Category: zerohedge

Authored by Andrew Syrios via The Mises Institute,

The Left has become increasingly and often bizarrely obsessed with all manners of supposed privilege these days. Buzzfeed even put out a quiz on how much privilege you have. All of these various privileges work to form a simple Marxist-like dichotomy between the oppressed and the oppressor. So for whites, men, heterosexuals, Christians, cisgendered, able-bodied and attractive people are all at least privileged if not part of an oppressor class. On the other hand, people of color, women, homosexuals, the disabled, Muslims and people of other faiths, transgendered, overweight people and presumably otherkins, headmates, and whatever other buzzwords the self-diagnosed crowd has come up with, are oppressed.

It’s hard to imagine a more effective way to increase division in society than by splitting everyone into different groups that are either good or bad, privileged or oppressed. And this division is then inevitably followed up by demanding a government solution to these inequities. One of the most obviously glaring omissions is that what made up the bulk of Marxist theory, namely the rich versus poor, hardly gets mentioned.

Indeed, one of the first things that came to mind with the recent proposals in South Africa to expropriate the land of white farmers without compensation is that no such proposals were being made for expropriating the land or assets of wealthy corporations. Perhaps that’s because wealth corporations can better defend themselves (or flee). Or perhaps it’s because class is far more fluid than things such as race. (Unless of course, you’re Rachel Dolezal).

One of the most remarkable failures of Marxist theory (of which there were many) was that Marx believed the revolutions would begin in the most advanced capitalist countries . This would imply a revolution was most likely to spring up in a country like Germany, the United States, Britain or France. Instead, the communists took over in far more backward countries that were still either partly or almost totally feudal, such as Russia and China.

In hindsight, this should have been obvious. Feudalism creates a strict hierarchal and static society where class is effectively something you are born into. Indeed, it is interesting to ponder whether it was the religious justification of the caste system that prevented a communist revolution from taking place in India. When class is something you cannot change, class warfare becomes a more appealing alternative. And while capitalism is a spectacularly more effective way to organize a society than communism, even the most ardent supporters of a free market will admit it takes time for class restrictions to fade and for a country to become wealthy after transitioning from a feudal or semi-feudal economy into a capitalist one.

For peasants who have lived under feudal lords and the like for ages, the false promises of communism were understandably more appealing.

However, even with all the government favors and restrictions hampering the economy, there is still upward mobility in capitalist nations. One study in the United States, for example, found that only five percent of those in the bottom quintile of income in 1975 remained there in 1991. And when age is taken into account, income and wealth disparities look far less stark . Despite terrible incentives from the welfare state, most of the poor don’t stay poor. And almost everyone at least has dreams and aspirations of moving up the ladder. In capitalist nations, class is not something you are stuck with.

In the current age, we can see how the use of class as a rallying cry mostly failed as Occupy Wallstreet quickly petered out and lost steam. Indeed, many Leftists have lost interest in class as it is generally the white working class in the United States who supported Trump and the white working class in Britain who supported Brexit.

In Occupy Wallstreet’s wake came the most deranged form of identity politics one could possibly imagine. And by focusing on immutable qualities (or qualities presumed to be immutable), the Left has fixed the pesky problem that class mobility created for their dreams of an ever-bigger state apparatus.

As noted above, modern day social justice warriors divvy everyone up according to various immutable or semi-immutable characteristics. You are either privileged and need to repent (give away your money, job, etc.) or oppressed and are owed something. Many of their arguments are simply ridiculous. For example, gender is a social construct but being fat is genetic. Others mute complex issues into simplistic dichotomies. Two of the most obvious are religion and gender.

In 2016, the Center for Studies on New Religions found that Christianity was the most persecuted religion in the world with 90,000 being killed for their religion. While Christianity is also the largest faith, this doesn’t exactly ring of privilege. And while it’s true, that being a Christian is probably a privilege of sorts in rural Montana, it’s not going to grant you much in Midtown Manhattan, Silicon Valley or Hollywood. Christianity seems to be the one religion you can make fun of these days. After all, a painting of Christ in urine is called “art” and sponsored by the National Endowment of the Arts (your tax dollars at work!) while a guy in Britain is imprisoned (and later died) for putting a bacon sandwich outside a Mosque.

With gender, at least in the West, it would seem rather obvious that there are advantages and disadvantages both genders have. Even if you assume the genders are biologically the same and all differences are a social construct (while there are also 57 different biological genders), the results would not imply privilege.

Yes, men make up 95 percent of Nobel prize winners, 95 percent of Fortune 500 CEO’s and 68 percent of STEM majors. But men also make up 93 percent of the incarcerated, just shy of 80 percent of suicides and 70 percentof the homeless. Feminists could push back and say that men get arrested more because they commit more crimes (that presumably the patriarchy made them do). But how does a man become a Fortune 500 CEO? Does it not require a lot of hard work and intelligence? And is anyone going to seriously claim that men are privileged when it comes to the divorce courts?

Feminists may challenge that men are in charge so any advantages to women are just “benevolent sexism.” But this retort would only be coherent if men and women were two collective beings. Each man and woman is, of course, just an individual and even though most of those in charge are men, the average man has as much ability to change the world as the average woman; close to zero. Every advantage and disadvantage men have is just the hand men were dealt.

Some of the same things could be said about whites, especially when whites can be discriminated against with affirmative action. And then there’s always that pesky question as to why Asian Americans earn more than whites if they’re, you know, being oppressed and all. Or perhaps Asian Americans are privileged too as they are now discriminated against by affirmative action as well.

Of course, this whole mess becomes even more complex when you realize you can be both an oppressor and oppressed at the same time. A white woman is privileged by her race and oppressed by her gender. This forms the “Kyriarchy” (yes, that’s a real term) of intersectionality where all these oppressions and privileges meet in one giant wheel of humanities majors pretending they are actual scientists who have come up with something that isn’t really, really stupid.

Indeed, the complexities and utter irrationality of intersectionalism is pretty easy to show. Do I, as a white man, stay privileged if I move to Japan or am I now an oppressed minority? Are the Japanese in Japan who oppose immigration “Japanese supremacists?”

While there have obviously been many major crimes committed by the West (or more accurately, Western governments), the West is by no means unique in these crimes nor immune to them. As someone with Greek ancestry, I could point to the Greek Genocide committed by the Ottoman Turks during the First World War (better known as the Armenian genocide, as approximately 1.5 million Armenians were killed along with 600,000 Greeks). I could demand redress from the “Turkish supremacists” as well as the return of Constantinople, of course. Or did my Greek ancestors have “white privilege” while they were being exterminated?

