical race theory and border
security are unimportant. But in 2022, as in most years, the economy will likely be the real
congressional battleground. The sooner Republicans recognize that, the better.
Mr. Rove helped organize the political-action committee American Crossroads and is author of
"The Triumph of William McKinley" (Simon & Schuster, 2015).
I don't believe policies matter any more. In 2020, democrats secured a permanent upper hand
for themselves which is mail-in ballots.
Kenneth Johnson
WSJ headline---"Yes, It's Still The Economy, Stew ped"
If....by the summer of 2022....inflation is 4%+....we're in a recession....and
unemployment is 6%+....the Democrats will lose the midterms....I hope.
If none of those things is true....they may 'dodge a bullet'.
Any other opinions?
Ron Hoelscher
They have lost the culture war and do not seem to realize it.
As far as spending, when an economy evolves to have very few people controlling the 90% of
the economy then the governing party must resort to handouts to the 90% to stay in power.
I think the Romans called it "bread and circuses." Trump was the circus, now people want
some bread.
Ovi, refer Iranian oilfields . I have always said that Iran is producing and selling all the
oil it wants to sell or can sell . The regime has outlived 10 US administrations and 6 US
presidents inspite of sanctions . They are having to sell at a discount but at the end of the
day the oil flows . Just some road bumps and a zig zag route . I doubt they have a lot of spare
capacity .If and when the sanctions are lifted all what is " unofficial " will become "
official " . As to OPEC or OPEC+ that they are close to capacity viewpoint is more prevailing
by the day .
Current around of stimulus has run it's coarse. I look for jobs numbers and inflation
numbers to soften over next few months. Which means more QE and lower interest rates for
longer. Higher stock prices.
But for the real economy. We pulled 5 years worth of GDP forward. Unless governments are
prepared to spend even more on a monthly and yearly basis going forward than they did since
March 2020 until now. And put more money into the hands of average people. We roll over first
then fall off a cliff economically. Private banks just aren't going to create the money via
loan creation in volume needed to offset or match what the government has done over past year.
So without further massive stimulus we get massive credit contraction.
With the debt burden not just public debt but private debt hanging over the economy we
likely never return to pre-pandemic levels of Global GDP
Price action for oil is still bullish but that can change in a hurry when jobs and inflation
data turn soft. HOLE IN HEAD IGNORED
05/31/2021 at 2:00 pm
HHH, " With the debt burden not just public debt but private debt hanging over the economy
we likely never return to pre-pandemic levels of Global GDP " . Been parroting this from a long
time but few want to admit that
the BAU is over . Life is(was) a party and all parties must end .
LONDON (Reuters) - Cryptocurrencies such as bitcoin are a "farce" and a symptom of bubbles forming in financial markets, Amundi
chief investment officer Pascal Blanque said on Thursday.
Bitcoin, trading at around $39,364, fell 35% last month after China doubled down on efforts to prevent speculative and financial
risks by cracking down on mining and trading of the largest cryptocurrency.
Speaking at a news conference, Blanque described the crypto currency as a "farce," adding that it was a symptom of the bubbles
forming in markets.
Scorpion 16 April, 2021 I am not surprised either that ARK bought COIN. She is a gambler not an
investor. Most of her investment is in overvalued, overhyped stocks they can't just keep going
up.
Lou 18 May, 2021 Until recently she was loaded up with Tesla - as much as 10% of the ARKK
portfolio - which accounted for a good part of its stellar performance (note that she had TSLA
in some of the other ARK funds. Not sure any of these other choices are going to give her ETFs
the ride TSLA gave them. Reply 2 Rene 7 May, 2021 Any one that invest in Bitcoin ,dogecoin,
Coin etc, must have his brain fall of pot or must have so much money like the Tesla Ceo, that
they can gamble for ever in a Casino, with that kind of money, i too will invest in Tin air,
and artificial money because Y cannot invest money sufficient to go broke in 10 life times.
that is very easy I don't need to expect any return in my investment.
Theo the Cat 19 May, 2021 I would never buy ARKK's stocks, but I am definitely watching and
eating popcorn. Alex 27 April, 2021 ARK is losing steam. People start to realize ARK can't
survive in a bear market
Theo the Cat 19 April, 2021 Ark is gonna turn into Titanic.
Rock 25 May, 2021 no one cares what ARK invests in... unless you want to lose money Reply 2
Cybercraig 25 April, 2021 I may end up selling ARK.G for a loss to balance next year's taxes.
Yech! Reply 5 4 Mighty Lion 19 May, 2021 Why is the reporting about ARK so sexist? Every single
article I've ever seen starts "Cathie Wood's ARK ETFs ... (such and such) ..." If it was
managed by a man, they would just say "ARK ETFs ... (etc). Reply 2 FlorinS 4 hours ago How can
we trust Cathie Wood ? Only few days ago she predicted that Bitcoin may reach $500,000.
Shares of Flywire, a company that helps organizations accept foreign-currency payments,
debuted on the Nasdaq on Wednesday at $34 apiece, up from their $24 IPO price. They rose about
4% on their first day of trading, giving the Boston-based fintech a roughly $3.5 billion
valuation by day's end. As a private company, Flywire was last valued at $1 billion after a
round of funding in early 2020, according to a PitchBook estimate.
Founded in 2009 under the name peerTransfer by Spanish serial entrepreneur Iker Marcaide,
Flywire originally aimed to make it easier for international students to pay U.S. tuition
without incurring foreign currency fees that could range from 3% to 5%. Flywire has since
expanded its services, enabling some 2,250 clients including universities, hospitals, travel
providers and businesses to accept payments in more than 130 currencies. It acquired Palo Alto
healthcare payments startup Simplee in February 2020. Despite the turmoil of last year, Flywire
processed $7.5 billion in payment volume and signed up 400 new customers while retaining 97% of
existing customers.
The "Everything Bubble" has jumped from hyperbole to literal truth in just a couple of
years, as more and more assets enter "crazy expensive/extremely reckless" territory. The latest
addition to the list is collateralized loan obligations (CLOs), which are created when a bank
lends money to a less-than-creditworthy company and then bundles that loan with a bunch of
similar loans into bonds for sale to yield-starved pension funds and bond funds.
There's a legitimate place in the market for this kind of security, as long as everyone
understands the risks. But in financial bubbles, banks' insatiable hunger for fees combines
with bond buyers' desperate need for income to cloud everyone's judgment. Lending standards
slip, bond quality declines, credit rating agencies look the other way to keep the deals
flowing, and buyers keep buying because they have no choice.
Record year
So far this year, issuance of new CLOs is on pace to easily exceed 2018's record.
Part of this surge is, like so much else, catch-up from last year's nationwide lockdown. But
most is just your typical out-of-control financing fueled by way too much new currency being
dumped into the banking system.
So how can bonds made up of below-investment-grade paper be investment grade? Through the
magic of securitization. As the Wall
Street Journal recently quoted CitiGroup:
Because CLOs' loan holdings are diversified, the bonds can achieve higher credit ratings
than the underlying loans, making them popular among institutions restricted to
investment-grade debt, such as banks and insurers.
Meanwhile, the combination of a recovering economy and lots of lenders willing to finance
pretty much anything is improving the prospects of financially challenged companies. Fewer of
them are defaulting, which increases the confidence of the people buying CLO bonds. Moody's
Investors Service now expects the trailing 12-month default rate on CLOs to fall to 3.9% by the
year-end, from 7.5% in March. And a growing number of firms are now being reviewed by rating
agencies to have their CLOs upgraded.
Meanwhile, spreads relative to risk-free paper are shrinking:
Sounds promising, right? And, alas, also familiar. Here's how CDOs, the previous bubble's
version of CLOs, worked just before the bottom fell out in 2008:
https://www.youtube.com/embed/3hG4X5iTK8M
Perpetual motion machine
Once they really get going, asset-backed securities like CDOs and CLOs take on a kind of
perpetual-motion-machine vibe in which easy money begets even easier money. To the extremely
credulous, such a system looks capable of spinning right along forever. Unfortunately, this
perception tends to become widespread just as some crucial cog in the machine is about to
break.
Which cog will it be? Candidates abound. Interest rates might rise, stocks might tank, the
government might realize its policies are stoking instability and try to "taper." Some crazy
geopolitical thing might happen (DO NOT look closely at Palestine, Ukraine, or Taiwan). It
doesn't matter which breaks first, as long as one eventually does.
Then the perpetual motion machine shifts into reverse, with rising defaults causing lower
CLO bond ratings causing mass sales by panicked institutions. And so on, until whoever had the
guts to short this market cashes out with epic gains. 11,429 31 NEVER
Detective Miller 2 hours ago
When there's nothing left there's always war.
Misesmissesme 2 hours ago
The institutions buying these instruments have no risk. They know they'll be bailed out
because they're too big to fail. Risk is all on the little guy who'll have to pay for the
bailouts.
NotApplicable PREMIUM 36 minutes ago
Powell and his magic checkbook.
Justus D. Barnes 2 hours ago (Edited)
Which war? Biblical or one of the escalating hot spots?
What if the Fed fought inflation my lowering the cost of electricity? Instead of
subsidies just increase the supply? They are printing billions why not see to it that we
double our energy production with nuclear power plants? If the cost of electricity was
halved that would instantly boost everyone's disposable income while making our
manufacturing more competitive.
Angelo Misterioso 56 minutes ago remove link
This is about the 5's derivation of this concept - going all the way back through, CDO
Squared, CRE CDO's, CDO's and CBO's before that... the hi grade CDO's were 200 to 1
levered...
just pure greed by the street and the regulators were the C students in math
class...
radical-extremist 1 hour ago
When homeowners in Stockton California began to discover the magical mystery of
Adjustable Rate Mortgages and couldn't afford to pay another $600 a month for their "dream
home" - the bottom began to fall out.
When unprofitable ghost companies, of which there are thousands, start defaulting on
their cheap loans - that's the sign. Which companies, where? No one's sure.
el_buffer 2 hours ago
I need to get my money out of this country before they rape me for yet another friggin
bailout.
Tanner798 1 hour ago
Keep in mind: most of the leveraged loans these CLOs are made up of are all floating
rate. If the Fed increases interest rates to combat inflation, the companies borrowing from
leveraged loans will no longer be able to afford their interest payments. The only reason
why the default rate is so low is due to the originators rolling these companies into
larger leveraged loans so they don't default. Rating agencies look the other way and
deteriorate the covanents to allow this to happen.
Ajax_USB_Port_Repair_Service_ 1 hour ago
Which state pension funds fare buying CLO's? My guess is the blue states.
Interesting Times In The UK 52 minutes ago
The Big Short is an excellent film, just as pertinent today ... as it was 13 years
ago.
Can't wait to watch the sequel ..
Portal 2 hours ago
Rampant speculation always precedes a collapse.
ThanksIwillHaveAnother 41 minutes ago (Edited)
I love how Wall Street constantly invents new words. In this case these are Junk
Bonds.
CLOs have become a $760 billion market, accounting for 70% of new leveraged loan purchases
last year, according to Citi.
... Just six nonfinancial, junk-rated companies defaulted during the first quarter of this
year, according to Moody's Investors Service -- the lowest level since 2018. The ratings agency
expects the trailing 12-month default rate to fall to 3.9% by the end of December, from 7.5% in
March.
... The combination has analysts and investors expecting a banner year for CLO issuance.
Bank of America
projects sales to total around $360 billion this year, including refinancings, while Citibank
expects around $290 billion. Both figures would surpass 2018's all-time high.
... Critics say CLOs allow companies to borrow more than they can support, exposing
investors to losses in a downturn. A wave of leveraged loan downgrades
hit CLO managers last year , causing some portfolios to surpass limits on low-rated
holdings or breach collateral tests.
... Some CLO tranches haven't traded consistently, wrote KKR analysts in a recent note, a
sign that there could be some fragility lurking underneath the market's surface.
"Despite the high volume of activity, we do not believe that liquidity across the [CLO]
market has been uniform and as robust as it may seem," they wrote.
Archegos' prime brokers initially attempted to try and avoid a market panic by coordinating
their sales of the massive blocks of shares their had accumulated on behalf of Archegos via a
complicated series of swap arrangements. But when Goldman Sachs and Morgan Stanley broke ranks
and opted to be the first out the door, Credit Suisse, which had the biggest exposure to
Archegos, was ultimately left with more than half of the $10 billion+ in losses that banks were
stuck with (while Hwang reportedly lost his entire 11-figure fortune).
Right now, it's not exactly clear what laws prosecutors suspect Archegos and the prime
brokers of breaking.
While authorities haven't accused Archegos or its banks of breaking any laws in their
dealings, the episode has drawn public criticism from regulators, as well as some inquiries
behind the scenes from watchdogs around the world. The implosion shows Wall Street has grown
too complacent about potential threats building up in the economy, Michael Hsu, the new
acting chief of the Office of the Comptroller of the Currency, said last week.
But the DoJ isn't the only agency poking around: Investigations are ongoing across the
globe.
The Securities and Exchange Commission launched a preliminary investigation into Hwang in
March, a person familiar with the matter said at the time. The agency has since explored how
to increase transparency for the types of derivative bets that sank the firm.
And in the U.K., the Prudential Regulation Authority has been asking firms including
Credit Suisse, Nomura and UBS Group AG to hand over information related to their lending to
Archegos, people familiar with the matter have said.
While investigators will undoubtedly focus on what happened, some believe that the real
concerns lie in current vulnerabilities in the world of equity finance. The team at Risky
Finance recently calculated that some $3 trillion in hidden Archegos-style exposure is out
there in the market, just waiting to explode if stocks sell off.
...
It should serve as a warning. 14 years ago, obscure corners of banking businesses became
hotbeds of regulatory arbitrage, speculation and leverage. The contagion of US subprime brought
the financial system to its knees. Now, after years of low or negative interest rates, equity
finance may have become a similar hotbed.
(Bloomberg) -- Senator Elizabeth Warren ripped the Federal Reserve for its oversight of
Credit Suisse Group AG in the run-up to Archegos Capital Management's implosion, arguing the
regulator badly blundered when it freed the bank from heightened monitoring.
Warren pointed out at a Tuesday Senate hearing that the Fed knew Credit Suisse had problems
estimating its potential trading losses because the agency had flagged the Swiss bank over that
issue in its 2019 stress tests. She questioned why Credit Suisse, under the watch of Fed Vice
Chairman for Supervision Randal Quarles, was among foreign banks released last year from
oversight by the Large Institution Supervision Coordinating Committee, which keeps tabs on
lenders that pose the greatest risk to the U.S. financial system.
"So you now agree that you made the wrong decision to weaken supervision?" the Massachusetts
Democrat asked Quarles, who was testifying before the Senate Banking Committee.
"We did not weaken supervision," he responded, saying the shrinking U.S. footprint of Credit
Suisse and other foreign banks prompted the Fed's decision. Quarles further argued that the
billions of dollars in losses that Credit Suisse suffered in relation to Archegos -- trader
Bill Hwang's family office -- weren't a result of faulty Fed oversight.
"The losses you are referring to didn't occur in the United States," he said.
Warren scoffed at the idea that missteps involving overseas lenders don't lead to U.S.
consequences. She reminded Quarles his term as vice chairman ends in five months, and said,
"our financial system will be safer when you are gone."
May beyes, but may there is will the Last Hurrah move up...
Even if the S&P 500 stays flat for the rest of 2021, this year would mark its third
consecutive year of double-digit gains. The index has only one such three-year period since
the dot-com bubble burst in 2000.
This week, LPL Research analyst Jeff Buchbinder said investors should expect stock market
gains to
slow significantly in the second half of 2021 as inflationary pressures and rising interest
rates weigh on investor sentiment.
"... In April, it exploded to a new WTF high of $847 billion, up by $188 billion in six months, having ascended to the zoo-has-gone-nuts level: ..."
"... Leverage creates buying pressure and drives up prices. As prices rise, the collateral can be leveraged up further, and leverage builds with rising asset prices. And then when prices decline, the leveraged bets are sold to pay down the debt, and the selling triggers more price declines, and forced selling sets in. This is when Archegos blew up. ..."
"... It's ironic that the Fed, out of the other side of its mouth, is warning about the results of its policies, including the ballooning leverage that isn't known until it blows up. ..."
"... Greed, I think. For instance, the uber rich have lots of influence over the frothing finance media. The media pumps up a stock and the wealthy play around that pumping, shorting or selling or what have you. Talking heads sell BS to suckers. ..."
"... Capital begets capital and the cycle continues. ..."
"... Who wins? Not you. Who loses? Not them. Motivation behind letting this happen? Byproduct of averting complete collapse. ..."
"... I started looking at market capitalization data yesterday after reading Wolf's post. The Finra data is easy, just have to find a free source for historical market cap. Intuitively, a level use of margin would cause the dollar value to rise with the dollar value of the market, but if margin grows faster it could be a warning. Unless I'm misreading this chart, it suggests they're tracking. ..."
"... Exactly. Adjusted for market cap its not quite as scary although cos market cap is ebbing a little now maybe it would look like its starting to get concerning. ..."
"... Yes. What is different this time is that it is tracking it with no delay since the March 2020 FED hail marys thrown to prevent Mr Market's melt down. He hasen't sobered up since. When the hangover starts, it's going to be a doozy. ..."
"... The leverage is trying to reconcile the big gap between the 10 year paying sub 1.75% and the actuarial expectation of 6-7% annual returns of pretty much any big player out there insurance companies, pension funds etc. ..."
"... All the regulators need to do is to explicitly state stock exposure via derivatives must be included in regulatory reporting requirements/foreign ownership limits. ..."
"... Come on sheeple: you can't willfully inflate share prices WITHOUT willfully inflating sales and earnings to match! ..."
"... we most assuredly had inflation and crap earnings. ..."
Yves here. We haven't been too concerned about stock market frothiness because overvalued
stock markets, in and of themselves, don't do tons of damage when they fizzle"¦except
when the purchases have been fueled by borrowing. That's the key difference between the 1929
crash and the dot-bomb era.
While we are not up to Roaring Twenties style leverage on leverage (trust me, it was
widespread), the borrowing is getting into nervous-making territory. The chart below, from
Advisor Perspectives, is through April and
compares margin debt levels to the S&P 500 (not a perfect comparison, but a consistent
proxy over time). The relationship isn't quite as whacked as Wolf's post suggests, but the
recent trajectory is worrisome. It has a blowoff look about it.
Stock market margin debt jumped by another $25 billion in April, to a historic high of $847
billion, according to FINRA data. It has exploded by $188 billion in six months, and by 61%
year-over-year, and by 55% from February 2020:
Excess leverage is the precise and predictable result of the policies the Fed is promoting
out of one side of its mouth with its interest rate repression and asset purchases.
Out of the other side of its mouth, the Fed "" via its blissfully ignored Financial
Stability Report "" is warning about leverage, stock market leverage, and particularly the
vast and unknown parts of leverage among hedge funds and insurance companies.
It named names: The family office Archegos, a private hedge fund that has to disclose very
little, and that then blew up because none of the brokers providing it with leverage knew about
the other brokers also providing leverage, and no one knew how much total leverage the outfit
had. The amount of leverage didn't come out until it blew up.
And this form of hidden leverage is not included in the known stock market margin debt
reported monthly by FINRA, based on reports by its member brokerage firms.
This known stock market leverage is an indicator of the trend in leverage, the tip of the
iceberg. History shows that a big surge in margin balances preceded and perhaps was a
precondition for the biggest stock market declines.
In April, it exploded to a new WTF high of $847 billion, up by $188 billion in six
months, having ascended to the zoo-has-gone-nuts level:
In this type of chart that covers two decades during which the purchasing power of the
dollar has dropped, long-term increases in absolute dollar amounts are not the focal point; but
the steep increases in margin debt before the selloffs are.
Leverage creates buying pressure and drives up prices. As prices rise, the collateral
can be leveraged up further, and leverage builds with rising asset prices. And then when prices
decline, the leveraged bets are sold to pay down the debt, and the selling triggers more price
declines, and forced selling sets in. This is when Archegos blew up.
And so the Fed says in its Financial Stability Report that "measures of hedge fund leverage
are somewhat above their historical averages, but the data available may not capture important
risks from hedge funds or other leveraged funds." And it recounts the Archegos fiasco, in terms
of how this hidden leverage works:
"In a separate episode in late March, a few banks took large losses when a highly
leveraged family office, Archegos Capital Management, was unable to meet margin calls related
to total return swap agreements and other positions financed by prime brokers. Price declines
in the concentrated stock positions held by Archegos triggered the margin calls, prompting
sales of the stock positions, which led to further declines in the prices of affected stocks
and, ultimately, substantial losses for some banks."
"The episode highlights the potential for material distress at NBFIs [Nonbank Financial
Institutions such as hedge funds] to affect the broader financial system," the Fed's report
said.
It's ironic that the Fed, out of the other side of its mouth, is warning about the
results of its policies, including the ballooning leverage that isn't known until it blows
up.
Ha, and then says the Fed, still speaking out of the other side of its mouth, if that risk
appetite declines "from elevated levels," and outfits want to get out from this leverage, or
are forced to get out from under this leverage, "a broad range of asset prices could be
vulnerable to large and sudden declines, which can lead to broader stress to the financial
system."
I really am puzzled at this point. Who wins, who loses, what is the motivation behind
letting this happen again and again? Is there an "economy" that the Fed administers that
protects and enables this activity?
Greed, I think. For instance, the uber rich have lots of influence over the frothing
finance media. The media pumps up a stock and the wealthy play around that pumping, shorting
or selling or what have you. Talking heads sell BS to suckers.
That's all true. I don't see how the banks (dark pools), hedge funds and the Fed fit into
a legitimate scenario though if leveraging just escalates each time. If all this continuation
is dependent on how the Fed reacts? Is the Fed the only thing that stands between the bad
actors crapping out or "The House" fronting them more chips?
Pretty much my interpretation yeah! The Fed is just a college of banks, they are just
there to have a structured, bureaucratic method for providing more liquidity when there's a
liquidity crisis. All that stuff about full employment is bull.
They were built to prevent the smoke filled meetings that JP Morgan and his buddies held
during the 1907 crash, where they put a gun to Teddy Roosevelt's head and told him to approve
mergers or else.
But in reality, the Fed is just a more structured smoke filled room. It's still a group of
elites getting together to make decisions on liquidity. Their job is also to smooth out the
frequent crashes of the 19th century, but honestly, since I turned working age, it's been one
crash after another, so clearly they are failing.
Jerome Powell is an extremely wealthy investment banker with a net worth (via internet
search) of between 20 and 55 million dollars. Whose side do you think he is on?
BA from Princeton and Law degree from Georgetown. That is why people try so hard to get
their kids into the Ivy League. Schumer"¦"¦Harvard 1970 I think. On and on. It
is a special club and you are not in it which george carlin pointed out.
Jonathan Levy in his new book "Ages of American Capitalism" maintains that what you are
talking about is what he call the The Great Repetition.
He characterizes the Fed as an administrative agency outside democratic control, by design
and that it is now the most powerful economic policy making institution in the country. He
believes that we are now trapped in a recurring economic pattern dependent upon converting
leveraged asset price inflation into fresh incomes built out of the credit cycle.
Liquidity is now a product of state power lodged inside the U.S. central bank. However
this repetitive stabilizer may have now become a great destabilizer, in the sense of creating
an ever accelerating economic inequality through its policies of offering never-ending
liquidity for speculative assets.
"Who wins?" Well, most of these arch-egos playing the financial game ALWAYS believe it
will be them. Whether by some cunning short-play or leveraged long-play. In the end, the
losers are EVERYONE because of the disruption in the economic system. But if you live close
to the bone with little financial cushion, then the blade will feel the sharpest.
Who wins? Not you. Who loses? Not them. Motivation behind letting this happen?
Byproduct of averting complete collapse.
21T of QE BEFORE the covid helicopters were released.
FED has been in self preservation mode since 2008. FED = Financial System = Economy. It's all
the same thing. Don't mistake it for the term you look up in the dictionary.
I started looking at market capitalization data yesterday after reading Wolf's post.
The Finra data is easy, just have to find a free source for historical market cap.
Intuitively, a level use of margin would cause the dollar value to rise with the dollar value
of the market, but if margin grows faster it could be a warning. Unless I'm misreading this
chart, it suggests they're tracking.
Exactly. Adjusted for market cap its not quite as scary although cos market cap is
ebbing a little now maybe it would look like its starting to get concerning.
> Unless I'm misreading this chart, it suggests they're tracking.
Yes. What is different this time is that it is tracking it with no delay since the
March 2020 FED hail marys thrown to prevent Mr Market's melt down. He hasen't sobered up
since. When the hangover starts, it's going to be a doozy.
Also, note how in previous eras margin debt grew at a rate faster than the price Mr Market
was selling for, at least some of the time.
When I heard about it, I didn't think Archegos was some kind outlier that had discovered
something no one else had thought of. It wasn't an outlier at all"¦it was a clue.
It does look like a blow off top. doesn't it?
And the Real estate Market sure looks like it's at a top.
I see one heck of a lot of leverage and lots of fraud in all of the markets ( Paper gold is
reliable that way) and quite a few threads unraveliing, Greensill and Archegos among
them.
There's nothing rational about these markets, it's straight up fear and greed and the suckers
are ripe for the plucking.
I will stick by my call of June for the top, with the numbers starting to show up in
July.
"The markets can stay irrational longer than [most of us] can stay solvent"
The leverage is trying to reconcile the big gap between the 10 year paying sub 1.75%
and the actuarial expectation of 6-7% annual returns of pretty much any big player out there
insurance companies, pension funds etc.
Between the dollar depreciating and the interest rates repression by the Fed, there isn't
much left. Except real estate but that carries its own "" very substantial- risks.
As my specialization was investment compliance at one of the larger fund shops (Blackrock
level), swaps and CFD exposure is reflected at its mark-to-market exposure in a NAV and can
be effectively considered as off-balance sheet exposure. The fund accounting treatment
between leverage via derivatives vs loans also lends itself to masking derivatives' leverage
issues.
In Europe, regulators require semi-annual risk reporting categorizing derivative notional
values but the Archegos issue also involves exchange/country-level aspects.
For instance, legal teams would go through each country's rules and regulations to see
whether there was a case to be made that derivatives exposures did not need to be included
such that capacity limits can be worked around. All the regulators need to do is to
explicitly state stock exposure via derivatives must be included in regulatory reporting
requirements/foreign ownership limits.
You're forgetting the flip side: You use "funny QE Money" to boost share prices is
necessarily correlated with using "funny QE Money" to prop up sales, gross margins, and
ebitda, and "¦.earnings!
Who is auditing all the leaders of the S&P 500 with foreign operations? WHo will
monitor if loans are taken, say overseas, and disguised as "sales", or "ebitda" flowing
eventually to earnings?
Come on sheeple: you can't willfully inflate share prices WITHOUT willfully inflating
sales and earnings to match!
We're living through forced price inflation. But yet, total revenues are UP? NO make
sense! But some co's are reporting "foreign sales" hugely up that nicely coincide with the
shortages and price jack-ups domestically!
No, not correct at all. First, you are confusing QE, which is an asset swap, with net
spending. So this is what Lambert would call a category error. Second, we most assuredly
had inflation and crap earnings. Go look at the 1970s stagflation. Corporate profits
were lousy (and not even clear if they meant what they appeared to mean due to the lack of
good inflation accounting) and stock prices were in the toilet.
First, you are confusing QE, which is an asset swap, with net spending. Yves
What about the profit (or less loss) the asset "swap" may make for the asset seller?
Granted a rich asset owner has less propensity to spend but cash for trash enables them to
buy other assets like apartments and houses to grind the poor for rents.
Anyway, fiat creation for other than the general welfare is gross violation of equal
protection under the law. Not to mention there are ethical means to increase liquidity such
as equal fiat distributions to citizens.
Stage one -- The markets are rising. Look at all that wealth we are
creating.
Stage two -- It's a bubble. That wealth is going to disappear.
Stage three -- Oh cor blimey! I remember now, this is what happened last time
At the end of the 1920s, the US was a ponzi scheme of inflated asset prices. The use of
neoclassical economics, and the belief in free markets, made them think that inflated asset
prices represented real wealth.
1929 -- Wakey, wakey time. The use of neoclassical economics, and the belief in free
markets, made them think that inflated asset prices represented real wealth, but it
didn't.
It didn't then, and it doesn't now.
How can one ignore all the noise in the media to focus on the crux of the situation,
implications, and the future outcomes?
One can only understand the impact of events better and envision the future by exploring
plausible scenarios and identifying signals which over time will enable one to size up the
probabilities of outcomes.
INTERNATIONAL -- MONETARY IMPERIALISM
Geopolitical relationships are frosty & flammable. All the narratives can be summed up
into a few SCENARIOS:
DECOUPLING. Two spheres of influence & supply chains. China & Russia led and
the Five Eyes led. Germany/EU?
WAR. The dollar empire launching a war against China &/or Russia. Iran?
The probabilities of these scenarios will be defined by the following SIGNALS:
NS2. Is Nord Stream 2 completed by September? If yes, a major geopolitical
victory for Russia. If the U$A can thwart this project then it still has the power and will
to shape Europe. If, on the other hand, Germany & Russia resists U$A's pressure and
complete the pipeline to operate, that would be an act of defiance unprecedented in postwar
history. This is the biggest clash between Russia and the United States since the end of
World War II. Let's see if European countries are less subservient to Washington.
De-DOLLARIZATION. China, Russia and other nations moving away from the US$ and trading
in their respective national currencies.
SANCTIONS. More sanctions from the dollar empire against China, Russia, Iran,
Germany... Counter sanctions, retaliations... impact on the global economy...
Any new scenarios & signals? What probabilities would one assign to various scenarios?
What will be the construct of scenarios and signals at the national level?
The Dollar Empire likes to initiate a conflict during Olympics when they are held in its
adversaries:
"... With its narrow focus on inflation expectations, the Fed seems to be fighting the last battle. Just because the Fed hasn't faced big trade-offs in recent decades doesn't mean trade-offs aren't coming or that they no longer exist. ..."
"... The long-term risks from asset bubbles and fiscal dominance dwarf the short-term risk of putting the brakes on a booming economy in 2022. ..."
Clinging to an emergency policy after the emergency has passed, Chairman Powell courts
asset bubbles.
...With its narrow focus on inflation expectations, the Fed seems to be fighting the
last battle. Just because the Fed hasn't faced big trade-offs in recent decades doesn't mean
trade-offs aren't coming or that they no longer exist.
Chairman Jerome Powell needs to recognize the likelihood of future political pressures on
the Fed and stop enabling fiscal and market excesses.
The long-term risks from asset bubbles and fiscal dominance dwarf the short-term risk of
putting the brakes on a booming economy in 2022.
Mr. Broda is a partner at Duquesne Family Office LLC, where Mr. Druckenmiller is
chairman and CEO.
Stefan Hofrichter, head of global economics and strategy at German fund management giant Allianz Global Investors, put
together a 10-point checklist for bubbles that he says was inspired by Charles Kindleberger, the author of the 1978 classic,
"Manias, Panics, and Crashes." In the table below, you can see what that list is, as well as the color-coded rating he
assigned to them.
At the end of April, the S&P 500
SPX,
0.20%
traded
at a cyclically adjusted price-earnings ratio of 37, a level not seen since the dot-com bubble of 1998, and the Nasdaq
Composite
COMP,
0.59%
was
at an even more-staggering 55. (European, Japanese and Asian equities, by contrast, are trading at or below their long-term
valuation multiples.) And he doesn't agree that the valuations are justified by low bond yields. "Low real yields have
historically typically implied rather low multiples, since low yields point to a slow-growth environment and a higher risk
of recession," says Hofrichter. "Monetary policy over the decades has lifted investors' risk appetite to extremes, powering
the run-up in equities," he says.
Also on the bubble list is that multiple asset classes are overvalued, noting that the term premium for longer-dated
sovereign bonds remains around 100 basis points below the long-term average. Another sign of bubbles is that they tend to
occur alongside the perception of a new era, which clearly is the case now with artificial intelligence. Ultra-easy
monetary policy, the advent of new financial instruments like special-purpose acquisition companies and cryptocurrencies,
and what he calls "overtrading" -- exponential price movements and signs of above-average risk taking -- also are
illustrative of bubbles.
So with all these bubble signs, isn't it a time to sell? "History has shown that bubbles only burst once central banks
start to hike rates or take other steps to rein in their 'easy money' policies." Until the Fed starts tapering its bond
purchases, "we think there is a reasonable chance that U.S. equities will continue bubbling up further. As a result, we
stay nervously 'risk on' for now, gravitating towards risk assets. And we have a bias for value stocks, which are trading
at a multidecade discount to growth stocks," he says.
Tim Duy, chief U.S. economist at SGH Macro Advisors, analyzed the wave of comments from Federal Reserve officials,
including Vice Chair Richard Clarida. "Notice how slowly the Fed is moving in the tapering direction, mixing in talking
about tapering with policy still being in a good place and not seeing substantial progress 'just yet.' This is by design.
It's enough that if you are watching for it and you know what to look for, you see the subtle shift but not enough to be
any kind of game-changer," he said. Duy expects the formal pivot toward tapering to be announced at the Jackson Hole, Wyo.
conference in August, with the actual reductions starting in the first quarter of 2022, or possibly the final quarter of
2021.
Fed Vice Chair for Supervision Randal Quarles has two speeches, the first on insurance regulation and the second on the
economic outlook.
The chief executives of Wall Street banks -- including Bank of America
BAC,
0.37%
,
Goldman
Sachs
GS,
1.01%
and
JPMorgan Chase
JPM,
0.35%
--
will testify in front of the Senate Banking Committee on the topic of oversight.
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Amazon
AMZN,
0.48%
struck
a deal to buy studio MGM for $8.45 billion, with Amazon saying the purchase rationale was the "treasure trove of IP in the
deep catalog that we plan to reimagine."
Dick's Sporting Goods
DKS,
14.98%
jumped
8% after hiking its earnings outlook. Zscaler
ZS,
12.18%
rose
11%, after the cybersecurity company's quarterly results and higher full-year outlook breezed past Wall Street
expectations. Retailer Nordstrom
JWN,
-5.54%
fell
5%, after reporting a wider loss than forecast.
After the close, graphics chip maker Nvidia
NVDA,
0.24%
,
database
software maker Snowflake
SNOW,
2.21%
and
identity management company Okta
OKTA,
1.07%
release
their latest numbers.
Need to Know starts early and is updated until the opening bell, but
sign
up here
to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.
Federal Reserve officials seem to be having some success in calming investor fears over inflation --- a chart from
Deutsche Bank illustrates why that was a tall task.
More On MarketWatch
Steven Goldstein is based in London and responsible for MarketWatch's coverage of financial markets in Europe, with a
particular focus on global macro and commodities. Previously, he was Washington bureau chief, directing MarketWatch's
economic, political and regulatory coverage. Follow Steve on Twitter: @MKTWgoldstein.
'Everybody wants to have asset prices forever going up and the cost of financing to be next to nothing,' Kerry Killinger says.
Like many other banks, Washington Mutual rode the wave of low-interest rates to grow its mortgage business during the housing boom
of the early 2000s. During Kerry Killinger's time as CEO, WaMu grew to have more than $300 billion in assets.
But when the subprime bubble burst, the bank's fortunes quickly turned. In September 2008, at the height of the financial crisis,
Killinger was forced out by the company's board, and ultimately the bank was seized by federal regulators. It still stands as the
largest bank failure in U.S. history.
In their new book, "Nothing Is Too Big to Fail: How the Last Financial Crisis Informs Today," Kerry Killinger and his wife Linda,
who previously served as the vice chair of the Federal Home Loan Bank of Des Moines, explore WaMu's failure, the government's
response to the last crisis and where there is growing risk in today's econom
...
In
the book, the Killingers raise concerns about asset bubbles they believe are forming in a wide range of asset classes, including
stocks, art and luxury items -- and housing. MarketWatch spoke with Kerry and Linda Killinger about the book, the Federal Reserve and
how to avoid another global financial crisis like the 2008 meltdown.
...
Linda Killinger:
I wanted to write a book about this because it was such an unusual, crazy experience. Back in the '80s I
was a partner in an international accounting firm, and the regulators would call me in to do plans for banks that were failing in
that time. I noticed that the regulators would do everything they could to help a bank get liquidity, or to help save a bank that
had not been consumed in crime or problems. But in this crisis of 2008, it just seemed like nobody wanted to help community banks.
In fact, they just did the opposite. They really went after them. I thought it was important to write about the difference and how
important it is to help community banks in a crisis like this.
Kerry Killinger:
My focus was more on public policy -- about being sure we learned all the lessons we possibly can. I've
become very concerned that some of the policies currently being adopted by the Federal Reserve and the regulators in government may
be leading us to a new financial crisis.
'Some of the policies currently being adopted by the Federal Reserve and the regulators in government may be leading us to a
new financial crisis.'
-- Kerry Killinger
MW
: In your book, you explain that you see another bubble forming in residential real-estate -- just one of the many asset
bubbles you warn about. What do you believe caused the last housing bubble that led to the Great Recession and how does it compare
to what's going on now?
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Kerry Killinger:
We've lived through a lot of housing cycles in our careers, and including the big bubble that that was
created in the early 2000s. The housing bubble was primarily caused in the early 2000s by the Fed keeping the fed funds rate below
the rate of inflation for several years. They did that in 2000 through 2003, and that lowered mortgage payments so low and led to
housing prices increasing because housing affordability was good with very low mortgage payments. That caused housing prices to rise
much more quickly than the rate of inflation.
From 2000 to 2006 nationally housing prices rose about 83%. Over that same period, the rate of inflation was up about 20%. So a huge
increase faster than the rate of inflation, and over the long run, housing prices ought to rise at about the rate of inflation,
which was about 2% a year or so. Clearly it was a speculative period where prices were rising too quickly, and speculators and
investors increasingly jumped on board.
To help fuel it, underwriting standards were reduced by Fannie and Freddie, the FHA, VA, Wall Street, bank portfolio lenders, and
all that. Then on top of that we had this growth of subprime lending. Keeping rates so low for so long was the most important
driving force in my opinion.
[Today] the similarities are that the Fed has pursued this policy of ultra-low interest rates with the fed funds rates.
Increasingly, the Fed is keeping mortgage rates at an artificially low level for 30-year fixed rates by purchasing assets in their
own portfolio, including mortgage-backed securities and an increasing array of guarantees that the Fed has done as part of its
policies to fight an economic downturn.
Those actions have led to what I'm calling ultra-low mortgage payments, and that naturally led to a surge in housing prices. Since
2015 housing prices nationally were up about 36% -- more than three times the rate of inflation over that period.
Another similarity is we're seeing speculators and investors jumping in. This go-around it's large entities wanting to buy tracts of
homes to use as rental housing. So the non-owner-occupied part of the market, which is the investor side, has gone up from 31.9% to
34.4% in the past year. We're getting a repeat of speculation coming in at this stage with investors coming in in a major way.
Now, subprime lending is not the same factor it was the last go-around fortunately, but we do know that there's an increasing amount
of subprime lending going on by the FHA, VA and some of the government enterprises. On the good news side, I think underwriting
standards have remained better, much better, than they were in the last go-around. But my caution is underwriting standards are all
based on housing prices that are, I believe, inflated because of these ultra-low-interest mortgage rates.
MW:
You wrote about how, in your view, the Fed's response last time around exacerbated the financial crisis. And just now,
you spoke about how the Fed is contributing to the rise in home prices. So what role do you think the Fed should play in addressing
the bubble that you argue is forming now?
Kerry Killinger:
This go around I think the Fed has learned that it needs to provide plenty of liquidity to keep from
having a crisis. My concern is I think the Fed has gotten hooked on these expansive policies of ultra-low interest rates, asset
guarantees, asset purchases and flooding the system with liquidity for a long period of time. And those policies are very
appropriate for helping get an economy out of a recession in order to get things stabilized, but their use over extended periods of
time always leads to an escalation in inflation and the creation of asset bubbles.
'The Fed has gotten hooked on these expansive policies of ultra-low interest rates, asset guarantees, asset purchases and
flooding the system with liquidity for a long period of time.'
-- Kerry Killinger
They are caught in a conundrum now. The policies that were appropriate to help get us beyond COVID-19 -- the longer they keep using
those same policies, I think they just keep inflating these bubbles. And it will be very difficult to manage them down in an orderly
manner. All assets go through these kinds of ups and downs -- the key is how do we manage them in a way that doesn't cause immediate
implosion, like they did in 2008? The longer they allow these bubbles to keep growing, the bigger challenge they're going to have
at some point in the future.
MW:
You're both strong proponents of community banks and have argued that they should play an important role in the
mortgage industry. But following the Great Recession, many banks have reduced or eliminated their mortgage businesses, citing the
steep cost of regulation, and non-bank mortgage companies have risen up to fill that void. Should the federal government make it
easier for community banks to lend mortgages, and how should it go about doing so?
Linda Killinger:
Well, it depends. I think, if it looks like a bank, it smells like a bank and does mortgages like a bank,
it should be regulated like a bank. Unless there's some incredible service that they provide that banks don't provide -- otherwise,
they're doing the same thing as community banks but they're not being regulated.
The problem with that is things are going pretty well right now because they're selling mostly to Fannie and Freddie. Fannie and
Freddie's guidelines are pretty good right now, but at any point in time [non-banks] could couple up with unregulated hedge funds or
other entities from Wall Street and start securitizing loans themselves, lowering standards and trying to attract more people.
Especially if the Congress and the new president want to have more affordable housing, it depends on what they do when they want to
push for more. There needs to be more affordable housing, but it shouldn't be handled in the way that it was last time. Last time
they had Fannie Mae in the 90s saying well 33% of your loan should be [low- and middle-income (LMI)] loans, and by 2008 it was 60%
should be LMI. So there's a tremendous pressure on Fannie and Freddie from Congress and the other regulators to really crank out
more LMI lending. We really have to be careful about how we do that in the future. Community banks should be involved because they
know how to do it right.
MW:
When the COVID-19 pandemic began, federal lawmakers and regulators were quick to roll out forbearance options to
homeowners who suddenly lost income as a result of the economic shock. A year later, many homeowners are still not making their
monthly mortgage payments and are in forbearance. With the foreclosure moratorium still in place, homeowners aren't yet at risk of
losing their homes, but that possibility lingers. What should we be doing right now to stave off another foreclosure crisis?
Linda Killinger:
During the crisis in 2007, when it started to collapse, Kerry put together a $3 billion fund [at WaMu] to
help subprime borrowers stay in their homes. He lowered the payments, and he lowered the amount that was owed, so it was manageable
and they could stay in their home. I think that's a responsibility of banks to do that. It's going to be hard when the forbearance
goes away -- unless banks and organizations are willing to really write down the principal or lower the payments just to help people
a little bit more.
Kerry Killinger:
Over the long run you are far better off to do everything you can to keep somebody in a home, if they can
possibly afford it. And the last route you want to have to go through is foreclosure, because the costs are painful for everybody
involved. We always used to try to do anything possible to keep people into the homes as long as we possibly can, and I think that
is a very positive thing what the government and everyone did when COVID hit. Some of those solutions are very appropriate for the
short term when you've got a crisis going on, but I think over time they need to be brought back to a more normal environment in
which you will always have a small percentage of homes that will have to go through foreclosure. They were just the wrong home for
the wrong people at the wrong time.
People don't even think about that anymore, but home prices will fall again in some markets for some reason. Given the rapid
escalation we have seen in the last five years, especially in the last 12 months, these are unsustainable price increases that will
be subject to some kind of correction when interest rates start to return to more normal levels. Probably one of the more
controversial things I'll say here is if you assume that we're going to have about a 2% inflation rate and a GDP growing over the
long term at about 2% to 2.5%, then mortgage interest rates on 30-year fixed-rate mortgages should be more in the 4.5% to 5% range.
MW:
Do you think consumers are willing to stomach mortgage rates at that level, after so many years in which mortgage rates
have remained so low?
Kerry Killinger:
Look, all of us want to have the good times roll. Everybody wants to have asset prices forever going up
and the cost of financing to be next to nothing. That's something that a lot of people wish for. We're just putting the warnings out
that seldom do things go up forever. Right now you have borrowing costs substantially below the rate of inflation and way below
historic norms, and that's unlikely to last forever.
I don't know if it's a matter of whether the consumers like it or not, but equilibrium would be closer to 4.5% to 5% on long-term
mortgages. I just put out there that if that happens, for whatever reason, the affordability of housing will become much more
stressed and mortgage payments will grow. That will have a tendency to put downward pressure on home prices. I don't think we're
likely to repeat the problems that hit in 2008 because I think the Fed is smart enough now not to pull liquidity to a point that
causes a downward spiral. But you could certainly see a period over several years of some downward pressure on prices as
affordability becomes more difficult because of rising monthly mortgage payments.
'Right now you have borrowing costs substantially below the rate of inflation and way below historic norms, and that's
unlikely to last forever.'
-- Kerry Killinger
MW:
What else about the market and the economy right now is a source of concern to you?
