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Stability is destabilizing: The idea of Minsky moment

News Financial Sector Induced Systemic Instability of Economy Recommended Links  Steve Keen Randall Wray Michael Hudson
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  "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. ”

Uncle Billy Cunctator
In comment to Economic Donkeys

 
  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:

  1. 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.
  2. 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. 
  3. 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 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:

  1. The employment rate will rise if economic growth exceeds the sum of population growth and growth in labor productivity;
  2. The wages share of output will rise if money wage demands exceed the sum of inflation and growth in labor productivity; and
  3. 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 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:

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?

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.”

Stephen Mihm is a history professor at the University of Georgia and author of “A Nation of Counterfeiters” (Harvard, 2007). © Copyright 2009 Globe Newspaper Company.

Attempts to reinvent Minsky will never stop

Here is one such paper   Leveraged Bubbles (Sep 01, 2015)

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.
Posted by Mark Thoma on Tuesday, September 1, 2015 at 09:25 AM in Economics, Financial System | Permalink  Comments (8)
Double Capitulation said...

"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.
 

mulp -> djb...

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.

Not very hands-off at all.

mulp -> Blissex...

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.


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[Jul 21, 2021] Bubbles, bubbles everywhere- Jeremy Grantham on the bust ahead

Jul 20, 2021 | www.msn.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.

[Jul 20, 2021] Bubbles, bubbles everywhere- Jeremy Grantham on the bust ahead

Jul 20, 2021 | www.msn.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.

[Jul 16, 2021] This one signal says a stock market correction may be on the way by Michael Brush

Notable quotes:
"... 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. ..."
Jul 14, 2021 | www.marketwatch.com
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,

[Jul 03, 2021] Opinion: The looming stagflationary debt crisis will deliver a one-two punch to markets and economies by Nouriel Roubini

Highly recommended!
Notable quotes:
"... 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. ..."
Jun 30, 2021 | www.marketwatch.com

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 commentary was published with permission of Project Syndicate -- The Looming Stagflationary Debt Crisis.

See also:

[Jul 03, 2021] Larry Summers Sees 5% Inflation At The End Of 2021

Notable quotes:
"... 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. ..."
Jul 03, 2021 | www.zerohedge.com

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.

[Jul 03, 2021] Housing Prices Are Going Up. Must They Crash by Kevin Erdmann

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?
Jun 29, 2021 | thebusinessnewsindia.com

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 ideas@barrons.com .

Kevin Erdmann is 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.

[Jun 25, 2021] Meme-based investing 'is a totally nihilistic parody of actual investing,' says Jeremy Grantham, who called 3 stock-market bu

Jun 25, 2021 | www.marketwatch.com

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
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"'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.

Deep Dive: We put AMC, GameStop and other meme stocks' numbers to the test -- here's which ones came out on top

Plus: We put 6 more meme stocks' numbers to the test, and the differences are telling

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.

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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.

What the News Means for You and You

[Jun 21, 2021] Minneapolis Fed President Neel Kashkari Calls DOGE a Ponzi Scheme

Jun 21, 2021 | slashdot.org

(cointelegraph.com) 45 BeauHD 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.

[Jun 20, 2021] Facebook, Alphabet Keep Rising; Apple, Netflix Fade - WSJ

Jun 20, 2021 | www.wsj.com

Big tech stocks are going their own ways in 2021.

It is a far cry from last year, when the so-called FAANG stocks took a commanding role in a market driven by the coronavirus pandemic.

After the swift downturn of early 2020, shares of Facebook Inc., FB -2.04% Apple Inc., AAPL -1.01% Amazon.com Inc., AMZN -0.07% Netflix Inc. NFLX 0.49% and Google parent Alphabet Inc. GOOG -0.64% recovered more quickly than the broad stock market. Then they pushed higher, ultimately powering the S&P 500 to a 16% gain for 2020.

... ... ...

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%.

J

James Robertson

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?

[Jun 12, 2021] Don't dismiss market bubbles" some leave lasting progress behind

Notable quotes:
"... 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. ..."
Jun 06, 2021 | investornewsletter.net

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.

[Jun 12, 2021] Suze Orman thinks rising stock prices could be a problem for you" here's why

Jun 08, 2021 | finance.yahoo.com

"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.


[Jun 12, 2021] Get Ready for $178 Billion of Selling Ahead of the Capital-Gains Tax Hike. These Are the Stocks Most at Risk. - MarketWatch

Jun 07, 2021 | www.marketwatch.com

...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.)

[Jun 07, 2021] 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 excessive leveraging

Jun 06, 2021 | investornewsletter.net

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.

[Jun 07, 2021] Get Ready for $178 Billion of Selling Ahead of the Capital-Gains Tax Hike. These Are the Stocks Most at Risk. - MarketWatch

Jun 07, 2021 | www.marketwatch.com

...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.)

[Jun 07, 2021] Don't get too optimistic about a stock market rally" they've been fizzling out

Jun 04, 2021 | futurewealthdaily.com
This post was originally published on this site

... ... ...

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 mark@hulbertratings.com . Continue Reading

[Jun 06, 2021] Morgan Stanley: 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.

Jun 06, 2021 | www.zerohedge.com

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.

[Jun 06, 2021] Yes, It's Still the Economy, Stupid by Karl Rove

An interesting question how stock market casino will volve. Will the Ponzi collase or will run for a couple more years.
Jun 02, 2021 | www.wsj.com

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).

M

Maria Stepanova

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.

[Jun 03, 2021] Will the stock bubble continue to inflate

Jun 03, 2021 | peakoilbarrel.com

HHH IGNORED HOLE IN HEAD IGNORED 05/31/2021 at 2:16 pm

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 .

05/31/2021 at 12:58 pm

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 .

[Jun 03, 2021] Bitcoin is a -farce- - Amundi CIO

Jun 03, 2021 | finance.yahoo.com

Thu, June 3, 2021, 7:18 AM AMUN.PA +0.21%

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.