One example probably best highlights the absurdities of intersectionalism better than any other. In 2014, it came out that in Britain, in the town of Rotherham, mostly Pakistani gangs had groomed and raped over 1,400 girls over the course of almost 20 years. The police had known about these crimes but had ignored them. To say this was a national scandal (and proof of massive government incompetence) is a huge understatement.

In 2016, the very white and very male Brock Turner , a Stanford student with a scholarship for swimming, sexually assaulted a classmate and was given a lenient sentence. While this was a terrible crime, in a country with 325 million people, it would seem to be, at best, a local story.

Instead, it blew up into a national flash point against the dreaded and evil patriarchy. Feminists wrote story after story about it. Rotherham on the other hand… not so much. Here are thesearch results for the feminist site Feministing.com:

For Jezebel.com, the count was:

• Rotherham : 3

• Brock Turner : 38

• Manspreading : 15

Intersectionality sure is complicated.

The only interpretation one can come to is that there is no attempt whatsoever to be consistent or even coherent. It’s simply about divvying people up into groups to demand the state take from another to give to you. It is Bastiat’s second option; “everyone plunders everyone.” But with a twist; first you must pick a team before you begin the attempts at plunder.

In essence, privilegenomics doesn’t even attempt to come up with an economic rationale for redistribution and bigger government. It’s just mere tribalism and a demand to take other’s stuff for historical grievances, some real and some imagined, but almost all done to and by people who have long since passed away.

It shouldn’t be hard to see why this nonsense has acted as a sort of rocket fuel for the Alt-Right. Some people can only be told how privileged and awful they are for so long before deciding to identify with a collective themselves that wants to grow the state for their own benefit. But the Alt Right is clearly a reaction to the Left’s madness. Discrediting the former should diminish if not eliminate the latter.

Regardless, it is now more important than ever for individualism to win out.

via RSS https://ift.tt/2QhwynJ Tyler Durden

A disturbing divergence in market outlooks has emerged in recent weeks, as US retail investors scramble to allocate more cash into the stock market, even as institutions sound the alarm and warn that price gains for the coming quarter will be limited.

After the best quarter for the S&P in 5 years, retail investors have flooded back into stocks, drawing down cash balances at brokerage accounts to record lows even as strategists at big banks from Goldman, to Citi, to Morgan Stanley and JPMorgan have recommended fading the rally in American stocks while forecasting the second-weakest year-end period of the market’s now-record long bull run. And, as we enter Q4, sellside analysts, traditionally cheerleaders for further market gains, look “timid”, and according to the average year-end S&P 500 target of 2,956, they forecast just a 1.4% gain in the fourth quarter. That would be the worst close to a year since 2012.

The story is familiar: “alarms are ringing” across Wall Street as Bloomberg puts it, as strategists continue to warn over peaking growth, trade tensions and stretched valuations. As a result, institutional and professional investors are hunkering down in anticipation of what comes next. Two weeks ago, we reported that Morgan Stanley’s hedge fund clients slashed the net exposure and leverage to the lowest level this year, a sign that risk appetite is retreating, just as the market pushed on to new all time highs.

Even one of the biggest bulls on Wall Street, BMO’s Brian Belski, has refused to raise his year-end price target of 2,950 for the S&P 500 amid concern that investors may have flocked to stocks in anticipation of a year-end rally that could be delayed by the political turmoil in Washington and the mid-term elections.

“Given the strong momentum of U.S. stocks, many clients have asked why we have not become more optimistic,” Belski wrote in a note Thursday. “We believe investors may have already ‘pulled forward’ any anticipated post-midterm election bump.”

Traditional mid-year election comparisons have also flown out of the window. According to Belski’s calculations, in midterm years the market starts the year slowly before rallying in the final quarter, with the final three months delivereding on average gains twice as big as those in non-midterm years. Needless to say, this year has been an outlier, with the S&P starting off January with a blow-off top, then suffering a near correction in February, before rallying another 9% through the end of September, “compared with an average loss of 1.7 percent at this time in midterm election years.”

Historical patterns aside, strategists are also concerned about the accelerating pace of Fed tightening and balance sheet shrinkage, which this quarter will ramp up by another $10 billion and hit a peak $50 billion a month as Treasuries and MBS holdings mature.

With earnings forecasts still on the rise and the Federal Reserve in no hurry to slow the pace of tightening, the market is unlikely to repeat the same pace of gains in coming months, according to John Augustine, chief investment officer who helps oversee $17 billion at Huntington Private Bank in Columbus, Ohio.

Meanwhile, stocks are hardly cheap, trading at 16.8x forecast earnings, a multiple that’s 14% higher than its 10-year average. Worse, according to Goldman Sachs, the market is not only “expensive on most metrics”, it is in the 89% percentile of aggregate overvaluations, while on a median basis when looked at traditional valuation metrics, stocks are more expensive than 97% of all historical observations.

“We’re probably seeing the peaking moment in the economy and earnings growth,” Augustine said. “Does it mean markets deteriorate? No. But stocks probably have done their bulk of work this year.”

Yet despite Wall Street’s warnings, retail investors not only ignore the tales of caution, but have become increasingly oblivious to any downside risks, in a repeat of what happened at the start of the year when the S&P 500 suffered its worst correction in two years.

As a result, retail investors have poured into the market as confirmed by the record low levels of cash at retail and discount brokers such as Charles Schwab, where cash as a percentage of client assets fell to 10.4%, matching the record low level reached in January (back then, just a few days later, the S&P plunged as a result of the VIXplosion that wiped out inverse VIX ETFs and countless vol sellers).

The main difference between January and now is the growing divergence between professional investors, who are growing more pessimistic by the day, even as retail investors refuse to slow down their ETF-buying ways which in turn continue to “lift all boats.”

To some, such as David Campbell of San Fran-based BOS, the lack of consensus is good news for American stocks.

“I don’t really worry about markets when there is a lot of skepticism. I worry about markets when I don’t see anybody being skeptical,” Campbell told Bloomberg. “The longer bull markets go, the more people who have been sitting on the sideline feel like they’re missing out. So there is built up pressure to give in and participate.”

Of course, with record low cash in brokerage accounts, the purchasing power on the “sidelines” have never been less. 

As for the who is proven right in the end, professional or “mom and pop” investors, in a world in which such former hedge fund titans as David Einhorn are now down 26% YTD, it has become virtually impossible to assume that just because they are “less informed”, retail investors will lose.

At the same time, one can make the argument that what we are seeing now is institutions and insiders simply dumping to euphoric retail investors at a record pace that suggests the manic phase is almost over.