Kerry Killinger:
I do think that the economy is both stabilized and now back into a strong growth mode, and I think we're
going to see very strong economic activity for the balance of this year and into next year. Inflation is picking up and will be
higher than what many think at this point. Businesses are telling me that they are having more price increases today than they have
had in the last decade. So I think the concern about inflation is real.
And these growing asset bubbles just continue to escalate to the point to where the assets are selling well above reasonable
estimates of intrinsic value. That always presents a certain amount of risk. And finally, we're seeing more and more speculative
products and speculators in the market -- not necessarily just in housing.
Look at certain parts of the stock market
DJIA,
-0.36%
SPX,
-0.40%
.
Look
at bitcoin
BTCUSD,
-4.31%
.
Look
at SPACs. Look at NFTs. I can just go through a litany of assets that have risen in price very, very dramatically. Whenever you have
a combination of rapidly rising price and increasing speculative activity, you have to raise the red flags. Are bubbles being
created here?
Linda Killinger:
Yes, and are pension plans buying some of those bubble products?
Kerry Killinger:
A fair bit of that build-up of buyers for those single-family homes are pension plans doing it directly to
have that asset category. Because with the Fed keeping interest rates artificially low, they can't afford to put into riskless
assets like Treasury securities. They have to keep searching out yields. One of them is increasingly into residential real estate.
Investors Double Down on Stocks, Pushing Margin Debt to Record : Chasing bigger gains, some
have exposed themselves to potentially devastating losses through riskier plays, such as
concentrated positions
and trading options.
Once upon a time last year, there was the EV startup hype-boom that found its way to the
SPAC hype-boom, and the two combined and generated miraculously swift and spectacular results;
and their collapse has been equally swift and spectacular.
And they're joined by the IPO hype-boom stocks, including the spectacularly hyped highflyers
that got shot down, such as Zoom (-49% from peak), Coinbase (-29%), or Airbnb (-35%), and
they're in turn joined by the ARK Innovation ETF (-34%). This whole thing has come unglued.
The EV SPAC boom-and-bust is reflected in the WOLF STREET EV SPAC Index, which has collapsed
by 57% since its peak on February 17. The index tracks seven EV-related companies that have
gone public via a merger with a SPAC: Nikola, QuantumScape (batteries for EVs), Canoo,
Lordstown Motors, Romeo Power (batteries for EVs), XL Fleet (EV drive systems for fleets), and
Lucid Motors. Since February 17, these seven stocks combined have shed $35 billion in value,
which they should have never had in the first place. Easy come, easy go, except when it's your
money (data via YCharts ):
...Ms. Wood's "disruptive innovation" jargon may be somewhat novel. What her investors are
experiencing isn't. Fund managers like Gerald Tsai in the 1960s who rode Polaroid and Xerox to
stardom or various dot-com visionaries in the late 1990s wound up doing poorly for clients who
discovered them after they became hotshots. The culprit is unrealistic expectations and
reversion to the mean for the bubbly sectors that got them there. Analyst Meb Faber points out
that not one of the five Morningstar "fund managers of the decade" through 2010 even managed to
beat the market in the next 10 years. The best of the bunch, Bruce Berkowitz's Fairholme Fund,
became the worst.
"If everyone sees it, is it still a bubble?" That was a great question I got over the
weekend. As a "contrarian" investor, it is usually when "everyone" is talking about an event;
it doesn't happen.
"To appreciate how widespread current concern about a bubble is, consider the accompanying
chart of data from Google Trends. It plots the relative frequency of Google searches based on
the term 'stock market bubble.' Notice that this frequency has recently jumped to a
far-higher level than at any other point over the last five years."
What Is A Bubble?
"My confidence is rising quite rapidly that this is, in fact, becoming the fourth 'real
McCoy' bubble of my investment career. The great bubbles can go on a long time and inflict a
lot of pain, but at least I think we know now that we're in one." – Jeremy Grantham
What is the definition of a bubble? According to Investopedia:
"A bubble is a market cycle that is characterized by the rapid escalation of market value,
particularly in the price of assets. Typically, what creates a bubble is a surge in asset
prices driven by exuberant market behavior. During a bubble, assets typically trade at a
price that greatly exceeds the asset's intrinsic value. Rather, the price does not align with
the fundamentals of the asset. "
This definition is suitable for our discussion; there are three components of a "bubble."
The first two,
price and valuation, are readily dismissed during the inflation phase. Jeremy Grantham once
produced the following chart of 40-years of price bubbles in the markets. During the inflation
phase, each was readily dismissed under the guise "this time is different."
We are interested in the "third" component of "bubbles," which is investor
psychology.
"It's the swings of psychology that get people into the biggest trouble. Especially since
investors' emotions invariably swing in the wrong direction at the wrong time. When things
are going well people become greedy and enthusiastic. When times are troubled, people become
fearful and reticent. That's just the wrong thing to do. It's important to control fear and
greed."
Currently, it's difficult for investors to become any more enthusiastic about market
returns. ( The RIAPro Fear/Greed Index
compiles measures of equity allocation and market sentiment. The index level is not a component
of the measure that runs from 0 to 100. The current reading is 99.9, which is a historical
record.)
Such is an interesting juxtaposition. On the one hand, there is a rising recognition of a
"bubble," but investors are unwilling to reduce "equity risk" for "fear of missing out or
F.O.M.O." Such was a point noted explicitly by Mark:
"Rather than responding by taking some chips off the table, however, many began freely
admitting a bubble formed. They no longer tried to justify higher prices on fundamentals.
Rather, they justified it instead in terms of the market's momentum. Prices should keep going
up as FOMO seduces more investors to jump on the bandwagon."
I know. The discussion of "valuations" is an old-fashioned idea relegated to investors of an
older era. Such was evident in the pushback on Charlie Munger's comments about Bitcoin
recently:
" While Munger has never been a bitcoin advocate, his dislike crystalized into something
close to hatred. Looking back over the past 52 weeks, the reason for Munger's anger becomes
apparent with Berkshire rising only 50.5% against bitcoin's more than 500% gain." –
Coindesk
In 1999, when Buffett spoke out against "Dot.com" stocks, he got dismissed with a similar
ire of "investing with Warren Buffett is like driving 'Dad's old Pontiac.'"
Today, young investors are not interested in the "pearls of wisdom" from experienced
investors. Today, they are "out of touch," with the market's "new reality."
"The big benefit of TikTok is it allows users to dole out and obtain information in short,
easily digestible video bites, also called TikToks. And that can make unfamiliar, complex
topics, such as personal finance and investing, more palatable to a younger audience.
That advice runs the gamut, from general information about home buying or retirement
savings to specific stock picks and investment ideas. Rob Shields, a 22-year-old, self-taught
options trader who has more than 163,000 followers on TikTok, posts TikToks under the
username stock_genius on topics such as popular stocks to watch, how to find good stocks, and
basic trading strategies." – WSJ:
Of course, the problem with information doled out by 22-year olds is they were 10-year olds
during the last "bear market." Given the lack of experience of investing during such a market,
as opposed to Warren Buffett who has survived several, is the eventual destruction of
capital.
Plenty Of Analogies
"There is no shortage of current analogies, of course. Take Dogecoin, created as a joke
with no fundamental value. As a
recent Wall Street Journal article outlined , the Dogecoin 'serves no purpose and, unlike
Bitcoin, faces no limit on the number of coins that exist.'
Yet investors flock to it, for no other apparent reason than its sharp rise. Billy Markus,
the co-creator of dogecoin, said to the Wall Street Journal, 'This is absurd. I haven't seen
anything like it. It's one of those things that once it starts going up, it might keep going
up.'" – Mark Hulbert
That exuberance shows up with professionals as well. As of the end of April, the National
Association Of Investment Managers asset allocation was 103%.
As Dana Lyons noted previously:
" Regardless of the investment acumen of any group (we think it is very high among NAAIM
members), once the collective investment opinion or posture becomes too one-sided, it can be
an indication that some market action may be necessary to correct such consensus. "
Give Me More
Of course, margin debt, which is the epitome of " speculative appetite," soared in recent
months.
As stated, "bubbles are about psychology," which the annual rate of change of leverage
shows.
Another form of leverage that doesn't show up in margin debt is ETF's structured to multiply
market returns. These funds have seen record inflows in recent months.
With margin debt reaching levels not seen since the peak of the last cyclical bull market
cycle, it should raise some concerns about sustainability. It is NOT the level of leverage that
is the problem as leverage increases buying power as markets are rising. The unwinding of this
leverage is critically dangerous in the market as the acceleration of "margin calls" leads to a
vicious downward spiral.
Importantly, this chart does not mean that a massive market correction is imminent. I t does
suggest that leverage, and speculative risk-taking, are likely much further advanced than
currently recognized.
Pushing Extremes
Prices are ultimately affected by physics. Moving averages, trend lines, etc., all exert a
gravitational pull on prices in both the short and long term. Like a rubber band, when prices
get stretched too far in one direction, they have always eventually "reverted to the mean" in
the most brutal of manners.
The chart below shows the long-term chart of the S&P 500 broken down by several
measures: 2 and 3-standard deviations, valuations, relative strength, and deviations from the
3-year moving average. It is worth noting that both standard deviations and distance from the
3-year moving average are at a record.
During the last 120-years, overvaluation and extreme deviations NEVER got resolved by
markets going sideways.
The only missing ingredient for such a correction currently is simply a catalyst to put
"fear" into an overly complacent marketplace. Anything from economic disruption, a
credit-related crisis, or an unexpected exogenous shock could start the "panic for the
exits."
Conclusion
There is more than adequate evidence a "bubble" exists in markets once again. However, as
Mark noted in his commentary:
'I have no idea whether the stock market is actually forming a bubble that's about to
break. But I do know that many bulls are fooling themselves when they think a bubble can't
happen when there is such widespread concern. In fact, one of the distinguishing
characteristics of a bubble is just that."
However, he concludes with the most important statement:
"It's important for all of us to be aware of this bubble psychology, but especially if
you're a retiree or a near-retiree. That's because, in that case, your investment horizon is
far shorter than for those who are younger. Therefore, you are less able to recover from the
deflation of a market bubble."
Read that statement again.
Millennials are quick to dismiss the "Boomers" in the financial markets today for "not
getting it."
No, we get it. We have just been around long enough to know how these things eventually
end.
"... "It's just unbelievable that central banks are actively encouraging this." ..."
"... Good point. Many times we look at charts and say WTF but once you normalize to inflation, maybe this is not as bad as originally it appeared ..."
"... reminds me of an abusive husband telling his beaten wife, "See what you made me do!" ..."
"... Hussman says the right way to do that is to look at margin debt to GDP ration, which is a record. GDP is doubling rate is about every 20 years now at nominal 3.5% ..."
"... That description applies to most Wall Streeters and banksters, whose titanic egos are amazing given the fact that most are parasites that contribute less than a woodlouse to society. Still, I dread the coming US debt collapse discussed in this website, which I would term a debt explosion as all of the bubbles start to pop and so many debtors and former creditors (like lessors, banks, etc.) become publicly known to be legally insolvent. ..."
"... I have invested carefully but we will all lose much or most of our savings. ..."
"... It is very irritating to think of the trillions that the banksters' deceptively named, "Federal" Reserve has been transferring to its ultra-rich owners for decades. They will probably even avoid most taxation again. ..."
Exactly. It is way more scary than even Wolf's charts suggest because there are so many
layers of leverage stacked on top of each other.
People taking out margin debt on stock portfolios that they bought by re-mortgaging their
bubbled houses to buy stocks with record corporate debt, collaterised (if at all) with bubble
assets, at record valuations driven itself by leverage etc etc
It's just unbelievable that central banks are actively encouraging this.
The amount of margin debt is not a WTF amount if you use the prices-double each 11 year
rule of thumb.
This 11 year period is strikingly accurate if you take the price of the New York Times
since 1900 (I have a booklet with frontpages of each year and discovered this when looking at
the selling prices). Having said that, the current 800B is the same as the previous inflation corrected peaks
of 2009 and around 1999.
So yes, Wolf is 100% correct with the prediction on what is coming. It is just not a WTF
amount but a history-repeats-itself moment
"normalize to inflationary, maybe not as bad as originally it appeared"
I know what you mean, but then the (major) problem is that the inflation itself shouldn't be viewed as "normal". Kinda reminds me of a gvt program defending doubled budget over 8 yrs because of
"inflation" when in point of fact it is likely that G printing/policy has *created* the
inflation in the first place (to help fund the program now pointing at inflation).
Also, reminds me of an abusive husband telling his beaten wife, "See what you made me
do!"
Hussman says the right way to do that is to look at margin debt to GDP ration, which is a record. GDP is doubling rate is about
every 20 years now at nominal 3.5%
That description applies to most Wall Streeters and banksters, whose titanic egos are
amazing given the fact that most are parasites that contribute less than a woodlouse to
society. Still, I dread the coming US debt collapse discussed in this website, which I would
term a debt explosion as all of the bubbles start to pop and so many debtors and former
creditors (like lessors, banks, etc.) become publicly known to be legally insolvent.
It is unfortunate that it may happen at the worst possible time, when we face an adversary
worse and more powerful than the Soviet Union or Nazi Germany ever was. I have invested
carefully but we will all lose much or most of our savings.
It is very irritating to think of
the trillions that the banksters' deceptively named, "Federal" Reserve has been transferring
to its ultra-rich owners for decades. They will probably even avoid most taxation again.
I do not like to even think how many Americans will wind up. Remember the saying "There
but for the grace of god, go I." Many of us will be saying that a lot in the coming years if
we are very fortunate.
"... the popping of the US's bubbles and then the debt-fueled collapse is probably being delayed temporarily by the fear of a certain threat. ..."
"... The loss of the US dollar's reserve status may thus be delayed by the reliability of our current leaders. The smarter, justifiably terrified, wealthy, foreign investors can keep us afloat given the growing nature of the threat, so the hyperinflation and financial collapse that our Wall Streeters and the deceptively named "Federal" Reserve have caused may be kept in abeyance. ..."
Amen. It is hilarious and I will not elaborate and inadvertently help opponents, but the popping of the US's bubbles and
then the debt-fueled collapse is probably being delayed temporarily by the fear of a certain threat. That threat has its
own problems, which prevent its taking strong action against our financial markets.
The loss of the US dollar's reserve status may thus be delayed by the reliability of our current leaders. The smarter,
justifiably terrified, wealthy, foreign investors can keep us afloat given the growing nature of the threat, so the hyperinflation
and financial collapse that our Wall Streeters and the deceptively named "Federal" Reserve have caused may be kept in abeyance.
It is like a video from Africa that I saw in which the attack by one predator is inadvertently foiled by the attack of another
predator on a helpless prey. Sadly, we are the prey. :-)
"... Margin debt saw an annual surge of 49% in February, which was the fastest jump since 2007. Prior to 2007, the fastest jump in margin debt was in 1999. Both instances were just prior to an epic melt-down in the stock market, amid the Great Financial Crisis of 2008 and the dot-com bubble unwind in 2000. ..."
A record surge in margin debt is raising eyebrows as the stock market continues to surge to
new all-time-highs.
Investors borrowed $814 billion against their investment portfolios at the end of February,
according to data
from FINRA cited in a report in the
Wall Street Journal on Thursday. That's a record high reading for margin debt, well above
January's record of $799 billion.
It's common for margin debt to rise and fall with the stock market, as increased portfolio
values afford investors more leverage to take on from their brokers. But the record rise in
margin debt is also one of the fastest on record.
Margin debt saw an annual surge of 49% in February, which was the fastest jump since 2007.
Prior to 2007, the fastest jump in margin debt was in 1999. Both instances were just prior to
an epic melt-down in the stock market, amid the Great Financial Crisis of 2008 and the dot-com
bubble unwind in 2000.
Leverage is a double-edged sword for investors, as many take on the debt to buy more stocks.
That is a winning strategy in a bull market, but a market correction can spell doom for
investors who have too much leverage and need to sell equities or deposit more cash to meet
margin calls, which can further exacerbate a downturn in stocks.
"... The CPI is calculated by analyzing the price of a "basket of goods." The makeup of that basket has a big impact on the final CPI number. According to WolfStreet , 10.9% of the CPI is based on durable goods (computers, automobiles, appliances, etc.). Nondurable goods (primarily food and energy) make up 26.6% of CPI. Services account for the remaining 62.5% of the basket. This includes rent, healthcare, cellphone service etc.) ..."
"... The things the government includes and excludes from the basket can make a profound difference in that final CPI number. Back in 1998, the government significantly revised the CPI metrics. Even the Bureau of Labor Statistics (BLS) admitted the changes were "sweeping." ..."
"... In 1998, the BLS followed the recommendations of the Boskin Commission. It was appointed by the Senate in 1995. Initially called the "Advisory Commission to Study the Consumer Price Index," its job was to study possible bias in the computation of the CPI. Unsurprisingly, it determined that the index overstated inflation " by about 1.1% per year in 1996 and about 1.3% prior to 1996. The 1998 changes to CPI were meant to address this "issue." ..."
"... As Peter pointed out, there is a lot of geometric weighting, substitution and hedonics built into the calculation. The government can basically create an index that outputs whatever it wants. ..."
"... Peter said there is a bit of irony in government officials and central bankers constantly complaining about "not enough inflation." ..."
"... They're the ones that are cooking the books to pretend that inflation is lower than it really is. Because what they're really trying to do is get the go-ahead to produce more inflation, which is printing money." ..."
"... And there are other things that hide inflation. For instance, shrinking packaging so there is less product sold at the same price, or substituting lower quality ingredients, or requiring consumers to assemble items themselves. ..."
"... They find different ways to lower the quality and not increase the price, and I'm sure that the government is not picking up on any of that. If the quality improves, yeah, yeah, they calculate that. But they probably ignore all the circumstances where the quality is diminished." ..."
"... The bottom line is we can't trust CPI to tell us the truth about inflation. ..."
And we're seeing rising prices all over the place, from the grocery store to the gas station. Even
the government numbers flash
warning signs . But as Peter Schiff explains in this clip from an interview with Jay Martin, it's probably even worse than we
realize because the government cooks the numbers when it calculates CPI.
The monthly rises in CPI
through the first quarter show an upward trend. The CPI in January was up 0.3%. It was up 0.4% in February. And now it's up 0.6%
in March. That totals a 1.013% increase in Q1 alone. The question is does this really reflect the truth about inflation? Peter doesn't
think it does.
The government always makes changes to their methods of measuring things, whether it's GDP, or inflation, or unemployment.
And they always tweak the numbers to produce a better result as a report card. "
Imagine if students in a school had the ability to change the metrics by which they were graded or the methodology the teacher
used to calculate their grades.
Would it surprise anybody that all of a sudden they started getting more As and Bs and fewer Cs and Ds? The government always
wants to make the good stuff better, like economic growth, and the bad stuff better, like unemployment or inflation. So, they
want to find ways to make those numbers little and the good numbers big."
The CPI is calculated by analyzing
the price of a "basket of goods." The makeup of that basket has a big impact on the final CPI number. According to WolfStreet , 10.9%
of the CPI is based on durable goods (computers, automobiles, appliances, etc.). Nondurable goods (primarily food and energy) make
up 26.6% of CPI. Services account for the remaining 62.5% of the basket. This includes rent, healthcare, cellphone service etc.)
The things the government includes and excludes from the basket can make a profound difference in that final CPI number. Back in 1998, the government significantly revised the CPI metrics. Even
the Bureau of Labor Statistics
(BLS) admitted the changes were "sweeping."
According to the BLS, periodic changes to the CPI calculation are necessary because "consumers change their preferences or new
products and services emerge. During these occasions, the Bureau reexamines the CPI item structure, which is the classification scheme
of the CPI market basket. The item structure is a central feature of the CPI program and many CPI processes depend on it."
In 1998, the BLS followed the recommendations of the Boskin Commission. It was appointed by the Senate in 1995. Initially called
the "Advisory Commission to Study the Consumer Price Index," its job was to study possible bias in the computation of the CPI. Unsurprisingly,
it determined that the index overstated inflation " by about 1.1% per year in 1996 and about 1.3% prior to 1996. The 1998 changes
to CPI were meant to address this "issue."
As Peter pointed out, there is a lot of geometric weighting, substitution and hedonics built into the calculation. The government
can basically create an index that outputs whatever it wants.
I think this period of "˜Oh wow! We have low inflation!' It's not a coincidence that it followed this major revision into how
we calculate it."
Peter said there is a bit of irony in government officials and central bankers constantly complaining about "not enough inflation."
They're the ones that are cooking the books to pretend that inflation is lower than it really is. Because what they're really
trying to do is get the go-ahead to produce more inflation, which is printing money."
Peter said the CPI will never reveal the true extent of rising prices.
And there are other things that hide inflation. For instance, shrinking packaging so there is less product sold at the same price,
or substituting lower quality ingredients, or requiring consumers to assemble items themselves.
They find different ways to lower the quality and not increase the price, and I'm sure that the government is not picking up
on any of that. If the quality improves, yeah, yeah, they calculate that. But they probably ignore all the circumstances where
the quality is diminished."
The bottom line is we can't trust CPI to tell us the truth about inflation.
"... In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. ..."
"... The parallel in the stock market is the hunt for the greater fool . Sure, GameStop shares bear no relation to the reality of the company, but I can make money from buying an overpriced stock if I can find someone willing to pay even more because they 'like the stock.' ..."
"... The concern for investors: How much of the market's gain is thanks to this pure speculation, and how much to the justifiable gains of the improving economy and low rates? If too much comes from speculation, the danger is that we run out of greater fools and prices quickly drop back. ..."
In Minsky's second stage, borrowers plan only to repay the interest, and
refinance when the main debt is due to be repaid; much company debt works like this. It is
taken out with a plan to roll it over indefinitely. Interest rates matter a lot: If they go
down when the company needs to refinance, it will pay less.
The equity parallel is to gains in valuation due to lower long-term rates. As with corporate
debt, this is entirely justified and sustainable so long as rates stay low, because future
earnings are now more appealing. The danger is that rates rise, in which case the stock might
be hit no matter how earnings pan out.
A big chunk of the gains in stocks in the past year came from the sharply lower rates in the
first response to the pandemic when the Federal Reserve flooded the system with money.
Price-to-forward-earnings multiples soared. From the S&P 500's low on
March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings
12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the
10-year Treasury, already down sharply from mid-February's high, fell
further as stocks rebounded.
In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the
hope of capital gains big enough to make up the gap. Land speculators are a prime
example.
The parallel in the stock market is the
hunt for the greater fool . Sure, GameStop shares
bear no relation to the reality of the company, but I can make money from buying an overpriced stock if I can find someone
willing to pay even more because they 'like the stock.'
Wild bets became obvious this year, as newcomers armed with stimulus, or 'stimmy,' checks
drove up the price of many tiny stocks, penny shares and those popular on Reddit discussion
boards.
The concern for investors: How much of the market's gain is thanks to
this pure speculation, and how much to the justifiable gains of the improving economy and low
rates? If too much comes from speculation, the danger is that we run out of greater fools
and prices quickly drop back.
"... Bitcoin right now is IMO hyperinflated and gotten ahead of itself, and that is definitely not a good sign for a purported stable 'store of value' asset. ..."
"... Perhaps historically that Weimar hyperinflation event gives us some intriguing evidence of what might transpire here. No, it wasn't the end of the world for the Germans of that era (they bounced back rather quickly as a nation) but a lot of everyday people suffered and a lot of wealth evaporated into thin air. ..."
"... "That description applies to most Wall Streeters and banksters, whose titanic egos are amazing given the fact that most are parasites that contribute less than a woodlouse to society. " ..."
"... The so called "Buffet Indicator" (Market Cap / GDP) now over 200%. I believe -- from memory – in Dot Com bomb bust was around 156% and, at housing crisis around 140% ..."
"... Schiller PE indicator – I believe around 37 again from memory only a few times above 30. ..."
"... I wish my wage growth is like this stock market chart sadly there's never been a WTF moment in my earnings compare to the market. That's what I get for pursuing a normal job that produce something rather than pushing money around to multiple it from nothing.. ..."
"I do not like to even think how many Americans will wind up."
The average clueless American sadly likely will not fare too well as this End Game gets closers to a reversion of means reset state.
When this debt tsunami is over those who went 'all in' on this carnival spectacle of
national debt and spendthrifts will be clinging to the flotsam and jetsam of their pitifully
reduced 'assets', or will be simply wiped out.
The question is, will non-fiat currency alternatives like cryptos (especially Bitcoin and
precious metals) be safe haven life preservers after the deluge? Bitcoin right now is IMO
hyperinflated and gotten ahead of itself, and that is definitely not a good sign for a
purported stable 'store of value' asset.
Perhaps historically that Weimar hyperinflation event gives us some intriguing evidence of
what might transpire here. No, it wasn't the end of the world for the Germans of that era
(they bounced back rather quickly as a nation) but a lot of everyday people suffered and a
lot of wealth evaporated into thin air.
"No, it wasn't the end of the world for the Germans of that era (they bounced back rather
quickly as a nation)". Please think again. What happened after was one of the darkest
chapters of mankind.
"That description applies to most Wall Streeters and banksters, whose titanic egos are
amazing given the fact that most are parasites that contribute less than a woodlouse to
society. "
Given historical facts, same "Wall Streeters" with their "titanic egos" might ... boosting both
cryptocurrency as well as a soon unserviceable US national debt.
Indeed, it takes massive egos that have crossed the line in recklessness to deal in such
markets in that manner. Problem, is that they will hurt many people through "osmosis" in due time. In addition to
the items pointed out in the article, two additional items that are beyond comprehension:
The so called "Buffet Indicator" (Market Cap / GDP) now over 200%. I believe -- from
memory – in Dot Com bomb bust was around 156% and, at housing crisis around 140%
Schiller PE indicator – I believe around 37 again from memory only a few times
above 30.
The destruction that has taken place has simply been ignored and, all the "bombs" like
Archegos that are under the surface and that won't come to light until a big problem exposes
them.
The insanity continues until it doesn't. It is world wide, but our corner of the world
does seem a bit more outrageous.
I wish my wage growth is like this stock market chart sadly there's never been a WTF
moment in my earnings compare to the market. That's what I get for pursuing a normal job that
produce something rather than pushing money around to multiple it from
nothing..
Learned some new things about margin debt. Thank you.
It is unbelievable that firms only know and track their own client margin debt. How so?
Try this with a mortgage. Imagine multiple second mortgages no one knows about collectively.
Where are the rules and laws.
And now on mortgages in Canada 90% first mortgages are a norm. A few add second mortgages
that actually exceed 100% LTV . to have play money for a new SUV.
In March 2021 margin debt exceed 800 billions. Previous max were around 120 billons
Money quote: "> A major correction needs a reason. What is it? Corporate debt". Just
remember that "the Market Can Remain Irrational Longer Than You Can Remain Solvent".
On the other hand as Minsky wrote increased leverage increases instability by amplifying
small events into systemic ones.
Credit spreads remain historically narrow (the premium charged for junk for example over the
risk free treasury rate.) That's another sign of bubble -- too much cash chasing investments
leads investors to increase the level of risk to get a decent return. That also could lead to
amplified losses when things start going south.
...Margin debt – the amount that individuals and institutions borrow against their
stock holdings as tracked by FINRA at its member brokerage firms – is just one indication
of stock market leverage. But FINRA reports it monthly. Other types of stock market leverage are
not reported at all, or are disclosed only piecemeal in SEC filings by brokers and banks that
lend to their clients against their portfolios, such as Securities-Based Loans (SBLs). No one
knows how much total stock market leverage there is. But margin debt shows the trend.
In February, margin debt jumped by another $15 billion to $813 billion, according to FINRA.
Over the past four months, margin debt has soared by $154 billion, a historic surge to historic
highs. Compared to February last year, margin debt has skyrocketed by $269 billion, or by nearly
50%, for another WTF sign that the zoo has gone nuts:
Just imagine at what leverage Softbank and Cathie Wood's Ark are playing the market; I'm
going to be just these are at least 10:1 leverage level. The explosion of all these bubble will
be so big that makes the crashes of 2000 and 2008 look like a child play.
But margin debt is not cheap, especially smaller amounts. For example, Fidelity charges
8.325% on margin balances of less than $25,000 – in an environment where banks, money
market accounts, and Treasury bills pay near 0%. Margin debt gets cheaper for larger balances,
an encouragement to borrow more. For margin debt of $1 million or more, the interest rate at
Fidelity drops to 4.0%
"Whether you need extra money for a short-term financing need or buying more securities, a
margin loan may help you get the money you need," Fidelity says on its website. In other words,
take out a margin loan to buy a car or much needed bitcoin or NFTs.
Every broker has its own margin interest rate schedule. Morgan Stanley charges 7.75% for
margin balances below $100,000, compared to Fidelity's 6.875% for balances between $50,000 and
$99,999. For margin balances over $50 million, Morgan Stanley charges 3.375%.
And it's risky leverage for the borrower. It seems like risk-free leverage when stocks go
up, but when your stocks do the unheard-of and tank below a certain level, your broker will ask
you to put more cash into your account or sell stocks into the tanking market, whereby you then
join the legions of forced sellers.
In the past, a big surge in margin balances tended to precede history-making stock market
declines:
Over the two-decade period of the chart, the long-term changes in the dollar amounts are
less important since the purchasing power of the dollar with regards to stocks has dropped.
But short-term, the changes show what is happening to margin debt in the run-up before the
sell-off, and what is happening during the sell-off when margin requirements turn investors
into legions of forced sellers.
Leverage is the great accelerator of stock prices, on the way up, and on the way down.
Purchasing stocks with borrowed money creates buying pressure, and prices rise, and rising
prices increase the margin balances a portfolio can support, and this encourages more
stock-buying on margin.
On the other hand, selling stocks to deal with margin calls adds more selling pressure to an
already declining market. The more prices fall, the more selling pressure there is from
frazzled forced sellers trying to deal with margin requirements.
Then at some magic point, margin debt has been reduced enough, and its contribution to the
selling pressure fades.
The historic surge in margin balances in recent months is another indicator of how
hyper-speculative and blindly courageous the mega-bubble has become. All kinds of new theories
are being proffered why fundamentals and valuations are meaningless, and why prices of all
assets will shoot to the moon, no matter what.
The Financial Instability Hypothesis (FIH) has both empirical and theoretical aspects that
challenge the classic precepts of Smith and Walras, who implied that the economy can be best
understood by assuming that it is constantly an equilibrium-seeking and sustaining system. The
theoretical argument of the FIH emerges from the characterization of the economy as a
capitalist economy with extensive capital assets and a sophisticated financial system.
In spite of the complexity of financial relations, the key determinant of system behavior
remains the level of profits: the FIH incorporates a view in which aggregate demand determines
profits. Hence, aggregate profits equal aggregate investment plus the government deficit. The
FIH, therefore, considers the impact of debt on system behavior and also includes the manner in
which debt is validated.
Minsky identifies hedge, speculative, and Ponzi finance as distinct income-debt relations
for economic units. He asserts that if hedge financing dominates, then the economy may well be
an equilibrium-seeking and containing system: conversely, the greater the weight of speculative
and Ponzi finance, the greater the likelihood that the economy is a "deviation-amplifying"
system. Thus, the FIH suggests that over periods of prolonged prosperity, capitalist economies
tend to move from a financial structure dominated by hedge finance (stable) to a structure that
increasingly emphasizes speculative and Ponzi finance (unstable). The FIH is a model of a
capitalist economy that does not rely on exogenous shocks to generate business cycles of
varying severity: business cycles of history are compounded out of (i) the internal dynamics of
capitalist economies, and (ii) the system of interventions and regulations that are designed to
keep the economy operating within reasonable bounds.
"... much like the dot-com period, there is a broad subset of stocks (mostly in technology) that have become completely untethered, particularly since the summer of 2020, from business fundamentals like earnings and even sales -- driven higher only by euphoric market participants extrapolating from a past extraordinary trajectory of prices. ..."
"... A lot of today's US stock market has become what I call a "pure price-chasing bubble." Examination of the history of comparable pure price-chasing bubbles shows there has been a set of key causal factors that contributed to these rare (I have found nine in total) market events; the presence of most of these factors has usually been necessary for markets to reach the requisite escape velocity. ..."
"... To fuel the bubble further, there was a rapid expansion of bank money beginning three years before the market peak -- but the expansion of credit was even greater, owing to an explosion of margin credit (with implied annuaized interest rates sometimes reaching 100 percent) through an informal system utilizing postdated checks ..."
"... The US market certainly exhibits an exceptional record of price appreciation, with the S&P 500 having risen by almost 500 percent over more than a decade. In contrast to most other bubbles, however, it is notable that US economic growth over this period has been relatively anemic. ..."
"... Due to a sustained high rate of corporate equity purchases financed with debt, this overarching expansion of credit has also made its way into the last decade's bull market and steepened its price trajectory. ..."
"... The role of message boards and chat rooms -- with their millions of participants, all in instant real-time contact -- has created crowd dynamics in speculative stock market favorites at a pace without parallel in other pure price-chasing bubbles. ..."
"... a peak will be reached, a decline will follow, and the psychological dynamics in play on the way up will go into reverse and will accelerate the fall. ..."
"... Moreover, in the context of a grossly underestimated mass of corporate debt, history tells us the consequences of the bursting of the US stock market bubble should be another financial crisis and another recession ..."
According to Frank Veneroso, a broad subset of today's US stock market has become what he
calls a "pure price-chasing bubble." Examination of the history of comparable pure
price-chasing bubbles shows there has been a set of key causal factors that contributed to
these rare market events.
The most extreme such case was an over-the-counter market in Kuwait called the "Souk
al-Manakh." This exemplar of a pure price-chasing phenomenon may shed light -- albeit
unflattering -- on the current US equity market, Veneroso contends.
If we are to believe authorities the USA. added 916K jobs in March, and the official
unemployment rate is at 6% (note the word official; the current official U6 unemployment rate as
of March 2021 is 10.70%; so the real number is probably much higher than 10%)
Fudging data became as prominent as it was in the USSR. The neoliberal empire can't afford objective stats.
Notable quotes:
"... monthly data is collected over a brief timeframe - just a few days - and that the calculations are seasonally adjusted. ..."
"... Yes, at least half the sheep population think they are real. It's insane how dumb people are today. ..."
I spent the last 2 weeks digging into the numbers - especially timing of the surveys and
data collection. I get the fact that weekly claims don't reflect new hires. I also realize
that monthly data is collected over a brief timeframe - just a few days - and that the
calculations are seasonally adjusted.
But let's be reasonable - how is it possible to have 700K - 800K initial jobless claims
every week and create nearly a million new jobs? Does anyone really believe any of these numbers?
Globalistsaretrash
Yes, at least half the sheep population think they are real. It's insane how dumb people
are today.
TL;DR- Citadel and friends have shorted the treasury bond market to oblivion using the
repo market. Citadel owns a company called Palafox Trading and uses them to EXCLUSIVELY short
& trade treasury securities. Palafox manages one fund for Citadel - the Citadel Global
Fixed Income Master Fund LTD. Total assets over $123 BILLION and 80% are owned by offshore
investors in the Cayman Islands. Their reverse repo agreements are ENTIRELY rehypothecated
and they CANNOT pay off their own repo agreements until someone pays them, first. The ENTIRE
global financial economy is modeled after a fractional reserve system that is beginning to
experience THE MOTHER OF ALL MARGIN CALLS.
THIS is why the DTC and FICC are requiring an increase in SLR deposits. The madness has
officially come full circle.
tnorth 4 hours ago
another month of completely rigged 'markets'
mtl4 4 hours ago remove link
Music is still playing, make sure you have a chair when it stops
this_circus_is_no_fun 1 hour ago remove link
Consider these two points:
Treasuries are claimed to be backed by the "full faith and credit of the United
States".
In Q1, Treasuries suffer their biggest loss in 40 years.
y_arrow
Kreditanstalt 1 hour ago (Edited)
I've always wondered why seemingly contradictory and uncorrelated assets and asset classes
alternately "soar" and "plunge" on different days, usually in random conjunction with
others...
It seems so counterintuitively...MECHANICAL...or theory-driven, rather than rational
"investing".
"... How convinced should anyone be when dismissing the message of metrics like these? To be sure, both the market and economy are in uncharted waters. It's possible -- perhaps likely -- that old standards don't apply when something as random as a virus is behind the stress. At the same time, many a portfolio has been squandered through complacency. Market veterans always warn of fortunes lost by investors who became seduced by talk of new rules and paradigms. ..."
"... At 35, the CAPE is at its highest since the early 2000s. ..."
"... Another indicator raising eyebrows is called Tobin's Q. The ratio -- which was developed in 1969 by Nobel Prize-winning economist James Tobin -- compares market value to the adjusted net worth of companies. It's showing a reading just shy of a peak reached in 2000. T ..."
"... the signal sent by the "Buffett Indicator," a ratio of the total market capitalization of U.S. stocks divided by gross domestic product. ..."
"... Still, it's hard to ignore the risks to underlying assumptions. While rock-bottom rates underpin many of the arguments, this year has shown that the Fed still is willing to let longer-term interest rates run higher. And betting on huge upside earnings surprises is risky too -- it's rare to see a 16% beat historically. Before last year, earnings had exceeded estimates by an average 3% a quarter since 2015. ..."
"... "This happens in every bubble," said Bill Callahan, an investment strategist at Schroders. "It's: 'Don't think about the traditional value metrics, we have a new one.' It's: 'Imagine if everyone did XYZ, how big this company could be.'" ..."
"... To Scott Knapp, chief market strategist of CUNA Mutual Group, abandoning standard valuation measures because the environment has changed places investors in "pretty sketchy territory." Talk of watershed moments rendering traditional metric irrelevant as a signal, he says. "That's usually an indication we're trying to justify something," he said. ..."
Shiller P/E. Tobin's Q. Buffett Indicator. Ignore them all?
It's 'usually an indication we're trying to justify something'
Everywhere you look, there's a valuation lens that makes stocks look frothy. Also everywhere you look is someone
saying don't worry about it.
The so-called
Buffett
Indicator
. Tobin's Q. The S&P 500's forward P/E. These and others show the market at stretched levels, sometimes
extremely so. Yet many market-watchers argue they can be ignored, because this time really is different. The
rationale? Everything from Federal Reserve largesse to vaccines promising a quick recovery.
How convinced should anyone be when dismissing the message of metrics like these? To be sure, both the market and
economy are in uncharted waters. It's possible -- perhaps likely -- that old standards don't apply when something as
random as a virus is behind the stress. At the same time, many a portfolio has been squandered through complacency.
Market veterans always warn of fortunes lost by investors who became seduced by talk of new rules and paradigms.
"Every time markets hit new highs, every time markets get frothy, there are always some talking heads that argue:
'It's different,'" said Don Calcagni, chief investment officer of Mercer
Advisors
.
"We just know from centuries of market history that that can't happen in perpetuity. It's just the delusion of
crowds, people get excited. We want to believe."
Source: Robert Shiller's website
Robert Shiller is no apologist. The Yale University professor is famous in investing circles for unpopular valuation
warnings that came true during the dot-com and housing bubbles. One tool on which he based the calls is his
cyclically adjusted price-earnings ratio that includes the last 10 years of earnings.
While it's flashing warnings again, not even Shiller is sure he buys it. At 35, the CAPE is at its highest since the
early 2000s. If that period of exuberance is excluded, it clocks in at its highest-ever reading. Yet in a recent
post
,
Shiller wrote that "with interest rates low and likely to stay there, equities will continue to look attractive,
particularly when compared to bonds."
Another indicator raising eyebrows is called Tobin's Q. The ratio -- which was
developed
in
1969 by Nobel Prize-winning economist James Tobin -- compares market value to the adjusted net worth of companies.
It's showing a reading just shy of a peak reached in 2000. To Ned Davis, it's a valuation chart worth being wary
about. Still, while the indicator is roughly 40% above its long-term trend, "there may be an upward bias on the ratio
from technological change in the economy," wrote the Wall Street veteran who founded his namesake firm.
Persuasive arguments also exist for discounting the signal sent by the "Buffett Indicator," a ratio of the total
market capitalization of U.S. stocks divided by gross domestic product. While it recently reached its highest-ever
reading above its long-term trend, the methodology fails to take into consideration that companies are more
profitable than they've ever been, according to Jeff Schulze, investment strategist at ClearBridge Investments.
"It's looked extended really for the past decade, yet you've had one of the best bull markets in U.S. history," he
said. "That's going to continue to be a metric that does not adequately capture the market's potential."
At Goldman Sachs Group Inc., strategists argue that however high P/Es are, the absence of significant leverage
outside the private sector or a late-cycle economic boom points to low risk of an imminent bubble burst. While people
are shoveling money into stocks at rates that have signaled exuberance in the past, risk appetite is rebounding after
a prolonged period of aversion, according to the strategists, who also cite low interest rates.
"Today is a very different situation -- I don't think we've got a broad bubble," Peter Oppenheimer, chief global
equity strategist at the firm, said in a recent interview on Bloomberg Television. "Given the level of real rates,
where they are, it's still likely to be broadly supportive for equities versus bonds."
Another rationale employed to dismiss certain valuation metrics is the earnings cycle. Corporate America is just
emerging from a recession, with profits forecast to stage a strong comeback. The strong outlook for profits is why
many investors are giving similarly stretched valuations the benefit of the doubt. Trading at 32 times reported
earnings, the S&P 500 looks quite expensive, but with income forecast to jump 24% to $173 a share this year, the
multiple drops to about 23.
The valuation case becomes more favorable should business leaders continue to blow past expectations. For instance,
if this year's earnings come in at 16% above analyst estimates, as they did for the previous quarter, that'd imply a
price-earnings ratio of less than 20. While that exceeds the five-year average of 18, Ed Yardeni is not troubled by
what he calls "the New Abnormal."
"Valuation multiples are likely to remain elevated around current elevated levels because fiscal and monetary
policies continue to flood the financial markets with so much free money," said the founder of Yardeni Research Inc.
He predicts the S&P 500 will finish the year at 4,300, about an 8% gain from current levels.
Still, it's hard to ignore the risks to underlying assumptions. While rock-bottom rates underpin many of the arguments, this year
has shown that the Fed still is willing to let longer-term interest rates run higher. And betting on huge upside earnings
surprises is risky too -- it's rare to see a 16% beat historically. Before last year, earnings had exceeded estimates by an
average 3% a quarter since 2015.
"This happens in every bubble," said Bill Callahan, an investment strategist at Schroders. "It's: 'Don't think about the
traditional value metrics, we have a new one.' It's: 'Imagine if everyone did XYZ, how big this company could be.'"
Returns of 2%
Valuations are never useful market-timing tools because expensive stocks can get more expensive, as was the case during the
Internet bubble. Yet viewed through a long-term lens, valuations do matter. That is, the more over-valued the market is, the
lower the future returns. According to a study by Bank of America strategists led by Savita Subramanian, things like
price-earnings ratios could explain 80% of the S&P 500's returns during the subsequent 10 years. The current valuation framework
implies an increase of just 2% a year over the next decade, their model shows.
To Scott Knapp, chief market strategist of CUNA Mutual Group, abandoning standard valuation measures because the environment has
changed places investors in "pretty sketchy territory." Talk of watershed moments rendering traditional metric irrelevant as a
signal, he says.
"That's usually an indication we're trying to justify something," he said.
"In a community where the primary concern is making money, one of the necessary rules is to
live and let live. To speak out against madness may be to ruin those who have succumbed to it.
So the wise in Wall Street are nearly always silent. The foolish thus have the field to
themselves."
John Kenneth Galbraith, The Great Crash of 1929
"Foolishness is a more dangerous enemy of the good than malice. One may protest against
evil; it can be exposed and, if need be, prevented by use of force. Evil always carries within
itself the germ of its own subversion in that it leaves behind in human beings at least a sense
of unease.
In conversation with them, one virtually feels that one is dealing not at all with a person,
but with slogans, catchwords and the like that have taken possession of them. They are under a
spell, blinded, misused, and abused in their very being."
Dietrich Bonhoeffer, Prisoner for God: Letters and Papers from Prison
"The ideal subject of totalitarian rule is not the convinced Nazi or the dedicated
communist, but people for whom the distinction between fact and fiction, true and false, no
longer exists."
Hannah Arendt, The Origins of Totalitarianism
"When we trade the effort of doubt and debate for the ease of blind faith, we become
gullible and exposed, passive and irresponsible observers of our own lives. Worse still, we
leave ourselves wide open to those who profit by influencing our behavior, our thinking, and
our choices. At that moment, our agency in our own lives is in jeopardy."
Margaret Heffernan
Today was a general wash and rinse in the markets.
Wax on, wax off.
If you look at the charts you will see the deep plunges in the early trading hours in stocks
and the metals, especially silver.
Simply put, it is called running the stops.
This is not 'the government' doing this.
These are the monstrous financial entities that we have allowed lax regulation and years of
propagandizing to create, in the biggest Banks and hedge funds.