[Jun 01, 2021] ARK Invest Stocks To Buy And Watch- 6 Stocks That Cathie Wood's ARK ETFs Own; Zoom Slides Before Earnings

Skepticism grows, judging from Yahoo comments below.
Jun 01, 2021 | finance.yahoo.com

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.

[May 31, 2021] Flywire Hits $3.5 Billion Valuation After First Day Of Trading As Fintech IPO Frenzy Continues

May 31, 2021 | www.forbes.com

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.

[May 30, 2021] CLOs Join The Everything Bubble - ZeroHedge

May 30, 2021 | www.zerohedge.com

CLOs Join The Everything Bubble BY TYLER DURDEN SUNDAY, MAY 30, 2021 - 01:00 PM

Authored by John Rubino via DollarCollapse.com,

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.

[May 29, 2021] Issuance of Bundles of Risky Loans Jumps to 16-Year High

May 29, 2021 | www.wsj.com

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.

[May 28, 2021] DoJ Launches Criminal Investigation Into Archegos Blowup - ZeroHedge

May 27, 2021 | www.zerohedge.com

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.


[May 28, 2021] Warren Tears Into Fed on Credit Suisse Oversight Before Archegos

May 26, 2021 | finance.yahoo.com

(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 28, 2021] No More Easy Money for speculators? It's too early to tell

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.
May 26, 2021 | finance.yahoo.com

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.

[May 28, 2021] Stock Market Leverage Hits WTF High while the Fed hypocritically warn about danger of

Notable quotes:
"... 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. ..."
May 22, 2021 | www.nakedcapitalism.com

Known Stock Market Leverage Hits WTF High. Out the Other Side of Its Mouth, the Fed Warns About Hidden Leverage that Blew up Archegos Posted on May 19, 2021 by Yves Smith

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.

By Wolf Richter, editor of Wolf Street . Originally published at Wolf Street

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."


Alfred , May 19, 2021 at 10:07 am

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?

cocomaan , May 19, 2021 at 11:12 am

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.

Alfred , May 19, 2021 at 11:50 am

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?

cocomaan , May 19, 2021 at 12:02 pm

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.

Alfred , May 19, 2021 at 12:47 pm

So reallly what they are doing now has become a way of doing business. And Powell is their PR man.

cocomaan , May 19, 2021 at 12:54 pm

Yeah, to me, it's just a federally sanctioned smoke filled room that has a veneer of academic economics at play in decision making.

I'm not a hotshot economics major or economic reporter, just a dude, but that's what I see. Anyone reading these comments can feel free to correct me.

Duck1 , May 19, 2021 at 6:30 pm

https://admiralcod.blogspot.com/2016/05/my-favorite-day.html

cocomaan , May 20, 2021 at 6:36 am

I found my new profile picture!

Dugless , May 19, 2021 at 10:26 pm

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?

Felix_47 , May 20, 2021 at 1:27 pm

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.

Gulag , May 19, 2021 at 3:32 pm

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.

juno mas , May 19, 2021 at 12:18 pm

"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.

Alfred , May 19, 2021 at 12:53 pm

Yes, you are right about the impact. The resources to prepare and recover have really suffered also for those close to the bone.

notabanker , May 19, 2021 at 10:01 pm

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.

Knute Rife , May 20, 2021 at 11:57 am

Who can tie their money up in cash and readily get financing so they can snap up assets on the cheap when the dumping starts? There's your answer.

Socal Rhino , May 19, 2021 at 10:30 am

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.

Harry , May 19, 2021 at 2:14 pm

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.

cnchal , May 19, 2021 at 3:51 pm

> 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.

Mikel , May 19, 2021 at 11:06 am

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.

LilD , May 19, 2021 at 1:51 pm

Don't worry, there's only one cockroach

Alfred , May 19, 2021 at 2:42 pm

and only one rat

Tom Stone , May 19, 2021 at 12:55 pm

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.

Taurus , May 20, 2021 at 5:39 am

"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.

MD , May 20, 2021 at 9:12 am

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.

kiers , May 20, 2021 at 11:34 am

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!

Yves Smith , May 20, 2021 at 11:41 am

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.

athingtoconsider , May 21, 2021 at 11:41 am

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.

Sound of the Suburbs , May 20, 2021 at 12:58 pm

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.

Somecallmetim , May 20, 2021 at 1:58 pm

The greed vs fear dynamics bring to mind a mascot for this discussion:

https://encrypted-tbn0.gstatic.com/images?q=tbn:ANd9GcR1BF-5Vf7-24CZVnoDbM9m8ZiOhAN95OyN-A&s

There's a good reason it's wearing a top hat.

McWatt , May 20, 2021 at 4:54 pm

All: I have been getting 8-10% price increase's from my suppliers the last few days. There is some serious inflation going on.

[May 28, 2021] Dedollarization is a serious threat to the US neoliberal empire

May 23, 2021 | www.moonofalabama.org

Max , May 23 2021 15:45 utc | 7

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:

The probabilities of these scenarios will be defined by the following SIGNALS:

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:

  1. 2008, Georgia conflict
  2. 2014, Ukraine conflict
  3. 2022, ?

[May 28, 2021] The Fed Is Playing With Fire, by Christian Broda and Stanley Druckenmiller

Notable quotes:
"... 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. ..."
May 11, 2021 | www.wsj.com

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.

[May 26, 2021] U.S. stocks are demonstrating most of the characteristics of a bubble, but don't sell yet, says strategist

May 26, 2021 | www.marketwatch.com

... .,. ,,,

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.

Subtle shift at the Fed

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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.

Read : Big bank CEOs to be grilled on diversity and woke capitalism.

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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.

Bitcoin reclaims $40,000 level

U.S. stock futures ES00, 0.16% NQ00, 0.30% rose, with the yield on the 10-year Treasury TMUBMUSD10Y, 1.578% at 1.56%.

Bitcoin BTCUSD, 3.15% , the volatile cryptocurrency, rose over 7% to reclaim the $40,000 level.

Random reads

How parking requirements ruin cities.

A new reality-television series will offer the chance to become an astronaut .