And when looking at the historical record, every time this process reached its inevitable end, the rug would be pulled out from under the market, at which point the furious retail liquidations began as institutions once again stepped in and the cycle would repeat itself. There is no reason why this time should be different. 

via RSS https://ift.tt/2IsuNkJ Tyler Durden

Authored by Lance Roberts via RealInvestmentAdvice.com,

A Pause That Refreshes?

That was so last week,

“Get out your party hats ladies and gentlemen, the markets hit all-time highs.

After increasing equity exposure in portfolios on the 11th, as the markets pulled back to the previous break-out support levels, I suggested a push to new highs was likely.”

The one thing that we addressed several times last week on our daily podcasts was the short-term overbought condition needed to be resolved before the markets could make a year-end push to 3000.

There has been a pretty well defined upward trendline (black dashed line) since the April lows which has consistently provided better entry opportunities to increase equity exposure.

While we are currently fully weighted in existing portfolios, we must take advantage of these entry points to “on-board” new clients. This is always the biggest challenge for any advisor.

As stated, our existing portfolios are currently fully weighted toward equity risk as there seems to be little which can derail this market currently. We have moved stop-loss levels up to recent lows, added some defensive positioning, and have added bonds as rates have climbed above 3%.

Speaking of rates, each time rates have climbed towards 3%, the market has stumbled.

There is also a reasonable match with oil prices.

This is particularly interesting with respect to the ongoing bullish narrative. Tariffs, higher interest rates, and higher oil prices are ultimately a direct tax on the consumer. Such will ultimately weigh on consumption, earnings, and the economy.

Another concern for the rally is the participation continues to narrow. Small caps, after leading the rally higher from the March lows have lost their “mojo.” 

Same for Mid-cap stocks.

This suggests that much of the “speculative” nature of the market seen early this year has subsided and risk is being concentrated into fewer areas.

As Steven Vanelli via Knowledge Leaders Capital blog noted on Friday

“Small caps have underperformed mid/large caps by about 5% since making a relative high June 21, 2018. There is support nearby, but if small caps underperform US mid/large caps by another 5%, then the technical picture could change for the worse.”

But there is more to this story than just relative underperformance. As Jesse Felder noted in his blog last week, breadth is becoming decidedly more bearish.

“Over the past ten days, this exchange has triggered an omen every day. Such a streak has not happened over at least the past 40 years. This brings the total number of omens triggered on both exchanges over the past month to 15, the most since December of 1999, just before the peak of the Dotcom Mania.”

“Even more notable, it brings the total omens triggered over the past year to 44, by far the most in at least 40 years and roughly doubles the total seen almost 20 years ago. The only thing to conclude from this is that we are currently seeing a historic divergence in equity market breadth, the sort of dispersion that has typically preceded broader market turbulence.”

So, the real question is whether the recent struggles with the market are simply just a pause that refreshes or the early stages of a more important topping process?

Over the past 50-years, when the market has posted a new high, failed, and then posted a subsequent high at the same time the Federal Reserve, and long-term rates, were rising – it was a significantly more important topping process.

1972 – Prior to the 1973-1974 bear market.

1999 – Prior to the Dot.com crash

2007 – Prior to the Financial Crisis

Today

It is too early to know just yet whether we are just experiencing a pause that refreshes or if we are at the beginnings of a more important juncture between rates and the markets. We will only know for sure in hindsight. 

For now, there is really no one is really concerned with the risks. As Dr. Ed Yardeni noted last week:

“The latest relief rally reflects mounting confidence that Trump’s trade war won’t escalate into one that depresses the economy and corporate earnings, which continue to soar. In addition, there is less fear lately that the Fed’s policy normalization will trip up the bull market. Earlier this year, there was fear that a 10-year US Treasury bond yield above 3.00% would be bearish for stocks. It recently rose back slightly above that level, yet it was widely deemed to be bullish for financial stocks. Go figure!”

He is right, which is why we have remained allocated to equities and have been opportunistic in adding exposure.

via RSS https://ift.tt/2y5xVP4 Tyler Durden

The uncertainties in the real estate market are causing people to shell out big bucks – sometimes over $10,000 per month –  to rent properties, instead of purchasing them, according to the New York Times. The report followed several couples who are prime examples of this trend, like Aimee Raupp-Temple and her husband, Ken Temple. They chose to rent instead of buy when they moved to the suburbs of Connecticut three years ago because they weren’t sure if they were going to stay. Now, after realizing that they did in fact like the area, they still decided to rent instead of buy.

The couple, whose patriarch works in finance, did so because they are convinced that home prices would continue to decline.

Aimee told the New York Times: “Our parents’ mentality was, you bought your home and that was your major profit place. Now, I think people are a little more cautious.” In fact, the real estate market appears so uncertain that many people are spending between $5,000 to $10,000 a month to rent because it actually feels like a safer bet than buying. This is especially true for suburban counties like Fairfield and Westchester, where median home sale prices can be above $1 million. The demand for single-family rentals is up not just in Connecticut, but across the broader region surrounding New York.

Many potential buyers are waiting to see how the market will pan out. Their concerns are new federal tax laws and general unease about the economy in an environment where the Fed continues to hike rates.

Aimee continued, “There are so many other ways to invest and make money than real estate now.”

The numbers confirm the trend: in Fairfield County, single-family rentals are up 13% in July compared to a year ago, according to data from the appraisal firm Miller Samuel. In Westchester County, there were similar results: single-family rentals were up 9.6%. This growth in rentals has been the most pronounced with higher-end buyers. An “exploding rental market” was the term used in a report put together by William Pitt/Julia B. Fee Sotheby’s International Realty.

This firm’s data shows that for the first half of 2018, homes that rented for $5,000 or more in the county were up 33% compared to 2015. Out of the 268 total properties, 61 of them rented for $10,000 or more, which was a 35% increase over 2015.

In other affluent areas like New Canaan, Darien, Greenwich and Westport, the lowest range of rental homes are generally older properties that have three or four bedrooms and a regular sized yard. The houses that are closer to $10,000 a month usually have at least five bedrooms and large lots – sometimes with beach locations and amenities.

Westchester County showed similar results in higher-end rentals, but at a slightly slower pace of growth at just over 12%. The growth there was focused on the southern end of the county, similar to other areas.

Kathleen Collins, an agent with William Pitt, told the Times: “I definitely see an increase in interest in rentals in the Bronxville area.” Collins said she had been approached by more real estate agents than usual this year, asking whether not property she had for sale may be available to rent.

Meeting the demand are high-end sellers who are now open to the idea of renting. Those who can’t stomach the sale price they want are even more enticed to rent. In Fairfield County, the number of homes offered for rent at $5,000 and up during the first half of this year was 25% higher than five years ago, according to data from William Pitt. Inventory was up 18%. William Pitt noted that renting is a way to cut potential losses, as well as meet demand. For instance, if homeowners sell a primary residence for less than it was bought for, the loss isn’t tax-deductible. But, if the homeowner rents it for at least two years, it can be legally converted to an investment property and capital losses from it can be written off in the future.