Most will run back to the familiar sources of their ideological addiction, the so-called
'news sites' that thrive on the internet and alternative radio funded by the oligarchs.
If you are one of those who cannot wait to run back to your familiar ideological watering
hole to relieve the tension of thought, you might just be one of the willfully blind and
lost.
Truth is more palatable to the sick at heart when it has been twisted out of shape.
The good news perhaps is that a cleaning out like this often proceeds a resumption of a move
higher.
First they kick off the riff raff. Oh, certainly that does not include you, but those
others, right?
Or not. It is not easy to think like a criminal when you are not privy to the same jealously
guarded information and perverse perspective on life.
On the lighter side I have experienced no side effects from the first dose of the
Coronavirus vaccine which I had the other day.
Let's see if the second shot has the same results.
The whole experience reminded me of 'Sabin Oral Sunday' back in 1960. I don't recall any
anti-vaxxer or ideologically driven whack-a-doodlism back then, but I was too young to
care. And polio shots were no fun. But it beat doing time in an iron lung.
How many people are really out of work? The answer is surprisingly difficult to ascertain.
For reasons that are likely ideological at least in part, official unemployment figures greatly
under-report the true number of people lacking necessary full-time work.
That the "reserve army of labor" is quite large goes a long way toward explaining the
persistence of stagnant wages in an era of increasing productivity.
How large? Across North America, Europe and Australia, the real unemployment rate is
approximately double the "official" unemployment rate.
The "official" unemployment rate in the United States, for example, was 5.5 percent for
February 2015. That is the figure that is widely reported. But the U.S. Bureau of Labor
Statistics keeps track of various other unemployment rates, the most pertinent being its "U-6"
figure. The U-6 unemployment rate includes all who are counted as unemployed in the "official"
rate, plus discouraged workers, the total of those employed part time but not able to secure
full-time work and all persons marginally attached to the labor force (those who wish to work
but have given up). The actual U.S. unemployment rate for February 2015, therefore, is 11 percent .
Canada makes it much more difficult to know its
real unemployment rate. The official Canadian
unemployment rate for February was 6.8 percent, a slight increase from January that
Statistics Canada attributes to "more people search[ing] for work." The official measurement in
Canada, as in the U.S., European Union and Australia, mirrors the official standard for
measuring employment defined by the International Labour Organization -- those not working at
all and who are "actively looking for work." (The ILO is an agency of the United Nations.)
Statistics Canada's closest measure toward counting full unemployment is its R8 statistic,
but the R8 counts people in part-time work, including those wanting full-time work, as
"full-time equivalents," thus underestimating the number of under-employed by hundreds of
thousands,
according to an analysis by The Globe and Mail . There are further hundreds of
thousands not counted because they do not meet the criteria for "looking for work." Thus
The Globe and Mail analysis estimates Canada's real unemployment rate for 2012 was
14.2 percent rather than the official 7.2 percent. Thus Canada's true current unemployment rate
today is likely about 14 percent.
Everywhere you look, more are out of work
The gap is nearly as large in Europe as in North America. The official European Union
unemployment rate was 9.8
percent in January 2015 . The European Union's Eurostat service requires some digging to
find out the actual unemployment rate, requiring adding up different parameters. Under-employed
workers and discouraged workers comprise four percent of the E.U. workforce each, and if we add
the one percent of those seeking work but not immediately available, that pushes the
actual unemployment rate to about 19 percent.
The same pattern holds for Australia. The Australia Bureau of Statistics revealed that its
measure of "extended labour force under-utilisation" -- this includes "discouraged" jobseekers,
the "underemployed" and those who want to start work within a month, but cannot begin
immediately -- was
13.1 percent in August 2012 (the latest for which I can find), in contrast to the
"official," and far more widely reported, unemployment rate of five percent at the time.
Concomitant with these sobering statistics is the length of time people are out of work. In
the European Union, for example, the long-term unemployment rate -- defined as the number of
people out of work for at least 12 months --
doubled from 2008 to 2013 . The number of U.S. workers unemployed for six months or longer
more than tripled from
2007 to 2013.
Thanks to the specter of chronic high unemployment, and capitalists' ability to transfer
jobs overseas as "free trade" rules become more draconian, it comes as little surprise that the
share of gross domestic income going to wages has declined steadily. In the U.S., the share has
declined from 51.5 percent in 1970 to about 42 percent. But even that decline likely
understates the amount of compensation going to working people because almost all gains in
recent decades has gone to the top one percent.
The increased ability of capital to move at will around the world has done much to
exacerbate these trends. The desire of capitalists to depress wages to buoy profitability is a
driving force behind their push for governments to adopt "free trade" deals that accelerate the
movement of production to low-wage, regulation-free countries. On a global basis, those with
steady employment are actually a minority of the world's workers.
Using International Labour Organization figures as a starting point, professors John Bellamy
Foster and Robert McChesney calculate that the "global reserve army of labor" -- workers who
are underemployed, unemployed or "vulnerably employed" (including informal workers) -- totals
2.4 billion. In contrast, the world's wage workers total 1.4 billion -- far less! Writing in
their book The Endless
Crisis: How Monopoly-Finance Capital Produces Stagnation and Upheaval from the USA to
China , they write:
"It is the existence of a reserve army that in its maximum extent is more than 70 percent
larger than the active labor army that serves to restrain wages globally, and particularly in
poorer countries. Indeed, most of this reserve army is located in the underdeveloped
countries of the world, though its growth can be seen today in the rich countries as well."
[page 145]
The earliest countries that adopted capitalism could "export" their "excess" population
though mass emigration. From 1820 to 1915, Professors Foster and McChesney write, more than 50
million people left Europe for the "new world." But there are no longer such places for
developing countries to send the people for whom capitalism at home can not supply employment.
Not even a seven percent growth rate for 50 years across the entire global South could absorb
more than a third of the peasantry leaving the countryside for cities, they write. Such a
sustained growth rate is extremely unlikely.
As with the growing environmental crisis, these mounting economic problems are functions of
the need for ceaseless growth. Once again, infinite growth is not possible on a finite planet,
especially one that is approaching its limits. Worse, to keep the system functioning at all,
the planned
obsolescence of consumer products necessary to continually stimulate household spending
accelerates the exploitation of natural resources at unsustainable rates and all this
unnecessary consumption produces pollution increasingly stressing the environment.
Humanity is currently consuming the equivalent of one and a
half earths , according to the non-profit group Global Footprint Network. A separate report
by WWF–World Wide Fund For Nature in collaboration with the Zoological Society of London
and Global Footprint Network, calculates that the Middle East/Central Asia, Asia-Pacific, North
America and European Union regions are each consuming about double their
regional biocapacity.
We have only one Earth. And that one Earth is in the grips of a system that takes at a pace
that, unless reversed, will leave it a wrecked hulk while throwing ever more people into
poverty and immiseration. That this can go on indefinitely is the biggest fantasy.
Listen to this article 6 minutes 00:00 / 06:06 1x Earnings, valuation and rampant speculation have all played a role in the extraordinary bull market that began a year ago this week. The latest combination of the three has a troubling reliance on the speculative element. A broad framework for thinking about stocks can be derived from the late economist Hyman Minsky's three stages of debt. In the first stage, borrowers take on only what they can afford to repay in full from their earnings by the time the debt matures; a standard mortgage works like this. Earnings, valuation and rampant speculation have all played a role in the extraordinary bull market that began a year ago this week. The latest combination of the three has a troubling reliance on the speculative element. A broad framework for thinking about stocks can be derived from the late economist Hyman Minsky's three stages of debt. In the first stage, borrowers take on only what they can afford to repay in full from their earnings by the time the debt matures; a standard mortgage works like this. A broad framework for thinking about stocks can be derived from the late economist Hyman Minsky's three stages of debt. In the first stage, borrowers take on only what they can afford to repay in full from their earnings by the time the debt matures; a standard mortgage works like this. A broad framework for thinking about stocks can be derived from the late economist Hyman Minsky's three stages of debt. In the first stage, borrowers take on only what they can afford to repay in full from their earnings by the time the debt matures; a standard mortgage works like this. U.S. 10-year Treasury yield Source: Tullett Prebon As of March 24 % Pre-pandemic peak of S&P 500 2020 '21 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 S&P 500 forward price/earnings ratio Source: Refinitiv Note: Weekly data S&P 500 peak 2020 '21 12 14 16 18 20 22 24 The parallel in the stock market is stocks going up when earnings -- or rather the expectation of earnings, since the market looks ahead -- go up. There is a risk of course, just as there is with debt: The earnings might not appear, and the stock goes back down. But earnings offer the least risky form of gains, and one that we should welcome as obviously justified. From the low in the summer, 2020 earnings forecasts jumped more than 10%, and expectations for this year rose more than 8%. Stocks responded. In Minsky's second stage, borrowers plan only to repay the interest, and refinance when the main debt is due to be repaid; much company debt works like this. It is taken out with a plan to roll it over indefinitely. Interest rates matter a lot: If they go down when the company needs to refinance, it will pay less. The equity parallel is to gains in valuation due to lower long-term rates. As with corporate debt, this is entirely justified and sustainable so long as rates stay low, because future earnings are now more appealing. The danger is that rates rise, in which case the stock might be hit no matter how earnings pan out. A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the The parallel in the stock market is stocks going up when earnings -- or rather the expectation of earnings, since the market looks ahead -- go up. There is a risk of course, just as there is with debt: The earnings might not appear, and the stock goes back down. But earnings offer the least risky form of gains, and one that we should welcome as obviously justified. From the low in the summer, 2020 earnings forecasts jumped more than 10%, and expectations for this year rose more than 8%. Stocks responded. In Minsky's second stage, borrowers plan only to repay the interest, and refinance when the main debt is due to be repaid; much company debt works like this. It is taken out with a plan to roll it over indefinitely. Interest rates matter a lot: If they go down when the company needs to refinance, it will pay less. The equity parallel is to gains in valuation due to lower long-term rates. As with corporate debt, this is entirely justified and sustainable so long as rates stay low, because future earnings are now more appealing. The danger is that rates rise, in which case the stock might be hit no matter how earnings pan out. A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the In Minsky's second stage, borrowers plan only to repay the interest, and refinance when the main debt is due to be repaid; much company debt works like this. It is taken out with a plan to roll it over indefinitely. Interest rates matter a lot: If they go down when the company needs to refinance, it will pay less. The equity parallel is to gains in valuation due to lower long-term rates. As with corporate debt, this is entirely justified and sustainable so long as rates stay low, because future earnings are now more appealing. The danger is that rates rise, in which case the stock might be hit no matter how earnings pan out. A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the In Minsky's second stage, borrowers plan only to repay the interest, and refinance when the main debt is due to be repaid; much company debt works like this. It is taken out with a plan to roll it over indefinitely. Interest rates matter a lot: If they go down when the company needs to refinance, it will pay less. The equity parallel is to gains in valuation due to lower long-term rates. As with corporate debt, this is entirely justified and sustainable so long as rates stay low, because future earnings are now more appealing. The danger is that rates rise, in which case the stock might be hit no matter how earnings pan out. A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the The equity parallel is to gains in valuation due to lower long-term rates. As with corporate debt, this is entirely justified and sustainable so long as rates stay low, because future earnings are now more appealing. The danger is that rates rise, in which case the stock might be hit no matter how earnings pan out. A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the The equity parallel is to gains in valuation due to lower long-term rates. As with corporate debt, this is entirely justified and sustainable so long as rates stay low, because future earnings are now more appealing. The danger is that rates rise, in which case the stock might be hit no matter how earnings pan out. A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the The parallel in the stock market is the The parallel in the stock market is the hunt for the greater fool . Sure, GameStop < shares bear no relation to the reality < of the company, but I can make money from buying an overpriced stock if I can find someone willing to pay even more because they "like the stock." Wild bets became obvious this year, as newcomers armed with stimulus, or "stimmy," checks Wild bets became obvious this year, as newcomers armed with stimulus, or "stimmy," checks Wild bets became obvious this year, as newcomers armed with stimulus, or "stimmy," checks drove up the price of many tiny stocks, penny shares and those popular on Reddit discussion boards. Speculative bets such as the solar and ARK ETFs rallied up until mid-February, long after growth stocks peaked in August Price performance Source: FactSet *Russell 1000 indexes As of March 25, 7:02 p.m. ET % Invesco Solar Value* ARK Innovation Growth* Sept. 2020 '21 -25 0 25 50 75 100 125 The concern for investors: How much of the market's gain is thanks to this pure speculation, and how much to the justifiable gains of the improving economy and low rates? If too much comes from speculation, the danger is that we run out of greater fools and prices quickly drop back. The concern for investors: How much of the market's gain is thanks to this pure speculation, and how much to the justifiable gains of the improving economy and low rates? If too much comes from speculation, the danger is that we run out of greater fools and prices quickly drop back. me title= A look at how stocks moved through the pandemic suggests earnings and bond yields are still much more important than the gambling element for the market as a whole, but is still troubling. From the S&P peak in mid-February to the end of June, the story was of cratering earnings partly offset by higher valuations. The S&P was down 8%. Earnings forecasts for 12 months ahead fell 20%, while with 10-year yields down almost a full percentage point, valuations were up from a precrisis high of 19 times forecast earnings (itself the highest since the aftermath of the dot-com bubble) to 21 times. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. A look at how stocks moved through the pandemic suggests earnings and bond yields are still much more important than the gambling element for the market as a whole, but is still troubling. From the S&P peak in mid-February to the end of June, the story was of cratering earnings partly offset by higher valuations. The S&P was down 8%. Earnings forecasts for 12 months ahead fell 20%, while with 10-year yields down almost a full percentage point, valuations were up from a precrisis high of 19 times forecast earnings (itself the highest since the aftermath of the dot-com bubble) to 21 times. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. A look at how stocks moved through the pandemic suggests earnings and bond yields are still much more important than the gambling element for the market as a whole, but is still troubling. From the S&P peak in mid-February to the end of June, the story was of cratering earnings partly offset by higher valuations. The S&P was down 8%. Earnings forecasts for 12 months ahead fell 20%, while with 10-year yields down almost a full percentage point, valuations were up from a precrisis high of 19 times forecast earnings (itself the highest since the aftermath of the dot-com bubble) to 21 times. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. From the S&P peak in mid-February to the end of June, the story was of cratering earnings partly offset by higher valuations. The S&P was down 8%. Earnings forecasts for 12 months ahead fell 20%, while with 10-year yields down almost a full percentage point, valuations were up from a precrisis high of 19 times forecast earnings (itself the highest since the aftermath of the dot-com bubble) to 21 times. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. From the S&P peak in mid-February to the end of June, the story was of cratering earnings partly offset by higher valuations. The S&P was down 8%. Earnings forecasts for 12 months ahead fell 20%, while with 10-year yields down almost a full percentage point, valuations were up from a precrisis high of 19 times forecast earnings (itself the highest since the aftermath of the dot-com bubble) to 21 times. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. NEWSLETTER SIGN-UP
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Since June the story has reversed. Earnings forecasts have soared, and this year's earnings predictions are now
back up to match where 2020 earnings were expected to be before the recession. The bond yield has leapt almost
a full percentage point, and is higher than it was last February.
Yet, since June, the market's overall valuation is slightly up, and growth stocks are up 23%. Sure, cheap value
stocks responded as expected, rising almost a third and beating growth stocks. But if a lower bond yield
justified the rise in valuations, a higher bond yield ought to mean lower valuations, and probably outright
lower prices for growth stocks.
This is concerning but, directionally at least, is explained by the oddity of August, when bond yields rose
alongside valuation multiples and
the
biggest technology stocks leapt in price
. Measure it from the end of August, instead of the end of June,
and valuations have dropped a bit as bond yields have risen.
But the fall isn't enough to provide much comfort, and worse is that the highly speculative stocks popular with
many individual traders bucked the trend. Notable themes including electric cars, hydrogen, SPACs and wind and
solar power went into ludicrous mode until the middle of February this year, when the rise in bond yields
accelerated and the speculative stocks fell back some.
Share prices propelled more by earnings expectations than bond yields is healthy, while speculation is -- by its
nature -- fickle, and so a poor basis for holding on to a stock for long. My hope is that the contribution of pure
gambling to the overall level of the market is relatively small. But it is hard to explain why stocks should be
so much higher than before the pandemic panic when the earnings outlook is worse and bond yields are back to
where they were.
"... Many of these new companies made outrageous, and often fraudulent, claims about their business ventures for the purpose of raising capital and boosting share prices. ..."
"... However, in the midst of the "mania," things like valuation, revenue, or even viable business models didn't matter. It was the "Fear Of Missing Out," which sucked investors into the fray without regard for the underlying risk. ..."
"... Sir Issac Newton, the brilliant mathematician, was an early investor in South Sea Corporation. Newton quickly made a lot of money and recognized the early stages of a speculative mania. Knowing that it would eventually end badly, he liquidated his stake at a large profit. ..."
"... However, after he exited, South Sea stock experienced one of the most legendary rises in history. As the bubble kept inflating, Newton allowed his emotions to overtake his previous logic and he jumped back into the shares. Unfortunately, it was near the peak. ..."
"... The story of Newton's losses in the South Sea Bubble has become one of the most famous in popular finance literature. While surveying his losses, Newton allegedly said that he could "calculate the motions of the heavenly bodies, but not the madness of people." ..."
"... Yes, this time is different. "Like all bubbles, it ends when the money runs out." – Andy Kessler ..."
I have previously discussed the importance of understanding how "physics" plays a crucial role in the stock market. As Sir Issac
Newton once discovered, "what goes up, must come down."
Andy Kessler, via the Wall Street
Journa l, recently discussed a similar point with respect to the momentum in stock prices. To wit:
"Does this sound familiar: Smart guy owns stock in March at $200, sells it in June at around $600, but then buys it back in
July and August for between $900 and $1,000. By September it's back at $200. Ouch. Tesla this year? Yahoo in 2000? Nope. That
was Sir Isaac Newton getting pulled into the great momentum trade of the South Sea Co., which cratered 300 years ago this month.
He lost the equivalent of more than $3 million today. Newton, whose second law of motion is about the momentum of a body equaling
the force acting on it, didn't know that works for stocks too."
To understand what happened to the South Sea Corporation, you need a bit of history.
The South Sea History
In 1720, in return for a loan of £7 million to finance the war against France, the House of Lords passed the South Sea Bill, which
allowed the South Sea Company a monopoly in trade with South America.
England was already a financial disaster and was struggling to finance its war with France. As debts mounted, England needed a
solution to stay afloat. The scheme was that in exchange for exclusive trading rights, the South Sea Company would underwrite the
English National Debt. At that time, the debt stood at £30 million and carried a 5% interest coupon from the Government. The South
Sea company converted the Government debt into its own shares.
They would collect the interest from the Government and then pass it on to their shareholders.
Interesting Absurdities
At the time, England was in the midst of rampant market speculation. As soon as the South Sea Company concluded its deal with
Parliament, the shares surged to more than 10 times their value. As South Sea Company shares bubbled up to incredible new heights,
numerous other joint-stock companies IPO'd to take advantage of the booming investor demand for speculative investments.
Many of these new companies made outrageous, and often fraudulent, claims about their business ventures for the purpose of
raising capital and boosting share prices. Here are some examples of these companies' business proposals (History House, 1997):
Supplying the town of Deal with fresh water.
Trading in hair.
Assuring of seamen's wages.
Importing pitch and tar, and other naval stores, from North Britain and America.
Insuring of horses.
Improving the art of making soap.
Improving gardens.
The insuring and increasing children's fortunes.
A wheel for perpetual motion.
Importing walnut-trees from Virginia.
The making of rape-oil.
Paying pensions to widows and others, at a small discount.
Making iron with pit coal.
Transmutation of quicksilver into a malleable fine metal.
For carrying on an undertaking of great advantage; but nobody to know what it is.
A Speculative Mania
However, in the midst of the "mania," things like valuation, revenue, or even viable business models didn't matter. It was
the "Fear Of Missing Out," which sucked investors into the fray without regard for the underlying risk.
Though South Sea Company shares were skyrocketing, the company's profitability was mediocre at best, despite abundant promises
of future growth by company directors.
The eventual selloff in Company shares was exacerbated by a previous plan of lending investors money to buy its shares. This "margin
loan," meant that many shareholders had to sell their shares to cover the plan's first installment of payments.
As South Sea Company and other "bubble " company share prices imploded, speculators who had purchased shares on credit went bankrupt.
The popping of the South Sea Bubble then resulted in a contagion that spread across Europe.
Newton's Folly
Sir Issac Newton, the brilliant mathematician, was an early investor in South Sea Corporation. Newton quickly made a lot of
money and recognized the early stages of a speculative mania. Knowing that it would eventually end badly, he liquidated his stake
at a large profit.
However, after he exited, South Sea stock experienced one of the most legendary rises in history. As the bubble kept inflating,
Newton allowed his emotions to overtake his previous logic and he jumped back into the shares. Unfortunately, it was near the peak.
It is noteworthy that once Newton decided to go back into South Sea stock, he moved essentially all his financial assets into
it. In general, Newton was intimately familiar with commodities and finance. As Master of the Mint, his post required him to make
many decisions that depended on market prices and conditions. The story of Newton's losses in the South Sea Bubble has become
one of the most famous in popular finance literature. While surveying his losses, Newton allegedly said that he could "calculate
the motions of the heavenly bodies, but not the madness of people."
Throughout financial history, markets have evolved from one speculative "bubble," to bust, to the next with each one being believed
"it was different this time." The slides below are from a presentation I made to a large mutual fund company. What we some common
denominators between all previous bubbles and now.
The table below shows a listing of assets classes that have experienced bubbles throughout history, with the ones related to the
current environment highlighted in yellow. It is not hard to see the similarities between today and the previous market bubbles in
history. Investors are currently chasing "new technology" stocks from Zoom to Tesla, piling into speculative call options, and piling
into leverage. What could possibly go wrong?
Oh, by the way, the slides above are from a 2008 presentation just one month before the Lehman crisis. The point here is that
speculative cycles are always the same.
The Speculative Cycle
Charles Kindleberger suggested that speculative manias typically commence with a "displacement" which excites speculative interest.
The displacement may come from either an entirely new object of investment (IPO) or from increased profitability of established investments.
The speculation is then reinforced by a "positive feedback" loop from rising prices. which ultimately induces "inexperienced investors"
to enter the market. As the positive feedback loop continues, and the "euphoria" increases, retail investors then begin to "leverage"
their risk in the market as "rationality" weakens.
The full cycle is shown below.
During the course of the mania, speculation becomes more diffused and spreads to different asset classes. New companies are floated
to take advantage of the euphoria, and investors leverage their gains using derivatives, stock loans, and leveraged instruments.
As the mania leads to complacency, fraud and manipulation enter the market place. Eventually, the market crashes and speculators
are wiped out. The Government and Regulators react by passing new laws and legislations to ensure the previous events never happen
again.
The Latest Mania
Let's go back to Andy for a moment:
"When bull markets get going, investors come out of the woodwork to pile in. These momentum investors -- I call them momos
-- figure if a stock is going up, it will keep going up. But usually, there is some source of hot air inflating stocks: either
a structural anomaly that fools investors into thinking ever-rising stock prices are real or a source of capital that buys, buys,
buys -- proverbial 'dumb money.' Think of it as a giant fireplace bellows, an accordion-like contraption that pumps in fresh oxygen
to keep flames growing." – Andy Kessler
We have seen these manias repeated throughout history.
In 1929 you could buy stocks with as little as a 5% down payment
The 1960s and '70s had the Nifty Fifty bubble.
In 1987 it was a rising dollar, portfolio insurance, and major investments by the Japanese into U.S. real estate.
In 2000, it was the new paradigm of the internet and the influx of new online trading firms like E*Trade creating liquidity
issues in Nasdaq stocks. Additionally, record numbers of companies were being brought public by Wall Street to fill investor demand.
In 2008, subprime mortgages, low interest rates, and lax lending policies, combined with a litany of derivative products inflated
massive bubbles in debt instruments.
In 2020?
What about today? Look back at the chart of the South Sea Company above. Now, the one below. See any similarities. Yes, that's
Tesla. However, you can't solely blame the Federal Reserve as noted by Andy:
"Most simply blame the Federal Reserve -- especially today, with its zero-interest-rate policy -- for pumping the hot air that
gets the momos going. Fair enough, but that's only part of the story. Long market runs have always allured investors who figure
they're smart to jump in, even if it's late.
Everyone forgets the adage, 'Don't mistake brains for a bull market.'"
As stated, while no two financial manias are ever alike, the end results are always the same. Are there any similarities in today's
market? You decide.
"From SPACs, or special purpose acquisition companies, which are modern-day blind pools that often don't end well. Today's
momos also chase stock splits, which mean nothing for a company's actual value. Same for a new listing in indexes like the S&P
500. Isaac Newton could explain the math." – Andy Kessler
You get the idea. But one of the tell-tale indications is the speculative chase of "zombie" companies which are only still alive
primarily due to the Federal Reserve's interventions.
Fixing The Cause Of The Crash
Historically, all market crashes have been the result of things unrelated to valuation levels. Issues such as liquidity, government
actions, monetary policy mistakes, recessions, or inflationary spikes are the culprits that trigger the "reversion in sentiment."
Importantly, the "bubbles" and "busts" are never the same. I previously quoted Bob Bronson on this point:
"It can be most reasonably assumed that markets are efficient enough that every bubble is significantly different than the
previous one. A new bubble will always be different from the previous one(s). Such is since investors will only bid prices to
extreme overvaluation levels if they are sure it is not repeating what led to the previous bubbles. Comparing the current extreme
overvaluation to the dotcom is intellectually silly.
I would argue that when comparisons to previous bubbles become most popular, it's a reliable timing marker of the top in a
current bubble. As an analogy, no matter how thoroughly a fatal car crash is studied, there will still be other fatal car crashes.
Such is true even if we avoid all previous accident-causing mistakes."
Comparing the current market to any previous period in the market is rather pointless. The current market is not like 1995, 1999,
or 2007? Valuations, economics, drivers, etc. are all different from cycle to the next.
Most importantly, however, the financial markets always adapt to the cause of the previous "fatal crash." Unfortunately, that
adaptation won't prevent the next one.
Yes, this time is different. "Like all bubbles, it ends when the money runs out." – Andy Kessler
"... In the Risk Alert below, the itemization of various forms of abuses, such as the many ways private equity firms parcel out interests in the businesses they buy among various funds and insiders to their, as opposed to investors' benefit, alone should give pause. And the lengthy discussion of these conflicts does suggest the SEC has learned something over the years. Experts who dealt with the agency in its early years of examining private equity firms found the examiners allergic to considering, much the less pursuing, complex abuses. ..."
"... Undermining legislative intent of new supervisory authority the SEC never embraced its new responsibilities to ride herd on private equity and hedge funds. ..."
"... The agency is operating in such a cozy manner with private equity firms that as one investor described it: It's like FBI sitting down with the Mafia to tell them each year, "Don't cross these lines because that's what we are focusing on." ..."
"... Advisers charged private fund clients for expenses that were not permitted by the relevant fund operating agreements, such as adviser-related expenses like salaries of adviser personnel, compliance, regulatory filings, and office expenses, thereby causing investors to overpay expenses ..."
"... Current SEC chairman Jay Clayton came from Sullivan & Cromwell, bringing with him Steven Peikin as co-head of enforcement. And the Clayton SEC looks to have accomplished the impressive task of being even weaker on enforcement than Mary Jo White. ..."
"... On the same side though, fraud is a criminal offence, and it's SEC's duty to prosecute. And I believe that a lot of what PE engage in would happily fall under fraud, if SEC really wanted. ..."
"... Crimogenic: Producing or tending to produce crime or criminality. An additional factor is that, in the main, the criminals do not take their money and leave the gaming tables but pour it back in and the crime metastasizes. AKA, Kleptocracy. ..."
"... You might add that the threat of consequences for these crimes makes the criminals extremely motivated to elect officials who will not prosecute them (e.g. Obama). They're not running for office, they're avoiding incarceration. ..."
"... Andrew Levitt, for instance, complained bitterly that Joe Lieberman would regularly threaten to cut the SEC's budget for allegedly being too aggressive about enforcement. Lieberman was the Senator from Hedgistan. ..."
"... More banana republic level grift. What happens when investors figure out they can't believe anything they are told? ..."
"... Can we come up with a better descriptor for "private equity"? I suggest "billionaire looters". ..."
"... Where is the SEC when Bain Capital (Romney) wipes out Toys-R-Us and Dianne Feinstein's husband Richard Blum wipes out Payless Shoes. They gain control of the companies, pile on massive debt and take the proceeds of the loan, and they know the company cannot service the loan and a BK is around the corner. ..."
"... Thousands lose their jobs. And this is legal? And we also lost Glass-Steagal and legalized stock buy-backs. The Elite are screwing the people. It's Socialism for the Rich, the Politicians and Govt Employees and Feudalism for the rest of us. ..."
We've embedded an SEC Risk Alert on private equity abuses at the end of this post. 1 What is remarkable about this
document is that it contains a far longer and more detailed list of private abuses than the SEC flagged in its initial round of examinations
of private equity firms in 2014 and 2015. Those examinations occurred in parallel with groundbreaking exposes by Gretchen Morgenson
at the New York Times and Mark Maremont in the Wall Street Journal.
At least some of the SEC enforcement actions in that era look
to have been triggered by the press effectively getting ahead of the SEC. And the SEC even admitted the misconduct was more common
at the most prominent firms.
Yet despite front-page articles on private equity abuses, the SEC engaged in wet noodle lashings. Its pattern was to file only
one major enforcement action over a particular abuse. Even then, the SEC went to some lengths to spread the filings out among the
biggest firms. That meant it was pointedly engaging in selective enforcement, punishing only "poster child" examples and letting
other firms who'd engaged in precisely the same abuses get off scot free.
The very fact of this Risk Alert is an admission of failure by the SEC. It indicates that the misconduct it highlighted five years
ago continues and if anything is even more pervasive than in the 2014-2015 era. It also confirms that its oft-stated premise then,
that the abuses it found then had somehow been made by firms with integrity that would of course clean up their acts, and that now-better-informed
investors would also be more vigilant and would crack down on misconduct, was laughably false.
In particular, the second section of the Risk Alert, on Fees and Expenses (starting on page 4) describes how fund managers are
charging inflated or unwarranted fees and expenses. In any other line of work, this would be called theft. Yet all the SEC is willing
to do is publish a Risk Alert, rather than impose fines as well as require disgorgements?
The SEC's Abject Failure
In the Risk Alert below, the itemization of various forms of abuses, such as the many ways private equity firms parcel out interests
in the businesses they buy among various funds and insiders to their, as opposed to investors' benefit, alone should give pause.
And the lengthy discussion of these conflicts does suggest the SEC has learned something over the years. Experts who dealt with the
agency in its early years of examining private equity firms found the examiners allergic to considering, much the less pursuing,
complex abuses.
Undermining legislative intent of new supervisory authority the SEC never embraced its new responsibilities to ride herd on
private equity and hedge funds.
The SEC has long maintained a division between the retail investors and so-called "accredited investors" who by virtue of having
higher net worths and investment portfolios, are treated by the agency as able to afford to lose more money. The justification is
that richer means more sophisticated. But as anyone who is a manager for a top sports professional or entertainer, that is often
not the case. And as we've seen, that goes double for public pension funds.
Starting with the era of Clinton appointee Arthur Levitt, the agency has taken the view that it is in the business of defending
presumed-to-be-hapless retail investors and has left "accredited investor" and most of all, institutional investors, on their own.
This was a policy decision by the agency when deregulation was venerated; there was no statutory basis for this change in priorities.
Congress tasked the SEC with supervising the fund management activities of private equity funds with over $150 million in assets
under management. All of their investors are accredited investors. In other words, Congress mandated the SEC to make sure these firms
complied with relevant laws as well as making adequate disclosures of what they were going to do with the money entrusted to them.
Saying one thing in the investor contracts and doing another is a vastly worse breach than misrepresentations in marketing materials,
yet the SEC acted as if slap-on-the-wrist-level enforcement was adequate.
We made fun when thirteen prominent public pension fund trustees wrote the SEC asking for them to force greater transparency of
private equity fees and costs. The agency's position effectively was "You are grownups. No one is holding a gun to your head to make
these investments. If you don't like the terms, walk away." They might have done better if they could have positioned their demand
as consistent with the new Dodd Frank oversight requirements.
Actively covering up for bad conduct . In 2014, the SEC started working at giving malfeasance a free pass. Specifically, the SEC
told private equity firms that they could continue their abuses if they 'fessed up in their annual disclosure filings, the so-called
Form ADV. The term of art is "enhanced disclosure". Since when are contracts like confession, that if you admit to a breach, all
is forgiven? Only in the topsy-turvy world of SEC enforcement.
The agency is operating in such a cozy manner with private equity firms that as one investor described it: It's like FBI sitting down with the Mafia to tell them each year, "Don't cross these lines because that's what we are focusing
on."
Specifically, as we indicated, the SEC was giving advanced warning of the issues it would focus on in its upcoming exams, in order
to give investment managers the time to get their stories together and purge files. And rather than view its periodic exams as being
designed to make sure private equity firms comply with the law and their representations, the agency views them as "cooperative"
exercises! Misconduct is assumed to be the result of misunderstanding and error, and not design.
It's pretty hard to see conduct like this, from the SEC's Risk Alert, as being an accident:
Advisers charged private fund clients for expenses that were not permitted by the relevant fund operating agreements, such
as adviser-related expenses like salaries of adviser personnel, compliance, regulatory filings, and office expenses, thereby causing
investors to overpay expenses
The staff observed private fund advisers that did not value client assets in accordance with their valuation processes or in
accordance with disclosures to clients (such as that the assets would be valued in accordance with GAAP). In some cases, the staff
observed that this failure to value a private fund's holdings in accordance with the disclosed valuation process led to overcharging
management fees and carried interest because such fees were based on inappropriately overvalued holdings .
Advisers failed to apply or calculate management fee offsets in accordance with disclosures and therefore caused investors
to overpay management fees.
We're highlighting this skimming simply because it is easier for laypeople to understand than some of the other types of cheating
the SEC described. Even so, industry insiders and investors complained that the description of the misconduct in this Risk Alert
was too general to give them enough of a roadmap to look for it at particular funds.
Ignoring how investors continue to be fleeced . The SEC's list includes every abuse it sanctioned or mentioned in the 2014 to
2015 period, including undisclosed termination of monitoring fees, failure to disclose that investors were paying for "senior advisers/operating
partners," fraudulent charges, overcharging for services provided by affiliated companies, plus lots of types of bad-faith conduct
on fund restructurings and allocations of fees and expenses on transactions allocated across funds.
The SEC assumed institutional investors would insist on better conduct once they were informed that they'd been had. In reality,
not only did private equity investors fail to demand better, they accepted new fund agreements that described the sort of objectionable
behavior they'd been engaging in. Remember, the big requirement in SEC land is disclosure. So if a fund manager says he might do
Bad Things and then proceeds accordingly, the investor can't complain about not having been warned.
Moreover, the SEC's very long list of bad acts says the industry is continuing to misbehave even after it has defined deviancy
down via more permissive limited partnership agreements!
Why This Risk Alert Now?
Keep in mind what a Risk Alert is and isn't. The best way to conceptualize it is as a press release from the SEC's Office of Compliance
Inspections and Examinations. It does not have any legal or regulatory force. Risk Alerts are not even considered to be SEC official
views. They are strictly the product of OCIE staff.
On the first page of this Risk Alert, the OCIE blandly states that:
This Risk Alert is intended to assist private fund advisers in reviewing and enhancing their compliance programs, and also
to provide investors with information concerning private fund adviser deficiencies.
Cutely, footnotes point out that not everyone examined got a deficiency letter (!!!), that the SEC has taken enforcement actions
on "many" of the abuses described in the Risk Alert, yet "OCIE continues to observe some of these practices during examinations."
Several of our contacts who met in person with the SEC to discuss private equity grifting back in 2014-2015 pressed the agency
to issue a Risk Alert as a way of underscoring the seriousness of the issues it was unearthing. The staffers demurred then.
In fairness, the SEC may have regarded a Risk Alert as having the potential to undermine its not-completed enforcement actions.
But why not publish one afterwards, particularly since the intent then had clearly been to single out prominent examples of particular
types of misconduct, rather than tackle it systematically? 2
So why is the OCIE stepping out a bit now? The most likely reason is as an effort to compensate for the lack of enforcement actions.
Recall that all the OCIE can do is refer a case to the Enforcement Division; it's their call as to whether or not to take it up.
The SEC looks to have institutionalized the practice of borrowing lawyers from prominent firms. Mary Jo White of Debevoise brought
Andrew Ceresney with her from Debeviose to be her head of enforcement. Both returned to Debevoise.
Current SEC chairman Jay Clayton came from Sullivan & Cromwell, bringing with him Steven Peikin as co-head of enforcement. And
the Clayton SEC looks to have accomplished the impressive task of being even weaker on enforcement than Mary Jo White. Clayton made
clear his focus was on "mom and pop" investors, meaning he chose to overlook much more consequential abuses by private equity firms
and hedgies. The New York Times determined that the average amount of SEC fines against corporate perps fell markedly in 2018 compared
to the final 20 months of the Obama Administration. The SEC since then levied $1 billion fine against the Woodbridge Group of Companies
and its one-time owner for running a Ponzi scheme that fleeced over 8,400, so that would bring the average penalty up a bit. But
it still confirms that Clayton is concerned about small fry, and not deeper but just as pickable pockets.
David Sirota argues that the OCIE
was out to embarrass Clayton and sabotage what Sirota depicted as an SEC initiative to let retail investors invest in private equity.
Sirota appears to have missed that that horse has left the barn and is in the next county, and the SEC had squat to do with it.
The overwhelming majority of retail funds is not in discretionary accounts but in retirement accounts, overwhelmingly 401(k)s.
And it is the Department of Labor, which regulates ERISA plans, and not the SEC, that decides what those go and no go zones are.
The DoL has already green-lighted allowing large swathes of 401(k) funds to include private equity holdings.
From a post earlier this month :
Until now, regulations have kept private equity out of the retail market by prohibiting managers from accepting capital from
individuals who lack significant net worth.
Moreover, even though Sirota pointed out that Clayton had spoken out in favor of allowing retail investors more access to private
equity investments, the proposed regulation on the definition of accredited investors in fact not only does not lower income or net
worth requirements (save for allowing spouses to combine their holdings) it in fact solicited comments on the idea of raising the
limits.
From a K&L Gates write up :
Previously, the Concept Release requested comment on whether the SEC should revise the current individual income ($200,000)
and net worth ($1,000,000) thresholds. In the Proposing Release, the SEC further considered these thresholds, noting that the
figures have not been adjusted since 1982. The SEC concluded that it does not believe modifications to the thresholds are necessary
at this time, but it has requested comments on whether the final should instead make a one-time increase to the thresholds in
the account for inflation, or whether the final rule should reflect a figure that is indexed to inflation on a going-forward basis.
It is not clear how many people would be picked up by the proposed change, which was being fleshed out, that of letting some presumed
sophisticated but not rich individuals, like junior hedge fund professionals and holders of securities licenses, be treated as accredited
investors. In other words, despite Clayton's talk about wanting ordinary investors to have more access to private equity funds, the
agency's proposed rule change falls short of that.
Moreover, if the OCIE staff had wanted to undermine even the limited liberalization of the definition of accredited investor so
as to stymie more private equity investment, the time to do so would have been immediately before or while the comments period was
open. It ended March 16 .
So again, why now? One possibility is that the timing is purely a coincidence. For instance, the SEC staffers might have been
waiting until Covid-19 news overload died down a bit so their work might get a hearing (and Covid-19 remote work complications may
also have delayed its release).
The second possibility is that OCIE is indeed very frustrated with the enforcement chief Peikin's inaction on private equity.
The fact that Peikin's boss and protector Clayton has made himself a lame duck meant a salvo against Peikin was now a much lower
risk. If any readers have better insight into the internal workings of the SEC these days, please pipe up.
______
1 Formally, as you can see, this Risk Alert addresses both private equity and hedge fund misconduct, but on reading
the details, the citing of both types of funds reflects the degree to which hedge funds have been engaging in the buying and selling
of stakes in private companies. For instance, Chatham Asset Management, which has become notorious through its ownership of American
Media, which in turn owns the National Enquirer, calls itself a hedge fund. Moreover, when the SEC started examining both private
equity and hedge funds under new authority granted by Dodd Frank, it described the sort of misconduct described in this Risk Alert
as coming out of exams of private equity firms, and its limited round of enforcement actions then were against brand name private
equity firms like KKR, Blackstone, Apollo, and TPG. Thus for convenience as well as historical reasons, we refer only to private
equity firms as perps.
2 Media stories at the time, including some of our posts, provided substantial evidence that particular abuses, such
as undisclosed termination of monitoring fees and failure to disclose that "senior advisers" presented as general partner "team members"
were in fact consultants being separately billed to fund investments, were common practices. Yet the SEC chose to lodge only marquee
enforcement actions against one prominent firm for each abuse, as if token enforcement would serve as an adequate deterrent. The
message was the reverse, that the overwhelming majority of the abuses were able to keep their ill-gotten gains and not even face
public embarrassment.
TBH, in the view of Calpers ignoring its advisors, I do have a little understanding of the SEC's point "you're grown ups" (the
worse problem is that the advisors who leach themselves to the various accredited investors are often not worth the money.
On the same side though, fraud is a criminal offence, and it's SEC's duty to prosecute. And I believe that a lot of what PE
engage in would happily fall under fraud, if SEC really wanted.
Yes, the SEC conveniently claims a conflicted authority – 1. to regulate compliance but without an "enforcement authority",
and 2. report egregious behavior to their "enforcement authority". So the SEC is less than a permissive nanny. Sort of like "access"
to enforcement authority. Sounds like health care to me.
No, this is false. The SEC has an examination division and an enforcement division. The SEC can and does take enforcement actions
that result in fines and disgorgements, see the $1 billion fine mentioned in the post. So the exam division can recommend enforcement
to the enforcement division. That does not mean it will get done. Some enforcement actions originate from within the enforcement
division, like insider trading cases, and the SEC long has had a tendency to prioritize insider trading cases.
The SEC cannot prosecute. It has to refer cases that it thinks are criminal to the DoJ and try to get them to saddle up.
Crimogenic: Producing or tending to produce crime or criminality. An additional factor is that, in the main, the criminals
do not take their money and leave the gaming tables but pour it back in and the crime metastasizes.
AKA, Kleptocracy.
Thus in 2008 and thereafter the criminal damage required 2-3 trillion, now 7-10 trillion.
Any economic expert who does not recognize crime as the number one problem in the criminogenic US economy I disregard. Why
read all that analysis when, at the end of the run, it all just boils down to bailing out the criminals and trying to reset the
criminogenic system?
You might add that the threat of consequences for these crimes makes the criminals extremely motivated to elect officials who
will not prosecute them (e.g. Obama). They're not running for office, they're avoiding incarceration.
The SEC has been captured for years now. It was not that long ago that SEC Examination chief Andrew Bowden made a grovelling
speech to these players and even asked them to give his son a job which was so wrong-
But there is no point in reforming the SEC as it was the politicians, at the beck and call of these players, that de-fanged
the SEC – and it was a bipartisan effort! So it becomes a chicken-or-the-egg problem in the matter of reform. Who do you reform
first?
Can't leave this comment without mentioning something about a private equity company. One of the two major internal airlines
in Oz went broke due to the virus and a private equity buyer has been found to buy it. A union rep said that they will be good
for jobs and that they are a good company. Their name? Bain Capital!
We broke the story about Andrew Bowden! Give credit where credit is due!!!! Even though Taibbi points to us in his first line,
linking to Rolling Stone says to those who don't bother clicking through that it was their story.
Of course I remember that story. I was going to mention it but thought to let people see it in virtually the opening line of
that story where he gives you credit. More of a jolt of recognition seeing it rather than being told about it first.
Of the three branches of government which ones are not captured by big business? If two out of three were to captured then
does it matter what the third does?
Is the executive working for the common good or for the interests of big business?
Is the legislature working for the common good or for the interests of big business?
Is the judiciary working for the common good or for the interests of big business?
In my opinion too much power has been centralised, too much of the productivity gains of the past 40 years have been monetised
and therefore made possible to hoard and centralise. SEC should (in my opinion) try to enforce more but without more support then I do not believe (it is my opinion, nothing more
and nothing less) that they can accomplish much.
The SEC is a mysterious agency which (?) must fall under the jurisdiction of the Treasury because it is a monetary regulatory
agency in the business of regulating securities and exchanges. But it has no authority to do much of anything. The Treasury itself
falls under the executive administration but as we have recently seen, Mnuchin himself managed to get a nice skim for his banking
pals from the money Congress legislated.