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Read Next Inflation 'surprises' are 'almost off the chart' as data runs hotter than expected

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

About the Author Steve Goldstein

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.

[May 18, 2021] Former WaMu CEO sees a housing bubble forming because the Fed is 'hooked' on low interest rates

May 18, 2021 | finance.yahoo.com

'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.

[May 13, 2021] Investors Double Down on Stocks, Pushing Margin Debt to Record

This was in December 2020 but the same was true in March of 2020. Now chicken might come to roost
Dec 29, 2020 | www.wsj.com

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.

[May 12, 2021] The Most Hyped Corners Of The Stock Market Come Unglued - ZeroHedge

May 12, 2021 | www.zerohedge.com

Authored by Wolf Richter via WolfStreet.com,

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 ):

[May 12, 2021] Cathie Wood's ARK Wasn't Built for a Flood - WSJ

May 12, 2021 | www.wsj.com

...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.

Star managers can be dangerous to your wealth.

Write to Spencer Jakab at spencer.jakab@wsj.com

[May 11, 2021] If Everyone Sees It, Is It Still A Bubble

May 11, 2021 | www.zerohedge.com

Authored by Lance Roberts via RealInvestmentAdvice.com,

"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.

As Mark Hulbert noted recently , "everyone" is worrying about a "bubble" in the stock market. To wit:

"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.

A Bubble In Psychology

As Howard Marks previously noted:

"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."

In other words, investors have fully adopted the "Greater Fool Theory."

Okay, Boomer!

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.

[May 10, 2021] Many layers of leverage stacked on top of each other increase the probability of dollar collapse

Notable quotes:
"... "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. ..."
Apr 26, 2021 | wolfstreet.com

YuShan Apr 18, 2021 at 3:13 am

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.

historicus Apr 18, 2021 at 5:06 am

"It's just unbelievable that central banks are actively encouraging this."

Indeed. It's QUITE believable that the politicians love the free money and would never be bold enough to say .

"Hey Fed. Your mandates say you are to FIGHT inflation (stable prices) NOT PROMOTE inflation."

Moosy Apr 17, 2021 at 6:13 pm

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

ru82 Apr 17, 2021 at 11:45 pm

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

cas127 Apr 18, 2021 at 5:06 am

"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!"

Old School Apr 19, 2021 at 6:08 am

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%

K Apr 17, 2021 at 9:10 pm

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.

[May 10, 2021] Stock Market Leverage in La-La Land, Rises to Historic WTF High

Notable quotes:
"... 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. ..."
Apr 26, 2021 | wolfstreet.com
K Apr 17, 2021 at 9:34 pm

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. :-)

Therefore, I would not short things right now.

Jacklynhunter Apr 18, 2021 at 5:08 am

Accounting fixes this.

[May 10, 2021] Investors are borrowing a record amount on margin to bolster their stock portfolios

Notable quotes:
"... 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. ..."
Apr 26, 2021 | markets.businessinsider.com

Matthew Fox Apr. 8, 2021, 04:21 PM


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.

That dynamic was on full display last month, after a downturn in ViacomCBS spurred a massive $20 billion liquidation event for family office Archegos Capital, which was long shares of the media company. That epic unwind by a number of prime brokers that serviced Archegos led to billion dollar losses for banks that were slow to unwind the positions, like Nomura and Credit Suisse.

But until a broad market decline materializes, expect margin debt to continue its surge to record highs as it's led by new highs in the stock market.

[May 09, 2021] CPI Is A Lie! We can't trust CPI to tell us the truth about inflation by Peter Schiff

Highly recommended!
Notable quotes:
"... 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. ..."
May 04, 2021 | www.zerohedge.com

Via SchiffGold.com,

We've been talking a lot about the specter of inflation. Despite the Fed's assurances not to worry because any price increases we're seeing are transitory, some people are indeed worried. A former JP Morgan managing director warned about inflation and echoed Peter Schiff's view that the central bank is powerless to fight it.

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. "

https://www.youtube.com/embed/lnPrsBzIZsw

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.

[May 03, 2021] This Bull Market Has a Troubling Reliance on Speculation by James Mackintosh

Highly recommended!
See also Investors Big and Small Are Driving Stock Gains With Borrowed Money - WSJ The stock market definitely has gambling problem. Just look at Yahoo Finance coverage. It is insane. They cheerleading reckless behaviour and ignore each and every warning sign.
Notable quotes:
"... 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. ..."
Mar 26, 2021 | www.wsj.com

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.

... ... ...

Write to James Mackintosh at James.Mackintosh@wsj.com

[Apr 26, 2021] When this debt tsunami is over those who went 'all in' might be simply wiped out.

Notable quotes:
"... 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.. ..."
Apr 26, 2021 | wolfstreet.com

Heinz Apr 18, 2021 at 9:48 am

"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.

zr Apr 18, 2021 at 3:14 pm

"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.

The Nominalist Apr 18, 2021 at 6:23 pm

"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.

Trinacria Apr 18, 2021 at 2:48 pm

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:

  1. 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%
  2. 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.

Phoenix_Ikki Apr 17, 2021 at 2:19 pm

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..

Mertin Apr 17, 2021 at 3:02 pm

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.

Headshake.

[Apr 26, 2021] Stock Market Leverage Spikes in Historic Manner- Another WTF Chart of a Zoo that Has Gone Nuts

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.
Apr 26, 2021 | www.nakedcapitalism.com

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.

These theories smacked into the bloodletting in Treasury bonds and high-grade corporate bonds with longer maturities, as long-term yields have been marching higher for months, which I discuss in my podcast . THE WOLF STREET REPORT: Market Manias Galore, But Long-Term Interest Rates Smell a Rat

[Apr 15, 2021] The Financial Instability Hypothesis by Hyman P. Minsky -- SSRN

Apr 15, 2021 | papers.ssrn.com

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.

[Apr 15, 2021] Anatomy of a Stock Market Bubble by FRANK VENEROSO

Highly recommended!
Notable quotes:
"... 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 ..."
Apr 01, 2021 | www.levyinstitute.org

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.