The growth in demand for these types of rentals has been further catalyzed by concerns about new tax law, which caps income tax deductions for property, state and local taxes at $10,000. Further fueling the nervousness, according to Jonathan Miller, the president of Miller Samuel, is unclear economic policy and rising interest rates.

“We’re going through this era of uncertainty. And what do buyers do when the near-term seems uncertain? They pause. People are just nervous that values will continue to decline, and for that reason, more people are opting to rent, if they are not forced to buy”, Miller said.

And while demand for rents is rising, traditional purchases are fading fast. In many of the same counties, buyers are simply unmotivated. In New Canaan, property values have declined by 10% to 12% over the last year. At the same time, the number of sales is down by 15%.

* * *

The article also tells the story of another couple, Michelle and Jeremy Fine, who signed a two year lease in March for a five bedroom house in the Old Hill section of Westport. The couple has two children and were previously living in a rented condo in White Plains before they decided not to buy it because of property tax reasons. They stated that the change in federal tax law was definitely a factor for them to rent. 

Michelle Fine told the NY Times: “I don’t believe you’re spending that much more on rent than you would on a mortgage. Being in a home you purchased that is not the right fit is a bigger challenge if you have to sell. You have to weigh out what’s more important.”

Todd David Miller, a vice president of sales at the Higgins Group, told the New York times that of the $57 million that his sales team has done this year in Westport and Fairfield, almost all the sellers have moved out of state or are renting in the area instead. Those who are staying are moving toward rental homes near the beach.

“These are mainly higher-end transactions, and the majority of them had to sell at a loss, They don’t want to put any more money into real estate right now,” he said.

Leslie Razook, an agent with William Pitt, echoed this sentiment for New Canaan and Greenwich. 

Another couple, Scott and Nina Ackerman, decided not to buy after selling their home in Rye, New York where they lived for 17 years. While they noted there was ample supply for homes in the area, they couldn’t find what they wanted and figured they wouldn’t force the issue. Renting seemed like a good alternative. They are doing it now in a four-bedroom home for $7,000 a month. Scott stated, “Home prices seem to be coming our way. We made a good sale, and I think we’re going to have an opportunity.”

But the home buying market hasn’t dried up completely, despite this seismic shift that appears to be taking place.

Harper and Scott Mates are a younger couple who spent a year renting a seven bedroom house in Rye, New York before deciding to buy. Coming from the city with young children, they wanted to stay close to their job but they weren’t sure of the location. Unlike the other couples, they fell in love with the area and jumped at the opportunity to purchase a five bedroom house on an acre of land within a couple of days it was listed.

via RSS https://ift.tt/2P0gKFy Tyler Durden

Authored by Jeffrey Snider via Alhambra Investment Partners,

There are more than 300 PhD Economists working on staff for the Federal Reserve. The central bank tells us that they “represent an exceptionally diverse range of interests and specific areas of expertise.” Perhaps, but they are all PhD Economists, aren’t they? These highly educated people cover a broad range of topics, for sure, and all from the same starting point and perspective.

Believe it or not, the Fed has an entire research section devoted to Prices and Wages. It’s difficult to process given for four years we’ve heard from FOMC officials about the link between prices and wages starting from the unemployment rate. And we are still waiting for that forecast link to show itself.

That’s the problem when PhD’s are advising PhD’s about conclusions they’ve already drawn ahead of time. Economists may be diverse in their interests but their ideology prevents any sort of honest inquiry of discovery. Echo chamber.

The Section’s Chief is Dr. Kristin Hubrich, with Matteo Luciani her Chief Economist. Dr. Luciani’s current research topic, according to the Federal Reserve, isn’t the relationship between business profitability and wage growth, thus inflation in or out of a Phillips Curve setting, rather it is Non Stationary Dynamic Factor Models. But of course it is.

They feel the need to build better models because some of those we have now aren’t sufficient. I don’t mean the Fed’s models which have missed every big economic swing since they were first introduced, rather Dr. Luciani takes issue with other statistical constructions like GDP and GDI.

According to a paper he co-authored with Matteo Barigozzi of the London School of Economics for the Federal Reserve Board earlier this year, over the past few years GDP and GDI together may have been understating growth. If the two Matteo’s are right, there was little or no downturn in 2015-16, no labor market slowdown thereafter, and the unemployment rate isn’t just a fanciful picture of an incomplete denominator.

Yellen was right all along – if you just change the numbers.

In this note, we introduce a new estimate of GDO [Gross Domestic Output] obtained from a Non-Stationary Dynamic Factor model estimated on a large dataset of US macroeconomic indicators. Compared to the approaches of the BEA and the Philadelphia Fed, our estimate of GDO incorporates information coming from a wider spectrum of the economy, and this additional information empirically proves to be non-trivial. Indeed, our estimate of GDO offers a different picture of economic activity: according to our estimate, since 2010 quarterly annualized GDO growth was on average 1/2 of a percentage point higher than estimated by the BEA or the Philadelphia Fed, thus showing a more rapid pace of improvement than measured by national account statistics.

This kind of investigation isn’t unique at the Fed nor any other research division from another central bank. This is what they do. Maybe they have so much time to dream about saving Economics because our actual economic predicament is really straightforward and easy to demonstrate.

Despite this economic boom, workers and therefore consumers don’t appear to be benefiting much from it. If they aren’t, it really can’t be much of a boom.

This isn’t a new development, but the situation has worsened since that last downturn more than two years ago. Incomes have tracked the participation problem closely, but that doesn’t explain 2016 and onward when the unemployment rate dived lower than any models anticipated. Aggregate labor income continues to be stagnant even with that rate around and below 4%.

The Personal Income and Spending update for August 2018, released by the BEA today, shows for still another month nothing has changed. Income growth is tepid and is in fact less than spending, meaning that even factoring the revisions to Proprietors’ Income at the last benchmark incomes don’t come anywhere close to matching the unemployment rate.

This is where the constant supply of mainstream anecdotes about a LABOR SHORTAGE!!! backfires. Each one only proves that companies are doing everything they can except to pay more for workers. It’s almost as if they can’t pay for them – which is exactly what’s going on here.

Again, this is pretty simple economics (small “e”), requiring no doctorate or formal economic training to appreciate.

At times when companies don’t make money, profit growth slows or reverses, they pay very close attention to their costs. This is about as uncontroversial as it gets. They may even be forced into extreme adjustments like layoffs if their bottom lines are really threatened.