That's because Congress doesn't know how to effectuate a damn thing – they legislate
stuff that morphs before our very eyes and goes to the grifters without a hitch. So why don't we demand that consumer protection
be made into hard law with no wiggle room; that since investing is complex in this world of embedded funds and glossy prospectuses,
we the consumer should not have to wade through all the nonsense to make decisions – that everything be on the table. And if PE
can't manage to do that and still steal its billions then PE should be declared to be flat-out illegal.
Please stop spreading disinformation. This is the second time on this post. The SEC has nada to do with the Treasury. It is an independent regulatory agency. It however is the only financial regulator that does not keep what it kills (its own fees and fines) but is instead subject
to Congressional appropriations.
Andrew Levitt, for instance, complained bitterly that Joe Lieberman would regularly threaten
to cut the SEC's budget for allegedly being too aggressive about enforcement. Lieberman was the Senator from Hedgistan.
It should be noted that out here in the countryside of northern Michigan that embezzlement (a winter sport here while the men
are out ice fishing), theft and fraud are still considered punishable felonies. Perhaps that is simply a quaint holdover from
a bygone time. Dudley set the tone for the C of C with his Green Book on bank deregulation. One of the subsequent heads of C of
C was reported as seeing his position as "being the spiritual resource for banks". If bank regulation is treated in a farcical
fashion why should be the SEC be any different?
I was shocked to just now learn that ERISA/the Dept of Labor is in regulatory control of allowing pension funds to buy PE fund
of funds and "balanced PE funds". What VERBIAGE. Are "PE Fund of Balanced Funds" an actual category? And what distinguishes them
from good old straightforward Index Funds? And also too – what is happening before our very glazed-over eyes is that PE is high
grading not just the stock market but the US Treasury itself. Ordinary investors should be buying US Treasuries directly and retirement
funds should too. It will be a big bite but if it knocks PE out of business it would be worth it. PE is in the business of cooking
its books, ravaging struggling corporations, and boldly privatizing the goddamned Treasury. WTF?
What about the wanton destruction of the purchased companies? If this solely about the harm done to the poor investors?
If so, that is seriously wrong.
If, you know, the neoliberal "because markets" is the ruling paradigm then of course there is no harm done. The questions then
become: is "because markets" a sensible paradigm? What is it a sensible paradigm of? Is "because markets" even sensible for the
long term?
an aside: farewell, Olympus camera. A sad day. Farewell, OM-1 and OM-2. Film photography is really not replicated by digital
photography but the larger market has gone to digital. Speed and cost vs quality. Because markets. Now the vulture swoop.
Where is the SEC when Bain Capital (Romney) wipes out Toys-R-Us and Dianne Feinstein's husband Richard Blum wipes out Payless
Shoes. They gain control of the companies, pile on massive debt and take the proceeds of the loan, and they know the company cannot
service the loan and a BK is around the corner.
Thousands lose their jobs. And this is legal? And we also lost Glass-Steagal and
legalized stock buy-backs. The Elite are screwing the people. It's Socialism for the Rich, the Politicians and Govt Employees and
Feudalism for the rest of us.
"... Kane, who coined the term "zombie bank" and who famously raised early alarms about American savings and loans, analyzed European banks and how regulators, including the U.S. Federal Reserve, backstop them. ..."
"... We are only interested observers of the arm wrestling between the various EU countries over the costs of bank rescues, state expenditures, and such. But we do think there is a clear lesson from the long history of how governments have dealt with bank failures . [If] the European Union needs to step in to save banks, there is no reason why they have to do it for free best practice in banking rescues is to save banks, but not bankers. That is, prevent the system from melting down with all the many years of broad economic losses that would bring, but force out those responsible and make sure the public gets paid back for rescuing the financial system. ..."
"... In 2019, another question, alas, is also piercing. In country after country, Social Democratic center-left parties have shrunk, in many instances almost to nothingness. In Germany the SPD gives every sign of following the French Socialist Party into oblivion. Would a government coalition in which the SPD holds the Finance Ministry even consider anything but guaranteeing the public a huge piece of any upside if they rescue two failing institutions? ..."
Running in the background, though, was a new, darker theme: That the post-2008 reforms had gone too far in restricting policymakers'
discretion in crises. The trio most responsible for making the post-Lehman bailout revolution -- Ben Bernanke, Timothy Geithner,
and Henry Paulson --
expressed their
misgivings in a joint op-ed :
But in its post-crisis reforms, Congress also took away some of the most powerful tools used by the FDIC, the Fed and the Treasury
the FDIC can no longer issue blanket guarantees of bank debt as it did in the crisis, the Fed's emergency lending powers have
been constrained, and the Treasury would not be able to repeat its guarantee of the money market funds.
These powers were critical in stopping the 2008 panic The paradox of any financial crisis is that the policies necessary to
stop it are always politically unpopular. But if that unpopularity delays or prevents a strong response, the costs to the economy
become greater.
We need to make sure that future generations of financial firefighters have the emergency powers they need to prevent the next
fire from becoming a conflagration.
Sotto voce fears of this sort go back to the earliest reform discussions. But the question surfaced dramatically in Timothy Geithner's
2016 Per Jacobsson Lecture, " Are We Safer? The Case for Strengthening
the Bagehot Arsenal ." More recently, the Group of Thirty
has advanced similar suggestions -- not too surprisingly, since Geithner was co-project manager of the report, along with Guillermo
Ortiz, the former Governor of the Mexican Central Bank, who introduced the former Treasury Secretary at the Per Jacobson lecture.
Aside from the financial collapse itself, probably nothing has so shaken public confidence in democratic institutions as the wave
of bailouts in the aftermath of the collapse. The redistribution of wealth and opportunity that the bailouts wrought surely helped
fuel the populist surges that have swept over Europe and the United States in the last decade. The spectacle of policymakers rubber
stamping literally unlimited sums for financial institutions while preaching the importance of austerity for everyone else has been
unbearable to millions of people.
Especially in money-driven political systems, affording policymakers unlimited discretion also plainly courts serious risks. Put
simply, too big to fail banks enjoy a uniquely splendid situation of "heads I win, tails you lose" when they take risks. Scholars
whose research INET has supported, notably
Edward Kane , have shown how the certainty of government bailouts advantages large financial institutions, directly affecting
prices of their bonds and stocks.
For these reasons INET convened a panel at a G20 preparatory meeting in Berlin on "
Moral Hazard Issues in Extended Financial Safety Nets ."
The Power Point presentations of the three panelists are presented in the order in which they gave them, since the latter ones sometimes
comment on Edward Kane
's analysis of the European banks. Kane, who coined the term "zombie bank" and who famously raised early alarms about American
savings and loans, analyzed European banks and how regulators, including the U.S. Federal Reserve, backstop them.
Peter Bofinger
, Professor of International and Monetary Economics at the University of Würzburg and an outgoing member of the German Economic Council,
followed with a discussion of how the system has changed since 2008.
Helene Schuberth
, Head of the Foreign Research Division of the Austrian National Bank, analyzed changes in the global financial governance system
since the collapse.
The panel took place as public discussion of a proposed merger between two giant German banks, the Deutsche Bank and Commerzbank,
reached fever pitch. The panelists explored issues directly relevant to such fusions, without necessarily agreeing among themselves
or with anyone at INET.
But the point Robert Johnson, INET's President, and I
made some years back , amid an earlier wave of talk about using public money to bail out European banks, remains on target:
We are only interested observers of the arm wrestling between the various EU countries over the costs of bank rescues,
state expenditures, and such. But we do think there is a clear lesson from the long history of how governments have dealt with
bank failures . [If] the European Union needs to step in to save banks, there is no reason why they have to do it for free best
practice in banking rescues is to save banks, but not bankers. That is, prevent the system from melting down with all the many
years of broad economic losses that would bring, but force out those responsible and make sure the public gets paid back for rescuing
the financial system.
The simplest way to do that is to have the state take equity in the banks it rescues and write down the equity of bank shareholders
in proportion. This can be done in several ways -- direct equity as a condition for bailout, requiring warrants that can be exercised
later, etc. The key points are for the state to take over the banks, get the bad loans rapidly out of those and into a "bad bank,"
and hold the junk for a decent interval so the rest of the market does not crater. When the banks come back to profitability,
you can cash in the warrants and sell the stock if you don't like state ownership. That way the public gets its money back .at
times states have even made a profit.
In 2019, another question, alas, is also piercing. In country after country, Social Democratic center-left parties have shrunk,
in many instances almost to nothingness. In Germany the SPD gives every sign of following the French Socialist Party into oblivion.
Would a government coalition in which the SPD holds the Finance Ministry even consider anything but guaranteeing the public a huge
piece of any upside if they rescue two failing institutions?
There needs to be an asset tax on/break up of the megas. End the hyper-agglomeration of deposits at the tail end. Not holding
my breath though. (see NY state congressional delegation)
To be generous, tax starts at $300 billion. Even then it affects only a dozen or so US banks. But would be enough to clamp
down on the hyper-scale of the largest US/world banks. The world would be better off with lot more mid-sized regional players.
Anyone who mentions Timmy Geithner without spitting did not pay attention during the Obama reign of terror. He and Obama crowed
about the Making Home Affordable Act, implying that it would save all homeowners in mortgage trouble, but conveniently neglected
to mention that less than 100 banks had signed up. The thousands of non-signatories simply continued to foreclose.
Not to mention Eric Holder's intentional non-prosecution of banksters. For these and many other reasons, especially his "Islamic
State is only the JV team" crack, Obama was one of our worst presidents.
Fergusons graph on DBK's default probabilities coincides with the ECB's ending its asset purchase programme and entering the
"reinvestment phase of the asset purchase programme". https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html
The worst of the euro zombie banks appear to be getting tense and nervous. https://www.youtube.com/watch?v=dKpzCCuHDVY
Maybe that is why Jerome Powell did his volte-face last month on gradually raising interest rates. Note that the Fed also reduced
its automatic asset roll-off. I'm curious if the other euro-zombies in the "peers" return on equity chart are are experiencing
volatility also.
Apparently the worst fate you can suffer as long as you don't go Madoff is Fuld. According to Wikipedia his company manages
a hundred million which must be humiliating. It's not as humiliating as locking the guy up in prison would be by a very long stretch.
Greenspan famously lamented that there isn't anything the regulators can really do except make empty threats. This is dishonest.
The regulations are not carved in stone like the ten commandments. In China they execute incorrigible financiers all the time.
Greenspan was never willing to counter any problem that might irritate powerful financial constituencies. For example, during
the internet stock bubble of the late 1990's, Greenspan decried the "irrational exuberance" of the stock market. The Greenspan
Fed could have raised the margin requirement for stocks to buttress this view, but did not. As I remembered reading, Greenspan
was in poor financial shape when he got his Fed job.
His subsequent performance at the Fed apparently left him a wealthy man. Real regulation by Greenspan may have adversely affected
his wealth. It may explain why Alan Greenspan would much rather let a financial bubble grow until it pops and then "fix it".
Everybody forgets (or at least does not mention) that Greenspan was a member of the Class of '43, the (mostly Canadian) earliest
members of the Objectivist Cult with guru Ayn Rand. Expecting him to act rationally is foolish. It may happen accidentally (we
do not know why he chose to let the economy expand unhindered in 1999), but you cannot count on it. In a world with information
asymmetry expecting markets to be concerned about reputation is ridiculous. To expect them to police themselves for long term
benefit is even more ridiculous.
I think Finance is currently about 13% of the S&P 500, down from the peak of about 18% or so in 2007. I think we will have
a healthy economy and improved political climate when Finance is about 8-10% of the S&P 500 which is about where I think finance
plays a healthy, but not overwhelming rentier role in the economy.
"... She soldiered through her painful stomach ailments and secretly tape-recorded 46 hours of conversations between New York Fed officials and Goldman Sachs. After being fired for refusing to soften her examination opinion on Goldman Sachs, Segarra released the tapes to ProPublica and the radio program This American Life and the story went viral from there... ..."
"... In a nutshell, the whoring works like this. There are huge financial incentives to go along, get along, and keep your mouth shut about fraud. The financial incentives encompass both the salary, pension and benefits at the New York Fed as well as the high-paying job waiting for you at a Wall Street bank or Wall Street law firm if you show you are a team player . ..."
"But the impotence one feels today -- an impotence we should never consider permanent -- does not excuse one from remaining true
to oneself, nor does it excuse capitulation to the enemy, what ever mask he may wear. Not the one facing us across the frontier or
the battle lines, which is not so much our enemy as our brothers' enemy, but the one that calls itself our protector and makes us
its slaves. The worst betrayal will always be to subordinate ourselves to this Apparatus, and to trample underfoot, in its
service, all human values in ourselves and in others."
Simone Weil
"And in some ways, it creates this false illusion that there are people out there looking out for the interest of taxpayers, the
checks and balances that are built into the system are operational, when in fact they're not. And what you're going to see and what
we are seeing is it'll be a breakdown of those governmental institutions. And you'll see governments that continue to have policies
that feed the interests of -- and I don't want to get clichéd, but the one percent or the .1 percent -- to the detriment of everyone
else...
If TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the
same winding mountain road, but this time in a faster car... I think it's inevitable. I mean, I don't think how you can look at all
the incentives that were in place going up to 2008 and see that in many ways they've only gotten worse and come to any other conclusion."
Neil Barofsky
"Written by Carmen Segarra, the petite lawyer turned bank examiner turned whistleblower turned one-woman swat team, the 340-page
tome takes the reader along on her gut-wrenching workdays for an entire seven months inside one of the most powerful and corrupted
watchdogs of the powerful and corrupted players on Wall Street – the Federal Reserve Bank of New York.
The days were literally gut-wrenching. Segarra reports that after months of being alternately gas-lighted and bullied at
the New York Fed to whip her into the ranks of the corrupted, she had to go to a gastroenterologist and learned her stomach lining
was gone.
She soldiered through her painful stomach ailments and secretly tape-recorded 46 hours of conversations between New York Fed officials
and Goldman Sachs. After being fired for refusing to soften her examination opinion on Goldman Sachs,
Segarra released the tapes to ProPublica and
the radio program This American Life and the story went viral from there...
In a nutshell, the whoring works like this. There are huge financial incentives to go along, get along, and keep your mouth shut
about fraud. The financial incentives encompass both the salary, pension and benefits at the New York Fed as well as the high-paying
job waiting for you at a Wall Street bank or Wall Street law firm if you show you are a team player .
If the Democratic leadership of the House Financial Services Committee is smart, it will reopen the Senate's aborted inquiry into
the New York Fed's labyrinthine conflicts of interest in supervising Wall Street and make removing that supervisory role a core component
of the Democrat's 2020 platform. Senator Bernie Sanders' platform can certainly be expected to continue the accurate battle cry that
'the business model of Wall Street is fraud.'"
The 238-page document, written by the majority staff of the House Transportation
Committee, calls into question whether the plane maker or the Federal Aviation Administration
has fully incorporated essential safety lessons, despite a global grounding of the MAX fleet
since March 2019.
After an 18-month investigation, the report, released Wednesday, concludes that Boeing's
travails stemmed partly from a reluctance to admit mistakes and "point to a company culture
that is in serious need of a safety reset."
The report provides more specifics, in sometimes-blistering language, backing up
preliminary
findings the panel's Democrats released six months ago , which laid out a pattern of
mistakes and missed opportunities to correct them.
In one section, the Democrats' report faults Boeing for what it calls "inconceivable and
inexcusable" actions to withhold crucial information from airlines about one cockpit-warning
system, related to but not part of MCAS, that didn't operate as required on 80% of MAX jets.
Other portions highlight instances when Boeing officials, acting in their capacity as
designated FAA representatives, part of a widely used system of delegating oversight
authority to company employees,
failed to alert agency managers about various safety matters .
Boeing concealed from regulators internal test data showing that if a pilot took longer
than 10 seconds to recognise that the system had kicked in erroneously, the consequences
would be "catastrophic" .
The report also detailed how an alert, which would have warned pilots of a potential
problem with one of their anti-stall sensors, was not working on the vast majority of the Max
fleet . It found that the company deliberately concealed this fact from both pilots and
regulators as it continued to roll out the new aircraft around the world.
In Bed With the Regulators
Boeing's defense is the FAA signed off on the reviews. Lovely. Boeing coerced or bribed the FAA to sign off on the reviews now tries to hide behind
the FAA.
There is only one way to stop executive criminals like those at Boeing. Charge them with manslaughter, convict them, send them to prison for life, then take all of
their stock and options and hand the money out for restitution.
adr , 1 hour ago
Remember, Boeing spent enough on stock buybacks in the past ten years to fund the
development of at least seven new airframes.
Instead of developing a new and better plane, they strapped engines that didn't belong on
the 737 and called it safe.
SDShack , 21 minutes ago
What is really sad is they already had a perfectly functional and safe 737Max. It was the
757. Look at the specs between the 2 planes. Almost same size, capacity, range, etc. Only
difference was the 757 requires longer runways, but I would think they could have adjusted
the design to improve that and make it very similar to the 737Max without starting from
scratch. Instead Boeing bean counters killed the 757 and gave the world this flying coffin.
Now the world bean counters will kill Boeing.
Tristan Ludlow , 1 hour ago
Boeing is a critical defense contractor. They will not be held accountable and they will
be rewarded with additional bailouts and contract awards.
MFL5591 , 1 hour ago
Can you imagine a congress of Criminals Like Schiff, Pelosi and Schumer prosecuting
someone else for fraud? What a joke. Next up will be Bill Clinton testifying against a person
on trial for Pedophilia!
RagaMuffin , 1 hour ago
Mish is half right. The FAA should join Boeing in jail. If they are not held responsible
for their role, why have an FAA?
Manthong , 1 hour ago
"There is only one way to stop executive criminals like those at Boeing.
Charge them with manslaughter, convict them, send them to prison for life, then take all
of their stock and options and hand the money out for restitution."
Correction:
There is only one way to stop regulator criminals like those in government.
Charge them with manslaughter, convict them, send them to prison for life, then take all
of their pensions and ill gotten wealth a nd hand the money out for restitution.
Elliott Eldrich , 43 minutes ago
"There is only one way to stop executive criminals like those at Boeing.
Charge them with manslaughter, convict them, send them to prison for life, then take all
of their stock and options and hand the money out for restitution."
Ha ha ha HA HA HA HA HA! Silly rabbit, jail is for poors...
Birdbob , 1 hour ago
Accountability of Elite Perps ended under Oblaba's reign of "Wall Street and Technocracy
Architects" .White collar criminals were granted immunity from prosecution. This was put into
play by Attorney Genital Eric Holder. This was the beginning of having an orificial Attorney
Genital that facilitated the District of Criminals organized crime empire ending the 3 letter
agencies' interference. https://www.blogger.com/blog/post/edit/8310187817727287761/1843903631072834621
Dash8 , 1 hour ago
You don't seem to understand the basic principle of aircraft design...it must not require
an extraordinary response for a KNOWN problem.
Think of it this way; Ford builds a car that works great most of the time, but
occasionally a wheel will fall off at highway speeds...no problem, right? ....you just guide
the car to the shoulder on the 3 remaining wheels and all good.
Now, put your wife and kids in that car, after a day at work and the kids screaming in the
back.
Still feel good about your opinion?
canaanav , 1 hour ago
I wrote software on the 787. You are right. This was not a known problem and the Trim
Runaway procedure was already established. The issue was that the MAX needed a larger
horizontal stab and MCAS would have never been needed. The FAA doesnt have the knowledge to
regulate things like this. Boeing lost talent too, and gets bailouts and tax breaks to the
extent that they dont care.
Dash8 , 1 hour ago
But it was a known problem, Boeing admits this.
Argon1 , 41 minutes ago
LGBT & Ethnicity was a more important hiring criteria than Engineering talant.
gutta percha , 1 hour ago
Why is it so difficult to design and maintain reliable Angle Of Attack sensors? The
engineers put in layers and layers of complicated tech to sense and react to AOA sensor
failures. Why not make the sensors _themselves_ more reliable? They aren't nearly as complex
as all the layers of tech BS on top of them.
Dash8 , 1 hour ago
It's not, but it costs $$....and there you have it.
Argon1 , 37 minutes ago
Its the Shuttle Rocketdyne problem, the upper management phones down to the safety
committee and complains about the cost of the delay, take off your engineer hat and put on
your management hat. All of a sudden your project launches on schedule and the board claps
and cheers at their ability to defy physics and save $ millions by just shouting at someone
for about 60 seconds..
canaanav , 1 hour ago
Each AOA sensor is already redundant internally. They have multiple channels. I believe
they were hit with a maintenance stand and jammed. That said, AOA has never been a control
system component. It just runs the low-speed cue on the EFIS and the stick shaker. It's an
advisory-level system. Boeing tied it to Flight Controls thru MCAS. The FAA likely dictated
to Boeing how they wanted the System Safety Analysis (SSA) to look, Boeing wrote it that way,
the FAA bought off on it.
Winston Churchill , 43 minutes ago
More fundamental is why an aerodynamically stable aircraft wasn't designed in the first
place,love of money.
HardlyZero , 13 minutes ago
Yes. In reality the changed CG (Center of Gravity) due to the larger fan engine really did
setup as a "new" design, so the MAX should have been treated as "new" and completely
evaluated and completely tested as a completly new design. As a new design it would probably
double the development and test cost and schedule...so be it.
DisorderlyConduct , 1 hour ago
"Lovely. Boeing coerced or bribed the FAA to sign off on the reviews now tries to hide
behind the FAA."
No - what a shoddy analysis.
The FAA conceded many of their oversight responsibilities to Boeing - who was basically
given the green light to self-monitor. The FAA is the one that is in the wrong here.
Well, how the **** else was that supposed to end up? This is like the IRS letting people
self-audit...
Astroboy , 1 hour ago
Just as the Boeing saga is unfolding, we should expect by the end of the year other
similar situations, related to drug companies, pandemia and the rest.
8. The internet was invented by the US government, not Silicon Valley
Many people think that the US is ahead in the frontier technology sectors as a result of
private sector entrepreneurship. It's not. The US federal government created all these
sectors.
The Pentagon financed the development of the computer in the early days and the Internet
came out of a Pentagon research project. The semiconductor - the foundation of the
information economy - was initially developed with the funding of the US Navy. The US
aircraft industry would not have become what it is today had the US Air Force not massively
subsidized it indirectly by paying huge prices for its military aircraft, the profit of which
was channeled into developing civilian aircraft.
People believe that corporate executives are immune from prosecution and protected by the
fact that they are within the corporation. This is false security. If true purposeful and
intended criminal activities are conducted by any corporate executive, the courts can do what
is called "Piercing The Corporate Veil" . It is looking beyond the corporation as a virtual
person and looking at the actual individuals making and conducting the criminal
activities.
Some will know who Hyman Minsky was, some won't. Hudson gives him the primary credit for
providing the foundation for Modern Monetary Theory, and he gets praise from Keen, Wolfe and
many others too. On the occasion of his 100th birthday, here's a
long essay that seeks the following:
"But the question still stands: Was Minsky in fact a communist? Of course not. But, a
century after his birth, it is useful to clarify often neglected aspects of his intellectual
biography."
Since Minsky's referenced so often by Hudson particularly, I think this piece will be
helpful for those of us following the serious economic issues now in play. I'd reserve an
hour for a critical read.
For a fictional character, homo economicus has had a pretty good run
.
Since the 1950s,
this mono-motivated, self-seeking figure has stalked the pages of economics textbooks, busy deciding each
action according to a rational calculus of personal loss and gain. But more recently his territory has
shrunk as experts on human nature have demonstrated what any decent novelist could have told them: our real
selves are nothing like this.
Unfortunately, many economists still plug this flawed view of people into computer models that determine
all kinds of things that impact our lives, from how much workers get paid to how we value life or common
goods, such as a clean environment. The results can be disastrous.
Typically, economists aren't that keen on admitting that their work is deeply connected to morality --
never mind that Adam Smith himself was a moral philosopher. But if you ask a question as simple as how to
price a used car, you quickly find that moral concerns and economic activity happen together all the time.
In his 2012 book,
The Righteous Mind
, New York University social psychologist Jonathan Haidt
explored why so many perfectly intelligent people have misread human nature– and not just economists, but
plenty of psychologists and even (shocker!) people who identify as politically liberal. For him, the key to
getting to know ourselves properly lies with moral psychology, a newish strain that pulls together
evolutionary, neurological, and social-psychological research on moral emotions and intuitions.
As Haidt sees it, we are creatures driven by moral intuition and attuned to both our personal interests
as well as what's good for the groups with which we identify. He points out that in order to thrive, we have
to appreciate our complex, interactive natures and see each other more clearly and empathetically – an
observation that may be especially useful at a time when threats like climate change and the concentration
of money and power threatens all of us, no matter who we are or what groups we belong to. At the moment, we
aren't doing such a good job of this.
In Haidt's view, the conscious mind is like a press secretary spewing after-the-fact justifications for
decisions already made. Thinkers like David Hume and Sigmund Freud were certainly hip to this idea, but
somehow a lot of economists missed the memo, as did psychologists following dominant rationalist models in
the 1980s and '90s.
Haidt invites us to consider ourselves as a rider (our analytical, rational part) and an elephant (our
emotional, intuitive part). The rider holds the reins, but the beast below is in charge, urged on by the
complex interaction of genetic influence, neural wiring, and social conditioning. The rider can advise the
elephant, but the elephant calls most of the shots.
Fortunately, the elephant is quite intelligent and equipped with all sorts of intuitions that are good
for conscious reasoning. But elephants get very stubborn when threatened and like to stick to what's
familiar. The rider, for her part, is not exactly a reliable character. She's not really searching for
truth, but mostly for ways to justify what the elephant wants.
That's why a rebel economist challenging conventional thinking about subjects like human nature faces a
heavy lift. Experts have to see a lot of evidence accumulating across many studies before they reach a point
where they are finally forced to think differently. Scientific studies are even less helpful in persuading
the general public.
When I asked Haidt how the mavericks could help their cause, he noted that humans are social creatures
more influenced by people than by ideas. So, it matters
who
says something as much as
what
they say. It also makes a difference how they say it: elephants don't like to be insulted, and they lean
towards arguments made by people they like and admire. Not very rational, perhaps, but likely true.
Homo Duplex
The notion that human beings are social creatures is another strike against homo economicus. We are
selfish much of the time, but we are also "groupish," as Haidt puts it, and perhaps better described as
"homo duplex" operating on two levels. Here he offers another animal analogy, suggesting that we're 90%
chimp and 10% bee, meaning that from an evolutionary perspective, we are selfish primates with a more
recently developed a "hivish" overlay that lets us occasionally devote ourselves to helping others, or our
groups.
This helps explain why you can't predict how someone is going to vote based on their narrow
self-interest. Political opinions are like badges of social membership. We don't just ask what's in it for
us, but also what it means to our groups. Having a kid in public school doesn't tell you that a person will
support aid to public schools, probably because there are group interests in play. What unifies us in
groups, Haidt argues, are certain moral foundations that allow us to share emotionally compelling worldviews
that we can easily justify and defend against any attack by outsiders who don't share them. And we can get
pretty nasty about those outsiders.
This begins to sound like ugly tribalism, the kind of stuff that leads to war. But Haidt reminds us that
this propensity also prepares us to get along within our groups and even to cooperate on a large scale -- our
human superpower. We differ from other primates because we exhibit shared intentionality: we're able to plan
things together and work together towards a common goal. You never see two chimps carrying a log – they just
don't act in concert that way. We do, and in our groups we've developed mechanisms to suppress cheaters and
free riders and reap the benefit of division of labor. Groups of early humans may well have triumphed over
other hominids not because they smashed them with clubs , but because they out-cooperated them.
To better understand how we operate in political groups, which have lately become more antagonistic,
Haidt created a map of our moral landscape called Moral Foundations Theory which delineates multiple
"foundations" we presumably use when making moral decisions, including care/harm, fairness/cheating,
loyalty/betrayal, authority/subversion, sanctity/degradation, and liberty/oppression. (Some scholars have
challenged
his system, offering alternative maps). His research indicates that liberals and
conservatives differ in the emphasis they place on each of these foundations, with conservatives tending to
value all six domains equally and liberals valuing the first two much more than the other three.
Haidt argues that liberals tend to home in on care and fairness when they talk about policy issues, which
can put them at a disadvantage vis-à-vis conservatives, who tend to activate the whole range of foundations.
Republicans are thus better able to talk to elephants than Democrats because they possess more ways to go
for the gut, as it were. If Democrats want to win, Haidt warns, they need to think of morality as more than
just care and fairness and to try to better understand that foundations more important to conservatives,
like deference to authority or a reverence for sacredness, are not pathological, but aspects human social
evolution that have helped us survive in many situations.
When he wrote
The Righteous Mind
, Haidt noted that Democrats had espoused a moral vision that
did not resonate with many working class and rural voters. In the current presidential race, he sees some
progress on economic populism from the Bernie Sanders wing, in part because Occupy Wall Street got people
attuned to issues of fairness and the oppression of the 1%. When politicians talk about the abuse of
political and economic power, they can activate not only care and fairness concerns, but also the
liberty/oppression foundation which people respond to across the political spectrum.
But this line is also tricky because, as Haidt pointed out to me, "Americans don't really hate their
rich." (One
recent study
suggested only 25% of Americans have a negative view of the rich, though a majority said
they should be taxed more).
Haidt also worries that many Democrats, particularly elites, are currently engaging with cultural issues
by embracing a what he called a "common enemy" form of identity politics which "demonizes people at the
intersectional point of evil (white men)" rather than focusing on a "common humanity" story which "draws a
larger circle around everyone. (Haidt plunged into controversial territory with his 2018 book,
The
Coddling of the American Mind
, which argues that college campuses are shutting down useful debate
through "safetyism" that protects students from ideas considered harmful or offensive).
He observed to me that while the polarizing Donald Trump may have turned off the younger generation "for
the next few decades," Democrats may be failing "to look seriously at the ways that their social
policies -- and their messengers -- alienate many moderates." Newly "woke" white elites, for example, who see
racism as the driver of nearly every phenomenon, may be having an unintended negative effect in his view.
When they ascribe Trump's victory to racial resentment and ignore the concerns of those who fear sliding
down the economic ladder, for example, they may turn off potential allies. Call a person or a group racist
and you won't be able to convince them to support your view on anything. Their elephants aren't listening.
Haidt acknowledges that our moral matrices are not written in stone; they can and do evolve, sometimes
quite rapidly within a couple of generations. Economic forces surely act to shift attunement to moral
foundations, making people more susceptible, for example, to anti-immigration arguments. If you fail to
consider the economic influence on this kind of moral activation, you'll be less equipped to address
problems like ethnic conflict. Being able to step outside our own moral matrix is essential to persuasion.
We not only have to talk to the elephant, but see the beehive.
We also have to remember the truth is not likely to be something held by any one individual, but rather
something that emerges as a large number of flawed and limited minds exchange views on a given subject. Our
smarts and flexibility are increased by our ability to cooperate and share information. Economists, for
example, improve their understanding of human nature by opening up to other social sciences and the
humanities for insight.
There is evidence that economists are paying attention to moral psychology. In their book
Identity
Economics
, Nobel laurate
George
Akerlof
and Rachel Kranton argue that people identify with "social categories," and that each category,
whether it be Christian, mother, or neighbor, has associated norms or ideals to which people want to aspire.
Sam Bowles'
The Moral Economy
shows that monetary incentives don't work in many situations and that
policies targeting our selfish instincts can actually weaken the institutions which depend on our more
selfless impulses– including financial markets. At the Institute of New Economic Thinking (INET), the
connection between economics and morality has been explored by
INET president Rob
Johnson and political philosopher Michael Sandel
as well as thinkers like
economic historian Robert Skidelsky
and
economist Darrick Hamilton
.
All of this rather bad news for homo economicus. But pretty good news for humanity.
we're 90% chimp and 10% bee, meaning that from an evolutionary perspective, we are selfish primates
with a more recently developed a "hivish" overlay that lets us occasionally devote ourselves to helping
others, or our groups.
Well if one wants to take an "evolutionary perspective" (works for me) then obviously our instincts are
shaped to promote survival of the species and not just the individual. And if that's true then the
Randian/economics version of rational isn't rational at all. Perhaps it would be clearer to talk about this
problem in terms of rational versus irrational rather than appealing to some "altruism gene" that will
supposedly save us. IMO only that rational, intelligent, creative aspect of humans will save us from that
irrational side that is indeed totally instinctive. Somehow we've gotten this far–despite everything–"by the
skin of our teeth." Here's hoping those minds will find a path.
Over what? Carol's point about the sociology of Ayn Rand?
In point of fact, Carol, altruism is always secondary (where it appears) in nature. Selfishness
ensures the fittest genes survive to carry on the species. Only in the face of catastrophe does
altruism at
the individual level become more valuable than selfishness. So, indeed it is because of our
selfishness, because we've struggled by the skin of our teeth, that we as a species have survived and
prospered.
but, but erik, that leaves out all the energy saving advantage we get from a cohesive group
which is also determined to survive and carry on centuries of knowledge on just how to do so .
Just a quick jab: why does Haidt, and others, assume that feelings are inferior to logic and intellect?
Seems to me they are inter-twined, separate-able, but equal in value, if not dimension.
It could be a three way set-up instead of a two way (like markets, which are commonly spoken of as two:
buyer and seller, but are three: buyer, seller, and banker /money man). Man's consciousness could be 1)
feelings, 2) logic /intellect, and 3) the decider (call out to ex-prez W, so got political jab in too!).
In fairness to Haidt, I think he's more nuanced than "rationality good; feelings bad"
I have encountered more of that rather rigid approach among those who have read "Thinking Fast and
Slow" perhaps because that book doesn't do as good a job of outlining as crucial the capacity to
recognize which situations favor System 1 thinking and those which favor System 2 -- a problem compounded
by the emphasis in the book on the rather narrow range of circumstances in which System 2 is clearly
superior.
Jeez – I spent years getting an Econ degree in the homo economus/monetarist era (dark times), when I
should've been making my way through my D&D Dungeon Master's sci fi collection!
I always thought that the Professors who thought up homo economus never went with their wives (as
it was back then) to the grocery store.
The rational choice, always, was the store brand. DelMonte and all other such brands owed their
very existence to non-rational, emotional choices–by tons of people.
'Rational' just means 'consistently following an internally sound logic.' A machine does that –
following the logic of its mechanics. A computer does that – following the logic of code. An animal does
that – following the logic dictated by emotion. And an animal certainly does that better than we humans
whose behaviors become muddled by ideas. Truly, by this measure animals are better machines than humans –
more mechanical, more emotional, more logical, more rational.
That's why a rebel economist challenging conventional thinking about subjects like human nature faces
a heavy lift. Experts have to see a lot of evidence accumulating across many studies before they reach a
point where they are finally forced to think differently.
As an ex-organic chemist, I was astonished to find that more than a few scientists cling to outdated
paradigms with a tenacity that would shame the most rigid religious fundamentalist. Cf. heliobacter,
continental drift, even the heliocentric solar system.
While "continental" drift was first proposed in about 1600 AD it was not completely wrong. Like many
initial geologic theories it was partially correct. It is now known that it is not the "continents" that
move across the earth, but tectonic plates, on which the continents are located, that is creating
movement. The convection of the earths interior magma is thought to be the movement vector for the
plates.
"this propensity also prepares us to get along within our groups and even to cooperate on a large scale --
our human superpower"
Yuval Harari's central point revolves around this. Humans, like other primates, engage in "grooming"
activities to maintain group cohesion. With the development of language, this "grooming" went from picking
lice out of each other's hair (fun!) to gossiping about each other. But this behavior seems to be unable to
maintain a group size larger than 150 individuals, not surprising considering the person-to-person contact
necessary.
To gather a larger group around common goals requires myth, Harari says. Early myths involved gods, often
imagined as living in a separate world with structures parallel to our own. In a polytheistic society, the
head god related to the lesser gods as a king related to his human subjects. In the henotheistic Ancient
Near East, nations like Babylon, Assyria and even the southern Israelite kingdom of Judah envisioned a
parallel war occurring in "heaven" between the national gods when two countries went to war. These days,
there are new, completely secular myths like what Harari calls "Money" that orient our world around
materialism, competition and power.
William H. McNeill also noted the almost universal human behaviours of mass marching/dancing (which
requires and reinforces cooperation) as indicative of a social behaviour rooted in a biological need
We also have "mirror neurons" for a reason -- one that baffles the proponents of "homo economicus"
I was more interested in this article from the political perspective; i.e. what liberals get wrong.
Like many who read this site, I'm interested in the primary elections and want Bernie to win.
But Bernie's message could be better by being more attuned to some of the "Moral Foundation" issues Haidt
raises.
Take Medicare for All which, by most accounts, is the leading issue to most voters:
Talking more about Medicare being a simple and successful 50+ year program appeals to authority. Medicare
Advantage plans can be framed as subversion. Or loyalty / betrayal. Also consider sanctity / degradation.
Talking more about the 80/20 aspect of coverage addresses fairness / cheating and "free stuff"
Not talking about eliminating private insurance shows concern for liberty / oppression. I would actually
make a joke about people who would still want private insurance after M4A becomes available
Just food for thought in terms of how the ideas contained in the article could be applied.
And the next time some nefarious reporter asks how we will pay for this or that; I wish someone will just
say "Mexico will pay for it".
As an economist (M.A. in Econ), I am elated to see Jonathan Haidt's work receive this kind of attention
from serious thinkers. In addition to the reasons cited by Lynn Parramore, I believe Professor Haidt's work
validates, by building on, the work of Humanistic Economics by Professor Mark Lutz (Ph.D. UC-Berkeley) and
Dr. Kenneth Lux. Moreover, Professor Haidt's work appears, to me, to further validate the astute criticisms
of Dean Baker and Mark Weisbrot for neoclassical Marxists' use of "Rational Economic Man" in their
paradigm's modls (no "e"). Having obtained my degree about 25 years ago, basically in humanistic economics,
I am sure that adoption of such thinking by grad students in economics can help rescue humanity from its
current barbaric state. I just hope there's still time left.
On hate and having negative view on the rich
: this article mentions that "only" 25% of
Americans have a negative or very negative view of the rich". Only is the proper word? I would say that is a
lot of bad feelings. Hate is not a sane feeling and we are inclined to hate in stressful situations. So, if
25% of Americans, have these negative feelings (8% very negative) about the rich this spells quite a lot of
despair/stress. It would be interesting a comparison with other countries to evaluate if this is normal by
international standards.
I mention this because stress & despair might explain, at least partially, the relative low turnout in
general elections in the US compared with other OECD countries. Does anybody here know the evolution of
electoral turnout in the US since 1950? Has turnout declined with time?
I remembered an old David Brooks column mentioning that Americans vote their aspirations.
I'm not a fan of Brooks, but this 20 year old column may explain some USA citizens' current
attitudes..
Here is a sample quote (about a proposed Al Gore estate tax):
"The most telling polling result from the 2000 election was from a Time magazine survey that asked
people if they are in the top 1 percent of earners. Nineteen percent of Americans say they are in the
richest 1 percent and a further 20 percent expect to be someday. So right away you have 39 percent of
Americans who thought that when Mr. Gore savaged a plan that favored the top 1 percent, he was taking a
direct shot at them."
While it has been 20 years since this was published, one might suspect American "I'll be rich"
aspirations have taken a beating during this interval.
The economics profession has ridden the hydrocarbon energy spend of the last 100+ years as hydrocarbon
energy has been pulled from the ground and converted into "economic growth".
It will be interesting to see how the profession responds to future events with climate change, peak
human population and peak energy inexorably (in my view) arriving.
One thing that has happened is that over the past several decades so- called liberals have agreed with
conservatives that the market represents freedom and efficiency and the government represents the opposite.
Some younger people are rebelling, but older voters have been hearing this their whole lives without
challenge until Sanders came along.
I just read a description of a Trump rally at the NYT and I think it was accurate. The reporters just
repeated what ordinary people said there. One guy claimed the Democrats have just swung so far left he can't
support them anymore, yet on economics this simply isn't the case. Sanders just represents what Democrats
used to be on economic issues.
I enjoyed the article, and agree with the main ideas, but he was a little rough on our primate cousins.
Chimps may not cooperate by "carrying logs", but, like a lot of social animals, they work together when,
say, hunting other primates. And most social animals have a pretty well-developed sense of fairness (watch
what happens if you give one of your dogs a treat and ignore the other one).
Yes I am trying to think about what chimps would actually need to transport a log for. That famous
jocular saying by one of the researchers "we were beginning to think the difference between us was merely
cultural".
Is that a sense of fairness or a sense of competition or perhaps a sense of both? Each dog would
prefer being the favorite but will accept being the equal.
Dogs are an interesting analogy because in my observation they are, as social animals, so much like
us. Perhaps the main takeaway from the above article is the belief that there is such a thing as "human
nature" and that we have a kinship with the other species. Needless to say such a view was once anathema
in an intellectual climate dominated by religion and a human centric world view. Even now people like
Pence are "dominionists" and believe that humans have been given dominion over the planet and all its
other species because of what it says in the Bible. Power always needs to justify itself–perhaps because
of that innate sense of fairness/competition that you mention.
Haidt got me thinking about language too. His thesis could be talking about the evolution of
language itself. The evolution of rationalization. Since he seems to premise his insights on human
intuition and a certain bedrock of morality that all animals seem to have. Pre language. Can we
attribute the morality of animals to a lack of rationalization? They do seem to lack immorality. If we
were mute, but very intuitive as we are, what effect would our intuition have on our communication
skills and our actions? Raising the question here, Is language the emotional middleman that is always
(duplex) less than rational and causing all this confusion? Sort of thinking here about someone giving
an over-the-top sermon, like an economics professor claiming that we are all homo-economicus.
Morality traditionally implies conscious choice so I'm not sure that's relevant to the animal
world. Guess what I'm saying is that we are similar to certain animals in our instincts, not our
intelligence.
However the language of economic profs is deceptive since they should be saying "irrational self
interest" rather than "rational self interest." Pure selfishness usually ends up being bad even for
the selfish.
Also on this very subject, last night on Nova, the one about dogs, their domestication (or
ours?) and their amazing ability to relate – communicate. They attribute a dog's ability to
communicate to oxytocin – because they thrive on love and friendship. I do believe that because
I've only had one aloof dog and he was very wolf-like. A throwback. Indicating that evolution
tends toward love – not to be too corny. Maybe Oxytocin will save us ;-)
If by "pack animals" you mean species that live in societies I never said they didn't. But
obviously there is also cooperation on some level and social bonding. I do think this is a very
complicated subject and not easily reduced to simplifications by yours truly–not a biologist–or the
above article. But arguably the above is correct in asserting that economists themselves are
ignoring the complications.
And for those interested, here is
a paper published in 2008
that empirically demonstrates that the "Homo economicus" approach in this case
disguised in the form of "median-voter model" is bullshit regarding inequality, redistribution and public
opinion, though they regard it as intelectually compelling. Economists!
>Experts have to see a lot of evidence accumulating across many studies before they reach a point where
they are finally forced to think differently.
Ummm, the whole, underlying maybe, point of the rest of the article is that the dominant economic thought
of our age has nothing to do with evidence. Yet they overthrew Keynes. "Trust us, We're Experts" or
something like that right?
I just finished slogging through The Master and His Emissary by Iain McGilchrist, which harmonizes with
this article. Instead of the rider on an elephant, McGilchrist writes of the functions of the left and right
hemispheres of the brain, which are significantly different. The left brain is verbal, analytical, and task
oriented. It likes straight lines. (This strikes me as a description of the pseudo-accuracy and busyness of
economics.) The right brain sees a larger picture, is less talky, and is generally better at perceiving the
world around us. It is the hemisphere that can attain greater knowledge even if it is not as adept at
expressing such knowledge in words. (The "bee" part of the brain–and more than 10 percent.)
McGilchrist's book is good, but way too long, which is an irony given that he asserts that the left
brain, the emissary, is trying to subvert the master, the part of the brain less likely to go on and on and
on in words.
But this era of too many easy paradigms (economics, "free markets"), too much flimsy analysis (critical
studies, queer studies, economics, New York Times op-ed columnists), and too much talk (social media) is
very much left-brained. I think that what is wearing all of us out is the endless tsunami of word salad.
Economics, with its insistance on rationality rather than reasonableness (left brain rather than right
brain), fell into the salad bowl a long time ago.
Yes. I, too, think this is a very important book. Being retired, I don't think it's too long. I revel
in how much stuff I got for only thirty bucks (or whatever it was -- something like that.)
The neurological case is complete after 94 very dense pages. (535 citations. Pleasantly readable prose,
though, and that bizarre experiment that "proves" that porcupines are monkeys.) After that he traces the
effects and footprints of the two independent modes of thought through philosophy, art, music, and,
generally, the working of our societies from ancient to post-modern.
There's a strong parallel to Daniel Kahneman's Fast and Slow thinking, the right hemisphere being the
fast one. The one wrinkle is that language is the province of the left hemisphere, but Kahnemann finds
that fast thinking is perfectly adept at small-talk, as long as it doesn't get too abstract.