[Apr 02, 2021] 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?

Highly recommended!
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. ..."
Apr 02, 2021 | www.zerohedge.com

variousmarkets

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.

[Mar 31, 2021] Citadel and friends have shorted the treasury bond market to oblivion using the repo market.

Mar 31, 2021 | www.zerohedge.com

play_arrow


Crash Overide 2 hours ago (Edited)

Speaking of treasuries... and Citadel, I thought it was an interesting read.

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:

  1. Treasuries are claimed to be backed by the "full faith and credit of the United States".
  2. 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".

Almost like random BETTING

[Mar 28, 2021] Bubble Deniers Abound to Dismiss Valuation Metrics One by One by Vildana Hajric , Claire Ballentine , Lu Wang

Notable quotes:
"... 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. ..."
Mar 287, 2021 | www.bloomberg.com

March 27, 2021

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."

relates to Bubble Deniers Abound to Dismiss Valuation Metrics One by One

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.

[Mar 28, 2021] Willful Blindness - Wash and Rinse in Metals and Stocks

Mar 28, 2021 | jessescrossroadscafe.blogspot.com


"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.

And the band played on.

Have a pleasant evening.

[Mar 28, 2021] Real unemployment is double the 'official' unemployment rate

Notable quotes:
"... The Globe and Mail ..."
"... The Globe and Mail ..."
"... The Endless Crisis: How Monopoly-Finance Capital Produces Stagnation and Upheaval from the USA to China ..."
Mar 28, 2021 | systemicdisorder.wordpress.com

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 .

Share of wages, 1950-2014 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.

Around the world, worker productivity has risen over the past four decades while wages have been nearly flat. Simply put, we'd all be making much more money if wages had merely kept pace with increased productivity.

Insecure work is the global norm

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.

[Mar 26, 2021] This Bull Market Has a Troubling Reliance on Speculation - WSJ by James Mackintosh March 25, 2021 9:42 am ET 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%.
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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.

me title=

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.

Write to James Mackintosh at James.Mackintosh@wsj.com

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Appeared in the March 26, 2021, print edition as 'This Bull Market Has A Gambling Problem.'

[Mar 07, 2021] Newton, Physics, The Market Bubble by Lance Roberts

Notable quotes:
"... 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 ..."
Sep 19, 2020 | www.zerohedge.com

Authored by Lance Roberts via RealInvestmentAdvice.com,

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):

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."

For More On The History Of Speculative Bubbles: "Devil Take The Hindmost."

History Never Repeats, But It Rhymes

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 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

[Mar 07, 2021] SEC Issues Devastating Risk Alert on Private Equity Abuses; Effectively Admits Failure of Last 5+ Years of Enforcement by Yves Smith

Notable quotes:
"... 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. ..."
Jun 26, 2020 | www.nakedcapitalism.com

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.

And the coddling of crookedness continued. From a January post :

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.

Private equity firms have succeeded in storming that barricade. The Department of Labor published a June 3 information letter that allows private equity funds, or more accurately funds of funds, to be included in certain 401(k) plan offerings, namely, target date funds and balanced funds. This is significant because despite the SEC regularly calling out bad practices with target date funds, they are the strategy used to manage the majority of 401(k) assets .

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 .

The New York Times reported that Senate Republicans deemed Clayton's odds of confirmation as US Attorney for the Southern District of New York as remote even before the Trump fired Geoffrey Berman to clear a path for Clayton. So the idea that a technical release by the OCIE would derail Clayton's confirmation is a stretch.

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.


skippy , June 26, 2020 at 4:27 am

Peter Sellers I'll say now – ????

https://www.youtube.com/watch?v=1TtZgs8k8dU

vlade , June 26, 2020 at 4:35 am

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.

Susan the other , June 26, 2020 at 11:43 am

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.

Yves Smith Post author , June 26, 2020 at 4:06 pm

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.

Maritimer , June 26, 2020 at 5:04 am

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?

(Can I get my economics degree now?)

Adam Eran , June 26, 2020 at 1:33 pm

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 Rev Kev , June 26, 2020 at 5:17 am

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-

https://www.rollingstone.com/politics/politics-news/regulatory-capture-captured-on-video-190033/

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!

Yves Smith Post author , June 26, 2020 at 5:44 am

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.

Plus we transcribed his fawning remarks.

https://www.nakedcapitalism.com/2015/03/secs-andrew-bowden-regulator-sale.html

And he resigned three weeks later.

The Rev Kev , June 26, 2020 at 5:56 am

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.

Jesper , June 26, 2020 at 6:36 am

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?

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.

Susan the other , June 26, 2020 at 11:57 am

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.

Yves Smith Post author , June 26, 2020 at 4:08 pm

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.

Edward , June 26, 2020 at 7:16 am

More banana republic level grift. What happens when investors figure out they can't believe anything they are told?

RJMc, MD , June 26, 2020 at 8:43 am

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?

Susan the other , June 26, 2020 at 12:08 pm

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?

Kouros , June 26, 2020 at 12:27 pm

I want to bring this to Yves' attention: the recent SCOTUS decision on Thole v. U.S. Bank that opens the doors wide for corporate America to steal with impunity from the pension plans: https://www.unz.com/estriker/corrupt-supreme-court-gives-green-light-to-corporations-to-steal-from-pensioners/

Glen , June 26, 2020 at 12:51 pm

Can we come up with a better descriptor for "private equity"? I suggest "billionaire looters".

Olivier , June 26, 2020 at 2:00 pm

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.

flora , June 26, 2020 at 3:27 pm

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?

flora , June 26, 2020 at 3:19 pm

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.

Stan Sexton , June 26, 2020 at 8:17 pm

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.

[Mar 07, 2021] Bank Regulation Can not Be Heads Banks Win, Tails Taxpayers Lose

Notable quotes:
"... 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? ..."
Mar 31, 2019 | www.nakedcapitalism.com
... ... ...

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?