Businesses may also simply refuse to hire many more workers or pay a lot for them as well as their existing labor force. If profitability is in doubt, the last thing any company will do is be aggressive on costs. Labor is almost always the biggest cost.

While the 2015-16 downturn was a manufacturing recession, it was also a profit recession, too. In other words, while not all businesses were tied to the fortunes of crashing commodity prices they were impacted nonetheless.

They tightened up their cost practices and aggregate income growth even contracted ever so slightly for eight months (after October 2015), an even bigger contraction in non-linear terms. That was the full reach of the downswing.

Profits have never really come back, though. As noted yesterday, profits aren’t any higher in the latest data for Q2 2018 than they were in 2014 nor are they really that much more than 2012. The “rising dollar” downturn may not have visited a profit recession on everyone, but it does seem to have been a wakeup call that economic recovery wasn’t going to show up even after QE3 and QE4.

Indeed, the sluggish profit recovery in the rest of 2016 and 2017 merely confirmed the lack of acceleration and therefore explains the persistent reluctance of businesses, in the aggregate, to pay an accelerating wage for marginal labor. There is practically no demand for marginal labor regardless of the wage.

If you struggle to make money, you don’t hire more workers nor enthusiastically bid up the price for them. It is just that simple: economics, not Economics. Not only is it simple, that’s what all the data shows.

Rather than appreciate this honest, consistent, and corroborated verdict, 300 PhD’s are doing what? They sure aren’t investigating why QE failed 4 times (just here in the US) to change the economic and therefore profit picture for businesses. They don’t seem all that interested in this as a possibility, even in the Prices and Wages Section.

Say what you want about Milton Friedman on the topic of inflation and monetary policies, but he got this part right:

The difficulty of having people understand monetary theory is very simple – the central banks are good at press relations. The central banks hire people and the central banks employ a large fraction of all economists so there is a bias to tell the case – the story – in a way that is favorable to the central banks.

No kidding.

via RSS https://ift.tt/2OmYCZG Tyler Durden

One year after the deadliest mass shooting in US history, experts are no closer to determining why the attacker, 64-year-old gambler Stephen Paddock, laid down a hail of bullets at the Route 91 Harvest Festival, killing 58 concertgoers and injuring over 400 who suffered gunshot wounds. 

On Monday, the Las Vegas strip will “go dark” at around the same time as Paddock opened fire on the crowd, in commemoration of the dead. 

Marquees along the Strip will go dark at 10:01 p.m. in a tribute that will last several minutes. The iconic signs also went dark on Oct 8, 2017, one week following the horrific tragedy at the Route 91 Harvest Festival. –LA Times

Experts remain puzzled as to Paddock’s motive after the Las Vegas Metropolitan Police Department spent 10 months investigating, interviewing his relatives, girlfriend, ex-wife, doctor and casino hosts, reports the Wall Street Journal, which notes that “several hypotheses on the Las Vegas gunman’s possible psychopathy and desire for infamy have begun to emerge, but they are tentative and based on limited evidence—a troubling outcome for people whose job it is to look for clues that could help prevent such a deadly incident in the future.”

“People are bewildered by the case—there’s a bewilderment, and there’s a horror,” said UC San Diego forensic psychologist, J. Reid Meloy. “The most troubling cases are those without an answer.” 

Sheriff Joseph Lombardo, head of the Vegas police, said upon the release of the final report in August that Paddock’s gambling losses may have been a factor; his bank accounts dwindled from $2.1 million to $530,000 in the two years before the attack. But the sheriff said investigators weren’t able to “definitively answer the why.” –WSJ

“We wish we knew more about it,” said psychologist and threat-assessment expert John Nicoletti. “With all the missing data, what everybody says, it’s just speculation.” 

FBI criminal profilers, meanwhile, have been working on their own Paddock report that is expected to be released soon. The agency’s top official in Vegas said in a summer radio interview that the report may not deliver “a definitive why.” 

“It’s a puzzling case and a challenging case,” said retired FBI profiler Mary Ellen O’Toole. “In a lot of ways, he is an outlier.”

From the start, Paddock defied much of what professionals in this grim field have come to expect. Typically, mass shooters are younger men who nurse real or perceived grievances, according to a recent FBI study of 63 such attackers. Four out of five displayed some concerning behavior before an attack, including telling others on social media or in person of their violent intent.

Paddock was more clandestine. Video-surveillance footage shows him calmly gambling, eating and bringing more than 20 pieces of luggage up to his 32nd floor suite in the Mandalay Bay Resort & Casino in the days before the attack. The luggage contained an arsenal of semiautomatic rifles, and he turned his room into a sniper’s nest to rain bullets down on a defenseless crowd at the Route 91 Harvest country music festival on Oct. 1, 2017. –WSJ

In the ensuing months, investigators were unable to find any animus which might explain Paddock’s actions. That has left some experts to conclude that his motive was infamy. 

“Some people kill for notoriety and infamy, and that’s what he did,” said Dr. Russell Palarea, president of the threat-assessment firm Operational Psychology Services. 

Meloy, the UCSD psychologist, thinks that Paddock’s motive is tied to his father – who was a bank robber and con man who was on the FBI’s Ten Most Wanted Fugitives list in 1969, and determined to be a sociopath. 

“I began to think about psychopathy, Meloy told the WSJ. “when I was struck by the history of the dad and the fact that his biology was rooted in a father who had a diagnosis as a psychopath.“

Meloy says that speculation by Paddock’s brother in interviews that “he had done everything in the world he wanted to do and was bored with everything” supports his hypothesis, along with the fact that several other people described Paddock as emotionally detached. Meloy is not alone in this theory. 

The coldblooded and grandiose assault on a crowd of people Paddock had never met also bore characteristics of psychopathy, not of someone having a mental breakdown, said Dr. O’Toole, the retired FBI profiler. “It was a complete lack of empathy for the trauma and damage done to strangers,” she said. –WSJ

That said, the theory does have holes – including Paddock’s lack of a violent past, impulsiveness and lying. Paddock called his mother before the attack to make sure she was safe ahead of Hurricane Irma. He also shared his investments and wealth with family and friends, such as his girlfriend, Marilou Danley. 

Paddock also took prescription medication to control anxiety, typically not a trait seen in those with no conscience. 

“In order to say that Stephen Paddock was a psychopath, you would have to do a posthumous assessment with case materials, you’d have to do interviews, you’d have to go back over years of behavior,” said O’Toole.