Worst for me is that now that I've read it, I've got to go back into Heidegger, all the other modern
Germans, John Dryden, classical and modern painting, religion
So how would homo economicus work out in anything other than a modern industrial system? In earlier
times, I would say that at the least they would be shunned as a danger to the community or maybe even thrown
out altogether as being incapable of working in a close-knit community. Want a modern example instead? How
about the fact that you cannot have a military based on the idea of homo economicus unless you are talking
about a band of mercenaries. This whole stupid idea is why every relationship these days whether for work,
employment, government, etc is defined by contracts. In short, it is a cookie-cutter idea that come in only
one shape.
"Since the 1950s, this mono-motivated, self-seeking figure has stalked the pages of economics
textbooks, busy deciding each action according to a rational calculus of personal loss and gain."
Advertising gave up with that sort of approach years ago.
Advertisers appeal to deep seated wants and desires and this works really well, so they haven't looked back.
Are the wealthy much more rational?
Let's have a look at adverts targeted at wealthy people.
Are they a long list of specifications and comparisons saying why these products are better?
No.
An advert for a Sunseeker luxury yacht conveys luxury, elegance, being able to get away from it all and
there is usually a young woman in the back in a bikini; the less said about that the better.
What about PR and propoganda?
How do they work?
The same as advertising really, and it's got nothing to do with appealing to rational human beings.
It works; they are not going to be doing it differently anytime soon.
A propos of nothing, long, long ago there was an ad during the Superbowl placed by Cadillac. It was
all about authority, power, celebrity, and it hardly mentioned cars at all, if it even did. Blog
commenters had to work very hard to explain how this was selling Cadillacs. IMHO, it didn't sell
Cadillacs. It told the top Cadillac executives all the things about themselves that they most longed to
hear. It didn't sell cars to wealthy people, it sold the ad itself to the Cadillac C-suite. It worked
like a charm.
Y-axis – top to bottom
X-axis – Across genders, races, etc ..
As long as the Democrats wealthy donors keep them focussed on identity politics and the X-axis, the
donors should be able to keep making progress in the reverse direction on the Y-axis.
and he's MUCH better than Haidt. I recommend this book and lots
of his earlier work, much of it done with Herbert Gintis.
Their 1976 "Schooling in capitalist America" is no less necessary
reading now than it was then, and their 1986 "Democracy & capitalism"
is maybe even more relevant now (Milanovic credits it as a forerunner
to his current "Capitalism, alone", which it is–and much more than that).
More recent stuff is referenced in "The moral economy" and pretty
much always worthwhile.
Morality is a big part of decision making, but I'll argue that is secondary to our cognitive biases that
exist at an even lower level of consciousness to enable us to retain function and decision making in the
face of an overwhelming number of variables.
The opposite of cognitive bias or perhaps the antidote is critical thinking, which must be
taught/learned, so yeah it is preposterous to assume people use solid reasoning that could only come about
with the use of critical thinking, which vasts swaths of society almost never exercise.
The article to me is all over the place, which builds on Haidt's views that seem all over the place too.
Interesting though. Comments too. The experimental data about Haidt's classifications of moral decision
making elements, and where self-described liberals and conservatives rank them in importance was
interesting. I suppose the liberals regarding only two of the six as important could be due to their college
educations. As a math professor I had once observed about a smart student in his class: "he learned his
subject too well". Or to paraphrase Othello: "One that learned not wisely but too well".
The most important takeaway from this is that we should not let economists guide the economy. Not the
economists believing in homo economicus anyway (and, while we are at it, believing in equilibrium as
well). The reason for existence of such a concept is clearly to replace ethics and morality as a guiding
principle of human economic activity with a pseudo- "natural law" (humans by nature are "economicus" –
i.e. self-interested and materialistic – phew!), which once entrenched, relieves those in power from
moral obligations because it safely explains away almost any economic outcome as result of "natural"
forces – i.e. no one to blame (globalization=natural force). It's a great tool for them. Down with it.
The asumption of rationality has been defeated by many economists, as well as psychologists,
sociologists, etc.. Carrying on about this is unncessary. Assuming that humans worry about "care and
fairness' is true. The "12" prophets of the Tanakh (Old Testament") raised this concern numerous times, and
one can find it as a major issue in the Synoptic Gospels. Smith also worried about this in his first book on
economocs, "The Theory of Moral Sentiments." The only reason for any further consideration of "rationality"
in economics is due to the attemprt by economists to treat economics as a "science" like physics. There are
also numerous misguided attempts to mathemaize economics.
But one insidious reason to pretend that economics is a "science" is to justify the idea of a "Nobel
Prize" in economics, or to give a "halo" to economists that win the "Swedish Central Bank Prize in Economic
Scholarship in Memory of Alfred Nobel."
Avner Offer and Gabriel Söderberg have written a good book about the creation of this prize, "The Nobel
Factor." Please note, the words "Nobel Prize" do not seem to appear on either the certificates or medal
awarded.
Daniel Kahneman who won the prize (justifiably, (and John Nash a famous mathematicin who won many real
prizes) notd that giving labels often transfers a false aura to those being labeled. Offer and Söderberg
noted that this is true of the label "winner of the Nobel Prize." Given that there is no decent
encompasssing theory of economics similar to Newton's Laws and how often the prizes are awarded to
economists who don't produce anything like such a theory, we should once and for all abandone the pretense
that economis is a science. It is an attempt to describe social behaviour in a very restricted context.
Leaving it to psychologists, sociologists and others has produce better undertandings of human behaviour.
I had hoped to welcome 2020 with a optimistic post.
Alas, the current news cycle has thrown up little cause for optimism.
Instead, what has caught my eye today: 2019 closes with release of a new study showing the FDA's failure to police opioids manufacturers
fueled the opioids crisis.
This is yet another example of a familiar theme: inadequate regulation kills people: e.g. think Boeing. Or, on a longer term,
less immediate scale, consider the failure of the Environmental Protection Agency, in so many realms, including the failure to curb
emissions so as to slow the pace of climate change.
In the opioids case, we're talking about thousands and thousands of people.
On Monday, Jama
Internal Medicine published research concerning the US Food and Drug Administration's (FDA) program to reduce opioids abuse.
The FDA launched its risk evaluation and mitigation strategy – REMS – in 2012. Researchers examined nearly 10,000 documents, released
in response to a Freedom of Information ACT (FOA) request, to generate the conclusions published by JAMA.
In 2011, the F.D.A. began asking the makers of OxyContin and other addictive long-acting opioids to pay for safety training
for more than half the physicians prescribing the drugs, and to track the effectiveness of the training and other measures in
reducing addiction, overdoses and deaths.
But the F.D.A. was never able to determine whether the program worked, researchers at the Johns Hopkins Bloomberg School of
Public Health found in a new review, because the manufacturers did not gather the right kind of data. Although the agency's approval
of OxyContin in 1995 has long come under fire, its efforts to ensure the safe use of opioids since then have not been scrutinized
nearly as much.
The documents show that even when deficiencies in these efforts became obvious through the F.D.A.'s own review process, the
agency never insisted on improvements to the program, [called a REMS]. . .
The FDA's regulatory failure had serious public health consequences, according to critics of US opioids policy, as reported by
the NYT:
Dr. Andrew Kolodny, the co-director of opioid policy research at the Heller School for Social Policy and Management at Brandeis,
said the safety program was a missed opportunity. He is a leader of
a group of physicians who had encouraged the F.D.A.
to adopt stronger controls, and a frequent critic of the government's response to the epidemic.
Dr. Kolodny, who was not involved in the study, called the program "a really good example of the way F.D.A. has failed to regulate
opioid manufacturers. If F.D.A. had really been doing its job properly, I don't believe we'd have an opioid crisis today."
Now, as readers frequently emphasize in comments: pain management is a considerable problem – one I am all too well aware of,
as I watched my father succumb to cancer. He ultimately passed away at my parents' home.
Although these drugs "can be clinically useful among appropriately selected patients, they have also been widely oversupplied,
are commonly used nonmedically, and account for a disproportionate number of fatal overdoses," the authors write.
The FDA was unable, more than 5 years after it had instituted its study of the opioids program's effectiveness, to determine whether
it had met its objectives, and this may have been because prior assessments were not objective, according to CNN:
Prior analyses had largely been funded by drug companies, and a 2016 FDA advisory committee "noted methodological concerns
regarding these studies," according to the authors. An inspector general report also concluded in 2013 that the agency "lacks
comprehensive data to determine whether risk evaluation and mitigation strategies improve drug safety."
In addition to failing to evaluate the effective of the limited steps it had taken, the FDA neglected to take more aggressive
steps that were within the ambit of its regulatory authority. According to CNN:
"FDA has tools that could mitigate opioid risks more effectively if the agency would be more assertive in using its power to
control opioid prescribing, manufacturing, and distribution," said retired FDA senior executive William K. Hubbard in an
editorial that accompanied the study. "Instead of bold, effective action, the FDA has implemented the Risk Evaluation and
Mitigation Strategy programs that do not even meet the limited criteria set out by the FDA."
One measure the FDA could have taken, according to Hubbard: putting restrictions on opioid distribution.
"Restricting opioid distribution would be a major decision for the FDA, but it is also likely to be the most effective policy
for reducing the harm of opioids," said Hubbard, who spent more than three decades at the agency and oversaw initiatives in areas
such as regulation, policy and economic evaluation.
Perhaps the Johns Hopkins study will spark moves to reform the broken FDA, so that it can once again serve as an effective regulator.
This could perhaps be something we can look forward to achieving in 2020 (although I won't hold my breath).
Or, perhaps if enacting comprehensive reform is too overwhelming, especially with a divided government, as a starting point: can
we agree to stop allowing self-interested industries to finance studies meant to assess the effectiveness of programs to regulate
that very same industry? Please?
As the Chicago revolution took hold, Bork's views crept into the judiciary. Eventually in a
fit of activism, the courts did away with the prohibition on predatory pricing. In its 1993
decision in Brooke Group Ltd. v. Brown & Williamson Tobacco Corporation , the United
States Supreme Court completely re-imagined the Robinson-Patman Act.
The case originally involved the tobacco oligopoly controlled by six firms. Liggett had
introduced a cheap generic cigarette and gained market share. When Brown & Williamson saw
that generics were undercutting their shares, it undercut Liggett and sold cigarettes at a
loss. Liggett sued, alleging that the predatory behavior was designed to pressure it to raise
prices on its generics, thus enabling Brown & Williamson to maintain high profits on
branded cigarettes.
In its decision, the Court held that in order for there to be a violation of the Clayton Act
and the Robinson-Patman Act, a plaintiff must show not only that the alleged predator priced
the product below the cost of its production but also that the predator would be likely to
recoup the losses in the future. The recoupment test dealt a death blow to predatory pricing
lawsuits because it is, of course, impossible to prove a future event.
The Supreme Court parroted Bork, noting that "predatory pricing
schemes are rarely tried, and even more rarely successful ." The Court also argued that it was
best not to pursue predatory pricing cases because doing so would "chill the very conduct the
antitrust laws are designed to protect."
The result has been severe. After 1993, no plaintiff alleging predatory pricing has
prevailed at the federal level, and most cases are thrown out in summary judgement. The DOJ and
FTC have completely ignored the law and ceased enforcing it.
Through judicial activism and executive neglect, the laws regarding antitrust and predatory
pricing have become odd relics, like those on greased pigs and cannibalism.
Predatory pricing is symptomatic of the broader problems when it comes to antitrust. Today,
except in extreme circumstances such as outright monopoly, courts are unlikely to block mergers
over an increase in market concentration. The Supreme Court has now tilted so far the other way
that it prefers to allow too much concentration rather than too little. It made this clear in
its Verizon Communications Inc. v. Law Offices of Curtis V. Trinko LLP decision, where
it stated its preference for minimizing incorrect merger challenges rather than preventing
excessive concentration.
In the Trinko case, for example, Justice Scalia suggested that those who enforce
antitrust laws ought to be deferential to firms with monopoly power, which are "an important
element of a free market system."
Scalia continued: "Against the slight benefits of antitrust intervention here, we must weigh
a realistic assessment of its costs ." The opportunity to acquire monopoly power and charge
monopoly prices is "what attracts 'business acumen' in the first place," he said, and "induces
risk taking that produces innovation and economic growth." He wrote that the "mere possession
of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful;
it is an important element of the free-market system."
The result of all this has been an increase of monopolies. Professor John Kwoka reviewed
decades of merger cases and concluded that "recent merger control has not been sufficiently
aggressive in challenging mergers." The overall effect has been "approval of significantly more
mergers that prove to be anticompetitive."
The Sherman Act and the Robinson-Patman Act may be deeply misguided; perhaps they should
even be repealed. But they haven't been. Passing new legislation is the proper way to change
laws one disagrees with. Getting rid of them in practice via judicial activism or an an
unwilling executive is not democratic.
The death of antitrust and predatory pricing reflects not only a failure of jurisprudence
but of economics. For all the claims of up-to-the-minute economic sophistication that activist
judges have used in the field of antitrust, the scholarship on predatory pricing is wildly out
of date. Brooke made Robinson-Patman irrelevant by citing "modern" economic
scholarship, yet the research the Supreme Court relied on goes back to studies by John McGee
and Roland Koller, published in 1958 and 1969 respectively.
Predatory pricing has only become more rational in a world where winner-take-all platforms
are happy to sustain short-term losses for the sake of long-term market share gains. What they
lose on one side with free shipping or below cost products, they make up for in other parts of
their business.
The rationality of predatory pricing is not some new economic finding. Almost 20 years ago,
Patrick
Bolton , a professor at Columbia Business School, wrote that "several sophisticated
empirical case studies have confirmed the use of predatory pricing strategies. But the courts
have failed to incorporate the modern writing into judicial decisions, relying instead on
earlier theory no longer generally accepted."
According to Bork, predatory pricing didn't work in theory, but does it work in practice?
Antitrust experts remember the Brooke case, but none seem to recall what actually
happened to the companies involved in the lawsuit.
After the Supreme Court decision left it without any legal remedy, Liggett succumbed to
pressure from Brown & Williamson and raised its prices. The entire industry raised prices
too. In the end, Liggett was not able to attract enough market share and ended up selling most
of its brands to Phillip Morris a few years later. Ever since, the tobacco oligopoly has raised
prices in lockstep twice a year with no competition. No company is foolish enough to lower
prices for fear of predatory pricing.
The losers from the judicial activism of Brooke are consumers and the rule of law.
The winners are the oligopolies and monopolies who protect their markets.
When it comes to enforcing antitrust, it's worth remembering the words of Robert Bork. As he
wrote in 1971 in his seminal piece " Neutral
Principles and Some First Amendment Problems ," "If the judiciary really is supreme, able
to rule when and as it sees fit, the society is not democratic."
The Supremes have been the Federal legislature since 1803. Recommending restraint is the
same thing as ordering one party in a legislature to surrender to the opposite party
regardless of majorities.
Monopolization is the core of Free Market economics. Free, literally, means free to become
a monopoly, free to practice vulture capitalism, free to use superior capitalization to
destroy competition, free to move your factory to China.
Free Market is a buzz phrase among bankers and other well-to-do to increase their income
at your expense instead of through superior production, design, and advertising methods. If
you want to know why we live in such a dysfunctional economy, its because we've abandoned
competitive capitalism for a free market economy.
Adam Smith (yes, that Adam Smith) noted in Wealth of Nations that if you put
two competing businessmen in a room together, not only do they get along just fine, their
conversation quickly turns to the subject of how they can work work together to rig markets
and screw the consumer for moar profitt.
Adam Smith was a much more interesting and sophisticated thinker than the B-school
Cliffs Notes version.
I think we could us more purist views of capitalism in conversations about capitalism. The
kinds of behaviors engaged designed to put others out of business described in the article
is not exemplary of capitalism.
The purpose of capitalism is not explicated with models of destroying competition. And
it certainly does not have mechanisms in which the government acts as an arm of business.
The notion that the business of "America" (the US) is business is misleading. Because when
it comes the government of the US her role is to ensure fair play. And power dynamics used
to destroy the ability of another to tap into the available market share is not a
capitalist principle. When one reads about the level and kinds of antics that corporate
boards and CEO's play to damage competition, to include the use of campaign funds to "buy"
or influence unique favors at cost to consumers - then we are talking about kind of faux
"law of the jungle". Bailing out business but not the defrauded customers of those same
businesses -- mercantilism not capitalism.
And it is these types of behaviors guised as capitalism, that fuels liberal demands for
a system of governance that is more akin to communism and socialism. They note the abuses,
but apply the wrong remedy.
I would agree that predatory pricing actually undercuts better pricing, improved
products or innovation (product creativity).
Conservatives are outraged, still, that Democrats refused to confirm Bork to the Supreme
Court.
Never mind the fact the Democrats were fully within their rights not to confirm, advise
and consent does not mean rubber stamp, Bork was the guy who actually carried out Nixon's
Saturday Night Massacre. Why would conservatives want a corrupt and unethical person like
this in the Supreme Court in the first place?
Conservatives' outraged is very ironic considering Reagan still got to nominate another
candidate, which the Dems confirmed. Meanwhile in a completely unprecedented and vindictive
move, Republicans denied a Democratic president outright his right to a Supreme Court
appointment. There is no comparison between these two episodes.
"Thomas Bowers, a former Deutsche Bank executive and head of the American
wealth-management division, killed himself in Malibu, California, on Tuesday, November 19th,
according to the Los Angeles county coroner's initial report.
You have to look at the banker suicide index. Banker suicides go up exponentially prior to
a banking collapse. I lost count of banker suicides during the 2008 collapse. Bank troubles =
suicides of high ranking employees is the algorithm.
I don't know how well this will retain format but it is the latest from the US Fed on
providing "liquidity" to the private banking system
"
Friday, 11/15/2019- Thursday, 12/12/2019 The Desk plans to conduct overnight repo operations
on each business day as well as a series of term repo operations over the specified period.
OVERNIGHT OPERATIONS DATES AGGREGATE OPERATION LIMIT
Friday, 11/15/2019 - Thursday, 12/12/2019 At least $120 billion
TERM OPERATION DATE MATURITY DATE TERM AGGREGATE OPERATION LIMIT
Tuesday, 11/19/2019 Tuesday, 12/3/2019 14-days At least $35 billion
Thursday, 11/21/2019 Thursday, 12/5/2019 14-days At least $35 billion
Monday, 11/25/2019 Monday, 1/6/2020 42-days At least $25 billion
Tuesday, 11/26/2019 Tuesday, 12/10/2019 14-days At least $35 billion
Wednesday, 11/27/2019 Thursday, 12/12/2019 15-days At least $35 billion
Monday, 12/2/2019 Monday, 1/13/2020 42-days At least $15 billion
Tuesday, 12/3/2019 Tuesday, 12/17/2019 14-days At least $35 billion
Thursday, 12/5/2019 Thursday, 12/19/2019 14-days At least $35 billion
Monday, 12/9/2019 Monday, 1/6/2020 28-days At least $15 billion
Tuesday, 12/10/2019 Monday, 12/23/2019 13-days At least $35 billion
Thursday, 12/12/2019 Thursday, 12/26/2019 14-days At least $35 billion
"
Some take away quotes from various ZH postings
"
In short, the Fed's dual mandate has been replaced by a single mandate of promoting financial
stability (or as some may say, boosting JPMorgan's stock price) similar to that of the
ECB.
Here BofA adds ominously that "by deciding to dynamically assess bank demand for reserves
and reduce the risk of air pockets in repo markets, we believe the Fed has entered
unchartered territory of monetary policy that may stretch beyond its dual mandate." And the
punchline: "By running balance-sheet policy to ensure overnight funding markets remain flush,
the Fed is arguably circumventing the most important brake on excess leverage: the
price."
So if NOT QE is in fact, QE, and if the Fed is once again in the price manipulation
business, what then?
According to BofA's Axel, the most worrying part of the Fed's current asset purchase
program is the realization that an ongoing bank footprint in repo markets is required to
maintain control of policy rates in the new floor system, or as we put it less politely,
banks are now able to hijack the financial system by indicating that they have an overnight
funding problem (as JPMorgan very clearly did) and force the Fed to do their (really
JPMorgan's) bidding.
And this is where BofA's warning hits a crescendo, because while repo is fully
collateralized and therefore contains negligible counterparty credit risk, "there may be a
situation in which banks want to deleverage quickly, for example during a money run or a
liquidation in some market caused by a sudden reassessment of value as in 2008."
Got that? Going forward please refer to any market crash as a "sudden reassessment of
value", something which has become impossible in a world where "value" is whatever the Fed
says it is... Well, the Fed or a bunch of self-serving venture capitalists, who pushed the
"value" of WeWork to $47 billion just weeks before it was revealed that the company is
effectively insolvent the punch bowl of endless free money is taken away.
Therefore, to Bank of America, this new monetary policy regime actually increases systemic
financial risk by making repo markets more vulnerable to bank cycles. This, as the bank
ominously warns, "increases interconnectedness, which is something regulators widely
recognize as making asset bubbles and entity failures more dangerous."
It is, however, BofA's conclusion that we found most alarming: as Axel writes, in his
parting words:
"some have argued, including former NY Fed President William Dudley, that the last
financial crisis was in part fueled by the Fed's reluctance to tighten financial conditions
as housing markets showed early signs of froth. It seems the Fed's abundant-reserve regime
may carry a new set of risks by supporting increased interconnectedness and overly easy
policy (expanding balance sheet during an economic expansion) to maintain funding conditions
that may short-circuit the market's ability to accurately price the supply and demand for
leverage as asset prices rise."
What I didn't include in comment # 137 above but did in the last Weekly Open Thread is the
following about the recent NOT SHORT TERM actions of the US Fed:
The POMO is a Permanent Open Market Operation (purchases from the primary private banks of
Treasuries & MBS) that bought $20 billion between mid-August to mid-September, another
bought $20 billion between mid-September to mid-October and $60 billion between mid-October
to mid-November....totaling $100 billion of US taxpayers money, so far, and is expected to
continue at the $60 billion/month until, supposedly, the middle of next year. (This is the
one that should concern folks the most because the economy has supposedly not crashed yet and
here the Fed is "foaming the runway" of the private banking system on the backs of Americans
already
@ William Gruff # 156 who wrote
"
There is no increase in the domestic US production of anything but bullshit, which America is
cranking out in record quantities, and with delusional fascists leading that productivity
surge.
"
I agree and want to summarize my comments # 137, 138 to add that on top of the manufacturing
recession that you write of and link to that the US has been in a financial recession since
the August/September time frame.
The US Fed has and continues to foam the private banking runway with billions of dollars
to prop up and delay price/value assessment. One reason that I can think of for that is the
coming IPO of Aramco for Saudi Arabia.
Another reason is likely to be a huge game of musical chairs being played where those in
control are arranging a specific set of very few chairs to be available for them when the
music stops. It will all be legal of course since all these financial derivative instruments
that will be in place will have Super-Priority in bankruptcy which gives those creditors of a
bankrupt debtor (America) the right to receive payment before others who would seem to have
superior claims to money or assets. The other losers in this case will be Social Security,
pension funds, state and municipal bonds to say nothing of the savings of the public that
think they are protected with FDIC.
If this event does not incite the pubic to nationalize the private banking system and
imprison many then a super-national cult of folk will own what is left of the Western world
and be defended by xxxx army.
"... There is no strong evidence of a positive impact of TSR plans on firm performance ..."
"... "Despite the fact that just under 50% of S&P 500 firms have this pay metric as part of their executive compensation plans and that this pay metric is designed to align the interest of shareholders and executives," Enayati told Yahoo Finance, "we find that there's no relationship between the pay metric and top-line business outcomes like 1-, 3-, or 5-year total shareholder return, return on equity, earnings per share growth, or revenue growth." ..."
The analysis, done in conjunction with consultants Pearl Meyer & Partners, examined a decade's
worth of data from every company in the S&P 500 (^GSPC). It compared companies that offer their
top brass a total shareholder return (TSR) plan to those that don't and found the increasingly
popular pay plans haven't significantly boosted any of a number of key metrics.
Total shareholder return is how well an investment in a company has done over a given period.
It's a combination of the stock's price change and dividends paid. With TSR plans, managers are
rewarded with shares, options, or even cash to give them a stake in how well the stock does.
For a growing number of corporate heads, big bonuses based on stock performance is a large
part of their pay.
In 2004, just 17% of S&P 500 companies gave CEOs and top executives some form of a TSR plan. A
decade later, nearly half of the companies in the index offered it.
As for those S&P 500 CEOs that have TSR plans, it represents on average some 29% of their
total direct compensation, though that percentage is a decline from 38% a decade ago. That's
because as more companies adopt TSR plans, they are doing so with less weight than companies who
took on these kinds of bonuses earlier.
The average CEO of an S&P 500 company made $13.8 million – or 204 times their average employee
– in 2014, according to job website Glassdoor.com.
Get the Latest Market Data and News with the Yahoo Finance App
Nonetheless, giving CEOs more for total shareholder return doesn't make a difference,
according to the Cornell study.
"There is no strong evidence of a positive impact of TSR plans on firm performance,"
wrote Hassan Enayati, Kevin Hallock, and Linda Barrington of Cornell University's Institute for
Compensation Studies.
"Despite the fact that just under 50% of S&P 500 firms have this pay metric as part of
their executive compensation plans and that this pay metric is designed to align the interest of
shareholders and executives," Enayati told Yahoo Finance, "we find that there's no relationship
between the pay metric and top-line business outcomes like 1-, 3-, or 5-year total shareholder
return, return on equity, earnings per share growth, or revenue growth."
Interestingly, the researchers discovered that while the number of companies paying top
executives for shareholder return incentives is increasing, the size of those bonuses relative to
total compensation is on the decline.
According to Enayati, part of that has to do with companies decreasing the weight of total
shareholder return compensation plans. "But then also the new adopters are coming in at lower
weights, perhaps just to test the water," he explained.
But Enayati doesn't rule out other performance bonuses. "While there's no evidence that this tool
hits the mark, that isn't to say that other metrics shouldn't be pursued as a solid way to align
those incentives," he said.
The analysis, done in conjunction with consultants Pearl Meyer & Partners, examined a decade's
worth of data from every company in the S&P 500. It compared companies that offer their top brass
a total shareholder return (TSR) plan to those that don't and found the increasingly popular pay
plans haven't significantly boosted any of a number of key metrics. ...
likbez said...
Looks to me like a generic problem of any neoliberal regime that became more acute as secular
stagnation of economics became a "new normal".
High compensation (which is just a part of generic redistribution of wealth up -- the goal
on neoliberalism) drives up ruthless sociopaths making short term stock performance the priority
and displaces engineers who are capable drive the firm into the future.
Short termism and financial machinations to boost the stock price are probably among key reasons
of decline of IBM and HP.
Paradoxically Icahn recently provided us with some interesting insights into bizarre world
of stock buybacks. See video on http://carlicahn.com/
"... The lawsuit also aggressively contests Boeing's spin that competent pilots could have prevented the Lion Air and Ethiopian Air crashes: ..."
"... When asked why Boeing did not alert pilots to the existence of the MCAS, Boeing responded that the company decided against disclosing more details due to concerns about "inundate[ing] average pilots with too much information -- and significantly more technical data -- than [they] needed or could realistically digest." ..."
"... The filing has a detailed explanation of why the addition of heavier, bigger LEAP1-B engines to the 737 airframe made the plane less stable, changed how it handled, and increased the risk of catastrophic stall. It also describes at length how Boeing ignored warning signs during the design and development process, and misrepresented the 737 Max as essentially the same as older 737s to the FAA, potential buyers, and pilots. It also has juicy bits presented in earlier media accounts but bear repeating, like: ..."
"... Then, on November 7, 2018, the FAA issued an "Emergency Airworthiness Directive (AD) 2018-23-51," warning that an unsafe condition likely could exist or develop on 737 MAX aircraft. ..."
"... Moreover, unlike runaway stabilizer, MCAS disables the control column response that 737 pilots have grown accustomed to and relied upon in earlier generations of 737 aircraft. ..."
"... And making the point that to turn off MCAS all you had to do was flip two switches behind everything else on the center condole. Not exactly true, normally those switches were there to shut off power to electrically assisted trim. Ah, it one thing to shut off MCAS it's a whole other thing to shut off power to the planes trim, especially in high speed ✓ and the plane noise up ✓, and not much altitude ✓. ..."
"... Classic addiction behavior. Boeing has a major behavioral problem, the repetitive need for and irrational insistence on profit above safety all else , that is glaringly obvious to everyone except Boeing. ..."
"... In fact, Boeing 737 Chief Technical Pilot, Mark Forkner asked the FAA to delete any mention of MCAS from the pilot manual so as to further hide its existence from the public and pilots " ..."
"... This "MCAS" was always hidden from pilots? The military implemented checks on MCAS to maintain a level of pilot control. The commercial airlines did not. Commercial airlines were in thrall of every little feature that they felt would eliminate the need for pilots at all. Fell right into the automation crapification of everything. ..."
At first blush, the suit filed in Dallas by the Southwest Airlines Pilots Association (SwAPA) against Boeing may seem like a family
feud. SWAPA is seeking an estimated $115 million for lost pilots' pay as a result of the grounding of the 34 Boeing 737 Max planes
that Southwest owns and the additional 20 that Southwest had planned to add to its fleet by year end 2019. Recall that Southwest
was the largest buyer of the 737 Max, followed by American Airlines. However, the damning accusations made by the pilots' union,
meaning, erm, pilots, is likely to cause Boeing not just more public relations headaches, but will also give grist to suits by crash
victims.
However, one reason that the Max is a sore point with the union was that it was a key leverage point in 2016 contract negotiations:
And Boeing's assurances that the 737 Max was for all practical purposes just a newer 737 factored into the pilots' bargaining
stance. Accordingly, one of the causes of action is tortious interference, that Boeing interfered in the contract negotiations to
the benefit of Southwest. The filing describes at length how Boeing and Southwest were highly motivated not to have the contract
dispute drag on and set back the launch of the 737 Max at Southwest, its showcase buyer. The big point that the suit makes is the
plane was unsafe and the pilots never would have agreed to fly it had they known what they know now.
We've embedded the compliant at the end of the post. It's colorful and does a fine job of recapping the sorry history of the development
of the airplane. It has damning passages like:
Boeing concealed the fact that the 737 MAX aircraft was not airworthy because, inter alia, it incorporated a single-point failure
condition -- a software/flight control logic called the Maneuvering Characteristics Augmentation System ("MCAS") -- that,if fed
erroneous data from a single angle-of-attack sensor, would command the aircraft nose-down and into an unrecoverable dive without
pilot input or knowledge.
The lawsuit also aggressively contests Boeing's spin that competent pilots could have prevented the Lion Air and Ethiopian Air
crashes:
Had SWAPA known the truth about the 737 MAX aircraft in 2016, it never would have approved the inclusion of the 737 MAX aircraft
as a term in its CBA [collective bargaining agreement], and agreed to operate the aircraft for Southwest. Worse still, had SWAPA
known the truth about the 737 MAX aircraft, it would have demanded that Boeing rectify the aircraft's fatal flaws before agreeing
to include the aircraft in its CBA, and to provide its pilots, and all pilots, with the necessary information and training needed
to respond to the circumstances that the Lion Air Flight 610 and Ethiopian Airlines Flight 302 pilots encountered nearly three
years later.
And (boldface original):
Boeing Set SWAPA Pilots Up to Fail
As SWAPA President Jon Weaks, publicly stated, SWAPA pilots "were kept in the dark" by Boeing.
Boeing did not tell SWAPA pilots that MCAS existed and there was no description or mention of MCAS in the Boeing Flight Crew
Operations Manual.
There was therefore no way for commercial airline pilots, including SWAPA pilots, to know that MCAS would work in the background
to override pilot inputs.
There was no way for them to know that MCAS drew on only one of two angle of attack sensors on the aircraft.
And there was no way for them to know of the terrifying consequences that would follow from a malfunction.
When asked why Boeing did not alert pilots to the existence of the MCAS, Boeing responded that the company decided against
disclosing more details due to concerns about "inundate[ing] average pilots with too much information -- and significantly more
technical data -- than [they] needed or could realistically digest."
SWAPA's pilots, like their counterparts all over the world, were set up for failure
The filing has a detailed explanation of why the addition of heavier, bigger LEAP1-B engines to the 737 airframe made the plane
less stable, changed how it handled, and increased the risk of catastrophic stall. It also describes at length how Boeing ignored
warning signs during the design and development process, and misrepresented the 737 Max as essentially the same as older 737s to
the FAA, potential buyers, and pilots. It also has juicy bits presented in earlier media accounts but bear repeating, like:
By March 2016, Boeing settled on a revision of the MCAS flight control logic.
However, Boeing chose to omit key safeguards that had previously been included in earlier iterations of MCAS used on the Boeing
KC-46A Pegasus, a military tanker derivative of the Boeing 767 aircraft.
The engineers who created MCAS for the military tanker designed the system to rely on inputs from multiple sensors and with
limited power to move the tanker's nose. These deliberate checks sought to ensure that the system could not act erroneously or
cause a pilot to lose control. Those familiar with the tanker's design explained that these checks were incorporated because "[y]ou
don't want the solution to be worse than the initial problem."
The 737 MAX version of MCAS abandoned the safeguards previously relied upon. As discussed below, the 737 MAX MCAS had greater
control authority than its predecessor, activated repeatedly upon activation, and relied on input from just one of the plane's
two sensors that measure the angle of the plane's nose.
In other words, Boeing can't credibly say that it didn't know better.
Here is one of the sections describing Boeing's cover-ups:
Yet Boeing's website, press releases, annual reports, public statements and statements to operators and customers, submissions
to the FAA and other civil aviation authorities, and 737 MAX flight manuals made no mention of the increased stall hazard or MCAS
itself.
In fact, Boeing 737 Chief Technical Pilot, Mark Forkner asked the FAA to delete any mention of MCAS from the pilot manual so
as to further hide its existence from the public and pilots.
We urge you to read the complaint in full, since it contains juicy insider details, like the significance of Southwest being Boeing's
737 Max "launch partner" and what that entailed in practice, plus recounting dates and names of Boeing personnel who met with SWAPA
pilots and made misrepresentations about the aircraft.
Even though Southwest Airlines is negotiating a settlement with Boeing over losses resulting from the grounding of the 737 Max
and the airline has promised to compensate the pilots, the pilots' union at a minimum apparently feels the need to put the heat on
Boeing directly. After all, the union could withdraw the complaint if Southwest were to offer satisfactory compensation for the pilots'
lost income. And pilots have incentives not to raise safety concerns about the planes they fly. Don't want to spook the horses, after
all.
But Southwest pilots are not only the ones most harmed by Boeing's debacle but they are arguably less exposed to the downside
of bad press about the 737 Max. It's business fliers who are most sensitive to the risks of the 737 Max, due to seeing the story
regularly covered in the business press plus due to often being road warriors. Even though corporate customers account for only 12%
of airline customers, they represent an estimated 75% of profits.
Southwest customers don't pay up for front of the bus seats. And many of them presumably value the combination of cheap travel,
point to point routes between cities underserved by the majors, and close-in airports, which cut travel times. In other words, that
combination of features will make it hard for business travelers who use Southwest regularly to give the airline up, even if the
737 Max gives them the willies. By contrast, premium seat passengers on American or United might find it not all that costly, in
terms of convenience and ticket cost (if they are budget sensitive), to fly 737-Max-free Delta until those passengers regain confidence
in the grounded plane.
Note that American Airlines' pilot union, when asked about the Southwest claim, said that it also believes its pilots deserve
to be compensated for lost flying time, but they plan to obtain it through American Airlines.
If Boeing were smart, it would settle this suit quickly, but so far, Boeing has relied on bluster and denial. So your guess is
as good as mine as to how long the legal arm-wrestling goes on.
Update 5:30 AM EDT : One important point that I neglected to include is that the filing also recounts, in gory detail, how Boeing
went into "Blame the pilots" mode after the Lion Air crash, insisting the cause was pilot error and would therefore not happen again.
Boeing made that claim on a call to all operators, including SWAPA, and then three days later in a meeting with SWAPA.
However, Boeing's actions were inconsistent with this claim. From the filing:
Then, on November 7, 2018, the FAA issued an "Emergency Airworthiness Directive (AD) 2018-23-51," warning that an unsafe condition
likely could exist or develop on 737 MAX aircraft.
Relying on Boeing's description of the problem, the AD directed that in the event of un-commanded nose-down stabilizer trim
such as what happened during the Lion Air crash, the flight crew should comply with the Runaway Stabilizer procedure in the Operating
Procedures of the 737 MAX manual.
But the AD did not provide a complete description of MCAS or the problem in 737 MAX aircraft that led to the Lion Air crash,
and would lead to another crash and the 737 MAX's grounding just months later.
An MCAS failure is not like a runaway stabilizer. A runaway stabilizer has continuous un-commanded movement of the tail, whereas
MCAS is not continuous and pilots (theoretically) can counter the nose-down movement, after which MCAS would move the aircraft
tail down again.
Moreover, unlike runaway stabilizer, MCAS disables the control column response that 737 pilots have grown accustomed to and
relied upon in earlier generations of 737 aircraft.
Even after the Lion Air crash, Boeing's description of MCAS was still insufficient to put correct its lack of disclosure as
demonstrated by a second MCAS-caused crash.
We hoisted this detail because insiders were spouting in our comments section, presumably based on Boeing's patter, that the Lion
Air pilots were clearly incompetent, had they only executed the well-known "runaway stabilizer," all would have been fine. Needless
to say, this assertion has been shown to be incorrect.
Excellent, by any standard. Which does remind of of the NYT zine story (William Langewiesche
Published Sept. 18, 2019) making the claim that basically the pilots who crashed their planes weren't real "Airman".
And making
the point that to turn off MCAS all you had to do was flip two switches behind everything else on the center condole. Not exactly
true, normally those switches were there to shut off power to electrically assisted trim. Ah, it one thing to shut off MCAS it's
a whole other thing to shut off power to the planes trim, especially in high speed ✓ and the plane noise up ✓, and not much altitude
✓.
And especially if you as a pilot didn't know MCAS was there in the first place. This sort of engineering by Boeing is criminal.
And the lying. To everyone. Oh, least we all forget the processing power of the in flight computer is that of a intel 286. There
are times I just want to be beamed back to the home planet. Where we care for each other.
One should also point out that Langewiesche said that Boeing made disastrous mistakes with the MCAS and that the very future
of the Max is cloudy. His article was useful both for greater detail about what happened and for offering some pushback to the
idea that the pilots had nothing to do with the accidents.
As for the above, it was obvious from the first Seattle Times stories that these two events and the grounding were going to
be a lawsuit magnet. But some of us think Boeing deserves at least a little bit of a defense because their side has been totally
silent–either for legal reasons or CYA reasons on the part of their board and bad management.
Classic addiction behavior. Boeing has a major behavioral problem, the repetitive need for and irrational insistence on profit
above safety all else , that is glaringly obvious to everyone except Boeing.
"The engineers who created MCAS for the military tanker designed the system to rely on inputs from multiple sensors and with
limited power to move the tanker's nose. These deliberate checks sought to ensure that the system could not act erroneously or
cause a pilot to lose control "
"Yet Boeing's website, press releases, annual reports, public statements and statements to operators and customers, submissions
to the FAA and other civil aviation authorities, and 737 MAX flight manuals made no mention of the increased stall hazard or MCAS
itself.
In fact, Boeing 737 Chief Technical Pilot, Mark Forkner asked the FAA to delete any mention of MCAS from the pilot manual
so as to further hide its existence from the public and pilots "
This "MCAS" was always hidden from pilots? The military implemented checks on MCAS to maintain a level of pilot control. The commercial airlines did not. Commercial
airlines were in thrall of every little feature that they felt would eliminate the need for pilots at all. Fell right into the
automation crapification of everything.
A Secretive Committee of Wall Street Insiders Is the Least of the New York Fed's Concerns.
In July 17, Mary Callahan Erdoes, head of JPMorgan Chase & Co.'s $2.2 trillion asset and wealth management division, walked into
the wood-paneled tenth-floor conference room at the Federal Reserve Bank of New York to address some fellow Wall Street luminaries
-- Bridgewater Associates' Ray Dalio, Dawn Fitzpatrick of Soros Fund Management, short-seller Jim Chanos, and LBO kingpin David Rubenstein
among them.
All are members of the Investor Advisory Committee on Financial Markets (IACFM) -- a forum to provide financial insight to the
New York Fed. Chairing the meeting was New York Fed president John C. Williams, vice chair of the powerful, rate-setting Federal
Open Market Committee, who was a year into his tenure.
Erdoes held forth at the meeting, which included a buffet lunch.
---
And so on.
This is us, we have a unexhaustable desire for these secret meetings to meet, so we vote, every year to convene them. If these
secret meeting did not occur then we could never do a deal with the super wealthy and our precious will not be insured. Reply Saturday,
October 05, 2019 at 06:04 PM
"... The aim of the panel, called the Joint Authorities Technical Review, was to expedite getting the 737 Max into the air by creating a vehicle for achieve consensus among foreign regulators who had grounded the 737 Max before the FAA had. But these very regulators had also made clear they needed to be satisfied before they'd let it fly in their airspace. ..."
"... The FAA hopes to give the 737 Max the green light in November, while the other regulators all have said they have issues that are unlikely to be resolved by then. The agency is now in the awkward position of having a body it set up to be authoritative turn on the agency's own procedures. ..."
"... the FAA had moved further and further down the path of relying on aircraft manufactures for critical elements of certification. Not all of this was the result of capture; with the evolution of technology, even the sharpest and best intended engineer in government employ would become stale on the state of the art in a few years. ..."
"... Although all stories paint a broadly similar picture, .the most damning is a detailed piece at the Seattle Times, Engineers say Boeing pushed to limit safety testing in race to certify planes, including 737 MAX ..The article gives an incriminating account of how Boeing got the FAA to delegate more and more certification authority to the airline, and then pressured and abused employees who refused to back down on safety issues . ..."
"... In 2004, the FAA changed its system for front-line supervision of airline certification from having the FAA select airline certification employees who reported directly to the FAA to having airline employees responsible for FAA certification report to airline management and have their reports filtered through them (the FAA attempted to maintain that the certification employees could provide their recommendations directly to the agency, but the Seattle Times obtained policy manuals that stated otherwise). ..."
"... On Monday, the Post and Courier reported about the South Carolina plant that produced 787s found with tools rattling inside that Boeing SC lets mechanics inspect their own work, leading to repeated mistakes, workers say. These mechanic certifications would never have been kosher if the FAA were vigilant. Similarly, Reuters described how Boeing weakened another safety check, that of pilot input. ..."
"... As part of roughly a dozen findings, these government and industry officials said, the task force is poised to call out the Federal Aviation Administration for what it describes as a lack of clarity and transparency in the way the FAA delegated authority to the plane maker to assess the safety of certain flight-control features. The upshot, according to some of these people, is that essential design changes didn't receive adequate FAA attention. ..."
"... But the report could influence changes to traditional engineering principles determining the safety of new aircraft models. Certification of software controlling increasingly interconnected and automated onboard systems "is a whole new ballgame requiring new approaches," according to a senior industry safety expert who has discussed the report with regulators on both sides of the Atlantic. ..."
"... For instance, the Journal reports that Canadian authorities expect to require additional simulator training for 737 Max pilots. Recall that Boeing's biggest 737 Max customer, Southwest Airlines, was so resistant to the cost of additional simulator training that it put a penalty clause into its contract if wound up being necessary. ..."
"... Patrick Ky, head of the European Union Aviation Safety Agency, told the European Parliament earlier this month, "It's very likely that international authorities will want a second opinion" on any FAA decision to lift the grounding. ..."
"... Most prominently, EASA has proposed to eventually add to the MAX a third fully functional angle-of-attack sensor -- which effectively measures how far the plane's nose is pointed up or down -- underscoring the controversy expected to swirl around the plane for the foreseeable future. ..."
"... It's hard to see how Boeing hasn't gotten itself in the position of being at a major competitive disadvantage by virtue of having compromised the FAA so severely as to have undercut safety. ..."
"... has Boeing developed a plan to correct the trim wheel issue on the 787max? i haven't seen a single statement from them on how they plan to fix this problem. is it possible they think they can get the faa to re-certify without addressing it? ..."
"... Don't forget that the smaller trim wheels are in the NG as well. any change to fix the wheels ripples across more planes than just the Max ..."
"... The self-inflicted wound caused by systematic greed and arrogance – corruption, in other words. Boeing is reaping the wages of taking 100% of their profits to support the stock price through stock buybacks and deliberately under-investing in their business. Their brains have been taken over by a parasitic financial system that profits by wrecking healthy businesses. ..."
"... Shareholder Value is indeed the worst idea in the world. That Boeing's biggest stockholder, Vanguard, is unable to cleanup Boeing's operations makes perfect sense. I mean vanguards expertise is making money, not building anything. Those skills are completely different. ..."
"... One maxim we see illustrated here and elsewhere is this: Trust takes years to earn, but can be lost overnight. ..."