The full article of Edward Kane

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WheresOurTeddy , March 29, 2019 at 11:49 am

Enforcement of financial laws is not our thing. Just ask Chuck Schumer of the #Non-Resistance:

https://theintercept.com/2019/03/28/sec-democratic-commissioner-chuck-schumer/

Louis Fyne , March 29, 2019 at 12:17 pm

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.

thesaucymugwump , March 29, 2019 at 12:17 pm

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.

chuck roast , March 29, 2019 at 12:21 pm

Thank you Yves and Tom Ferguson.

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.

Craig H. , March 29, 2019 at 1:04 pm

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.

John Wright , March 30, 2019 at 10:31 am

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".

Procopius , March 31, 2019 at 12:30 am

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.

rd , March 29, 2019 at 3:06 pm

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.

Inode_buddha , March 29, 2019 at 4:51 pm

I think things will be much better when finance is about ~3% of the S&P 500, but no more than that.

[Mar 07, 2021] Regulatory Capture: The Banks and the System That They Have Corrupted

Notable quotes:
"... 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 . ..."
Mar 14, 2019 | jessescrossroadscafe.blogspot.com

"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.'"

Pam Martens, Wall Street on Parade

[Sep 20, 2020] The Criminal Prosecution Of Boeing Executives Should Begin by Mike Shedlock

Sep 20, 2020 | www.zerohedge.com

Authored by Mike Shedlock via MishTalk,

Damning details of purposeful malfeasance by Boeing executives emerged in a Congressional investigation.

FAA, Boeing Blasted Over 737 MAX Failures

On Wednesday, the Transportation Committee Blasted FAA, Boeing Over 737 MAX Failures

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 Purposely Hid Design Flaws

The Financial Times has an even more damning take in its report Boeing Hid Design Flaws in Max Jets from Pilots and Regulators .

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.

https://thenewroads.com/2019/12/09/forecast-for-2020/

https://thenewroads.com/2020/07/21/great-conjunction-jupiter-and-saturn-next-to-the-solstice-of-december-2020/
play_arrow

highwaytoserfdom , 1 hour ago

It is political economy...

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.

https://www.zerohedge.com/news/2014-06-20/what-piketty-didnt-say-13-facts-they-dont-tell-you-about-economics

LoneStarHog , 1 hour ago

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.

Jamie Dimon should be first on this list.

[Apr 28, 2020] Hudson gives him the primary credit for providing the foundation for Modern Monetary Theory

Apr 28, 2020 | www.moonofalabama.org

karlof1 , Apr 27 2020 0:25 utc | 53

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.

[Feb 16, 2020] Psychologist Explains Why Economists -- and Liberals -- Get Human Nature Wrong by Lynn Parramore

Feb 12, 2020 | www.nakedcapitalism.com

By Lynn Parramore, Senior Research Analyst at the Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website

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.

The Rider and the Elephant

Morality, Haidt argues, doesn't arise from reason, and besides, humans aren't winning any prizes for rationality. Heaps of studies show how factors beyond conscious awareness influence how we think and act, from judges giving out more lenient sentences after lunch to bottles of hand sanitizer making people more feel more conservative .

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.


Carolinian , February 12, 2020 at 1:37 am

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.

eg , February 12, 2020 at 2:30 pm

I believe that a huge controversy continues to rage in Biology around "group selection"

erik , February 13, 2020 at 12:53 am

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.

Susan the other , February 13, 2020 at 2:41 pm

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 .

H. Alexander Ivey , February 12, 2020 at 2:01 am

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!).

But all that rather kicks Haidt's argument

eg , February 12, 2020 at 2:34 pm

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.

vlade , February 12, 2020 at 3:00 am

Social scientists can't add:
"value all six domains equally [ ] valuing the first two much more than the other three."

More seriously, yes. Years ago, Heinlein wrote "Man is not a rational animal, he is a rationalizing animal".

somecallmetim , February 12, 2020 at 8:56 pm

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!

Dell , February 13, 2020 at 2:53 pm

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.

But the implications of that never sunk in.

erik , February 13, 2020 at 1:04 am

'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.

Hayek's Heelbiter , February 12, 2020 at 5:28 am

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.

divadab , February 12, 2020 at 11:02 am

Huh? Heliocentric solar system is an outdated paradigm? Are you talking about this planet or are you coming from another solar system?

vlade , February 12, 2020 at 11:50 am

same for continental drift – pretty much no one in geology challenges plate tectonics, as it explains way more than any other theory on offer.

Anon , February 12, 2020 at 12:06 pm

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.

Henry Moon Pie , February 12, 2020 at 6:04 am

"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.

eg , February 12, 2020 at 2:46 pm

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"

Eric , February 12, 2020 at 7:20 am

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".

deplorado , February 13, 2020 at 1:20 am

This!
Share it with the campaign on twitter – please!

LowellHighlander , February 12, 2020 at 7:24 am

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.

Jeremy Grimm , February 12, 2020 at 1:03 pm

But economics without homo economicus? Does that not mess-up a lot of beautiful economic proofs and their beautiful mathematics?

eg , February 12, 2020 at 3:00 pm

Let them have their toys -- just don't let them near anything like policy

Ignacio , February 12, 2020 at 7:30 am

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.

Ignacio , February 12, 2020 at 7:52 am

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?

Dirk77 , February 12, 2020 at 5:13 pm

There is a Wikipedia article under the title Voter Turnout in the US Presidential Elections fwiw.

John Wright , February 12, 2020 at 9:46 am

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."

https://www.nytimes.com/2003/01/12/opinion/the-triumph-of-hope-over-self-interest.html

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.

Susan the other , February 12, 2020 at 10:38 am

Yes, after all corvid-19 only has a mortality rate of 2.5% . are viruses comparable to hate?

Donald , February 12, 2020 at 7:49 am

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.

gsinbe , February 12, 2020 at 7:57 am

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).

a different chris , February 12, 2020 at 8:59 am

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".

Carolinian , February 12, 2020 at 9:26 am

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.

Susan the other , February 12, 2020 at 10:54 am

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.

Carolinian , February 12, 2020 at 12:00 pm

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.