One law enforcement official close to the investigation has his own theory: “My opinion is he was pissed over getting his butt kicked gambling, or he wanted to follow in his father’s shoes.” 

via RSS https://ift.tt/2zGteNv Tyler Durden

Authored by EconomicPrism’s MN Gordon, annotated by Acting-Man’s Pater Tenebrarum,

Positive Energy

By now, late September of 2018, it has become increasingly evident that something big is about to happen. What exactly that may be is anyone’s guess.  But, whatever it is, we suggest you prepare for it now… before it is too late.

Art auction energizer: Norman Rockwell’s portrait of John Wayne. You can’t go wrong shelling out top dollar for me, pilgrim, can you? [PT]

Several weeks ago, if you haven’t heard, an undisclosed rich guy enthusiastically bid up and then bought Norman Rockwell’s portrait of John Wayne for a cool $1.49 million at the 12th Annual Jackson Hole Art Auction. According to auction coordinator  Madison Webb, “There was a really positive energy in the room.”

Indeed, it takes a lot of really positive energy – and a healthy bank account – to shell out that sum of money for a painting of “The Duke.”  Still, positive energy, like good weather, can quickly turn negative. Soon enough, we suppose, the purchaser’s excitement will transform into a serious case of buyer’s remorse.

Of course, we could be wrong.  The buyer could have a special liking for old John Wayne movies.  Perhaps he’s a collector of Norman Rockwell paintings.  Or maybe he won the lottery and is compelled to burn through his winnings in odd and outlandish ways.

What this has to do with anything is a bit of a stretch.  But art, if this qualifies as such, offers a rough barometer of social mood (see:  The Bubble in Modern Art). Moreover, when the price for a painting of a 20th century actor pretending to be a 19th century character of American nostalgia sells at nearly a million and a half bucks, we suspect something more is at work.

Sanctions and Bottlenecks

Take oil, for instance.  The price of WTI crude oil is back above $70 a barrel. Brent crude trades at over $80 a barrel.  Aside from a brief price spike at the beginning of summer, oil hasn’t been this high since its price collapsed in late 2014. What gives?

WTIC and Brent, daily (continuous contract charts): note the recent “double divergence” in prices.  This is quite an interesting development, because these are the first price divergences between the two types of crude oil since the rally began in early 2016 from below $30/bbl. Every other interim high was “confirmed”, this is to say a new highs in one oil type always coincided with new highs in the other. Note that there was a non-confirmed new low in the correction that ended in the summer of 2017 – this non-confirmation at a low was immediately followed by the strong rally that is still underway. However: crude oil futures remain in backwardation, a bullish factor that has hitherto kept the uptrend alive, despite speculators holding truly huge net long positions in both WTIC and Brent futures for almost a year (in excess of 600,000 contracts net in WTIC futures). This large one-sided position makes the market vulnerable, but as long as backwardation persists, rolling long positions over remains a profitable proposition. It remains to be seen whether the recent price divergences will actually turn out to be meaningful. [PT]

To begin with, oil markets are notoriously cyclical.  Production and consumption rates often crisscross in short succession.  Oil prices swing wildly to both the upside and the downside as supplies shift from gluts to shortages and back again.  But that’s not all…

In addition to regular supply and demand dynamics, oil markets are also subject to extreme government intervention.  Specifically, the Organization of Petroleum Exporting Countries (OPEC) – a 14 nation cartel, which often works in concert with Russia – colludes to fix the price of oil to its liking.

OPEC press conference. It is hard to say how much influence on prices the cartel actually has. After the 1980 oil price peak, oil production in non-OPEC countries was ramped up enormously, which undermined OPEC’s power to such an extent that it had to watch helplessly as prices collapsed by almost 75% over the next 20 odd years. The fact that Russia is cooperating with OPEC these days has strengthened the cartel’s hand somewhat, but the surge in US shale oil production has offset this effect to some extent. [PT]

As far as we can tell, a combination of factors could push the price of oil up much further from here. These factors include U.S. sanctions on Iran’s oil exports and bottlenecks in delivering U.S. shale oil to market. In addition, and despite President Trump’s cajoling, OPEC has only hesitantly hinted at increasing its oil production.  Bloomberg reports:

“Major oil trading houses are predicting the return of $100 crude for the first time since 2014 as OPEC and its allies struggle to compensate for U.S. sanctions on Iran’s exports.

“With Brent crude already jumping to an almost four-year high on Monday, that’s exactly the kind of price surge President Donald Trump has been seeking to prevent by pressuring OPEC to raise production.  Yet the cartel and its allies gave mixed signals at a meeting in Algiers on Sunday, ultimately showing little sign they would heed U.S. demands to rapidly push down crude prices.”

Oil Mania Redux

Yet for every opinion there is a counter opinion.  An argument that goes counter to another reasoned argument.  Taken by itself, each argument stands on its own rationale.  Taken together, they contradict each other.

For example, petroleum geologist and oil analyst Art Berman believes rising oil prices will be short-lived.  According to Berman, a metric he calls comparative petroleum inventories, which compares inventory data to the five year average for any given week, crude supplies will soon move back into surplus.  After that, oil prices will fall.

Commitments of traders in WTIC futures: hedgers currently hold a net short position of roughly 600,000 contracts, which is mirrors the speculative net long position (including non-reportable/small spec positions). Large speculators have pulled back a bit recently, from around 700,000 contracts net long to the current 560,000 contracts net long position. It is interesting that this has happened during a rally. We have seen similar behavior in the final stages of major rally legs in a number of commodities (including oil) in the past. Note that the final upward spike into the 2008 top in crude oil was mainly driven by a few commercial hedgers becoming unable to post enough margin to maintain their positions. A large Asian bunker oil storage company eventually went bankrupt when it could no longer keep up – and this bankruptcy effectively top-ticked oil prices at the time, with WTIC futures rallying by around $10 in a single trading day when the positions of the company were closed out by margin clerks. [PT]

Who is right?  Who is wrong?  Is oil going to $100 or $50 a barrel?  Surely, time will tell. Here at the Economic Prism we will refrain from making an oil price forecast.  However, we will offer one constructive anecdote.

If you recall, back in June 2008, Brent crude spiked up to nearly $150 a barrel. At the time, many intelligent people claimed we had hit peak production, and that prices would continue to go up forever. Speculators chased prices higher reinforcing the popular peak production theory.  Then, over the next six months or so, oil prices collapsed along with stocks and real estate.

“Peak Oil” – a Club of Rome scarcity meme that is revived every time nominal oil prices rise – which usually happens in concert with periods of excessive money printing. Then it is time to write and sell books about the impending catastrophe, which has the same record of predictive accuracy as the original Malthusian thesis on overpopulation, or the countless predictions made by climate scaremongers since the late 19th century, namely zero. Note: Malthus’ belly-aching about overpopulation may have had some merit in pre-capitalistic times, but with the adoption of capitalist modes of production it has not just become obsolete, it has actually become the opposite of the truth. We like the “Peak Everything” book title best, as a marker of “peak hysteria”. What the scarcity scaremongers never take into account are the economics of resource extraction and human ingenuity – and these are decisive oversights. [PT]   

The point is, sometimes prices move according to the fundamentals of supply and demand. At other times they become disconnected from the fundamentals entirely. During a speculative mania, decisions are guided by emotions rather than logic.