The FAA evidently lacked
perspective on how much trouble it was in after the two international headline-grabbing crashes
of the Boeing 737 Max. It established a "multiagency panel" meaning one that included
representatives from foreign aviation regulators, last April. A new Wall Street Journal article
reports that the findings of this panel, to be released in a few weeks, are expected to
lambaste the FAA 737 Max approval process and urge a major redo of how automated aircraft
systems get certified .
The aim of the panel, called the Joint Authorities Technical Review, was to expedite getting
the 737 Max into the air by creating a vehicle for achieve consensus among foreign regulators
who had grounded the 737 Max before the FAA had. But these very regulators had also made clear
they needed to be satisfied before they'd let it fly in their airspace.
The JATR gave them a venue for reaching a consensus, but it wasn't the consensus the FAA
sought. The foreign regulators, despite being given a forum in which to hash things out with
the FAA, are not following the FAA's timetable. The FAA hopes to give the 737 Max the green
light in November, while the other regulators all have said they have issues that are unlikely
to be resolved by then. The agency is now in the awkward position of having a body it set up to
be authoritative turn on the agency's own procedures.
The Seattle Times, which has broken many important on the Boeing debacle, reported on how
the FAA had moved further and further down the path of relying on aircraft manufactures for
critical elements of certification. Not all of this was the result of capture; with the
evolution of technology, even the sharpest and best intended engineer in government employ
would become stale on the state of the art in a few years.
However, one of the critical decisions the FAA took was to change the reporting lines of the
manufacturer employees who were assigned to FAA certification.
From a May post :
Although all stories paint a broadly similar picture, .the most damning is a detailed
piece at the Seattle Times,
Engineers say Boeing pushed to limit safety testing in race to certify planes, including 737
MAX ..The article gives an incriminating account of how Boeing got the FAA to delegate
more and more certification authority to the airline, and then pressured and abused employees
who refused to back down on safety issues .
As the Seattle Times described, the problems extended beyond the 737 Max MCAS software
shortcomings; indeed, none of the incidents in the story relate to it.
In 2004, the FAA changed its system for front-line supervision of airline certification
from having the FAA select airline certification employees who reported directly to the FAA
to having airline employees responsible for FAA certification report to airline management
and have their reports filtered through them (the FAA attempted to maintain that the
certification employees could provide their recommendations directly to the agency, but the
Seattle Times obtained policy manuals that stated otherwise).
Mind you, the Seattle Times was not alone in depicting the FAA as captured by Boeing. On
Monday, the Post and Courier reported about the South Carolina plant that produced 787s found
with tools rattling inside that
Boeing SC lets mechanics inspect their own work, leading to repeated mistakes, workers say.
These mechanic certifications would never have been kosher if the FAA were vigilant. Similarly,
Reuters described how Boeing weakened another safety check, that of pilot input.
One of the objectives for creating this panel was to restore confidence in Boeing and the
FAA, but that was always going to be a tall order, particularly after more bad news about
various 737 Max systems and Boeing being less than forthcoming with its customers and
regulators emerged.
From the Wall Street Journal :
As part of roughly a dozen findings, these government and industry officials said, the
task force is poised to call out the Federal Aviation Administration for what it describes as
a lack of clarity and transparency in the way the FAA delegated authority to the plane maker
to assess the safety of certain flight-control features. The upshot, according to some of
these people, is that essential design changes didn't receive adequate FAA attention.
The report, these officials said, also is expected to fault the agency for what it
describes as inadequate data sharing with foreign authorities during its original
certification of the MAX two years ago, along with relying on mistaken industrywide
assumptions about how average pilots would react to certain flight-control emergencies .
The FAA has stressed that the advisory group doesn't have veto power over modifications to
MCAS.
But the report could influence changes to traditional engineering principles determining
the safety of new aircraft models. Certification of software controlling increasingly
interconnected and automated onboard systems "is a whole new ballgame requiring new
approaches," according to a senior industry safety expert who has discussed the report with
regulators on both sides of the Atlantic.
If the FAA thinks it can keep this genie the bottle, it is naive. The foreign regulators
represented on the task force, including from China and the EU, have ready access to the
international business press. And there will also be an embarrassing fact on the ground, that
the FAA, which was last to ground the 737 Max, will be the first to let it fly again, and
potentially by not requiring safety protections that other regulators will insist on. For
instance, the Journal reports that Canadian authorities expect to require additional simulator
training for 737 Max pilots. Recall that Boeing's biggest 737 Max customer, Southwest Airlines,
was so resistant to the cost of additional simulator training that it put a penalty clause into
its contract if wound up being necessary.
It's a given that the FAA will be unable to regain its former stature and that all of its
certifications of major aircraft will now be second guessed subject to further
review by major foreign regulators. That in turn will impose costs on Boeing, of changing its
certification process from needing to placate only the FAA to having to appease potentially
multiple parties. For instance, the EU regulator is poised to raise the bar on the 737 Max:
Patrick Ky, head of the European Union Aviation Safety Agency, told the European
Parliament earlier this month, "It's very likely that international authorities will want a
second opinion" on any FAA decision to lift the grounding.
Even after EASA gives the green light, agency officials are expected to push for
significant additional safety enhancements to the fleet. Most prominently, EASA has proposed
to eventually add to the MAX a third fully functional angle-of-attack sensor -- which
effectively measures how far the plane's nose is pointed up or down -- underscoring the
controversy expected to swirl around the plane for the foreseeable future.
A monopoly is a precious thing to have. Too bad Boeing failed to appreciate that in its zeal
for profits. If the manufacturer winds up facing different demands in different regulatory
markets, it will have created more complexity for itself. Can it afford not to manufacture to
the highest common denominator, say by making an FAA-only approved bird for Southwest and
trying to talk American into buying FAA-only approved versions for domestic use only? It's hard
to see how Boeing hasn't gotten itself in the position of being at a major competitive
disadvantage by virtue of having compromised the FAA so severely as to have undercut
safety.
Even if Boeing finds solutions that international regulators can finally accept, their
implementation will take additional months. The AoA sensor and trim wheel issues will
likely require hardware changes to the 600 or so existing MAX airplanes. The demand for
simulator training will further delay the ungrounding of the plane. There are only some two
dozen 737 MAX simulators in this world and thousands of pilots who will need to pass
through them.
has Boeing developed a plan to correct the trim wheel issue on the 787max? i haven't seen
a single statement from them on how they plan to fix this problem. is it possible they think
they can get the faa to re-certify without addressing it?
The self-inflicted wound caused by systematic greed and arrogance – corruption, in
other words. Boeing is reaping the wages of taking 100% of their profits to support the stock
price through stock buybacks and deliberately under-investing in their business. Their brains
have been taken over by a parasitic financial system that profits by wrecking healthy
businesses.
It's not only Boeing – the rot is general and it is terrible to see the destruction
of American productive capacity by a parasitic finance sector.
Shareholder Value is indeed the worst idea in the world. That Boeing's biggest
stockholder, Vanguard, is unable to cleanup Boeing's operations makes perfect sense. I mean
vanguards expertise is making money, not building anything. Those skills are
completely different.
Shareholder value does what it intended to do, which is to maximise stock value in the
short term, even if it significantly cuts value in the long term.
By that measure allowing Boeing to take over the FAA and self-certify the 737-MAX was a
big success, because of short term maximization of stock value that resulted. It is now
someone else's problem regarding any long term harm.
Having worked at Boeing and the FAA, this report is very welcome. One thing: federal
hiring practices in a way lock out good people from working there. Very often the fed
managing some project has only a tenuous grasp is what is going on.
But has the job bc they
were hired in young and cheap, which is what agencies do with reduced budgets. That and job
postings very often stating that they are open only to current feds says it all.
So deferring
to the airline to "self-certify" would be a welcome relief to feds in many cases. At this
point, I doubt the number of their "sharpest and best intended" engineers is very high.
If
you want better oversight, then increase the number and quality of feds by making it easier
to hire, and decrease the number of contractors.
I deal with federal and state regulators (not airplane) all the time. Very well meaning
people, but in many cases are utterly unqualified to do the technical work. So it works well
when they stick to the policy issues and stay out of the technical details.
However, we have
Professional Engineers and other licensed professionals signing off on the engineering
documents per state law. You can look at the design documents and the construction
certification and there is a name and stamp of the responsible individual.
The licensing laws clearly state that the purpose of licensing is to hold public health
and safety paramount. This is completely missing in the American industrial sector due to the
industrial exemptions in the professional engineering licensing laws. Ultimately, there is
nobody technically responsible for a plane or a car who has to certify that they are making
the public safe and healthy.
Instead, the FAA and others do that. Federal agencies and the
insurance institute test cars and give safety ratings. Lawyers sue companies for defects
which also helps enforce safety.
One maxim we see illustrated here and elsewhere is this: Trust takes years to earn, but
can be lost overnight.
Boeing management and the FAA, having lost the trust of most people in the world through
their actions lately, seem to nevertheless think it will be a simple matter to return to the
former status quo. It seems as likely, or perhaps more likely, that they will never be
able to return to the former status quo. They have been revealed as poseurs and imposters,
cheerfully risking (and sometimes losing) their customers' lives so they can buy back more
stock.
This image will be (rightfully) hard for them to shake.
So people are going to quit their jobs rather than fly on Boeing planes? Joe and Marge
Six-Pack are going to choose flights not based on what they can afford but based on what make
of plane they are flying on? As if the airlines will even tell them in advance?
There are close to zero consequences to Boeing and FAA management. Click on the link to
the Purdue Sacklers debacle. The biggest inconvenience will be paying the lawyers.
From 1992 to 1999 I worked for the FAA running one of their labs in OKC. My role, among
other things, was to provide data to the Administrator on employee attitudes, business
practice changes, and policy impact on morale and safety. Back then, likely as now, it was a
common complaint heard from FAA execs about the conflict of interest of having to be both an
aviation safety regulatory agency and having to promote aviation. Congress seemed fine with
that – apparently still is. There is FAA pork in nearly every Congressional district
(think airports for example). Boeing is the latest example of how mission conflict is not
serving the aviation industry or public safety. With its headquarters within walking distance
of Capitol Hill, aviation lobbyists do not even get much exercise shuttling.
The 1996 Valuejet crash into the Florida swamps shows how far back the mission conflict
problem has persisted. Valuejet was a startup airline that was touted as more profitable than
all the others. It achieved that notoriety by flying through every FAA maintenance loophole
they could find to cut maintenance costs. When FAA started clamping down, Senate Majority
Leader Daschle scolded FAA for not being on the cutting edge of industry innovation. The
message was clear – leave Valuejet alone. That was a hard message to ignore given that
Daschle's wife Linda was serving as Deputy FAA Administrator (the #2 position) – a
clear conflict of interest with the role of her spouse – a fact not lost on
Administrator Hinson (the #1 position). Rather than use the disaster as an opportunity to
revisit FAA mission conflict, Clinton tossed Administrator Hinson into the volcano of public
outcry and put Daschle in charge. Nothing happened then, and it looks like Boeing might
follow Valuejet into the aviation graveyard.
Nothin' like regulatory capture. Along with financialized manufacturing, the cheap &
profitable will outdo the costly careful every time. Few businesses are run today with the
moral outlook of some early industrialists (not enough of them, but still present) who,
through zany Protestant guilt, cared for their reputations enough to not make murderous
product, knowing how the results would play both here and in Heaven. Today we have PR and
government propaganda to smear the doubters, free the toxic, and let loose toxins.
From food to clothing, drugs to hospitals, self-propelled skateboards to aircraft,
pesticides to pollution, even services as day care & education, it is time to call the
minions of manufactured madness to account. Dare we say "Free government from Murder
Inc."?
This is an excellent summary of the untenable situation that Boeing and the Federal
Government have gotten themselves into. In their rush to get richer the Elite ignored the
fact that monopolies and regulatory capture are always dangerously corrupt. This is not an
isolated case. FDA allows importation of uninspected stock pharmaceutical chemicals from
China. Insulin is unaffordable for the lower classes. Diseases are spreading through homeless
encampments. EPA approved new uses of environmentally toxic nicotinoid insecticide,
sulfoxaflor. DOD sold hundreds of billions of dollars of armaments to Saudi Arabia that were
useless to protect the oil supply.
The Powers-that-be thought that they would be a hegemon forever. But, Joe Biden's green
light for the Ukraine Army's attack against breakaway Donbass region on Russia's border
restarted the Cold War allying Russia with China and Iran. This is a multi-polar world again.
Brexit and Donald Trump's Presidency are the Empire's death throes.
NC readers know what the problem is as two comments above indicate clearly. Isn't the FAA
ashamed to keep conniving with the money and permitting dangerous planes to fly?
Boeing just got a WTO ruling against Airbus. It seems that one rogue produces others. Time
to clean the stable and remove the money addiction from safety regulation
I think that I can see an interesting situation developing next year. So people will be
boarding a plane, say with Southwest Airlines, when they will hear the following announcement
over the speakers-
"Ladies and gentlemen, this is your Captain speaking. On behalf of myself and the
entire crew, welcome aboard Southwest Airlines flight WN 861, non-stop service from Houston
to New York. Our flight time will be of 4 hours and 30 minutes. We will be flying at an
altitude of 35,000 feet at a ground speed of approximately 590 miles per hour.
We are pleased to announce that you have now boarded the first Boeing 737 MAX that has
been cleared to once again fly by the FAA as being completely safe. For those passengers
flying on to any other country, we regret to announce that you will have to change planes at
New York as no other country in the world has cleared this plane as being safe to fly in
their airspace and insurance companies there are unwilling to issue insurance cover for them
in any case.
So please sit back and enjoy your trip with us. Cabin Crew, please bolt the cabin doors
and prepare for gate departure."
"... The real unemployment rate is probably somewhere between 10%-12%. ..."
"... The U-6 also includes what the labor dept. calls involuntary part time employed. It should include the voluntary part time as well, but doesn't (See, they're not actively looking for work even if unemployed). ..."
"... But even the involuntary part time is itself under-estimated. I believe the Labor Dept. counts only those involuntarily part time unemployed whose part time job is their primary job. It doesn't count those who have second and third involuntary part time jobs. That would raise the U-6 unemployment rate significantly. The labor Dept's estimate of the 'discouraged' and 'missing labor force' is grossly underestimated. ..."
"... The labor dept. also misses the 1-2 million workers who went on social security disability (SSDI) after 2008 because it provides better pay, for longer, than does unemployment insurance. That number rose dramatically after 2008 and hasn't come down much (although the government and courts are going after them). ..."
"... The way the government calculates unemployment is by means of 60,000 monthly household surveys but that phone survey method misses a lot of workers who are undocumented and others working in the underground economy in the inner cities (about 10-12% of the economy according to most economists and therefore potentially 10-12% of the reported labor force in size as well). ..."
"... The SSDI, undocumented, underground, underestimation of part timers, etc. are what I call the 'hidden unemployed'. And that brings the unemployed well above the 3.7%. ..."
The real unemployment rate is probably somewhere between 10%-12%. Here's why: the 3.7% is
the U-3 rate, per the labor dept. But that's the rate only for full time employed. What the
labor dept. calls the U-6 includes what it calls discouraged workers (those who haven't looked
for work in the past 4 weeks). Then there's what's called the 'missing labor force'–i.e.
those who haven't looked in the past year. They're not calculated in the 3.7% U-3 unemployment
rate number either. Why? Because you have to be 'out of work and actively looking for work' to
be counted as unemployed and therefore part of the 3.7% rate.
The U-6 also includes what the labor dept. calls involuntary part time employed. It
should include the voluntary part time as well, but doesn't (See, they're not actively looking
for work even if unemployed).
But even the involuntary part time is itself under-estimated. I believe the Labor Dept.
counts only those involuntarily part time unemployed whose part time job is their primary job.
It doesn't count those who have second and third involuntary part time jobs. That would raise
the U-6 unemployment rate significantly. The labor Dept's estimate of the 'discouraged' and
'missing labor force' is grossly underestimated.
The labor dept. also misses the 1-2 million workers who went on social security
disability (SSDI) after 2008 because it provides better pay, for longer, than does unemployment
insurance. That number rose dramatically after 2008 and hasn't come down much (although the
government and courts are going after them).
The way the government calculates unemployment is by means of 60,000 monthly household
surveys but that phone survey method misses a lot of workers who are undocumented and others
working in the underground economy in the inner cities (about 10-12% of the economy according
to most economists and therefore potentially 10-12% of the reported labor force in size as
well). The labor dept. just makes assumptions about that number (conservatively, I may
add) and plugs in a number to be added to the unemployment totals. But it has no real idea of
how many undocumented or underground economy workers are actually employed or unemployed since
these workers do not participate in the labor dept. phone surveys, and who can blame them.
The SSDI, undocumented, underground, underestimation of part timers, etc. are what I
call the 'hidden unemployed'. And that brings the unemployed well above the 3.7%.
Finally, there's the corroborating evidence about what's called the labor force
participation rate. It has declined by roughly 5% since 2007. That's 6 to 9 million workers who
should have entered the labor force but haven't. The labor force should be that much larger,
but it isn't. Where have they gone? Did they just not enter the labor force? If not, they're
likely a majority unemployed, or in the underground economy, or belong to the labor dept's
'missing labor force' which should be much greater than reported. The government has no
adequate explanation why the participation rate has declined so dramatically. Or where have the
workers gone. If they had entered the labor force they would have been counted. And their 6 to
9 million would result in an increase in the total labor force number and therefore raise the
unemployment rate.
All these reasons–-i.e. only counting full timers in the official 3.7%;
under-estimating the size of the part time workforce; under-estimating the size of the
discouraged and so-called 'missing labor force'; using methodologies that don't capture the
undocumented and underground unemployed accurately; not counting part of the SSI increase as
unemployed; and reducing the total labor force because of the declining labor force
participation-–together means the true unemployment rate is definitely over 10% and
likely closer to 12%. And even that's a conservative estimate perhaps." Join the debate on
Facebook More articles by: Jack Rasmus
Jack Rasmus is author of the recently published book, 'Central Bankers at the End of
Their Ropes: Monetary Policy and the Coming Depression', Clarity Press, August 2017. He blogs
at jackrasmus.com and his twitter handle
is @drjackrasmus. His website is http://kyklosproductions.com .
Acknowledging and pricing macroeconomic uncertainties - Hansen and Sargent
False pretences of knowledge about complicated economic situations have become all too
common in public policy debates. This column argues that policymakers should take into
account what they don't know in their decision making. It describes a tractable approach for
acknowledging, characterising, and responding to different forms of uncertainty, by using
theories and statistical methods available at any particular moment.
---------
Yes, starting about 10,000 years ago.
After our current MMT, we will get the same false pretence, we will have a bunch of AOC
geeks on this blog explaining things have been fixed,'We won't do it again' to quote Ben,
among the many thousands of false pretencers. We will hear from the 'Uncle can fix it later'
crowd. "This time is different' chants another tribe. Someone will put up a blog, and we will
recite talking points absent any evidence.
The delusionals and their preachers do not go away, and neither do their followers. It is
like a religion, we know it is BS, but it keeps our hysteria in check.
"... The FAA has a clearly established pro-Boeing bias and will likely allow Boeing to unground the 737 MAX. We must demand that the two top FAA officials resign or recuse themselves from taking any more steps that might endanger the flying public. The two Boeing-indentured men are Acting FAA Administrator Daniel Elwell and Associate FAA Administrator for Aviation Safety Ali Bahrami. ..."
"... The FAA has long been known for its non-regulatory, waiver-driven, de-regulatory traditions. It has a hard time saying NO to the aircraft manufacturers and the airlines. After the aircraft hijackings directing flights to Cuba in the 1960s and 1970s, the FAA let the airlines say NO to installing hardened cockpit doors and stronger latches in their planes. These security measures would have prevented the hijackers from invading the cockpits of the aircrafts on September 11, 2001. The airlines did not want to spend the $3000 per plane. Absent the 9/11 hijackings, George W. Bush and Dick Cheney might not have gone to war in Afghanistan. ..."
"... Boeing has about 5,000 orders for the 737 MAX. It has delivered less than 400 to the world's airlines. From its CEO, Dennis Muilenburg to its swarms of Washington lobbyists, law firms, and public relations outfits, Boeing is used to getting its way. ..."
"... Right now, the Boeing/FAA strategy is to make sure Elwell and his FAA quickly decide that the MAX is safe for takeoff by delaying or stonewalling Congressional and other investigations. ..."
"... Time is not on the side of the 737 MAX 8. A comprehensive review of the 737 MAX's problems is a non-starter for Boeing. Boeing's flawed software and instructions that have kept pilots and airlines in the dark have already been exposed. New whistleblowers and more revelations will emerge. More time may also result in the Justice Department's operating grand jury issuing some indictments. More time would let the House Transportation and Infrastructure Committee, led by Chairman Peter DeFazio (D-OR) dig into the failure of accountability and serial criminal negligence of Boeing and its FAA accomplices. Chairman DeFazio knows the history of the FAA's regulatory capture. ..."
"... The FAA and its Boeing pals are using the "trade secret" claims to censor records sought by the House Committee. When it comes to investigating life or death airline hazards and crashes, Congress is capable of handling so-called trade secrets. This is all the more reason why the terminally prejudiced Elwell and Bahrami should step aside and let their successors take a fresh look at the Boeing investigations. That effort would include opening up the certification process for the entire Boeing MAX as a "new plane." ..."
The Boeing-driven FAA is rushing to unground the notorious prone-to-stall Boeing 737
MAX (that killed 346 innocents in two crashes) before several official investigations are
completed. Troubling revelations might keep these planes grounded worldwide.
The FAA has a clearly established pro-Boeing bias and will likely allow Boeing to unground
the 737 MAX. We must demand that the two top FAA officials resign or recuse themselves from
taking any more steps that might endanger the flying public. The two Boeing-indentured men are
Acting FAA Administrator Daniel Elwell and Associate FAA Administrator for Aviation Safety Ali
Bahrami.
Immediately after the crashes, Elwell resisted grounding and echoed Boeing claims that the
Boeing 737 MAX was a safe plane despite the deadly crashes in Indonesia and Ethiopia.
Ali Bahrami is known for aggressively pushing the FAA through 2018 to further abdicate its
regulatory duties by delegating more safety inspections to Boeing. Bahrami's actions benefit
Boeing and are supported by the company's toadies in the Congress. Elwell and Bahrami have both
acquired much experience by going through the well-known revolving door between the industry
and the FAA. They are likely to leave the FAA once again for lucrative positions in the
aerospace lobbying or business world. With such prospects, they do not have much 'skin in the
game' for their pending decision.
The FAA has long been known for its non-regulatory, waiver-driven, de-regulatory traditions.
It has a hard time saying NO to the aircraft manufacturers and the airlines. After the aircraft
hijackings directing flights to Cuba in the 1960s and 1970s, the FAA let the airlines say NO to
installing hardened cockpit doors and stronger latches in their planes. These security measures
would have prevented the hijackers from invading the cockpits of the aircrafts on September 11,
2001. The airlines did not want to spend the $3000 per plane. Absent the 9/11 hijackings,
George W. Bush and Dick Cheney might not have gone to war in Afghanistan.
The FAA's historic "tombstone" mentality (slowly reacting after the crashes) is well known.
For example, in the 1990s the FAA had a delayed reaction to numerous fatal crashes caused by
antiquated de-icing rules. The FAA was also slow to act on ground-proximity warning
requirements for commuter airlines and flammability reduction rules for aircraft cabin
materials.
That's the tradition that Elwell and Bahrami inherited and have worsened. They did not even
wait for Boeing to deliver its reworked software before announcing in April that simulator
training would not be necessary for the pilots. This judgment was contrary to the experience of
seasoned pilots such as Captain Chesley "Sully" Sullenberger. Simulator training would delay
ungrounding and cost the profitable airlines money.
Boeing has about 5,000 orders for the 737 MAX. It has delivered less than 400 to the world's
airlines. From its CEO, Dennis Muilenburg to its swarms of Washington lobbyists, law firms, and
public relations outfits, Boeing is used to getting its way. Its grip on Congress – where
300 members take campaign cash from Boeing – is legendary. Boeing pays little in federal
and Washington state taxes. It fumbles contracts with NASA and the Department of Defense but
remains the federal government's big vendor for lack of competitive alternatives in a highly
concentrated industry.
Right now, the Boeing/FAA strategy is to make sure Elwell and his FAA quickly decide that
the MAX is safe for takeoff by delaying or stonewalling Congressional and other
investigations.
The compliant Senate Committee on Commerce, Science and Transportation, under Senator Roger
Wicker (R-MS), strangely has not scheduled anymore hearings. The Senate confirmation of Stephen
Dickson to replace acting chief Elwell is also on a slow track. A new boss at the FAA might
wish to take some time to review the whole process.
Time is not on the side of the 737 MAX 8. A comprehensive review of the 737 MAX's problems
is a non-starter for Boeing. Boeing's flawed software and instructions that have kept pilots
and airlines in the dark have already been exposed. New whistleblowers and more revelations
will emerge. More time may also result in the Justice Department's operating grand jury issuing
some indictments. More time would let the House Transportation and Infrastructure Committee,
led by Chairman Peter DeFazio (D-OR) dig into the failure of accountability and serial criminal
negligence of Boeing and its FAA accomplices. Chairman DeFazio knows the history of the FAA's
regulatory capture.
Not surprising on June 4, 2019, DeFazio sent a stinging letter to FAA's Elwell and his
corporatist superior, Secretary of Transportation Elaine L. Chao, about the FAA's intolerable
delays in sending requested documents to the Committee. DeFazio's letter says: "To say we are
disappointed and a bit bewildered at the ongoing delays to appropriately respond to our records
requests would be an understatement."
The FAA and its Boeing pals are using the "trade secret" claims to censor records sought by
the House Committee. When it comes to investigating life or death airline hazards and crashes,
Congress is capable of handling so-called trade secrets. This is all the more reason why the
terminally prejudiced Elwell and Bahrami should step aside and let their successors take a
fresh look at the Boeing investigations. That effort would include opening up the certification
process for the entire Boeing MAX as a "new plane."
The Boeing-biased Elwell and Bahrami have refused to even raise in public proceedings the
question: "After eight or more Boeing 737 iterations, at what point does the Boeing MAX 8
become a new plane?" Many, including Cong. David Price (D-NC), chair of the House
Appropriations Subcommittee, which oversees the FAA's budget, have already questioned the
limited certification process.
Heavier engines on the old 737 fuselage changed the MAX's aerodynamics and made it
prone-to-stall. It is time for the FAA's leadership to change before the 737 MAX flies with
vulnerable, glitch-prone software "fixes".
Notwithstanding the previous Boeing 737 series' record of safety in the U.S. during the past
decade – (one fatality), Boeing's bosses, have now disregarded warnings by its own
engineers. Boeing executives do not get one, two, three or anymore crashes attributed to their
ignoring long-known aerodynamic engineering practices.
The Boeing 737 MAX must never be allowed to fly again, given the structural design defects
built deeply into its system.
"... Current Establishment Survey (CES) Report ..."
"... Current Population Survey (CPS ..."
"... The much hyped 3.6% unemployment (U-3) rate for April refers only to full time jobs (35 hrs. or more worked in a week). And these jobs are declining by 191,000 while part time jobs are growing by 155,000. So which report is accurate? How can full time jobs be declining by 191,000, while the U-3 unemployment rate (covering full time only) is falling? The answer: full time jobs disappearing result in an unemployment rate for full time (U-3)jobs falling. A small number of full time jobs as a share of the total labor force appears as a fall in the unemployment rate for full time workers. Looked at another way, employers may be converting full time to part time and temp work, as 191,000 full time jobs disappear and 155,000 part time jobs increase. ..."
"... The April selective numbers of 263,000 jobs and 3.6% unemployment rate is further questionable by yet another statistic by the Labor Dept.: It is contradicted by a surge of 646,000 in April in the category, 'Not in the Labor Force', reported each month. That 646,000 suggests large numbers of workers are dropping out of the labor force (a technicality that actually also lowers the U-3 unemployment rate). 'Not in the Labor Force' for March, the previous month Report, revealed an increase of an additional 350,000 added to 'Not in the Labor Force' totals. In other words, a million–or at least a large percentage of a million–workers have left the labor force. This too is not an indication of a strong labor market and contradicts the 263,000 and U-3 3.6% unemployment rate. ..."
"... Whether jobs, wages or GDP stats, the message here is that official US economic stats, especially labor market stats, should be read critically and not taken for face value, especially when hyped by the media and press. The media pumps selective indicators that make the economy appear better than it actually is. Labor Dept. methods and data used today have not caught up with the various fundamental changes in the labor markets, and are therefore increasingly suspect. It is not a question of outright falsification of stats. It's about failure to evolve data and methodologies to reflect the real changes in the economy. ..."
"... Government stats are as much an 'art' (of obfuscation) as they are a science. They produce often contradictory indication of the true state of the economy, jobs and wages. Readers need to look at the 'whole picture', not just the convenient, selective media reported data like Establishment survey job creation and U-3 unemployment rates. ..."
The recently released report on April jobs on first appearance, heavily reported by the
media, shows a record low 3.6% unemployment rate and another month of 263,000 new jobs created.
But there are two official US Labor dept. jobs reports, and the second shows a jobs market much
weaker than the selective, 'cherry picked' indicators on unemployment and jobs creation noted
above that are typically featured by the press.
Problems with the April Jobs Report
While the Current Establishment Survey (CES) Report (covering large businesses)
shows 263,000 jobs created last month, the Current Population Survey (CPS ) second
Labor Dept. report (that covers smaller businesses) shows 155,000 of these jobs were
involuntary part time. This high proportion (155,000 of 263,000) suggests the job creation
number is likely second and third jobs being created. Nor does it reflect actual new workers
being newly employed. The number is for new jobs, not newly employed workers. Moreover, it's
mostly part time and temp or low paid jobs, likely workers taking on second and third jobs.
Even more contradictory, the second CPS report shows that full time work jobs actually
declined last month by 191,000. (And the month before, March, by an even more 228,000 full time
jobs decline).
The much hyped 3.6% unemployment (U-3) rate for April refers only to full time jobs (35
hrs. or more worked in a week). And these jobs are declining by 191,000 while part time jobs
are growing by 155,000. So which report is accurate? How can full time jobs be declining by
191,000, while the U-3 unemployment rate (covering full time only) is falling? The answer: full
time jobs disappearing result in an unemployment rate for full time (U-3)jobs falling. A small
number of full time jobs as a share of the total labor force appears as a fall in the
unemployment rate for full time workers. Looked at another way, employers may be converting
full time to part time and temp work, as 191,000 full time jobs disappear and 155,000 part time
jobs increase.
And there's a further problem with the part time jobs being created: It also appears that
the 155,000 part time jobs created last month may be heavily weighted with the government
hiring part timers to start the work on the 2020 census–typically hiring of which starts
in April of the preceding year of the census. (Check out the Labor Dept. numbers preceding the
prior 2010 census, for April 2009, for the same development a decade ago).
Another partial explanation is that the 155,000 part time job gains last month (and in prior
months in 2019) reflect tens of thousands of workers a month who are being forced onto the
labor market now every month, as a result of US courts recent decisions now forcing workers who
were formerly receiving social security disability benefits (1 million more since 2010) back
into the labor market.
The April selective numbers of 263,000 jobs and 3.6% unemployment rate is further
questionable by yet another statistic by the Labor Dept.: It is contradicted by a surge of
646,000 in April in the category, 'Not in the Labor Force', reported each month. That 646,000
suggests large numbers of workers are dropping out of the labor force (a technicality that
actually also lowers the U-3 unemployment rate). 'Not in the Labor Force' for March, the
previous month Report, revealed an increase of an additional 350,000 added to 'Not in the Labor
Force' totals. In other words, a million–or at least a large percentage of a
million–workers have left the labor force. This too is not an indication of a strong
labor market and contradicts the 263,000 and U-3 3.6% unemployment rate.
Bottom line, the U-3 unemployment rate is basically a worthless indicator of the condition
of the US jobs market; and the 263,000 CES (Establishment Survey) jobs is contradicted by the
Labor Dept's second CPS survey (Population Survey).
GDP & Rising Wages Revisited
In two previous shows, the limits and contradictions (and thus a deeper explanations) of US
government GDP and wage statistics were featured: See the immediate April 26, 2019 Alternative
Visions show on preliminary US GDP numbers for the 1st quarter 2019, where it was shown how the
Trump trade war with China, soon coming to an end, is largely behind the GDP latest numbers;
and that the more fundamental forces underlying the US economy involving household consumption
and real business investment are actually slowing and stagnating. Or listen to my prior radio
show earlier this year where media claims that US wages are now rising is debunked as well.
Claims of wages rising are similarly misrepresented when a deeper analysis shows the
proclaimed wage gains are, once again, skewed to the high end of the wage structure and reflect
wages for salaried managers and high end professionals by estimating 'averages' and limiting
data analysis to full time workers once again; not covering wages for part time and temp
workers; not counting collapse of deferred and social wages (pension and social security
payments); and underestimating inflation so that real wages appear larger than otherwise.
Independent sources estimate more than half of all US workers received no wage increase
whatsoever in 2018–suggesting once again the gains are being driven by the top 10% and
assumptions of averages that distort the actual wage gains that are much more modest, if at
all.
Ditto for GDP analysis and inflation underestimation using the special price index for GDP
(the GDP deflator), and the various re-definitions of GDP categories made in recent years and
questionable on-going GDP assumptions, such as including in GDP calculation the questionable
inclusion of 50 million homeowners supposedly paying themselves a 'rent equivalent'.
A more accurate 'truth' about jobs, wages, and GDP stats is found in the 'fine print' of
definitions and understanding the weak statistical methodologies that change the raw economic
data on wages, jobs, and economic output (GDP) into acceptable numbers for media promotion.
Whether jobs, wages or GDP stats, the message here is that official US economic stats,
especially labor market stats, should be read critically and not taken for face value,
especially when hyped by the media and press. The media pumps selective indicators that make
the economy appear better than it actually is. Labor Dept. methods and data used today have not
caught up with the various fundamental changes in the labor markets, and are therefore
increasingly suspect. It is not a question of outright falsification of stats. It's about
failure to evolve data and methodologies to reflect the real changes in the economy.
Government stats are as much an 'art' (of obfuscation) as they are a science. They
produce often contradictory indication of the true state of the economy, jobs and wages.
Readers need to look at the 'whole picture', not just the convenient, selective media reported
data like Establishment survey job creation and U-3 unemployment rates.
When so doing, the bigger picture is an US economy being held up by temporary factors (trade
war) soon to dissipate; jobs creation driven by part time work as full time jobs continue
structurally to disappear; and wages that are being driven by certain industries (tech, etc.),
high end employment (managers, professionals), occasional low end minimum wage hikes in select
geographies, and broad categories of 'wages' ignored.
Jack Rasmus is author of the recently published book, 'Central Bankers at the
End of Their Ropes: Monetary Policy and the Coming Depression', Clarity Press, August 2017. He
blogs at jackrasmus.com and his twitter
handle is @drjackrasmus. His website is http://kyklosproductions.com .
The jobs reports are fabrications and that the jobs that do exist are lowly paid domestic
service jobs such as waitresses and bartenders and health care and social assistance. What has
kept the American economy going is the expansion of consumer debt, not higher pay from higher
productivity. The reported low unemployment rate is obtained by not counting discouraged workers
who have given up on finding a job.
I was listening while driving to rightwing talk radio. It is BS just like NPR. It was about
the great Trump economy compared to the terrible Obama one. The US hasn't had a great economy
since jobs offshoring began in the 1990s, and with robotics about to launch Americans are
unlikely ever again to experience a good economy.
The latest jobs report released today claims 236,000 new private sector jobs. Where are the
jobs, if they in fact exist?
Manufacturing, that is making things, produced a mere 4,000 jobs.
The jobs are in domestic services. There are 54,800 jobs in "administrative and waste
services." This category includes things such as employment services, temporary help
services, and building services such as janitor services.
"Health care and social assistance" accounts for 52,600 jobs. This category includes
things such as ambulatory health care services and individual and family services.
There are a few other jobs scattered about. Warehousing and storage had 5,400 new
jobs.
Real estate rental and leasing hired 7,800.
Legal services laid off 700 people.
Architectural and engineering services lost 1,700 jobs.
There were 6,800 new managers.
The new jobs are not high value-added, high productivity jobs that provide middle class
incomes.
In the 21st century the US economy has only served those who own stocks. The liquidity that
the Federal Reserve has pumped into the economy has driven up stock prices, and the Trump tax
cut has left corporations with more money for stock buybacks and dividend payments. The
institute on Taxation and Economic Policy reports that 60 Fortune 500 companies paid no taxes
on $79 billion in income, instead receiving a rebate of $4.3 billion. https://itep.org/notadime/
The sign of a good economy is when companies are reinvesting their profits and borrowed
money in new plant and equipment to meet rising demand. Instead, US companies are spending more
on buybacks and dividends than the total of their profits. In other words, the companies are
going into debt in order to drive up their share prices by purchasing their own shares. The
executives and shareholders are looting their own companies, leaving the companies less
capitalized and deeper in debt. https://systemicdisorder.wordpress.com/2016/10/26/work-harder-for-speculators/
Meanwhile, for the American people the Trump regime's budget for 2020 delivers $845 billion
in cuts to Medicare, $1.5 trillion in cuts to Medicaid, and $84 billion in cuts to Social
Security disability benefits.
History is repeating itself: Let them eat cake. After me the deluge.
How the Boeing 737 Max grounding and the Genoa
bridge collapse show us that allowing companies to self-certify the safety of their products can be deadly
On
Wednesday the United States joined 42 other countries in grounding Boeing's 737 Max 8 jets, days after a crash
in Ethiopia of a 737 Max 8 jet left 157 people dead. The United States was a holdout, taking days longer to
ground the planes than most of Europe. Our Federal Aviation Administration (FAA) said, in those days between,
that they weren't grounding the planes because "
the
agency's own reviews of the aircraft show no 'systematic performance issues.'
"
There were some conflicting accounts of exactly how
the US came to ground the 737 Max 8. A
statement from Boeing
on Wednesday read that "Boeing has determined -- out of an abundance of caution and in
order to reassure the flying public of the aircraft's safety --
to
recommend to the FAA the temporary suspension of operations
of the entire global fleet of 371 737 MAX
aircraft."
In other words, Boeing claimed it was their idea /
recommendation that the FAA ground the aircraft. Meanwhile, Donald Trump declared that he grounded the aircraft
by executive order, forcing the FAA's hand.
Which begs the question -- why did it take a
presidential decree and/or the company itself to get the FAA, the main agency responsible for overseeing
airplane transit in the United States, to ground potentially dangerous aircraft?
As James Hall, the former National Transportation
Safety Board chairman,
explained in the Times
, in 2005 the FAA turned its safety certification responsibilities over to the
manufacturers themselves (if manufacturers met some requirements). In plain speak, this means that Boeing got
to decide if Boeing's airplanes were safe enough to fly -- with no additional third-party checks.
The FAA said the purpose of this change was to
save the aviation industry roughly $25 billion
between
2006 to 2015.
Given this, it makes you wonder if the statement on
Tuesday by Acting FAA Administrator Daniel K. Elwell -- that the agency had conducted its own review -- was
factual, or if the agency had simply reviewed the safety review that Boeing had conducted on itself. It also
clarifies why Boeing came to recommend to the FAA that their planes be grounded, rather than the FAA taking any
decisive action on their own.
The term for this maze, where a government safety
agency allows an industry to regulate itself so the industry can
save some
money
, and where the industry itself has to be the one to recommend to government that their product
shouldn't be in operation pending investigation, is
regulatory
capture
.
From Wikipedia
: "Regulatory capture is a form of government failure which occurs when a regulatory agency,
created to act in the public interest, instead advances the commercial or political concerns of special
interest groups that dominate the industry or sector it is charged with regulating."
The issue, in short, is that it is rarely in a
business' self-interest to ensure the absolute safety of their products. Safety testing takes time, money, and
if inspections reveal problems that need fixing, more money. Corporations are profit maximizers and pursue
whatever method they need to minimize cost (including minimizing fixing flaws in their products) and maximize
profit.
Without the threat of outside inspection or serious
repercussions, there are few incentives to fix potential problems. Insurance covers accidents, and most
mega-corporations have funds set aside in their operating budgets to pay the (generally small, relative to
their operating budgets) fines governments may impose if and when a problem is discovered.
This is why it is unlikely that industry will ever
sufficiently regulate itself on safety issues.
Remember Edward Norton's job in "Fight Club"?
"The car crashes and burns with everyone trapped inside. Now,
should we initiate a recall? Take the number of vehicles in the field, A. Multiply it by the probable rate of
failure, B. Multiply the result by the average out-of-court settlement, C. A x B x C equals X. If X is less
than the cost of a recall, we don't do one."
The United States isn't alone in turning over
self-certification of its transportation and infrastructure to industry. The Genoa Bridge Collapse in Italy
last year, in which 43 people died, is another case.
The
Morandi Bridge is a privately-owned toll bridge, publicly built but later sold off to Autostrade, a company
majority owned by the Benetton clothing family. As a private infrastructure company, Autostrade has a profit
maximization goal of keeping bridge maintenance costs low and toll profits high. Thanks to further
privatization efforts of the Italian government, the
safety and inspection
of bridges
is also conducted by private companies. In the case of the Morandi Bridge, the inspection
company responsible for safety checks and certification of the bridge was owned by Autostrade's parent company,
leaving the company that owns the bridge to self-certify its
safety.
The result, as the world saw, was a bridge that collapsed.
As Texas engineer Linwood Howell
said in the Times,
"the engineers inspecting the bridge would have their own professional liabilities to
worry about, including the profits of the company that was paying them," i.e. a clear conflict of interest
between maintaining basic safety and ensuring their own jobs.
Meanwhile, as Italian law professor Giuliano
Fonderico
noted
, "the government behaved more like its first priority was cooperating with Autostrade, rather than
regulating it."
George Stigler, who received the Nobel Peace Prize
in Economics
in part for his work around regulatory capture
in 1982, believed that it was likely that industry would
come to dictate the regulatory issues within their industries because of personal connections, a greater
understanding of issues facing industry than the general public, but mostly, a public ignorance around what
their regulators are up to.
Perhaps it is time for people to pay
a little more attention to what our regulators, who we pay to protect us from bridge collapses and plane
crashes, are up to. There are some
people with big ideas on fixes
for regulatory capture, but public demand will also need to exist for real
reform efforts to take place.
NEW YORK (Reuters) - The U.S. Securities and Exchange Commission is launching a review of the main set of rules governing stock
trading, opening the door to the biggest potential changes in a decade-and-a-half, the head of the agency said on Friday.
The possible changes are aimed at making it easier to trade illiquid stocks, making more trading information available to investors,
and improving the speed and quality of public data feeds needed for trading.
The SEC in 2005 adopted a broad framework called Regulation National Market System that was largely aimed at ensuring retail investors
get the best price possible and preventing trades from being executed at prices that are inferior to bids and offers displayed on
other trading venues.
Since then, faster, more sophisticated technology has put a bigger focus on rapid-fire, high-speed trading. There has also been
an influx of new electronic stock exchanges, fragmenting liquidity and increasing costs for brokers around exchange connectivity
and market data needed to fuel algorithmic trading.
"It is clear that the market challenges we faced in the early 2000s are not the same as the issues that we confront over a decade
later," Jay Clayton, chairman of the SEC, said at an event in New York.
To get a better grasp of current market issues, the SEC held a series of roundtable discussions with industry experts last year
that led to potential rule-making recommendations around thinly-traded securities, combating retail fraud, and market data and market
access, Clayton said.
Some areas the SEC is looking at include:
- Increasing the speed of, and adding more stock price information to, public data feeds to help make them more competitive against
the more expensive, private data feeds sold by most stock exchanges.
- Allowing thinly-traded securities to trade only on their listing market, rather than on all 13 U.S. stock exchanges.
- Improving disclosure around reverse mergers.
- Adjusting the quote size of some high-priced stocks.
The 2019 review follows an active 2018 for the SEC.
The regulator adopted rules to increase transparency around broker-dealer stock order routing and private off-exchange trading
venues. It also ordered a pilot program to test banning lucrative rebate payments that exchanges make to brokers for liquidity-adding
stock orders.
judi 1 hour ago What about Naked Shorting? It is out of control and no one including the SEC is doing anything to stop it??
Tara 41 minutes ago The rules implemented in 2005 did nothing to help retail traders with accounts under 25K.
When are you going to address the real issue of stock price manipulation? Also, bring back the uptick rule. And while you are at
it, we need rules to punish dishonest analysts who publish opinions of price that are so far off the charts, they never reflect actual
earnings often announced days later.
Rob 38 minutes ago They are going to make it more in favor of big boys aka the banks
"... Buying beautiful clothes at full retail price was not a part of my childhood and it is not a part of my life now. It felt more illicit and more pleasurable than buying drugs. It was like buying drugs and doing the drugs, simultaneously."" ..."