Susan the other , February 13, 2020 at 2:56 pm

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 ;-)

Susan the other , February 12, 2020 at 12:04 pm

Maybe we could develop a more finely-tuned consciousness.

eg , February 12, 2020 at 3:07 pm

Um, pack animals have hierarchies -- period

And we are biologically pack animals, mercifully moderated by culture

Carolinian , February 12, 2020 at 4:25 pm

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.

Ignacio , February 12, 2020 at 8:16 am

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!

John Wright , February 12, 2020 at 10:19 am

Your link did not work for me.

But this did work (after google searching for "mwm006.pdf") that was buried in your link

https://academic.oup.com/ser/article-pdf/6/1/35/4761357/mwm006.pdf

Ignacio , February 12, 2020 at 11:10 am

Thank you. That was the paper.

a different chris , February 12, 2020 at 8:56 am

>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?

DJG , February 12, 2020 at 8:58 am

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.

Mel , February 12, 2020 at 10:12 am

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

The Rev Kev , February 12, 2020 at 9:27 am

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.

Sound of the Suburbs , February 12, 2020 at 9:31 am

"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.

Economics seems to be the odd man out.

Mel , February 12, 2020 at 11:32 am

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.

Sound of the Suburbs , February 12, 2020 at 9:56 am

Inequality exists on two axes:

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.

Rob Chametzky , February 12, 2020 at 11:33 am

Samuel Bowles has examined these issues recently in "The moral
economy":

https://yalebooks.yale.edu/book/9780300163803/moral-economy

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.

–Rob Chametzky

Tim , February 12, 2020 at 2:41 pm

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.

flora , February 12, 2020 at 2:53 pm

Thanks for this post. Homo economicus was/is always and only about the 'one'.

Whereas the basis of moral philosophy is about 'the one and the many' in equal importance, imo.

Thanks for this post and to the commentors recommending more writings in this field.

Dirk77 , February 12, 2020 at 6:10 pm

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".

greensachs , February 12, 2020 at 6:26 pm

Nuff sd

"It's Armageddon Time for the Democratic Party"
https://theintercept.com/2020/02/12/its-armageddon-time-for-the-democratic-party/

TG , February 12, 2020 at 6:43 pm

Hmm yes but

Humans are rational economic agents! Therefore we must ship our industrial base to China so that the rich can make more money.

Humans are rational economic agents! Therefore we must allow big companies to merge and quash competition and raise prices.

Humans are rational economic agents! Therefore we must allow "surprise medical billing" when insured people go to the emergency room.

Humans are rational economic agents! Therefore we must do nothing to stop the use of slave labor in peeling shrimp for export in Southeast Asia.

Humans are rational economic agents! Therefore we must bail out and subsidize Wall Street and big finance with tens of trillions of taxpayer dollars.

Perhaps the "humans are rational economic agents!" argument is not really an argument, as such

deplorado , February 13, 2020 at 2:29 am

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.

Dick Swenson , February 14, 2020 at 4:25 pm

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.

[Jan 01, 2020] FDA Failed to Police Opioids Makers, Thus Fueling Opioids Crisis

Jan 01, 2020 | www.nakedcapitalism.com

FDA Failed to Police Opioids Makers, Thus Fueling Opioids Crisis Posted on January 1, 2020 by Jerri-Lynn Scofield By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She is currently writing a book about textile artisans.

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.

As the Gray Lady tells the story in As Tens of Thousands Died, F.D.A. Failed to Police Opioids :

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.

That being said, as CNN tells the story in The FDA can't prove its opioid strategy actually worked, study says :

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.

The Trump administration has made cleaning up the opioids crisis – which it inherited – a policy priority. To little seeming effect so far. although to be fair, this is not a simple problem to solve. And litigation to apportion various costs of the damages various prescription drugmakers, distributors, and doctors caused it far from over – despite some settlements, and judgements (see Federal Prosecutors Initiate Criminal Probe of Six Opioid Manufacturers and Distributors ; Four Companies Settle Just Before Bellwether Opioids Trial Was to Begin Today in Ohio ; Purdue Files for Bankruptcy, Agrees to Settle Some Pending Opioids Litigation: Sacklers on Hook for Billions? and Judge Issues $572 Million Verdict Against J & J in Oklahoma Opioids Trial: Settlements to Follow? )

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?

This is a concern in so many areas, with such self-interested considerations shaping not only regulation, but distorting academic research (see Virginia Supreme Court Upholds Ruling that George Mason University Foundation Is Not Subject to State FOIA Statute, Leaving Koch Funding Details Undisclosed ).

What madness!

[Jan 01, 2020] Prolonging the discussion about the bad habit Western Democracies have on falsifying official statistic

Jan 01, 2020 | www.moonofalabama.org

vk , Dec 29 2019 3:42 utc | 55

Prolonging the discussion about the bad habit Western Democracies have on falsifying official statistics:

On Those Questionable US Wage Stats Again

[Dec 06, 2019] Robert Bork Was the Judicial Activist He Warned Us About

Dec 06, 2019 | www.theamericanconservative.com

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."

Jonathan Tepper is a founder of Variant Perception , a macroeconomic research company, and co-author of The Myth of Capitalism: Monopolies and the Death of Competition . He is also TAC 's senior fellow on economic concentration issues. This article was supported by the Ewing Marion Kauffman Foundation. The contents of this publication are solely the responsibility of the authors.


polistra24 a day ago

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.
Kent a day ago
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.

Sid Finster Kent a day ago
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.

northernobserver a day ago
Libertarian policy corruption, the American Right's original sin.
ElitCommInc. a day ago
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).

Liam781 a day ago
Yes he was.
=marco01= 18 hours ago
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.

[Nov 28, 2019] Banker suicides go up exponentially prior to a banking collapse.

Nov 28, 2019 | www.moonofalabama.org

dltravers , Nov 28 2019 17:28 utc | 27

Walter @ 25

"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.

[Nov 21, 2019] FED as the inflator of the bubble: 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.

Nov 21, 2019 | www.moonofalabama.org

psychohistorian , Nov 15 2019 0:42 utc | 137

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."