At the moment, the markets seem poised for something big. You can sense it. The Fed continues to tighten the federal funds rate. The yield on the 10-Year Treasury note is holding above 3 percent. Emotions continue to strengthen their grip on the markets.

Certainly, the time seems right.  Markets are ripe.  What better vehicle than oil to provide an epic parabolic price spike and crash?

via RSS https://ift.tt/2NVyMML Tyler Durden

As was widely expected, Iranian President Hassan Rouhani’s pleas for the US to “honor its international commitments” and “return to the negotiating table” during a speech at the UN General Assembly last week were promptly ignored. And with the full implementation of US oil sanctions in November rapidly approaching, Iran is already antagonizing the US as the regime hopes to spin the inevitable economic toll into a propaganda victory – if only to stave off another round of disruptive street protests that shook the country during the first weeks of 2018.

As tensions between the US and North Korea flared last summer, the media largely ignored several confrontations between Iranian Revolutionary Guard troops and US carriers, including a USS Nimitz-class carrier. The Trump Administration, of course, was eager to play down these incidents because they ran counter to its preferred narrative that the president’s tough rhetoric had cowed the Iranians into reducing their ballistic missile tests and rolling back other generally disruptive behavior. 

But in the Iranian regime’s latest attempt to undercut this idea, a domestic television station has aired footage of an until-now unreported incident that occurred in March – a time when the Trump administration had insisted that these encounters had ceased – depicting IRGC ships and drones menacing a US carrier group centered around the USS Theodore Roosevelt in the all-important Strait of Hormuz. The footage was intended to be part of a documentary about the encounter set to air on Iranian television.

Here’s RT with more:

Iranian TV aired footage showing a March encounter when the USS Theodore Roosevelt was shadowed by a pack of fast attack craft apparently manned by the Islamic Republic’s elite Revolutionary Guards.

The camera, said to be installed on a nearby Iranian vessel, captures the USS Roosevelt, a Nimitz-class aircraft carrier, as well as her escort ship traversing waters of the Strait of Hormuz. Multiple Revolutionary Guard speedboats are seen closing in on the US carrier while an American helicopter is seen cruising over the area.

Some activity may be spotted on Roosevelt’s upper deck, with another helicopter preparing to take off. The video was part of an Iranian documentary on the encounter that took place on March 21 in Persian Gulf waters.

According to RT, the USS Roosevelt, which carries up to 130 aircraft and a crew of more than 5,000, had been stationed in the Gulf since 2017:

The 100,000-ton USS Roosevelt has been deployed to the Gulf since last year. Aside from a 5,000-strong crew, she usually carries up to 130 aircraft, including F/A-18 Super Hornet fighters, EA-18G Growler electronic warfare jets as well as E-2 Hawkeye airborne early warning planes.

Mid-sea encounters between US and Iranian ships are not uncommon. The latest encounter took place in August last year, when an Iranian drone shadowed the USS Nimitz carrier overnight and came close enough to capture F-18 fighter jets on the flight deck. US Navy claimed the drone operator did not respond to repeated radio calls and represented a danger for the sailors.

According to a Stratfor analysis of publicly available information about the location of US carrier groups, the Theodore Roosevelt has since returned home. Presently, only one Marine Expeditionary Unit remain in the Strait.

In the video, Iranian sailors warn the Americans in a radio transmission to “keep well clear” of the Guard patrol boats and to “refrain from the threat or use of force in any manner.”

The footage of the incident, which shows several IRGC speedboats powering toward the USS Theodore Roosevelt as drones and a US helicopter fly overhead, is available below:

Newly released footage from #Iran‘s state media shows a previously unreported close encounter between #IRGC speedboats and the USS Theodore Roosevelt in the Strait of Hormuz in March of this year.

No comment from the @USNavy yet. pic.twitter.com/wXjMxhkNR8

— Séamus Malekafzali (@Seamus_Malek) September 29, 2018

Later that month, another Iranian drone came within 200 feet of a F/A-18E Super Hornet while it was on its final approach to a Nimitz-class ship, forcing the pilot to change course. This inspired unnamed Pentagon officials accused Iran of acting in an “unsafe and unprofessional” manner. At the time, Tehran demanded a formal apology from US Secretary of State for its purported breach of sovereignty.

The encounter is reminiscent of a notorious incident in 2016 when Iran seized 10 US soldiers and two ships after they became stranded and drifted into Iranian waters. President Trump brought up this incident during his address before the Republican National Convention in 2016, where he cited images of the captured seamen as examples of American weakness.

Given the Strait of Hormuz’s strategic importance to Iran’s oil-export business – which the US is hoping to crush by reimposing sanctions – it will be interesting to watch if Iran’s decision to release the footage now is a harbinger of further “close encounters” set to take place in this critical naval zone. After all, with Iran – whose economy is deteriorating at an accelerating pace – now rapidly approaching a state of having little to lose, a military escalation may be just the “irrational” act that provides a nationalistic exhaust valve to the troubled – some say doomed – regime.

via RSS https://ift.tt/2OmUb0Y Tyler Durden

In response to NBC News and Wall Street Journal stories claiming that the White House Counsel’s office, led by Don McGahn, has been “micromanaging” the FBI’s “limited” background check probe into Trump SCOTUS pick Brett Kavanaugh, two White House spokeswomen disputed the reports, claiming that the Senate and the FBI – not the White House – have full discretion over the probe, and that the FBI will investigate whatever “credible” allegations arise.

As Sarah Huckabee Sanders and Kellyanne Conway took to the Sunday Shows, Trump denied the NBC and WSJ reports, saying on Twitter that he wanted the FBI to interview anyone they deemed appropriate.

NBC News incorrectly reported (as usual) that I was limiting the FBI investigation of Judge Kavanaugh, and witnesses, only to certain people. Actually, I want them to interview whoever they deem appropriate, at their discretion. Please correct your reporting!

— Donald J. Trump (@realDonaldTrump) September 30, 2018

As a reminder, on Saturday lawyer Michael Avenatti complained that the FBI had not contacted his client, Julie Swetnick, over her allegations that federal judge Brett Kavanaugh participated in the “gang rape” of girls at drunken high school parties, and shortly thereafter reports surfaced that the White House had asked FBI investigators to focus on only the first two named women who came forward with allegations against Kavanaugh.