"... "Erie Locomotive Plant Workers Strike against Two-Tier" [ Labor Notes ]. "UE proposed keeping the terms of the existing collective bargaining agreement in place while negotiating a new contract, but Wabtec rejected that proposal. Instead it said it would impose a two-tier pay system that would pay new hires and recalled employees up to 38 percent less in wages, institute mandatory overtime, reorganize job classifications, and hire temporary workers for up to 20 percent of the plant's jobs. ..."
"... Workers voted on Saturday to authorize the strike." • Good. Two-tier is awful, wherever found (including Social Security). ..."
"[S]hopping with T was different. When she walked into a store, the employees greeted her by name and began to
pull items from the racks for her to try on. Riding her coattails, I was treated with the same consideration, which is how I
wound up owning a beautiful cashmere 3.1 Philip Lim sweater that I had no use for and rarely wore, and which was eventually
eaten by moths in my closet.
Buying beautiful clothes at full retail price was not a part of my childhood and it is not a part of my life now. It
felt more illicit and more pleasurable than buying drugs. It was like buying drugs and doing the drugs, simultaneously.""
"Erie Locomotive Plant Workers Strike against Two-Tier" [
Labor
Notes ]. "UE proposed keeping the terms of the existing collective bargaining agreement in
place while negotiating a new contract, but Wabtec rejected that proposal. Instead it said it
would impose a two-tier pay system that would pay new hires and recalled employees up to 38
percent less in wages, institute mandatory overtime, reorganize job classifications, and hire
temporary workers for up to 20 percent of the plant's jobs.
Workers voted on Saturday to
authorize the strike." • Good. Two-tier is awful, wherever found (including Social
Security).
"... While the Tea Party was critical of status-quo neoliberalism -- especially its cosmopolitanism and embrace of globalization and diversity, which was perfectly embodied by Obama's election and presidency -- it was not exactly anti-neoliberal. Rather, it was anti-left neoliberalism-, it represented a more authoritarian, right [wing] version of neoliberalism. ..."
"... Within the context of the 2016 election, Clinton embodied the neoliberal center that could no longer hold. Inequality. Suffering. Collapsing infrastructures. Perpetual war. Anger. Disaffected consent. ..."
"... Both Sanders and Trump were embedded in the emerging left and right responses to neoliberalism's crisis. Specifically, Sanders' energetic campaign -- which was undoubtedly enabled by the rise of the Occupy movement -- proposed a decidedly more "commongood" path. Higher wages for working people. Taxes on the rich, specifically the captains of the creditocracy. ..."
"... In other words, Trump supporters may not have explicitly voted for neoliberalism, but that's what they got. In fact, as Rottenberg argues, they got a version of right neoliberalism "on steroids" -- a mix of blatant plutocracy and authoritarianism that has many concerned about the rise of U.S. fascism. ..."
"... We can't know what would have happened had Sanders run against Trump, but we can think seriously about Trump, right and left neoliberalism, and the crisis of neoliberal hegemony. In other words, we can think about where and how we go from here. As I suggested in the previous chapter, if we want to construct a new world, we are going to have to abandon the entangled politics of both right and left neoliberalism; we have to reject the hegemonic frontiers of both disposability and marketized equality. After all, as political philosopher Nancy Fraser argues, what was rejected in the election of 2016 was progressive, left neoliberalism. ..."
"... While the rise of hyper-right neoliberalism is certainly nothing to celebrate, it does present an opportunity for breaking with neoliberal hegemony. We have to proceed, as Gary Younge reminds us, with the realization that people "have not rejected the chance of a better world. They have not yet been offered one."' ..."
In Chapter 1, we traced the rise of our neoliberal conjuncture back to the crisis of liberalism during the late nineteenth and
early twentieth centuries, culminating in the Great Depression. During this period, huge transformations in capitalism proved impossible
to manage with classical laissez-faire approaches. Out of this crisis, two movements emerged, both of which would eventually shape
the course of the twentieth century and beyond. The first, and the one that became dominant in the aftermath of the crisis, was the
conjuncture of embedded liberalism. The crisis indicated that capitalism wrecked too much damage on the lives of ordinary citizens.
People (white workers and families, especially) warranted social protection from the volatilities and brutalities of capitalism.
The state's public function was expanded to include the provision of a more substantive social safety net, a web of protections for
people and a web of constraints on markets. The second response was the invention of neoliberalism. Deeply skeptical of the common-good
principles that undergirded the emerging social welfare state, neoliberals began organizing on the ground to develop a "new" liberal
govemmentality, one rooted less in laissez-faire principles and more in the generalization of competition and enterprise. They worked
to envision a new society premised on a new social ontology, that is, on new truths about the state, the market, and human beings.
Crucially, neoliberals also began building infrastructures and institutions for disseminating their new' knowledges and theories
(i.e., the Neoliberal Thought Collective), as well as organizing politically to build mass support for new policies (i.e., working
to unite anti-communists, Christian conservatives, and free marketers in common cause against the welfare state). When cracks in
embedded liberalism began to surface -- which is bound to happen with any moving political equilibrium -- neoliberals were there
with new stories and solutions, ready to make the world anew.
We are currently living through the crisis of neoliberalism. As I write this book, Donald Trump has recently secured the U.S.
presidency, prevailing in the national election over his Democratic opponent Hillary Clinton. Throughout the election, I couldn't
help but think back to the crisis of liberalism and the two responses that emerged. Similarly, after the Great Recession of 2008,
we've saw two responses emerge to challenge our unworkable status quo, which dispossesses so many people of vital resources for individual
and collective life. On the one hand, we witnessed the rise of Occupy Wall Street. While many continue to critique the movement for
its lack of leadership and a coherent political vision, Occupy was connected to burgeoning movements across the globe, and our current
political horizons have been undoubtedly shaped by the movement's success at repositioning class and economic inequality within our
political horizon. On the other hand, we saw' the rise of the Tea Party, a right-wing response to the crisis. While the Tea Party
was critical of status-quo neoliberalism -- especially its cosmopolitanism and embrace of globalization and diversity, which was
perfectly embodied by Obama's election and presidency -- it was not exactly anti-neoliberal. Rather, it was anti-left neoliberalism-,
it represented a more authoritarian, right [wing] version of neoliberalism.
Within the context of the 2016 election, Clinton embodied the neoliberal center that could no longer hold. Inequality. Suffering.
Collapsing infrastructures. Perpetual war. Anger. Disaffected consent. There were just too many fissures and fault lines in
the glossy, cosmopolitan world of left neoliberalism and marketized equality. Indeed, while Clinton ran on status-quo stories of
good governance and neoliberal feminism, confident that demographics and diversity would be enough to win the election, Trump effectively
tapped into the unfolding conjunctural crisis by exacerbating the cracks in the system of marketized equality, channeling political
anger into his celebrity brand that had been built on saying "f*** you" to the culture of left neoliberalism (corporate diversity,
political correctness, etc.) In fact, much like Clinton's challenger in the Democratic primary, Benie Sanders, Trump was a crisis
candidate.
Both Sanders and Trump were embedded in the emerging left and right responses to neoliberalism's crisis. Specifically, Sanders'
energetic campaign -- which was undoubtedly enabled by the rise of the Occupy movement -- proposed a decidedly more "commongood"
path. Higher wages for working people. Taxes on the rich, specifically the captains of the creditocracy.
Universal health care. Free higher education. Fair trade. The repeal of Citizens United. Trump offered a different response to
the crisis. Like Sanders, he railed against global trade deals like NAFTA and the Trans-Pacific Partnership (TPP). However, Trump's
victory was fueled by right neoliberalism's culture of cruelty. While Sanders tapped into and mobilized desires for a more egalitarian
and democratic future, Trump's promise was nostalgic, making America "great again" -- putting the nation back on "top of the world,"
and implying a time when women were "in their place" as male property, and minorities and immigrants were controlled by the state.
Thus, what distinguished Trump's campaign from more traditional Republican campaigns was that it actively and explicitly pitted
one group's equality (white men) against everyone else's (immigrants, women, Muslims, minorities, etc.). As Catherine Rottenberg
suggests, Trump offered voters a choice between a multiracial society (where folks are increasingly disadvantaged and dispossessed)
and white supremacy (where white people would be back on top). However, "[w]hat he neglected to state," Rottenberg writes,
is that neoliberalism flourishes in societies where the playing field is already stacked against various segments of society,
and that it needs only a relatively small select group of capital-enhancing subjects, while everyone else is ultimately dispensable.
1
In other words, Trump supporters may not have explicitly voted for neoliberalism, but that's what they got. In fact, as Rottenberg
argues, they got a version of right neoliberalism "on steroids" -- a mix of blatant plutocracy and authoritarianism that has many
concerned about the rise of U.S. fascism.
We can't know what would have happened had Sanders run against Trump, but we can think seriously about Trump, right and left
neoliberalism, and the crisis of neoliberal hegemony. In other words, we can think about where and how we go from here. As I suggested
in the previous chapter, if we want to construct a new world, we are going to have to abandon the entangled politics of both right
and left neoliberalism; we have to reject the hegemonic frontiers of both disposability and marketized equality. After all, as political
philosopher Nancy Fraser argues, what was rejected in the election of 2016 was progressive, left neoliberalism.
While the rise of hyper-right neoliberalism is certainly nothing to celebrate, it does present an opportunity for breaking
with neoliberal hegemony. We have to proceed, as Gary Younge reminds us, with the realization that people "have not rejected the
chance of a better world. They have not yet been offered one."'
Mark Fisher, the author of Capitalist Realism, put it this way:
The long, dark night of the end of history has to be grasped as an enormous opportunity. The very oppressive pervasiveness
of capitalist realism means that even glimmers of alternative political and economic possibilities can have a disproportionately
great effect. The tiniest event can tear a hole in the grey curtain of reaction which has marked the horizons of possibility under
capitalist realism. From a situation in which nothing can happen, suddenly anything is possible again.4
I think that, for the first time in the history of U.S. capitalism, the vast majority of people might sense the lie of liberal,
capitalist democracy. They feel anxious, unfree, disaffected. Fantasies of the good life have been shattered beyond repair for most
people. Trump and this hopefully brief triumph of right neoliberalism will soon lay this bare for everyone to see. Now, with Trump,
it is absolutely clear: the rich rule the world; we are all disposable; this is no democracy. The question becomes: How will we show
up for history? Will there be new stories, ideas, visions, and fantasies to attach to? How can we productively and meaningful intervene
in the crisis of neoliberalism? How can we "tear a hole in the grey curtain" and open up better worlds? How can we put what we've
learned to use and begin to imagine and build a world beyond living in competition? I hope our critical journey through the neoliberal
conjuncture has enabled you to begin to answer these questions.
More specifically, in recent decades, especially since the end of the Cold War, our common-good sensibilities have been channeled
into neoliberal platforms for social change and privatized action, funneling our political energies into brand culture and marketized
struggles for equality (e.g., charter schools, NGOs and non-profits, neoliberal antiracism and feminism). As a result, despite our
collective anger and disaffected consent, we find ourselves stuck in capitalist realism with no real alternative. Like the neoliberal
care of the self, we are trapped in a privatized mode of politics that relies on cruel optimism; we are attached, it seems, to politics
that inspire and motivate us to action, while keeping us living in competition.
To disrupt the game, we need to construct common political horizons against neoliberal hegemony. We need to use our common stories
and common reason to build common movements against precarity -- for within neoliberalism, precarity is what ultimately has the potential
to thread all of our lives together. Put differently, the ultimate fault line in the neoliberal conjiuicture is the way it subjects
us all to precarity and the biopolitics of disposability, thereby creating conditions of possibility for new coalitions across race,
gender, citizenship, sexuality, and class. Recognizing this potential for coalition in the face of precarization is the most pressing
task facing those who are yearning for a new world. The question is: How do we get there? How do we realize these coalitional potentialities
and materialize common horizons?
Ultimately, mapping the neoliberal conjuncture through everyday life in enterprise culture has not only provided some direction
in terms of what we need; it has also cultivated concrete and practical intellectual resources for political interv ention and social
interconnection -- a critical toolbox for living in common. More specifically, this book has sought to provide resources for thinking
and acting against the four Ds: resources for engaging in counter-conduct, modes of living that refuse, on one hand, to conduct one's
life according to the norm of enterprise, and on the other, to relate to others through the norm of competition. Indeed, we need
new ways of relating, interacting, and living as friends, lovers, workers, vulnerable bodies, and democratic people if we are to
write new stories, invent new govemmentalities, and build coalitions for new worlds.
Against Disimagination: Educated Hope and Affirmative Speculation
We need to stop turning inward, retreating into ourselves, and taking personal responsibility for our lives (a task which is ultimately
impossible). Enough with the disimagination machine! Let's start looking outward, not inward -- to the broader structures that undergird
our lives. Of course, we need to take care of ourselves; we must survive. But I firmly believe that we can do this in ways both big
and small, that transform neoliberal culture and its status-quo stories.
Here's the thing I tell my students all the time. You cannot escape neoliberalism. It is the air we breathe, the water in which
we swim. No job, practice of social activism, program of self-care, or relationship will be totally free from neoliberal impingements
and logics. There is no pure "outside" to get to or work from -- that's just the nature of the neoliberalism's totalizing cultural
power. But let's not forget that neoliberalism's totalizing cultural power is also a source of weakness. Potential for resistance
is everywhere, scattered throughout our everyday lives in enterprise culture. Our critical toolbox can help us identify these potentialities
and navigate and engage our conjuncture in ways that tear open up those new worlds we desire.
In other words, our critical perspective can help us move through the world with what Henry Giroux calls educated hope. Educated
hope means holding in tension the material realities of power and the contingency of history. This orientation of educated hope knows
very well what we're up against. However, in the face of seemingly totalizing power, it also knows that neoliberalism can never become
total because the future is open. Educated hope is what allows us to see the fault lines, fissures, and potentialities of the present
and emboldens us to think and work from that sliver of social space where we do have political agency and freedom to construct a
new world. Educated hope is what undoes the power of capitalist realism. It enables affirmative speculation (such as discussed in
Chapter 5), which does not try to hold the future to neoliberal horizons (that's cruel optimism!), but instead to affirm our commonalities
and the potentialities for the new worlds they signal. Affirmative speculation demands a different sort of risk calculation and management.
It senses how little we have to lose and how much we have to gain from knocking the hustle of our lives.
Against De-democratization: Organizing and Collective Coverning
We can think of educated hope and affirmative speculation as practices of what Wendy Brown calls "bare democracy" -- the basic
idea that ordinary' people like you and me should govern our lives in common, that we should critique and try to change our world,
especially the exploitative and oppressive structures of power that maintain social hierarchies and diminish lives. Neoliberal culture
works to stomp out capacities for bare democracy by transforming democratic desires and feelings into meritocratic desires and feelings.
In neoliberal culture, utopian sensibilities are directed away from the promise of collective utopian sensibilities are directed
away from the promise of collective governing to competing for equality.
We have to get back that democractic feeling! As Jeremy Gilbert taught us, disaffected consent is a post-democratic orientation.
We don't like our world, but we don't think we can do anything about it. So, how do we get back that democratic feeling? How do we
transform our disaffected consent into something new? As I suggested in the last chapter, we organize. Organizing is simply about
people coming together around a common horizon and working collectively to materialize it. In this way, organizing is based on the
idea of radical democracy, not liberal democracy. While the latter is based on formal and abstract rights guaranteed by the state,
radical democracy insists that people should directly make the decisions that impact their lives, security, and well-being. Radical
democracy is a practice of collective governing: it is about us hashing out, together in communities, what matters, and working in
common to build a world based on these new sensibilities.
The work of organizing is messy, often unsatisfying, and sometimes even scary. Organizing based on affirmative speculation and
coalition-building, furthermore, will have to be experimental and uncertain. As Lauren Berlant suggests, it means "embracing the
discomfort of affective experience in a truly open social life that no
one has ever experienced." Organizing through and for the common "requires more adaptable infrastructures. Keep forcing the existing
infrastructures to do what they don't know how to do. Make new ways to be local together, where local doesn't require a physical
neighborhood." 5 What Berlant is saying is that the work of bare democracy requires unlearning, and detaching from, our
current stories and infrastructures in order to see and make things work differently. Organizing for a new world is not easy -- and
there are no guarantees -- but it is the only way out of capitalist realism.
Getting back democratic feeling will at once require and help us lo move beyond the biopolitics of disposability and entrenched
systems of inequality. On one hand, organizing will never be enough if it is not animated by bare democracy, a sensibility that each
of us is equally important when it comes to the project of determining our lives in common. Our bodies, our hurts, our dreams, and
our desires matter regardless of our race, gender, sexuality, or citizenship, and regardless of how r much capital (economic,
social, or cultural) we have. Simply put, in a radical democracy, no one is disposable. This bare-democratic sense of equality must
be foundational to organizing and coalition-building. Otherwise, we will always and inevitably fall back into a world of inequality.
On the other hand, organizing and collective governing will deepen and enhance our sensibilities and capacities for radical equality.
In this context, the kind of self-enclosed individualism that empowers and underwrites the biopolitics of disposability melts away,
as we realize the interconnectedness of our lives and just how amazing it feels to
fail, we affirm our capacities for freedom, political intervention, social interconnection, and collective social doing.
Against Dispossession: Shared Security and Common Wealth
Thinking and acting against the biopolitics of disposability goes hand-in-hand with thinking and acting against dispossession.
Ultimately, when we really understand and feel ourselves in relationships of interconnection with others, we want for them as we
want for ourselves. Our lives and sensibilities of what is good and just are rooted in radical equality, not possessive or self-appreciating
individualism. Because we desire social security and protection, we also know others desire and deserve the same.
However, to really think and act against dispossession means not only advocating for shared security and social protection, but
also for a new society that is built on the egalitarian production and distribution of social wealth that we all produce. In this
sense, we can take Marx's critique of capitalism -- that wealth is produced collectively but appropriated individually -- to heart.
Capitalism was built on the idea that one class -- the owners of the means of production -- could exploit and profit from the collective
labors of everyone else (those who do not own and thus have to work), albeit in very different ways depending on race, gender, or
citizenship. This meant that, for workers of all stripes, their lives existed not for themselves, but for others (the appropriating
class), and that regardless of what we own as consumers, we are not really free or equal in that bare-democratic sense of the word.
If we want to be really free, we need to construct new material and affective social infrastructures for our common wealth. In
these new infrastructures, wealth must not be reduced to economic value; it must be rooted in social value. Here, the production
of wealth does not exist as a separate sphere from the reproduction of our lives. In other words, new infrastructures, based on the
idea of common wealth, will not be set up to exploit our labor, dispossess our communities, or to divide our lives. Rather, they
will work to provide collective social resources and care so that we may all be free to pursue happiness, create beautiful and/or
useful things, and to realize our potential within a social world of living in common. Crucially, to create the conditions for these
new, democratic forms of freedom rooted in radical equality, we need to find ways to refuse and exit the financial networks of Empire
and the dispossessions of creditocracy, building new systems that invite everyone to participate in the ongoing production of new
worlds and the sharing of the wealth that we produce in common.
It's not up to me to tell you exactly where to look, but I assure you that potentialities for these new worlds are everywhere
around you.
"... The CAPE aims to correct for those distortions. It smooths the denominator by using not current profits, but a ten-year average, of S&P 500 earnings-per-share, adjusted for inflation. Today, the CAPE for the 500 reads 29.7. It's only been that high in two previous periods: Before the crash of 1929, and during the tech bubble from 1998 to 2001, suggesting that when stocks are this expensive, a downturn may be at hand. ..."
"... is 36.1% higher ..."
"... Here's the problem that the CAPE highlights. Earnings in the past two decades have been far outpacing GDP; in the current decade, they've beaten growth in national income by 1.2 points (3.2% versus 2%). That's a reversal of long-term trends. ..."
"... Right now, earnings constitute an unusually higher share of national income. That's because record-low interest rates have restrained cost of borrowing for the past several years, and companies have managed to produce more cars, steel and semiconductors while shedding workers and holding raises to a minimum. ..."
"... t's often overlooked that although profits grow in line with GDP, which by the way, is now expanding a lot more slowly than two decades ago, earnings per share ..."
"... The reason is dilution. Companies are constantly issuing new shares, for everything from expensive acquisitions to stock option redemptions to secondary offerings. New enterprises are also challenging incumbents, raising the number of shares that divide up an industry's profits faster than those profits are increasing. Since total earnings grow with GDP, and the share count grows faster than profits, it's mathematically impossible for EPS growth to consistently rise in double digits, although it does over brief periods––followed by intervals of zero or minuscule increases. ..."
"... The huge gap between the official PE of 19 and the CAPE at 30 signals that unsustainably high profits are artificially depressing the former. and that profits are bound to stagnate at best, and more likely decline. ..."
"... In an investing world dominated by hype, the CAPE is a rare truth-teller ..."
For the past half-decade, a controversial yardstick called the CAPE has been flashing red,
warning that stock prices are extremely rich, and vulnerable to a sharp correction. And over
the same period, the Wall Street bulls and a number of academics led by Jeremy Siegel of the
Wharton School, have been claiming that CAPE is a kind of fun house mirror that makes
reasonable valuations appear grotesquely stretched.
CAPE, an acronym "Cyclically-adjusted price-to-earnings ratio," was developed by economist
Robert Shiller of Yale to correct for a flaw in judging where stock prices stand on the
continuum from dirt cheap to highly expensive based on the current P/E ratio. The problem:
Reported earnings careen from lofty peaks to deep troughs, so that when they're in a funk,
multiples jump so high that shares appear overpriced when they're really reasonable, and when
profits explode, they can skew the P/E by creating the false signal that they're a great
buy.
The CAPE aims to correct for those distortions. It smooths the denominator by using not
current profits, but a ten-year average, of S&P 500 earnings-per-share, adjusted for
inflation. Today, the CAPE for the 500 reads 29.7. It's only been that high in two previous
periods: Before the crash of 1929, and during the tech bubble from 1998 to 2001, suggesting
that when stocks are this expensive, a downturn may be at hand.
The CAPE's critics argue that its adjusted PE is highly inflated, because the past decade
includes a portion of the financial crisis that decimated earnings. That period was so unusual,
their thinking goes, that it makes the ten-year average denominator much too low, producing
what looks like a dangerous number when valuations are actually reasonable by historical norms.
They point to the traditional P/E based on 12-month trailing, GAAP profits. By that yardstick
today's multiple is 19.7, a touch above the 20-year average of 19, though exceeding the
century-long norm of around 16.
I've run some numbers, and my analysis indicates that the CAPE doesn't suffer from those
alleged shortcoming, and presents a much truer picture than today's seemingly reassuring P/E.
Here's why. Contrary to its opponents' assertions, the CAPE's earnings number is not
artificially depressed. I calculated ten year average of real profits for six decade-long
periods starting in February of 1959 and ending today, (the last one running from 2/2009 to
2/2019). On average, the adjusted earnings number rose 22% from one period to the next. The
biggest leap came from 1999 to 2009, when the 10-year average of real earnings advanced
42%.
So did profits since then languish to the point where the current CAPE figure is
unrealistically big? Not at all. The Shiller profit number of $91 per share is 36.1%
higher than the reading for the 1999 to 2009 period, when it had surged a record 40%-plus
over the preceding decade. If anything, today's denominator looks high, meaning the CAPE of
almost 30 is at least reasonable, and if anything overstates what today's investors will reap
from each dollar they've invested in stocks.
Indeed, in the latest ten-year span, adjusted profits have waxed at a 3.2% annual pace,
slightly below the 3.6% from 1999 to 2009, but far above the average of 1.6% from 1959 to
1999.
Here's the problem that the CAPE highlights. Earnings in the past two decades have been
far outpacing GDP; in the current decade, they've beaten growth in national income by 1.2
points (3.2% versus 2%). That's a reversal of long-term trends. Over our entire 60 year
period, GDP rose at 3.3% annually, and profits trailed by 1.3 points, advancing at just 2%. So
the rationale that P/Es are modest is based on the assumption that today's earnings aren't
unusually high at all, and should continue growing from here, on a trajectory that outstrips
national income.
It won't happen. It's true that total corporate profits follow GDP over the long term,
though they fluctuate above and below that benchmark along the way. Right now, earnings
constitute an unusually higher share of national income. That's because record-low interest
rates have restrained cost of borrowing for the past several years, and companies have managed
to produce more cars, steel and semiconductors while shedding workers and holding raises to a
minimum.
Now, rates are rising and so it pay and employment, forces that will crimp profits. I
t's often overlooked that although profits grow in line with GDP, which by the way, is now
expanding a lot more slowly than two decades ago, earnings per share grow a lot
slower, as I've shown, lagging by 1.3 points over the past six decades.
An influential study from 2003 by Rob Arnott, founder of Research Affiliates, and co-author
William J. Bernstein, found that EPS typically trails overall profit and economic growth by
even more, an estimated 2 points a year.
The reason is dilution. Companies are constantly issuing new shares, for everything from
expensive acquisitions to stock option redemptions to secondary offerings. New enterprises are
also challenging incumbents, raising the number of shares that divide up an industry's profits
faster than those profits are increasing. Since total earnings grow with GDP, and the share
count grows faster than profits, it's mathematically impossible for EPS growth to consistently
rise in double digits, although it does over brief periods––followed by intervals
of zero or minuscule increases.
The huge gap between the official PE of 19 and the CAPE at 30 signals that unsustainably
high profits are artificially depressing the former. and that profits are bound to stagnate at
best, and more likely decline. The retreat appears to have already started. The Wall
Street "consensus" Wall Street earnings forecast compiled by FactSet calls for an EPS decline
of 1.7% for the first quarter of 2017, and zero inflation-adjusted gains for the first nine
months of the year.
In an investing world dominated by hype, the CAPE is a rare truth-teller .
The bottom line is that this preoccupation with the 'headline number' for the current month
as a single datapoint that is promoted by Wall Street and the Government for official economic
data is misleading.
The effective method of considering a heavily adjusted and revised data series like this is
with a trend analysis of at least seven to twelve observations, and more if you can get
them.
But, that makes for a much less interesting and convenient narrative.
And as for the median wage and income -- it is still too weak to sustain an economic
recovery.
Stocks were a bit weak today, despite all this fabulous economic data, having exhausted the
sugar rush that was spoonfed to them by their friendly neighborhood Federal Reserve.
The French economist Thomas Piketty argued last year in a surprising best-seller, "Capital in
the Twenty-First Century," that rising wealth inequality was a natural result of free-market policies,
a direct challenge to the conventional view that economic inequalities shrink over time. The controversial
implication drawn by Mr. Piketty is that governments should raise taxes on the wealthy.
Notable quotes:
"... His speeches can blend biblical fury with apocalyptic doom. Pope Francis does not just criticize the excesses of global capitalism. He compares them to the "dung of the devil." He does not simply argue that systemic "greed for money" is a bad thing. He calls it a "subtle dictatorship" that "condemns and enslaves men and women." ..."
"... The Argentine pope seemed to be asking for a social revolution. "This is not theology as usual; this is him shouting from the mountaintop," said Stephen F. Schneck, the director of the Institute for Policy Research and Catholic studies at Catholic University of America in Washington. ..."
"... Left-wing populism is surging in countries immersed in economic turmoil, such as Spain, and, most notably, Greece . But even in the United States, where the economy has rebounded, widespread concern about inequality and corporate power are propelling the rise of liberals like Senator Bernie Sanders of Vermont and Senator Elizabeth Warren of Massachusetts, who, in turn, have pushed the Democratic Party presidential front-runner, Hillary Rodham Clinton, to the left. ..."
"... Even some free-market champions are now reassessing the shortcomings of unfettered capitalism. George Soros, who made billions in the markets, and then spent a good part of it promoting the spread of free markets in Eastern Europe, now argues that the pendulum has swung too far the other way. ..."
"... Many Catholic scholars would argue that Francis is merely continuing a line of Catholic social teaching that has existed for more than a century and was embraced even by his two conservative predecessors, John Paul II and Benedict XVI. Pope Leo XIII first called for economic justice on behalf of workers in 1891, with his encyclical "Rerum Novarum" - or, "On Condition of Labor." ..."
"... Francis has such a strong sense of urgency "because he has been on the front lines with real people, not just numbers and abstract ideas," Mr. Schneck said. "That real-life experience of working with the most marginalized in Argentina has been the source of his inspiration as pontiff." ..."
"... In Bolivia, Francis praised cooperatives and other localized organizations that he said provide productive economies for the poor. "How different this is than the situation that results when those left behind by the formal market are exploited like slaves!" he said on Wednesday night. ..."
"... It is this Old Testament-like rhetoric that some finding jarring, perhaps especially so in the United States, where Francis will visit in September. His environmental encyclical, "Laudato Si'," released last month, drew loud criticism from some American conservatives and from others who found his language deeply pessimistic. His right-leaning critics also argued that he was overreaching and straying dangerously beyond religion - while condemning capitalism with too broad a brush. ..."
"... The French economist Thomas Piketty argued last year in a surprising best-seller, "Capital in the Twenty-First Century," that rising wealth inequality was a natural result of free-market policies, a direct challenge to the conventional view that economic inequalities shrink over time. The controversial implication drawn by Mr. Piketty is that governments should raise taxes on the wealthy. ..."
"... "Working for a just distribution of the fruits of the earth and human labor is not mere philanthropy," he said on Wednesday. "It is a moral obligation. For Christians, the responsibility is even greater: It is a commandment." ..."
"... "I'm a believer in capitalism but it comes in as many flavors as pie, and we have a choice about the kind of capitalist system that we have," said Mr. Hanauer, now an outspoken proponent of redistributive government ..."
"... "What can be done by those students, those young people, those activists, those missionaries who come to my neighborhood with the hearts full of hopes and dreams but without any real solution for my problems?" he asked. "A lot! They can do a lot. ..."
ASUNCIÓN, Paraguay - His speeches can blend biblical fury with apocalyptic doom. Pope Francis
does not just criticize the excesses of global capitalism. He compares them to the "dung of the devil."
He does not simply argue that systemic "greed for money" is a bad thing. He calls it a "subtle dictatorship"
that "condemns and enslaves men and women."
Having returned to his native Latin America, Francis has renewed his left-leaning critiques on
the inequalities of capitalism, describing it as an underlying cause of global injustice, and a prime
cause of climate change. Francis escalated that line last week when he made a
historic apology for the crimes of the Roman Catholic Church during the period of Spanish colonialism
- even as he called for a global movement against a "new colonialism" rooted in an inequitable economic
order.
The Argentine pope seemed to be asking for a social revolution. "This is not theology as usual; this is him shouting from the mountaintop," said Stephen F. Schneck,
the director of the Institute for Policy Research and Catholic studies at Catholic University of
America in Washington.
The last pope who so boldly placed himself at the center of the global moment was John Paul II,
who during the 1980s pushed the church to confront what many saw as the challenge of that era, communism.
John Paul II's anti-Communist messaging dovetailed with the agenda of political conservatives eager
for a tougher line against the Soviets and, in turn, aligned part of the church hierarchy with the
political right.
Francis has defined the economic challenge of this era as the failure of global capitalism to
create fairness, equity and dignified livelihoods for the poor - a social and religious agenda that
coincides with a resurgence of the leftist thinking marginalized in the days of John Paul II. Francis'
increasingly sharp critique comes as much of humanity has never been so wealthy or well fed - yet
rising inequality and repeated financial crises have unsettled voters, policy makers and economists.
Left-wing populism is surging in countries immersed in economic turmoil, such as Spain, and,
most notably, Greece. But even in the United States, where the economy has rebounded, widespread
concern about inequality and corporate power are propelling the
rise of liberals like Senator Bernie Sanders of Vermont and Senator Elizabeth Warren of Massachusetts,
who, in turn, have pushed the Democratic Party presidential front-runner, Hillary Rodham Clinton,
to the left.
Even some free-market champions are now reassessing the shortcomings of unfettered capitalism.
George Soros, who made billions in the markets, and then spent a good part of it promoting the spread
of free markets in Eastern Europe, now argues that the pendulum has swung too far the other way.
"I think the pope is singing to the music that's already in the air," said Robert A. Johnson,
executive director of the Institute for New Economic Thinking, which was financed with $50 million
from Mr. Soros. "And that's a good thing. That's what artists do, and I think the pope is sensitive
to the lack of legitimacy of the system."
Many Catholic scholars would argue that Francis is merely continuing a line of Catholic social
teaching that has existed for more than a century and was embraced even by his two conservative predecessors,
John Paul II and Benedict XVI. Pope Leo XIII first called for economic justice on behalf of workers
in 1891, with his encyclical "Rerum Novarum" - or, "On Condition of Labor."
Mr. Schneck, of Catholic University, said it was as if Francis were saying, "We've been talking
about these things for more than one hundred years, and nobody is listening."
Francis has such a strong sense of urgency "because he has been on the front lines with real people,
not just numbers and abstract ideas," Mr. Schneck said. "That real-life experience of working with
the most marginalized in Argentina has been the source of his inspiration as pontiff."
Francis made his speech on Wednesday night, in Santa Cruz, Bolivia, before nearly 2,000 social
advocates, farmers, trash workers and neighborhood activists. Even as he meets regularly with heads
of state, Francis has often said that change must come from the grass roots, whether from poor people
or the community organizers who work with them. To Francis, the poor have earned knowledge that is
useful and redeeming, even as a "throwaway culture" tosses them aside. He sees them as being at the
front edge of economic and environmental crises around the world.
In Bolivia, Francis praised cooperatives and other localized organizations that he said provide
productive economies for the poor. "How different this is than the situation that results when those
left behind by the formal market are exploited like slaves!" he said on Wednesday night.
It is this Old Testament-like rhetoric that some finding jarring, perhaps especially so in the
United States, where Francis will visit in September. His environmental encyclical, "Laudato Si',"
released last month, drew loud criticism from some American conservatives and from others who found
his language deeply pessimistic. His right-leaning critics also argued that he was overreaching and
straying dangerously beyond religion - while condemning capitalism with too broad a brush.
"I wish Francis would focus on positives, on how a free-market economy guided by an ethical framework,
and the rule of law, can be a part of the solution for the poor - rather than just jumping from the
reality of people's misery to the analysis that a market economy is the problem," said the Rev. Robert
A. Sirico, president of the Acton Institute for the Study of Religion and Liberty, which advocates
free-market economics.
Francis' sharpest critics have accused him of being a Marxist or a Latin American Communist, even
as he opposed communism during his time in Argentina. His tour last week of Latin America began in
Ecuador and Bolivia, two countries with far-left governments. President Evo Morales of Bolivia, who
wore a Che Guevara patch on his jacket during Francis' speech, claimed the pope as a kindred spirit
- even as Francis seemed startled and caught off guard when Mr. Morales gave him a wooden crucifix
shaped like a hammer and sickle as a gift.
Francis' primary agenda last week was to begin renewing Catholicism in Latin America and reposition
it as the church of the poor. His apology for the church's complicity in the colonialist era received
an immediate roar from the crowd. In various parts of Latin America, the association between the
church and economic power elites remains intact. In Chile, a socially conservative country, some
members of the country's corporate elite are also members of Opus Dei, the traditionalist Catholic
organization founded in Spain in 1928.
Inevitably, Francis' critique can be read as a broadside against Pax Americana, the period of
capitalism regulated by global institutions created largely by the United States. But even pillars
of that system are shifting. The World Bank, which long promoted economic growth as an end in itself,
is now increasingly focused on the distribution of gains, after the Arab Spring revolts in some countries
that the bank had held up as models. The latest generation of international trade agreements includes
efforts to increase protections for workers and the environment.
The French economist Thomas Piketty argued last year in a surprising best-seller, "Capital
in the Twenty-First Century," that rising wealth inequality was a natural result of free-market policies,
a direct challenge to the conventional view that economic inequalities shrink over time. The controversial
implication drawn by Mr. Piketty is that governments should raise taxes on the wealthy.
Mr. Piketty roiled the debate among mainstream economists, yet Francis' critique is more unnerving
to some because he is not reframing inequality and poverty around a new economic theory but instead
defining it in moral terms. "Working for a just distribution of the fruits of the earth and human
labor is not mere philanthropy," he said on Wednesday. "It is a moral obligation. For Christians,
the responsibility is even greater: It is a commandment."
Nick Hanauer, a Seattle venture capitalist, said that he saw Francis as making a nuanced point
about capitalism, embodied by his coinage of a "social mortgage" on accumulated wealth - a debt to
the society that made its accumulation possible. Mr. Hanauer said that economic elites should embrace
the need for reforms both for moral and pragmatic reasons. "I'm a believer in capitalism but
it comes in as many flavors as pie, and we have a choice about the kind of capitalist system that
we have," said Mr. Hanauer, now an outspoken proponent of redistributive government policies
like a higher minimum wage.
Yet what remains unclear is whether Francis has a clear vision for a systemic alternative to the
status quo that he and others criticize. "All these critiques point toward the incoherence of the
simple idea of free market economics, but they don't prescribe a remedy," said Mr. Johnson, of the
Institute for New Economic Thinking.
Francis acknowledged as much, conceding on Wednesday that he had no new "recipe" to quickly change
the world. Instead, he spoke about a "process of change" undertaken at the grass-roots level.
"What can be done by those students, those young people, those activists, those missionaries
who come to my neighborhood with the hearts full of hopes and dreams but without any real solution
for my problems?" he asked. "A lot! They can do a lot. "You, the lowly, the exploited, the poor
and underprivileged, can do, and are doing, a lot. I would even say that the future of humanity is
in great measure in your own hands."
"... Mispricing risk is the new normal, apparently. The assumption is that the stock market is now in hand and will be fine -- unless something startles it. ..."
We will be getting more individual company financial results now that we are in the
reporting period again. These may help to sway the markets in some direction, or not.
Mispricing risk is the new normal, apparently. The assumption is that the stock market
is now in hand and will be fine -- unless something startles it.
Stocks and Precious Metals Charts -
Who Could See It
Coming?
- Dead Reckoning the Minsky Moment
"
In particular, over a protracted period of good times, capitalist economies tend to
move from a financial structure dominated by hedge finance units to a structure in
which there is large weight to units engaged in speculative and Ponzi finance."
Hyman Minsky,
The Financial Instability Hypothesis
"Twenty-five years ago, when most economists were extolling the virtues of financial
deregulation and innovation, a maverick named Hyman P. Minsky maintained a more
negative view of Wall Street; in fact, he noted that bankers, traders, and other
financiers periodically played the role of arsonists, setting the entire economy
ablaze. Wall Street encouraged businesses and individuals to take on too much risk, he
believed, generating ruinous boom-and-bust cycles. The only way to break this pattern
was for the government to step in and regulate the moneymen.
Many of Minsky's colleagues regarded his 'financial-instability hypothesis,' which he
first developed in the nineteen-sixties, as radical, if not crackpot. Today, with the
subprime crisis seemingly on the verge of metamorphosing into a recession, references
to it have become commonplace on financial web sites and in the reports of Wall Street
analysts. Minsky's hypothesis is well worth revisiting."
John Cassidy,
The Minsky Moment
, The New Yorker, 4 February 2008.
"The period of financial distress is a gradual decline after the peak of a speculative
bubble that precedes the final and massive panic and crash, driven by the insiders
having exited but the sucker outsiders hanging on hoping for a revival, but finally
giving up in the final collapse."
Charles Kindelberger,
Manias, Panics, and Crashes: A History of Financial Crises
"The sense of responsibility in the financial community for the community as a whole is
not small. It is nearly nil. Perhaps this is inherent. In a community where the
primary concern is making money, one of the necessary rules is to live and let live.
To speak out against madness may be to ruin those who have succumbed to it. So the
wise in Wall Street [and in the professional and credentialed class] are nearly always
silent."
John Kenneth Galbraith,
The Great Crash of 1929
"People who lost jobs -- and those are in the millions in 2008, 2009, and 2010 -- have
now gotten jobs, that's true, but the jobs they've gotten have lower wages, have less
security and fewer benefits than the ones they lost, which means they can't spend money
like we might have hoped they would if they had got the kinds of jobs they lost, but
they didn't...
The big tax cut last December, 2017, gave an awful lot of money to the richest
Americans and to big corporations. They had no incentive to plow that into their
businesses, because Americans can't buy any more than they already do. They're up to
their necks in debt and all the rest.
So what they did was to take the money they saved from taxes and speculate in the stock
market, driving up the shares and so forth. Naive people thought that was a sign of
economic health. It wasn't. It was money bidding up the price of stock until the
underlying economy was so far out of whack with the stock market that now everybody
realizes that and there's a rush to get out and boom, the thing goes down."
Bubbles most often resolve their imbalances irresponsibly and jarringly, with a correction
that is sharp and destructive. It is often triggered by some seemingly trivial event,
especially if its predatory mispricing of risk has been allowed to fester for an extended
period of time.. How can this be?
Credit cycles explain bubbles in modern finance, but the elite protect themselves and
their banks from the effects. Hence, only the middle and working class loses. And this has
been the case for many years now. Hence the growing unrest abroad, and the decisions by
the electorate at home that seem to puzzle and provoke the very comfortable 'credentialed'
class.
The reason for this is quite easy to understand. Those who benefit the most from the
bubble both actively and passively help sustain it. They are reluctant to surrender any
potion of their enormous advantage and personal gains, even if it might be better for them
in the long term.
They do not consider the damage that may be done to the underlying social fabric that
supports and protects their wealth. Contrary to all of the familiar assumptions, they are
not acting rationally or prudently, even for themselves. Their focus is short term and
short-sighted. They are drunk on their own success.
The interpreters and creators of the prevailing narrative are themselves beneficiaries of
the bubble economy, and will go to great lengths to misdirect the public discussion from
any root causes, and often from its very existence. They will distract the public with
inflammatory issues, economic fear, stage-managed spectacles, and manufactured
complexity. And finally, in the extremes of their shamelessness, they will seek to blame
the victims for their lack of sophistication and the government for its efforts to
restrain their predatory frauds.
This enables the cycle of boom and bust to repeat and worsen beyond all reasonable
expectations.
The lesson from history is that a system based on the ascendant greed of powerful insiders
is rarely rational and self-correcting, and is often spectacularly self-destructive. And
those with the most power, in their wonderful self-delusion, simply do not care until it
is too late. They are blinded by the moment, in their competition with each other, and
the insatiable nature of greed itself. 'Enough' is not in their reckoning.
To this end governments are fashioned, and people organize themselves from the damage that
can be done to society as a whole by a few. Unfortunately people forget, and it seems
that at least once every generation or so the madness slips loose its restraints, and this
sad lesson from history repeats.
And so once again the world must face its rendezvous with destiny.
The box scores for today's market action are shown in the graphs below.
Apparently rough weather is heading towards the east coast. The local grocery store was a
nuthouse even in the early afternoon. I am making some chicken soup for myself and Dolly.
Even if I could coax her out of her fuzzy blanket and pillows, Dolly would offer limited
assistance. She is clearly just in it for the chicken.
Look at financial fraud and smoke and mirrors in the current USA "casino capitalism" as
another example of the same. People do believe the insane valuations of tech firms like Apple,
Facebook, Google and Amazon despite dot-com bubble. A lot of people put hard earned money in
stock of those companies in wane hope to get out before the bubble pops.
"war is a racket" as the saying goes. it's usually less about actual capability than it is
keeping all the usual suspects latched firmly on the "military industrial" teat. it's
basically the world's largest welfare program disguised as "national defense" and - coupled
with financial fraud/smoke and mirrors - what props up the sad remnants of the US. unless
people believe the insane overvaluation of tech firms like facebook and amazon for another
generation.
it is also - like you and others have mentioned - an offensive system allowing for
first-strike capability and not feasible for many reasons (not the least of which is the
sheer amount of "space junk" floating around in orbit.) all it takes is one
russian/chinese/belgian/? missile getting through anyway...unless these idiots still agree
with bush sr's idea of "acceptable losses of entire cities".
This article published 10 years ago looks like it was written yesterday. The more things change in the USA casino
capitalism the more they stay the same
Now Trump tariffs will cause drop in consumption. What will follow it not very clear.
Hypertrophied growth of financial system is cancer. It is a parasitic institution much like cancer cells in human body.
Notable quotes:
"... The Federal Reserve made tragic policy errors most certainly with regard to interest rates. They were hampered by a lack of coordinated effort because of the official US policy focus on liquidation and non-interference, along with mass bank failures which rendered their attempts to reflate the money supply as largely futile. ..."
"... But good policies applied with vigor during a period of economic illness may be like forcing patients seriously ill with pneumonia to swim laps and run in marathons because you think such physical activity is inherently good and beneficial in itself at all times. ..."
"... Today it seems to us that the Fed and Treasury are trying to cure our current problems by filling the banks full of liquidity with the idea that it will eventually trickle down to the real economy through their toll gates. ..."
"... We believe this will not work. The financial system is rotten, and not only in its toxic and fraudulent assets. It is a weakened, rotten timber that will provide scant leverage for the rescue attempts. ..."