"


psychohistorian , Nov 15 2019 0:49 utc | 138

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

MBS = Mortgage Backed Securities

psychohistorian , Nov 15 2019 12:18 utc | 157
@ 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.

[Nov 09, 2019] Paying CEOs fat bonuses for stock performance doesn't work -- Cornell study

Notable quotes:
"... 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." ..."
Oct 03, 2015 | finance.yahoo.com

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.

People on Twitter seemed interested in this:
Paying CEOs fat bonuses for stock performance doesn't work, by Lawrence Lewitinn, Yahoo Finance: It turns out offering CEOs huge bonuses to boost shareholder returns doesn't actually work, according to a new study from Cornell University.

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/

[Oct 08, 2019] Southwest Pilots Blast Boeing in Suit for Deception and Losses from -Unsafe, Unairworthy- 737 Max -

Notable quotes:
"... 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. ..."
Oct 08, 2019 | www.nakedcapitalism.com

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.

If you are time-pressed, the best MSM account is from the Seattle Times, In scathing lawsuit, Southwest pilots' union says Boeing 737 MAX was unsafe

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.


Titus , October 8, 2019 at 4:38 am

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.

Carolinian , October 8, 2019 at 8:32 am

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.

Brooklin Bridge , October 8, 2019 at 8:08 am

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.

Summer , October 8, 2019 at 9:01 am

"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.

[Oct 05, 2019] A Secretive Committee of Wall Street Insiders controls NY FED

Oct 05, 2019 | www.institutionalinvestor.com

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

[Sep 18, 2019] FAA Hoist on Its Own Boeing 737 Max Petard Multiagency Panel to Issue Report Criticizing Agency Approval Process, Call for Cer

Notable quotes:
"... 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. ..."
Sep 18, 2019 | www.nakedcapitalism.com

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.


kimyo , September 17, 2019 at 4:42 am

Boeing Foresees Return Of The 737 MAX In November – But Not Everywhere

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?

marku52 , September 17, 2019 at 1:35 pm

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

divadab , September 17, 2019 at 8:36 am

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.

Dirk77 , September 17, 2019 at 9:12 am

+1

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.

Noel Nospamington , September 17, 2019 at 10:41 am

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.

Dirk77 , September 17, 2019 at 8:59 am

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.

Arthur Dent , September 17, 2019 at 10:54 am

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.

Harry , September 17, 2019 at 1:44 pm

But how can individuals take responsibility? Their pockets arn't deep enough,.

XXYY , September 17, 2019 at 2:57 pm

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.

notabanker , September 17, 2019 at 9:24 pm

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.

Tomonthebeach , September 17, 2019 at 11:29 am

FAA & Boeing: It's deja vu all over again.

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.

Kevin , September 17, 2019 at 12:34 pm

Boeing subsidies:

Mike , September 17, 2019 at 3:22 pm

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."?

VietnamVet , September 17, 2019 at 3:57 pm

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.

RBHoughton , September 17, 2019 at 8:40 pm

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

The Rev Kev , September 17, 2019 at 11:26 pm

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."

Arizona Slim , September 18, 2019 at 6:32 am

And then there's this -- Southwest is rethinking its 737 strategy:

https://www.youtube.com/watch?v=IoRPhfARWkg

[Sep 09, 2019] What's the True Unemployment Rate in the US? by Jack Rasmus

Highly recommended!
Notable quotes:
"... 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%. ..."
Sep 09, 2019 | www.counterpunch.org

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 .

[Aug 02, 2019] False pretences of knowledge about complicated economic situations have become all too common in public policy debates

Aug 02, 2019 | economistsview.typepad.com

Joe , July 24, 2019 at 08:18 AM

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.

[Jun 10, 2019] FAA's Boeing-biased Officials: Recuse Yourselves or Resign by Ralph Nader

Notable quotes:
"... 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." ..."
Jun 10, 2019 | www.counterpunch.org

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.

[May 08, 2019] How Accurate Are the US Jobs Numbers? by Jack Rasmus

Notable quotes:
"... 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. ..."
May 08, 2019 | www.counterpunch.org

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.

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 .

[May 05, 2019] Apres Moi le Deluge by Paul Craig Roberts

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.
May 03, 2019 | www.unz.com

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.

And there are 25,000 new waiters and bartenders.

Construction, mainly specialty trade contractors, added 33,000.

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.

The French Revolution followed.

[Mar 18, 2019] The Boeing debacle is the latest example of regulatory capture by D. Saint Germain

Mar 15, 2019 | medium.com

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."

These current examples of regulatory capture are the latest in a series of examples from recent times; others have pointed to regulatory capture in the Federal Reserve during the economic crisis , and the Mineral Management Service during the BP Oil Spill , to name two. Unfortunately it is only when a tragedy occurs that the public expresses concern.

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.

[Mar 10, 2019] U.S. SEC to review stock trading rules in big potential shakeup by John McCrank

Mar 10, 2019 | finance.yahoo.com

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:

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.

(Reporting by John McCrank; Editing by Tom Brown)

https://s.yimg.com/rq/darla/3-6-3/html/r-sf.html

Sign in to post a message. 17 viewing1 person reacting

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

[Mar 09, 2019] The USA new class in full glory: rich are shopping differently from the low income families and the routine is like doing drags, but more pleasurable and less harmful. While workers are stuglling with the wages that barely allow to support the family, the pressure to cut hours and introduce two tire system

Notable quotes:
"... 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). ..."
Mar 09, 2019 | www.nakedcapitalism.com

Guillotine Watch

"My Year of Living Like My Rich Friend" [ New York Magazine ].

"[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.""

Indeed:

https://www.youtube.com/embed/dfO0TgcDUnI

Class Warfare

"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).

[Feb 26, 2019] THE CRISIS OF NEOLIBERALISM by Julie A. Wilson

Highly recommended!
Notable quotes:
"... 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."' ..."
Oct 08, 2017 | www.amazon.com

Quote from the book is courtesy of Amazon preview of the book Neoliberalism (Key Ideas in Media & Cultural Studies)

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?

HOW WE GET THERE

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.

Against Disposability: Radical Equality

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.

[Feb 15, 2019] CAPE Fear The Bulls Are Wrong. Shiller's Measure Is the Real Deal

Notable quotes:
"... 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 ..."
Feb 15, 2019 | finance.yahoo.com

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 .

[Feb 05, 2019] 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 a nasty neoliberal propaganda trick. You need to analise the whole time serioes to get an objective picture

Highly recommended!
Notable quotes:
"... And as for the median wage and income -- it is still too weak to sustain an economic recovery. ..."
Feb 05, 2019 | jessescrossroadscafe.blogspot.com

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.

[Feb 02, 2019] In Fiery Speeches, Francis Excoriates Global Capitalism

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. ..."
Jul 11, 2015 | msn.com

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."

[Jan 20, 2019] Bubblicious Disregard for Risks

Notable quotes:
"... 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. ..."
Jan 20, 2019 | jessescrossroadscafe.blogspot.com

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.

The market seemed to be shrugging off the results being shown by the financials thus far.

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.

Have a pleasant evening.

[Jan 20, 2019] Who Could See It Coming - Dead Reckoning the Minsky Moment

Jan 20, 2019 | jessescrossroadscafe.blogspot.com

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."

Richard Wolff, The Next Economic Crisis Is Coming


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.

Have a pleasant evening.

[Jan 20, 2019] Psychologogical prerequisites for the financial bubble: gullibility of most people

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.
Jan 20, 2019 | www.moonofalabama.org
the pair , Jan 18, 2019 1:42:50 PM | 4 ">link

"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".

[Jan 07, 2019] 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. Now we have exactly the same trends

Highly recommended!
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. ..."
Oct 31, 2008 | jessescrossroadscafe.blogspot.com

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.

[Jan 07, 2019] The Fed IS the Ugly Truth

Notable quotes:
"... "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." ..."
The Automatic Earth
... ... ...

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.

Henrich:

Stock-Market Investors, It's Time To Hear The Ugly Truth

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.

zerosum #44732

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."

https://www.investopedia.com/terms/l/leverage.asp

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.

... ... ...

Doc Robinson January 7, 2019 at 4:06 am #44737

"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).

https://www.politifact.com/virginia/statements/2016/jul/06/mark-warner/mark-warner-says-average-holding-time-stocks-has-f/

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?

[Dec 16, 2018] Trump Models His War on Bank Regulators on Bill Clinton and W's Disastrous Wars by Bill Black

Notable quotes:
"... 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. ..."
Dec 14, 2018 | www.nakedcapitalism.com
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.


Chauncey Gardiner , December 14, 2018 at 2:01 pm

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.

RBHoughton , December 14, 2018 at 9:41 pm

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.

chuck roast , December 14, 2018 at 4:28 pm

Sameo-sameo

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."

flora , December 14, 2018 at 10:08 pm

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.

flora , December 14, 2018 at 10:47 pm

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.

Tim , December 15, 2018 at 8:29 am

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.

John k , December 15, 2018 at 12:14 pm

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.

[Dec 08, 2018] Now that the banks are calling in their insurance, the EU has to deliver either by screwing down Italy the same as they did Greece or getting the French and German public (or better the whole EU) to bail out the banks.

Dec 08, 2018 | www.unz.com

Anonymous [295] Disclaimer , says: December 7, 2018 at 12:23 pm GMT

@Miro23

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.

[Nov 27, 2018] Warning Contagion is Now Spreading to Corporate Bonds Zero Hedge

Nov 27, 2018 | www.zerohedge.com

by Phoenix Capita Sat, 11/24/2018 - 13:52 19 SHARES

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:

  1. Juiced their Earnings Per Share (the same earnings, spread over fewer shares= better EPS).
  2. Provided the stock market with a steady stream of buyers, which
  3. 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.

To pick up yours, swing by:

https://www.phoenixcapitalmarketing.com/stockmarketcrash.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

[Nov 26, 2018] How Low Can This Stock Market Go by JIM COLLINS

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. ..."
Nov 26, 2018 | realmoney.thestreet.com
Stocks quotes in this article: AAPL , NFLX , FB , AMZN , F , GE , IBM , T , GOOGL There 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.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

[Nov 24, 2018] Update on the Comparison with Prior Notable Declines

Nov 24, 2018 | jessescrossroadscafe.blogspot.com

[Nov 03, 2018] Crashed How a Decade of Financial Crises Changed the World Adam Tooze 9780670024933 Amazon.com Books

Nov 03, 2018 | www.amazon.com

"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

wsmrer 5.0 out of 5 stars 2008 Neoliberalism crashes the state rushes back-- just in time August 10, 2018 Format: Kindle Edition Verified Purchase

"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

David Shulman 5.0 out of 5 stars The World in Crisis August 22, 2018 Format: Kindle Edition Verified Purchase

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.

[Nov 01, 2018] The 2018 Globie Crashed by Joseph Joyce

Notable quotes:
"... Crashed: How a Decade of Financial Crises Changed the World ..."
"... Grave New World: The End of Globalization, the Return of History ..."
"... Global Inequality ..."
"... Currency Power: Understanding Monetary Rivalry ..."
"... The Shifts and the Shocks: What We've Learned–and Have Still to Learn–from the Financial Crisis ..."
Nov 01, 2018 | angrybearblog.com

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 World by 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.

Previous Globie Winners:

[Oct 30, 2018] Anyone working at IBM after 1993 should have had no expectation of a lifetime career

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 to do with the surplus of labor ..."
"... This is the nail in the coffin. As an IT manager responsible for selecting and purchasing software, I will never again recommend IBM products ..."
"... The way I saw it, every time I received a paycheck from IBM in exchange for two weeks' work, we were (almost) even. I did not owe them anything else and they did not owe me anything. The way I saw it, every time I received a paycheck from IBM in exchange for two weeks' work, we were (almost) even. I did not owe them anything else and they did not owe me anything. The idea of loyalty between a corporation and an at-will e