The 1920's were marked by a credit expansion, a significant growth in consumer debt, the
creation of asset bubbles, and the proliferation of financial instruments and leveraged
investments. The Federal Reserve expanded the money supply and the Republican government
pursued a laissez-faire approach to business.
This helped to create a greater wealth disparity, and saddled a good part of the public with
debts on consumables that were vulnerable to an economic contraction.
The bursting of the credit bubble triggered the stock market Crash of 1929. The Hoover
administration's response was guided by Secretary of the Treasury Andrew Mellon. As noted by
Herbert Hoover in his memoirs, "Mellon had only one formula: 'Liquidate labor, liquidate
stocks, liquidate the farmers, liquidate real estate.'"
Indeed, the collapse of consumption and credit, and the ensuing 'do nothing' policy of
liquidation by the government crippled the economy and drove unemployment up to the incredible
24% level at the climax of the liquidation and deleveraging.
Although some assets fared better than others, virtually everything was caught up in the
cycle of liquidation and everything was sold: stocks, bonds, farms, even long dated US
Treasuries, all of them collapsing into the bottom in late 1932.
The Federal Reserve made tragic policy errors most certainly with regard to interest rates.
They were hampered by a lack of coordinated effort because of the official US policy focus on
liquidation and non-interference, along with mass bank failures which rendered their attempts
to reflate the money supply as largely futile.
Thrifty management of the credit and monetary levels when the economy is balanced in the
manufacturing, service, export-import, and consumption distribution levels is a good policy to
follow.
But good policies applied with vigor during a period of economic illness may be like forcing
patients seriously ill with pneumonia to swim laps and run in marathons because you think such
physical activity is inherently good and beneficial in itself at all times.
Additionally, monetary expansion alone also does not work, as can be seen in the early
attempts by the Fed to expand the monetary base without policy initiatives to support expansion
and consumption. Hoover's administration raised the income tax and cut spending for a balanced
budget.
A combined monetary and government bias to stimulating consumption while restoring balance
and correcting the errors that fostered the credit bubble is the more effective course of
action.
Today it seems to us that the Fed and Treasury are trying to cure our current problems by
filling the banks full of liquidity with the idea that it will eventually trickle down to the
real economy through their toll gates.
We believe this will not work. The financial system is rotten, and not only in its toxic and
fraudulent assets. It is a weakened, rotten timber that will provide scant leverage for the
rescue attempts.
Better to cauterize the bleeds in the financial system and assume a 'trickle up' approach by
reaching the econmy through the individual rather than the individual through the banks.
Provide secure FDIC insurance to everyone to a generous degree , and let those banks who
must fail, fail. You will encourage reform and savings, we guarantee it. Stimulate work and
wages, and then consumption, and the financial system will follow.
While the financial system as it is constituted today remains the centerpiece of our
economy, we cannot sustainably recover since it is a source of recurring infection.
Globalists like to cite the introduction of the Smoot-Hawley tariffs as a major factor in
the development of the Great Depression. This appears to be largely unsubstantiated, and
attributable to a dogmatic bias to international trade as a panacea for failing domestic
demand.
In fact, before Smoot-Hawley both exports and imports were in a steep decline as consumption
collapsed around the world. If the US had declared itself open for free trade, to whom would
they sell, and who in the US would buy? Consumption was in a general collapse around the world.
Smoot Hawley did not help, but it also did not hurt because it was largely irrelevant.
It is a lesser discussed topic, but the US held the majority of the gold in the world in
1930 as the aftermath of their position as an industrial power in World War I and the expansion
that followed. Since the majority of the countries were on some version of the gold standard,
one could make a case that the US had an undue influence on the 'reserve currency of the world'
at that time, and its mistaken policies were transmitted via the gold standard to the rest of
the world.
The nations that exited the Great Depression the soonest, those who recovered more quickly
and experienced a shallower economic downturn, were those who stimulated domestic consumption
via public works and industrial policies: Japan, Germany, Italy, Sweden.
As a final point, we like to show this chart to draw a very strong line under the fact that
the liquidationist policy of the Hoover Administration caused most assets to suffer precipitous
declines. Certainly some fared better than others, such as gold which was pegged, and silver
which declined but not nearly as much as industrial metals and certainly financial instruments
like stocks which declined 89% from peak to trough.
FDR devalued the dollar by 40%, but he never followed Britain off the gold standard,
maintaining fictitious support by outlawing domestic ownership. As the government stepped away
from its liquidationist approach the economy gradually recovered and the money supply
reinflated, despite the carnage delivered to the US economy and the world, provoking the rise
of militarism and statist regimes in many of the developed nations.
There is a fiction that the economy never really recovered, and FDR's policies failed and
only a World War caused the recovery. In fact, if one cares to look at the situation more
closely, the recession of 1937 was a result of the aggressive military buildup for war in the
world, the diversion of capital and resources to non-productive goods and services, and of
course the general reversal of the New Deal by the US Supreme Court and the Republican minority
in Congress.
As an aside, it is interesting to read about the efforts of some US industrialists to foster
a fascist solution here in the US, as their counterparts and some of them had done in
Europe.
What finally put the world on the permanent road to recovery was the savings forced by the
lack of consumer goods during World War II and the rebuilding of Europe and Asia, devastated by
war, significantly aided by the policies of the Allied powers.
A Depression following a Crash caused by an asset bubble collapse is a terrible thing
indeed. But it does not have to be a prolonged ordeal.
Governments can and do make policy errors that prolong the period of adjustment, most
notably instituting an industrial policy that discourages domestic consumption and money supply
growth in a desire to obtain foreign reserves through exports.
From what we have seen thus far, we believe that the Russian experience in the 1990's is
going to be closer to what lies ahead for the US. Unless the US adopts an export driven, low
domestic consumption, high savings policy bias, non-productive military buildup and public
works, and discourages population growth we don't believe the Japanese experience will be
repeated.
Preventing the banking system from collapsing is a worthy objective. Perpetuating the
symptom of fraud and abuse and 'overreach' that was becoming pervasive in the system before the
collapse is not sustainable, instead leading to more frequent and larger collapses.
Balance will be restored, and a reversion to the means will occur, one way or the other. It
would be most practical to accomplish this in a peaceful, sustainable manner, with justice and
toleration.
"... "The entire US economy today is about the quick buck." ..."
"... " When market tumbled in 2015 and 2016, global central banks embarked on the largest combined intervention effort in history giving us a grand total of over $15 trillion." ..."
Central banks are founded for one reason only: to save
[private] banks from bankruptcy, invariably at the cost of society at large. They'll bring down markets
and societies just to make sure banks don't go under. They'll also, and even, do that when
these banks have taken insane risks. It's a battle societies can't possibly win as long as
central banks can raise unlimited amounts of 'money' and shove it into private banks. Ergo:
societies can't survive the existence of a central bank that serves the interests of its
private banks.
For years critics of U.S. central-bank policy have been dismissed as Negative Nellies,
but the ugly truth is staring us in the face: Stock-market advances remain a game of
artificial liquidity and central-bank jawboning, not organic growth. And now the jig is up.
As I've been saying for a long time: There is zero evidence that markets can make or sustain
new highs without some sort of intervention on the side of central banks. None. Zero. Zilch.
And don't think this is hyperbole on my part. I will, of course, present evidence.
In March 2009 markets bottomed on the expansion of QE1 (quantitative easing, part one),
which was introduced following the initial announcement in November 2008. Every major
correction since then has been met with major central-bank interventions: QE2, Twist, QE3 and
so on. When market tumbled in 2015 and 2016, global central banks embarked on the largest
combined intervention effort in history. The sum: More than $5 trillion between 2016 and
2017, giving us a grand total of over $15 trillion, courtesy of the U.S. Federal Reserve, the
European Central Bank and the Bank of Japan:
When did global central-bank balance sheets peak? Early 2018. When did global markets
peak? January 2018. And don't think the Fed was not still active in the jawboning business
despite QE3 ending. After all, their official language remained "accommodative" and their
interest-rate increase schedule was the slowest in history, cautious and tinkering so as not
to upset the markets.
With tax cuts coming into the U.S. economy in early 2018, along with record buybacks,
the markets at first ignored the beginning of QT (quantitative tightening), but then it all
changed. And guess what changed? Two things. In September 2018, for the first time in 10
years, the U.S. central bank's Federal Open Market Committee (FOMC) removed one little word
from its policy stance: "accommodative." And the Fed increased its QT program. When did U.S.
markets peak? September 2018.
[..] don't mistake this rally for anything but for what it really is: Central banks
again coming to the rescue of stressed markets. Their action and words matter in heavily
oversold markets. But the reality remains, artificial liquidity is coming out of these
markets. [..] What's the larger message here? Free-market price discovery would require a
full accounting of market bubbles and the realities of structural problems, which remain
unresolved. Central banks exist to prevent the consequences of excess to come to fruition and
give license to politicians to avoid addressing structural problems.
is it $15 trillion, or is it 20, or 30? How much did China add to the total? And for what?
How much of it has been invested in productivity? I bet you it's not even 10%. The rest has
just been wasted on a facade of a functioning economy. Those facades tend to get terribly
expensive.
Western economies would have shrunk into negative GDP growth if not for the $15-20 trillion
their central banks injected over the past decade. And that is seen, or rather presented, as
something so terrible you got to do anything to prevent it from happening. As if it's
completely natural, and desirable, for an economy to grow forever.
It isn't and it won't happen, but keeping the illusion alive serves to allow the rich to put
their riches in a safe place, to increase inequality and to prepare those who need it least to
save most to ride out the storm they themselves are creating and deepening. And everyone else
can go stuff themselves.
And sure, perhaps a central bank could have some function that benefits society. It's just
that none of them ever do, do they? Central banks benefit private banks, and since the latter
have for some braindead reason been gifted with the power to issue our money, while we could
have just as well done that ourselves, the circle is round and we ain't in it.
No, the Fed doesn't hide the ugly truth. The Fed is that ugly truth. And if we don't get rid
of it, it will get a lot uglier still before the entire edifice falls to pieces. This is not
complicated stuff, that's just what you're made to believe. Nobody needs the Fed who doesn't
want to pervert markets and society, it is that simple.
The word your looking for "abyss"
definition --
a catastrophic situation seen as likely to occur to the people with wealth that is built
upon "leverage."
Leverage results from using borrowed capital as a funding source when investing to expand
the firm's asset base and generate returns on risk capital. Leverage is an investment
strategy of using borrowed money -- specifically, the use of various financial instruments
or borrowed capital -- to increase the potential return of an investment. Leverage can also
refer to the amount of debt a firm uses to finance assets. When one refers to a company,
property or investment as "highly leveraged," it means that item has more debt than
equity.
"The entire US economy today is about the quick buck."
Even the stock market these days seems to be about the quick buck. In the US, the
average holding period for stocks has dropped from 8 years (1960), to 5 years (1970), to 2
years (1990), to 4 months (in the past few years).
The policies of the Fed (as well as the Board of Directors of the companies) are
evidently geared towards the short-term benefits of the owners who will be leaving in a few
months. The long-term health of the companies, the economy, and the overall society (mostly
non-owners) is evidently not so important to the Fed and the CEOs.
" When market tumbled in 2015 and 2016, global central banks embarked on the largest combined intervention effort
in history giving us a grand total of over $15 trillion."
Those $15 trillion in assets being held by the central banks propped the global stock market capitalization up to around
$75 trillion. Short term thinking that gives short-term benefits. Take away the props and of course that sucker is going to
fall.
What were they thinking, the overweight patient with all of those systemic problems is going to be able to walk just
fine when the crutches are taken away?
"... By Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate professor of economics and law at the University of Missouri-Kansas City, and co-founder of Bank Whistleblowers United. Jointly published with New Economic Perspectives ..."
"... Wall Street Journal ..."
"... Wall Street Journal ..."
"... The idea that examiners should not criticize any bank misconduct, predation, or 'unsafe and unsound practice' that does not constitute a felony is obviously insane. ..."
"... The trade association complaint that examiners dare to criticize non-felonious bank conduct – and the WSJ ..."
"... I have more than a passing acquaintance with banking, banking regulation, and banking's rectitude (such an old fashioned word) in the importance for Main Street's survival, and for the country's as a whole survival as a trusted pivot point in world finance , or for the survival of the whole American project. I know this sounds like an over-the-top assertion on my part, however I believe it true. ..."
"... Obama et al confusing "banking" with sound banking is too ironic, imo. ..."
"... It was actually worse than this. The very deliberate strategy was to indoctrinate employees of federal regulatory agencies to see the companies they regulated not as "partners" but as "customers" to be served. This theme is repeated again and again in Bush era agency reports. Elizabeth Warren was viciously attacked early in the Obama Administration for calling for a new "watchdog" agency to protect consumers. The idea that a federal agency would dedicate itself to protecting citizens first was portrayed as dangerously radical by industry. ..."
"... Models on Clinton and Bush. What's not to like? Why isn't msm and dem elites showing him the love when he's following their long term policies? And we might assume these would be hills policies if she had been pushed over the line. A little thought realizes that in spite of the pearl clutching they far prefer him to Bernie. ..."
By Bill Black, the author of The Best Way to Rob a Bank is
to Own One, an associate professor of economics and law at the University of Missouri-Kansas
City, and co-founder of Bank Whistleblowers United. Jointly published with New Economic Perspectives
The Wall Street Journal published an article
on December 12, 2018 that should warn us of coming disaster: "Banks Get Kinder, Gentler
Treatment Under Trump." The last time a regulatory head lamented that regulators were not
"kinder and gentler" promptly ushered in the Enron-era fraud epidemic. President Bush made
Harvey Pitt his Securities and Exchange Commission (SEC) Chair in August 2001 and, in one of
his early major addresses, he spoke on October 22, 2001 to a group of accounting
leaders.
Pitt, as a private counsel, represented all the top tier audit firms, and they had
successfully pushed Bush to appoint him to run the SEC. The second sentence of Pitt's speech
bemoaned the fact that the SEC had not been "a kinder and gentler place for accountants." He
concluded his first paragraph with the statement that the SEC and the auditors needed to work
"in partnership." He soon reiterated that point: "We view the accounting profession as our
partner" and amped it up by calling accountants the SEC's "critical partner."
Pitt expanded on that point: "I am committed to the principle that government is and must be
a service industry." That, of course, would not be controversial if he meant a service agency
(not "industry") for the public. Pitt, however, meant that the SEC should be a "service
industry" for the auditors and corporations.
Pitt then turned to pronouncing the SEC to be the guilty party in the "partnership." He
claimed that the SEC had terrorized accountants. He then stated that he had ordered the SEC to
end this fictional terror campaign.
[A]ccountants became afraid to talk to the SEC, and the SEC appeared to be unwilling to
listen to the profession. Those days are ended.
This prompted Pitt to ratchet even higher his "partnership" language.
I speak for the entire Commission when I say that we want to have a continuing dialogue,
and partnership, with the accounting profession,
Recall that Pitt spoke on October 22, 2001. Here are the relevant excerpts from the NY
Times' Enron
timeline :
Oct. 16 – Enron announces $638 million in third-quarter losses and a $1.2 billion
reduction in shareholder equity stemming from writeoffs related to failed broadband and water
trading ventures as well as unwinding of so-called Raptors, or fragile entities backed by
falling Enron stock created to hedge inflated asset values and keep hundreds of millions of
dollars in debt off the energy company's books.
Oct. 19 – Securities and Exchange Commission launches inquiry into Enron
finances.
Oct. 22 – Enron acknowledges SEC inquiry into a possible conflict of interest
related to the company's dealings with Fastow's partnerships.
Oct. 23 – Lay professes confidence in Fastow to analysts.
Oct. 24 – Fastow ousted.
The key fact is that even as Enron was obviously spiraling toward imminent collapse (it
filed for bankruptcy on December 2) – and the SEC knew it – Pitt offered no warning
in his speech. The auditors and the corporate CEOs and CFOs were not the SEC's 'partners.'
Thousands of CEOs and CFOs were filing false financial statements – with 'clean' opinions
from the then 'Big 5' auditors. Pitt was blind to the 'accounting control fraud' epidemic that
was raging at the time he spoke to the accountants. Thousands of his putative auditor
'partners' were getting rich by blessing fraudulent financial statements and harming the
investors that the SEC is actually supposed to serve.
Tom Frank aptly characterized the Bush appointees that completed the destruction of
effective financial regulation as "The Wrecking Crew." It is important, however, to understand
that Bush largely adopted and intensified Clinton's war against effective regulation. Clinton
and Bush led the unremitting bipartisan assault on regulation for 16 years. That produced the
criminogenic environment that produced the three largest financial fraud epidemics in history
that hyper-inflated the real estate bubble and drove the Great Financial Crisis (GFC).
President Trump has renewed the Clinton/Bush war on regulation and he has appointed banking
regulatory leaders that have consciously modeled their assault on regulation on Bush and
Clinton's 'Wrecking Crews.'
Bill Clinton's euphemism for his war on effective regulation was "Reinventing Government."
Clinton appointed VP Al Gore to lead the assault. (Clinton and Gore are "New Democrat" leaders
– the Wall Street wing of the Democratic Party.) Gore decided he needed to choose an
anti-regulator to conduct the day-to-day leadership. We know from Bob Stone's memoir the sole
substantive advice he gave Gore in their first meeting that caused Gore to appoint him as that
leader. "Do not 'waste one second going after waste, fraud, and abuse.'" Elite insider fraud
is, historically, the leading cause of bank losses and failures, so Stone's advice was sure to
lead to devastating financial crises. It is telling that it was the fact that Stone gave
obviously idiotic advice to Gore that led him to select Stone as the field commander of Clinton
and Gore's war on effective regulation.
Stone convinced the Clinton-Gore administration to embrace the defining element of crony
capitalism as its signature mantra for its war on effective regulation. Stone and his troops
ordered us to refer to the banks, not the American people, as our "customers." Peters' foreword
to Stone's book admits the action, but is clueless about the impact.
Bob Stone's insistence on using the word "customer" was mocked by some -- but made an
enormous difference over the course of time. In general, he changed the vocabulary of public
service from 'procedure first' to 'service first.'"
That is a lie. We did not 'mock' the demand that we treat the banks rather than the American
people as our "customer" – we openly protested the outrageous order that we embrace and
encourage crony capitalism. Crony capitalism's core principle – which is unprincipled
– is that the government should treat elite CEOs as their 'customers' or 'partners.' A
number of us publicly expressed our rage at the corrupt order to treat CEOs as our customers.
The corrupt order caused me to leave the government.
Our purpose as regulators is to serve the people of the United States – not bank CEOs.
It was disgusting and dishonest for Peters to claim that our objection to crony capitalism
represented our (fictional) disdain for serving the public. Many S&L regulators risked
their careers by taking on elite S&L frauds and their powerful political fixers. Many of us
paid a heavy personal price because we acted to protect the public from these elite frauds. Our
efforts prevented the S&L debacle from causing a GFC – precisely because we
recognized the critical need to spend most of our time preventing and prosecuting the elite
frauds that Stone wanted us to ignore..
Trump's wrecking crew is devoted to recreating Clinton and Bush's disastrous crony
capitalism war on regulation that produced the GFC. In a June 8,
2018 article , the Wall Street Journal mocked Trump's appointment of Joseph Otting
as Comptroller of the Currency (OCC). The illustration that introduces the article bears the
motto: "IN BANKS WE TRUST."
Otting, channeling his inner Pitt, declared his employees guilty of systematic misconduct
and embraced crony capitalism through Pitt's favorite phrase – "partnership."
I think it is more of a partnership with the banks as opposed to a dictatorial perspective
under the prior administration.
Otting, while he was in the industry, compared the OCC under President Obama to a fictional
interstellar terrorist. Obama appointed federal banking regulators that were pale imitation of
Ed Gray, Joe Selby, and Mike Patriarca – the leaders of the S&L reregulation. The
idea that Obama's banking regulators were akin to 'terrorists' is farcical.
The WSJ's December 12, 2018 article reported that Otting had also used Bob Stone's
favorite term to embrace crony capitalism.
Comptroller of the Currency Joseph Otting has also changed the tone from the top at his
agency, calling banks his "customers."
There are many terrible role models Trump could copy as his model of how to destroy banking
regulation and produce the next GFC, but Otting descended into unintentional self-parody when
he channeled word-for-word the most incompetent and dishonest members of Clinton and Bush's
wrecking crews.
The same article reported a trade association's statement that demonstrates the type of
outrageous reaction that crony capitalism inevitably breeds within industry.
Banks are suffering from "examiner criticisms that do not deal with any violation of law,"
said Greg Baer, CEO of the Bank Policy Institute ."
The article presented no response to this statement so I will explain why it is absurd.
First, "banks" do not "suffer" from "examiner criticism." Banks gain from examiner criticism.
Effective regulators (and whistleblowers) are the only people who routinely 'speak truth to
power.' Auditors, credit rating agencies, and attorneys routinely 'bless' the worst CEO abuses
that harm banks while enriching the CEO. The bank CEO cannot fire the examiner, so the
examiners' expert advice is the only truly "independent" advice the bank's board of directors
receives. That makes the examiners' criticisms invaluable to the bank. CEOs hate our advice
because we are the only 'control' (other than the episodic whistleblower) that is willing and
competent to criticize the CEO.
The idea that examiners should not criticize any bank misconduct, predation, or 'unsafe
and unsound practice' that does not constitute a felony is obviously insane. While
"violations of law" (felonies) are obviously of importance to us in almost all cases, our
greatest expertise is in identifying – and stopping – "unsafe and unsound
practices" because such practices, like fraud, are leading causes of bank losses and
failures.
Third, repeated "unsafe and unsound practices" are a leading indicator of likely elite
insider bank fraud and other "violations of law."
The trade association complaint that examiners dare to criticize non-felonious bank
conduct – and the WSJ reporters' failure to point out the absurdity of that
complaint – demonstrate that the banking industry's goal remains the destruction of
effective banking regulation. Trump's wrecking crew is using the Clinton and Bush playbook to
restore fully crony capitalism. He has greatly accelerated the onset of the next GFC.
Thank you for this, Bill Black. IMO the long-term de-regulatory policies under successive
administrations cited here, together with their neutering the rule of law by overturning the
Glass-Steagall Act; de-funding and failing to enforce antitrust, fraud and securities laws;
financial repression of the majority; hidden financial markets subsidies; and other policies
are just part of an organized, long-term systemic effort to enable, organize and subsidize
massive control and securities fraud; theft of and disinvestment in publicly owned resources
and services; environmental damage; and transfers of social costs that enable the organizers
to in turn gain a hugely disproportionate share of the nation's wealth and nearly absolute
political control under their "Citizens United" political framework.
Not to diminish, but among other things the current president provides nearly daily
entertainment, diversion and spectacle in our Brave New World that serves to obfuscate what
has occurred and is happening.
I'm with you Chauncey. I believe the rot really got started with creative accounting in
early 1970s. That's when accountants of every flavor lost themselves and were soon followed
by the lawyers. Sauce for the goose.
Banks and Insurers and many industrial concerns have become too big. We could avoid all
the regulatory problems by placing a maximum size on commercial endeavour.
A number of years ago I did both the primary capital program and environmental (NEPA) review
for major capital projects in a Federal Region. Hundreds of millions of dollars were at
stake. A local agency wanted us (the Feds) to approve pushing up many of their projects using
a so-called Public Private Partnership (PPP). This required the local agency to borrow many
millions from Wall Street while at the same time privatizing many of their here-to-fore
public operations. And of course there was an added benefit of instituting a non-union
shop.
To this end I was required to sit down with the local agency head (he actually wore white
shoes), his staff and several representatives of Goldman-Sachs. After the meeting ended, I
opined to the agency staff that Goldman-Sachs was "bullshit" and so were their projects.
Shortly thereafter I was removed to a less high-profile Region with projects that were not
all that griftable, and there was no danger of me having to review a PPP.
Oh, and I denied, denied, denied saying "bullshit."
Thank you, NC, for featuring these posts by Bill Black.
I have more than a passing acquaintance with banking, banking regulation, and banking's
rectitude (such an old fashioned word) in the importance for Main Street's survival, and for
the country's as a whole survival as a trusted pivot point in world finance , or for
the survival of the whole American project. I know this sounds like an over-the-top assertion
on my part, however I believe it true.
Main Street also knows the importance of sound banking. Sound banking is not a 'poker
chip' to be used for games. Sound banking is key to the American experiment in
self-determination, as it has been called.
Politicians who 'don't get this" have lost touch with the entire American enterprise,
imo. And, no, the neoliberal promise that nation-states no longer matter doesn't make this
point moot.
adding: US founding father Alexander Hambleton did understand the importance of sound
banking, and so Obama et al confusing "banking" with sound banking is too ironic, imo.
It was actually worse than this. The very deliberate strategy was to indoctrinate
employees of federal regulatory agencies to see the companies they regulated not as
"partners" but as "customers" to be served. This theme is repeated again and again in Bush
era agency reports. Elizabeth Warren was viciously attacked early in the Obama Administration
for calling for a new "watchdog" agency to protect consumers. The idea that a federal agency
would dedicate itself to protecting citizens first was portrayed as dangerously radical by
industry.
Models on Clinton and Bush.
What's not to like? Why isn't msm and dem elites showing him the love when he's following
their long term policies?
And we might assume these would be hills policies if she had been pushed over the line.
A little thought realizes that in spite of the pearl clutching they far prefer him to
Bernie.
Now that the banks are calling in their insurance, the EU has to deliver either by 1)
screwing down Italy the same as they did Greece, or 2) getting the French and German public
(or better the whole EU) to bail out the banks.
There is a third option: the banks simply accept their losses, and the bankers make do
without their customary bonuses for a few quarters.
Ignore the day-to-day moves in the markets, in the big picture, some MAJOR is happening
namely, that the Everything Bubble is bursting.
By creating a bubble in sovereign bonds, the bedrock of the current financial system,
Central Banks created a bubble in EVERYTHING. After all, if the risk-free rate of return is at
FAKE level based on Central Bank intervention ALL risk assets will eventually adjust to FAKE
levels.
This whole mess starting blowing up in February when we saw the bubble in passive investing/
shorting volatility start to blow up (some investment vehicles based on these strategies lost
85% in just three days).
The media and Wall Street swept that mess under the rug which allowed the contagion to start
spreading to other, more senior asset classes like corporate bonds.
The US Corporate bond market took 50 years to reach $3 trillion. It doubled that in the last
9 years, bringing it to its current level of $6 trillion.
This debt issuance was a DIRECT of result of the Fed's intervention in the bond markets.
With the weakest recovery on record, US corporations experienced little organic growth. As a
result, many of them resorted to financial engineering through which they issued debt and then
used the proceeds to buyback shares.
This:
Juiced their Earnings Per Share (the same earnings, spread over fewer shares= better
EPS).
Provided the stock market with a steady stream of buyers, which
Lead to higher options-based compensation for executives.
If you think this sounds a lot like a Ponzi scheme that relies on a bubble in corporate
debt, you're correct. And that Ponzi scheme is now blowing up. The question now is
how bad will it get?"
VERY bad.
The IMF estimates about 20% of U.S. corporate assets could be at risk of default if
rates rise – some are in the energy sector but it also includes companies in real
estate and utilities. Exchange-traded funds that buy junk bonds, like iShares iBoxx $
High Yield Corporate Bond Fund (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK),
could be among the most vulnerable if credit risks rise. iShares iBoxx $ Investment Grade
Corporate Bond ETF (LQD) could also suffer.
Source: Barron's
With a $6 trillion market, a 20% default rate would mean some $1.2 trillion in corporate
debt blowing up: an amount roughly equal to Spain's GDP .
This process is officially underway.
Credit Markets Are Bracing for Something Bad
Cracks in corporate debt lead market commentary.
the Bloomberg Barclays U.S. Corporate Bond Index losing more than 3.5 percent and on
track for its worst year since 2008.
Source: Bloomberg
Indeed, the chart for US corporate junk bonds is downright UGLY.
This is just the beginning. As contagion spreads we expect more and more junior debt
instruments to default culminating in full-scale sovereign debt defaults in the developed world
(Europe comes to mind).
This will coincide with a stock market crash that will make 2008 look like a picnic.
Again, the markets are going to CRASH. The time to prepare is now BEFORE this happens.
On that note we just published a 21-page investment report titled Stock Market Crash
Survival Guide .
In it, we outline precisely how the crash will unfold as well as which investments will
perform best during a stock market crash.
Today is the last day this report will be available to the public. We extended the deadline
into the weekend based on last week's action, but this is IT no more extensions.
In essence this is the largest casino in the world, created by casino capitalism. Previously
only wealthy individuals owned stocks. Now everybody owed them via thier 401K (which in recession
can easily become 201K ;-). In 2008 S&P500 touched the level of around 700. Does this mean
that the it was oversold? And what would happen to him if the government will not pushed
trillions to large banks, and some of those money went into S&p500.
Notable quotes:
"... There is no magic valuation level that supports high-flying stocks. They are driven by sentiment in both directions. ..."
"... That gets to the oft-quoted notion of "support." Does it really exist? Is there a level at which assets are just "too cheap" relative to their intrinsic values and therefore must be bought regardless of prevailing market trends? ..."
"... The mistake many market observers often make is to attribute all selloffs to gyrations in sentiment and to misunderstand that stock booms are driven by that exact factor -- in reverse. Sentiment will always rule market pricing in the short-term. ..."
Stocks quotes in this article: AAPL , NFLX , FB , AMZN , F , GE , IBM , T , GOOGLThere is no magic valuation level
that supports high-flying stocks. They are driven by sentiment in both directions.
It's on now. The markets are in full-blown correction mode.
I hope the truncated trading day on Friday did not escape your attention, because it
continued a negative price trend for stocks that began in late-September. The question now is:
How low can we go?
That gets to the oft-quoted notion of "support." Does it really exist? Is there a level
at which assets are just "too cheap" relative to their intrinsic values and therefore must be
bought regardless of prevailing market trends?
The mistake many market observers often make is to attribute all selloffs to gyrations
in sentiment and to misunderstand that stock booms are driven by that exact factor -- in
reverse. Sentiment will always rule market pricing in the short-term. That was just as
true with Apple ( AAPL ) at $220 per share as it is with
Apple at $172 per share, Netflix ( NFLX ) at $420 and $258 and on and on
down the list. Portfolio managers were buying Facebook ( FB ) above $200 per share and Amazon (
AMZN ) above
$2,000 because they had to, though, not based on innately unquantifiable, voodoo metrics such
as "disruption."
I am basing that statement on my regular conversations with fund managers at very large
asset managers, and of course no one can definitively take the pulse of every player in the
market. That is the great divide between individuals (my clients at Portfolio Guru LLC) and
institutions (pension funds, insurance companies, college endowments, sovereign wealth funds,
etc.)
Individuals want their portfolio values to rise. Period. Institutions want their portfolios
to outperform their carefully selected benchmarks over specific time periods on a risk-adjusted
basis.
So, that's what creates high-flying stocks to begin with. Portfolio managers need to
overweight the biggest names in the market -- owning more Apple, for instance, than its
weighting in the chosen benchmark would require, not simply owning or not owning Apple. In a
rising market that has a beneficial effect on valuations of those names.
If every portfolio manager needs to buy more Apple, Apple's share price will go up, making
it a larger component of the S&P 500 and Nasdaq 100. As Apple's weighting increases, those
fund managers would have to -- you guessed it -- buy more Apple!
The circularity of that logic is undeniable, but I am telling you that's how the market for
big-cap stocks works. Please remember the men and women pulling those levers are responsible
for much, much larger asset bases than you are. So they will always move the markets, even if
history has proven their timing to be poor more often than it is excellent.
Bottom line: High-flying stocks are driven by sentiment in both directions, thus there is no
magic valuation level that supports them.
This is quite apparent in the charts of "fallen angel" stocks such as Ford ( F ) , General Electric (
GE ) , IBM (
IBM ) , and
AT&T ( T ) . The
market hates those stocks no more the day after Thanksgiving than it did the day after
Independence Day, but certainly no less, either. An investor could generate hours of amusement
by Googling "this is a bottom for..." and then entering in any of those names. So many pundits,
so many bad support level calls.
So, value traps are no way to ride out a market correction, but what about the stocks that
brought us into that correction? Are the FAANG names -- Facebook, Amazon, Apple, Netflix, Apple
and Alphabet ( GOOGL ) (parent company of Google) --
destined to end up in the "hate pile" with GE and IBM? God, I hope not. That's the difference
between a pullback and a crash and, by implication, the difference between a depression and a
recession.
My analysis shows that buying Apple at 13x next year's earnings -- which implies a price of
$172.55, slightly above Friday's close -- has been a lucrative strategy in the past three
years. That said, I am worried that the steady stream of noise about production cuts from
Apple's suppliers implies Wall Street's estimates for Apple's fiscal 2019 earnings are
inflated. So I am not buying Apple today.
And so it goes. Chicken and egg. Is the stock market telling us the global economy is
slowing or is the global economy slowing driving down prices for assets, especially oil, thus
creating an economic slowdown? Crude's decline has spooked the market to no end, but so has
Apple's decline. And Netflix's and Facebook's.
At the end of the day, all securities are assets on someone's balance sheet. Gold, oil,
stocks, bonds, really anything on your screen except crypto, which is very very difficult to
clear and hence to accurately value. Anything that can be physically transferred can be sold,
and in a downturn that can be a sobering thought. Don't forget it.
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time I write an article for Real Money. Click the "+Follow" next to my byline to this article.
"An intelligent explanation of the mechanisms that produced the crisis and the response to
it...One of the great strengths of Tooze's book is to demonstrate the deeply intertwined nature
of the European and American financial systems." -- The New York Times Book
Review
"Whereas since the 1970s the incessant mantra of the spokespeople of the financial industry
had been free markets and light touch regulation, what they were now demanding was the
mobilization of all of the resources of the state to save society's financial infrastructure
from a threat of systemic implosion, a threat they likened to a military emergency." (Loc.
3172-3174)
Adam Tooze takes the well know Financial Crisis of 2007-08 through its full history of
international ramifications and brings it up to the present with the question of whether the
large organizations, structures and processes on the one hand; decision, debate, argument and
action on the other that managed to fall into place in that crisis period in this and many
other countries will develop if needed again. "The political in "political economy" demands
to be taken seriously." (Loc. 11694). That he does.
Tooze is an Economic Historian and Crashed: How a Decade of Financial Crises Changed the
World is a wonderfully rich enquiry into causes and effects of the Financial Crisis and how
the failing of poorly managed greed motivated practices of a few financial institutions, and
their subprime mortgagees, tumbled economies in the developed and developing world, causing
events that matched the Great Depression's dislocation and could have matched its duration,
springing from world wide money markets "interlocking matrix" of corporate balance sheets --
bank to bank."
A warning he is not kind to existing political beings, the Republican Party in particular
" to judge by the record of the last ten years, it is incapable of legislating or cooperating
effectively in government." (Loc.11704)
His criticism is, in fairness, based on technical management grounds, and he does find fault
as well with the inner core of the Obama advisors and their primary concerns for the
financial sectors well being, rather than nationwide happenings where homes and incomes
disappeared.
This reviewer's favorite (not mentioned by Tooze) is the early 2009 comment of Larry
Sumners when Christina D. Romer, the chairwoman of President Obama's Council of Economic
Advisers and leading authority on the Great Depression saw a need for $1.8 trillion stimulus
package, "What have you been smoking?"
Sumners, Geithner, and Orszag, who favored transferring $700 billion to the banks to offset
possible bank failures and such -- became policy. Tooze mentions that by 2012 Sumners was
concerned by the slowness of the U.S. economy's recovery taking, as it did, 8 years to reach
2008 levels of employment.
Can an Economic History be an exciting read? Tooze gives us over 700 pages of just that,
but much will be familiar as reported news and may be skimmed, and some of the Fed's expanded
international roles very dense in content. His strength is the knowledge of what could have
happened, had solutions not been found, and how agreements were reached out of public
sight.
" the world economy is not run by medium-sized entrepreneurs but by a few thousand massive
corporations, with interlocking shareholdings controlled by a tiny group of asset managers.
(Loc.418-419).
Add wily politicians and hard driven bankers EU Ukraine and China you have an adventure.
Corporate control is not new -- rich descriptions of its inner connections are.
Adam Tooze does this well a reference work for years to come.
5 stars
Columbia history professor Adam Tooze, an authority on the inter-war years, has offered up an
authoritative history of the financial crises and their aftermath that have beset the world
since 2008. He integrates economics, the plumbing of the interbank financial system and the
politics of the major players in how and why the financial crisis of 2008 developed and the
course of the very uneven recovery that followed. I must note that Tooze has some very clear
biases in that he views the history through a social democratic prism and is very critical of
the congressional Republican caucus and the go slow policies of the European Central Bank
under Trichet. To him the banks got bailed out while millions of people suffered as
collateral damage from a crisis that was largely made by the financial system. His view may
very well be correct, but many readers might differ. Simply put, to save the economy policy
makers had to stop the bleeding.
He starts off with the hot topic of 2005; the need for fiscal consolidation in the United
States. Aside from a few dissidents, most economists saw the need for the U.S. to close its
fiscal deficit and did not see the structural crisis that was developing underneath them.
Although he does mention Hyman Minsky a few times in the book, he leaves out Minsky's most
important insight that "stability leads to instability" as market participants are lulled
into a false sense of security. It therefore was against the backdrop of the "great
moderation" that the crisis began. And it was the seemingly calm environment that lulled all
too many regulators to sleep.
The underbelly of the financial system was and still is in many respects is the wholesale
funding system where too many banks are largely funded in repo and commercial paper markets.
This mismatch was exacerbated by the use of asset-backed commercial paper to fund long term
mortgage securities. It was problems in that market that triggered the crisis in August
2007.
The crisis explodes when Lehman Brothers files for bankruptcy in September 2008. In
Tooze's view the decision to let Lehman fail was political, not economic. After that the
gates of hell are opened causing the Bush Administration and the Federal Reserve to ask for
$750 billion dollar TARP bailout of the major banks. It was in the Congressional fight over
this appropriation where Tooze believes the split in the Republican Party between the
business conservative and social populist wing hardens. We are living with that through this
day. The TARP program passes with Democratic votes. Tooze also notes that there was great
continuity between the Bush and early Obama policies with respect to the banks and auto
bailout. Recall that in late 2008 and early 2009 nationalization of the banks was on the
table. Tooze also correctly notes that the major beneficiary of the TARP program was
Citicorp, the most exposed U.S. bank to the wholesale funding system.
Concurrent with TARP the Bernanke Fed embarks on its first quantitative easing program
where it buys up not only treasuries, but mortgage backed securities as well. It was with the
latter Europe's banks were bailed out. Half of the first QE went to bail out Europe's
troubled banks. When combined the dollar swap lines with QE, Europe's central banks
essentially became branches of the Fed. Now here is a problem. Where in the Federal Reserve
Act does it say that the Fed is the central bank to the world? To some it maybe a
stretch.
Tooze applauds Obama's stimulus policy but rightly says it was too small. There should
have been more infrastructure in it. To my view there could have been more infrastructure if
only Obama was willing to deal with the Republicans by offering to waive environmental
reviews and prevailing wage rules. He never tried for fear of offending his labor and
environmental constituencies. Tooze also gives great credit to China with it all out monetary
and fiscal policies. That triggered a revival in the energy and natural resource economies of
Australia and Brazil thereby helping global recovery.
He then turns to the slow responses in Europe and the political wrangling over the tragedy
that was to befall Greece. It came down to the power of Angela Merkel and her unwillingness
to have the frugal German taxpayer subsidize the profligate Greeks. As they say "all politics
is local". The logjam in Europe doesn't really break until Mario Draghi makes an off-the-cuff
remark at a London speech in July 2012 by saying the ECB will do "whatever it takes" to
engender European recovery.
As a byproduct of bailing out the banks and failing to directly help the average citizen a
rash of populism, mostly of the rightwing variety, breaks out all over leading to Brexit,
Orban in Hungary, a stronger rightwing in Germany and, of course, Donald Trump. But to me it
wasn't only banking policy that created this. The huge surge in immigration into Europe has a
lot more to do with it. Tooze under-rates this factor. He also under-rates the risk of having
a monetary policy that is too easy and too long. The same type of Minsky risk discussed
earlier is now present in the global economy: witness Turkey, for example. Thus it is too
early to tell whether or not the all-out monetary policy of the past decade will be judged a
success from the vantage point of 2030.
Adam Tooze has written an important book and I view it as must read for a serious lay
reader to get a better understanding of the economic and political policies of the past
decade.
Each year I choose a book to be the Globalization Book of the Year, i.e., the "Globie". The prize is strictly honorific and does
not come with a check. But I do like to single out books that are particularly insightful about some aspect of globalization. Previous
winners are listed at the bottom.
This year's choice is
Crashed: How a Decade of Financial Crises Changed the Worldby
Adam Tooze of Yale University . Tooze, an historian, traces the events leading up to the crisis and the subsequent ten years.
He points out in the introduction that this account is different from one he may have written several years ago. At that time Barak
Obama had won re-election in 2012 on the basis of a slow but steady recovery in the U.S. Europe was further behind, but the emerging
markets were growing rapidly, due to the demand for their commodities from a steadily-growing China as well as capital inflows searching
for higher returns than those available in the advanced economies.
But the economic recovery has brought new challenges, which have swept aside established politicians and parties. Obama was succeeded
by Donald Trump, who promised to restore America to some form of past greatness. His policy agenda includes trade disputes with a
broad range of countries, and he is particularly eager to impose trade tariffs on China. The current meltdown in stock prices follows
a rise in interest rates normal at this stage of the business cycle but also is based on fears of the consequences of the trade measures.
Europe has its own discontents. In the United Kingdom, voters have approved leaving the European Union. The European Commission
has expressed its disapproval of the Italian government's fiscal plans. Several east European governments have voiced opposition
to the governance norms of the West European nations. Angela Merkel's decision to step down as head of her party leaves Europe without
its most respected leader.
All these events are outcomes of the crisis, which Tooze emphasizes was a trans-Atlantic event. European banks had purchased held
large amounts of U.S. mortgage-backed securities that they financed with borrowed dollars. When liquidity in the markets disappeared,
the European banks faced the challenge of financing their obligations. Tooze explains how the Federal Reserve supported the European
banks using swap lines with the European Central Bank and other central banks, as well as including the domestic subsidiaries of
the foreign banks in their liquidity support operations in the U.S. As a result, Tooze claims:
"What happened in the fall of 2008 was not the relativization of the dollar, but the reverse, a dramatic reassertion of the pivotal
role of America's central bank. Far from withering away, the Fed's response gave an entirely new dimension to the global dollar"
(Tooze, p. 219)
The focused policies of U.S. policymakers stood in sharp contrast to those of their European counterparts. Ireland and Spain had
to deal with their own banking crises following the collapse of their housing bubbles, and Portugal suffered from anemic growth.
But Greece's sovereign debt posed the largest challenge, and exposed the fault line in the Eurozone between those who believed that
such crises required a national response and those who looked for a broader European resolution. As a result, Greece lurched from
one lending program to another. The IMF was treated as a junior partner by the European governments that sought to evade facing the
consequences of Greek insolvency, and the Fund's reputation suffered new blows due to its involvement with the various rescue operations.The
ECB only demonstrated a firm commitment to its stabilizing role in July 2012, when its President Mario Draghi announced that "Within
our mandate, the ECB is ready to do whatever it takes to preserve the euro."
China followed another route. The government there engaged in a surge of stimulus spending combined with expansionary monetary
policies. The result was continued growth that allowed the Chinese government to demonstrate its leadership capabilities at a time
when the U.S. was abandoning its obligations. But the ensuing credit boom was accompanied by a rise in private (mainly corporate)
lending that has left China with a total debt to GDP ratio of over 250%, a level usually followed by some form of financial collapse.
Chinese officials are well aware of the domestic challenge they face at the same time as their dispute with the U.S. intensifies.
Tooze demonstrates that the crisis has let loose a range of responses that continue to play out. He ends the book by pointing
to a similarity of recent events and those of 1914. He raises several questions: "How does a great moderation end? How do huge risks
build up that are little understood and barely controllable? How do great tectonic shifts in the global world order unload in sudden
earthquakes?" Ten years after a truly global crisis, we are still seeking answers to these questions.
Under neoliberlaism the idea of loyalty between a corporation and an employee makes no more sense than loyalty between a motel and its guests.
Notable quotes:
"... Any expectation of "loyalty", that two-way relationship of employee/company from an earlier time, was wishful thinking ..."
"... With all the automation going on around the world, these business leaders better worry about people not having money to buy their goods and services plus what are they going
Steve Goldstein
Canada makes it much more difficult to know its real unemployment rate. The official Canadian unemployment rate for February was 6.8 percent, a slight increase from January that Statistics Canada attributes to "more people search[ing] for work." The official measurement in Canada, as in the U.S., European Union and Australia, mirrors the official standard for measuring employment defined by the International Labour Organization -- those not working at all and who are "actively looking for work." (The ILO is an agency of the United Nations.)
"