According to the New York Times, the FBI is also planning to question Kavanaugh’s high school friend Mark Judge, as well as Leland Keyser and P.J. Smyth, who Ford alleged also attended the party where Kavanaugh allegedly pinned her down, tried to remove her clothes and covered her mouth when she tried to scream for help, per Reuters.

The White House has reportedly asked the FBI to share its findings after it interviews Ramirez and Ford and Kavanaugh’s high school associates. After that, the president and his advisers will decide whether the accusations should be investigated further.

During an interview with Fox News Sunday, Sanders said the Senate is dictating the terms of the probe:

“The White House is not micromanaging this process,” White House press secretary Sarah Sanders said in an interview with “Fox News Sunday.”

“The Senate is dictating the terms,” she said. “The FBI, this is what they do. And we’re out of the way and letting them do exactly that.”

Meanwhile, Conway said on CNN’s State of the Union that the investigation is “not meant to be a fishing expedition” but that investigators should be looking at anything “credible”.

“The White House is not getting involved in the FBI investigation in that way,” she said. “They should be looking at anything they think is credible within this limited scope.”

Watch clips from the interview with Sarah Huckabee Sanders…

On potential meeting between President Trump and Deputy AG Rod Rosenstein, @PressSec tells Chris: A date for that hasn’t been set. It could be this week. I could see it pushing back another week given all of the other things that are going on with the Supreme Court. pic.twitter.com/vGszXB6diE

— FoxNewsSunday (@FoxNewsSunday) September 30, 2018

…and the full interview with Kellyanne Conway on SOTU, during which she also shocks Jake Tapper by revealing that she was a victim of sexual assault:

Meanwhile, Sen. Lindsey Graham on on ABC’s “This Week” that the three Republican senators who pushed for the probe specifically asked that it be “limited in scope” and focus on the “credible allegations” from those who haven’t testified (which suggests that Ford will largely be left out of it).

To be sure, investigators in the background check probe aren’t obligated to share their findings with the public, but it’s possible that Trump or members of the Senate Judiciary Committee could openly share them (or more likely leak them) to the press. Despite the White House’s denials, we imagine the Senate, wary of perceptions that the probe is a sham so close to the midterms, will come forward with its own denial, saying that the FBI is free to conduct its investigation as it sees fit.

via RSS https://ift.tt/2Rc724w Tyler Durden

Submitted by Francesco Filia of Fasanara Capital

How Expensive Is The Equity Market In The US

The biggest equity bubble out there is in the US: the Nasdaq and the S&P. This is no news, few disagree in market chatters. Nobody is positioned for it, though. Looking at valuation metrics, there is not the shadow of a doubt: Shiller P/E, Hussman P/E, P/Sales, P/Book, EV/EBITDA, Cash Flow Yield, Forward P/E.

At Fasanara, we add to the list the ‘Peak PEG Ratio’ (read here a full working definition), a measure of how expensive a stock is relative to its ability to generate earnings. In single stocks, the PEG ratio is commonly used, as is rationale for investors to have the will to pay higher multiples for stocks capable of generating high growth. Yet, for indexes, this is rarely done. If and when you do, this is the incontrovertible result:

We consider cyclically-adjusted earnings, like Prof Shiller institutionalized (and won a Nobel doing). To counter one of its most frequent critics, to have included non-normal conditions during the Lehman crisis, we just consider the two top quarters in earnings in the last 40. In spite of that, the resulting pic is still a NASA Space Shuttle that left the orbit.

The cartel of ZIRP, 5trn US QE, 5trn US Buybacks, and now late-cycle 1.4trn tax cuts sugar-rush did not go unnoticed in markets. The S&P qualifies as the most expensive in history and pre-history. When compared to potential economic growth, multiples on the S&P500 exceed even those seen during the Tech Bubble in 2000. When measured against potential growth, even against its peak earnings in 10 years, the S&P has never before been this expensive before. It is approx. 60% above its historical average fair value.

How Expensive Is The Bond Market In Europe

The biggest bond bubble out there is in Europe, where real and nominal rates are still negative in spite of ebullient global equities. Bond yields are historically aligned with growth and inflation rates, according to basic valuation models. Why not, then, draw their historical simple relationship to them, in ratio format. This is what the ‘Real Rate to Growth Ratio’ does (read here a full definition), no more no less. And this is the self-explanatory Chart that results:

When compared to trend growth, government bonds in core Europe have rarely been as expensive as they are today. They are 250/300 basis point away from equilibrium.

How Much More Expensive Can They Get

Not much further, perhaps. This is what we find out in our studies on market structure and what we call the Tipping Points Analysis (‘TPA’). Our analysis is available in this e-Book, and is further discussed in slides 16 and 17 in this presentation.

Nobody Cares

Let’s be clear: nobody cares about valuations these days in markets. The lack of care is visible across the spectrum of investable assets, public and private: Equities, Bonds, High Yield, Emerging Markets, Venture Capital, Private Equity, Real Estate. It seems that we live through the apotheosis of what Nassim Taleb calls the ‘Bob Rubin trade’: my profit, your losses. A perverse incentive scheme is heavily skewed for money managers to not care, and moral hazard to disseminate across. Regulators, more strangely but not uncommonly to history, turn a blind eye, as ‘you cannot know a bubble, except in retrospect’, they lament. There is crowding in Academics too, Rob Arnott would probably say. Or worse, the ‘Portfolio Balance Channel Theory’ of Ben Bernanke actively goal-sought this out, as output to the experimental model. Call it the key to kick-off ‘animal spirit’ or ‘trickle-down economics’, elegantly.

As sober investors though, we should care that nobody does. Tail Risk badly needs complacency as a basic ingredient to assert itself, and compound Systemic Risks.

In Complexity Science parlance, complacency is the lack of the negative feedback loop keeping systems at bay, in stable state. Complacency is instead propelling them further out, in thin air stratosphere, where far-from-equilibrium dynamics apply.

The Critical Transformation Hypothesis

Our thoughts are expanded upon in this video slideshow. In a big long nutshell, we believe that Systemic Risk in financial markets are best analyzed through the prism of Complexity Science, using the analytical tools available to non-linear socio-ecological systems, where a shift in positive loops comes in anticipation of a dramatic transformation.

Chaos theory and Catastrophe Theory can then help shed light on the current set-up in markets. Years of monumental Quantitative Easing / Negative Interest Rates monetary policy affected the behavioral patterns of investors and changed the structure itself of the market, in what accounts as self-amplifying positive feedbacks. The structure of the market moved into a low-diversity trap, where concentration risks of various nature intersect and compound: approx. 90% of daily equity flows in the US is today passive or quasi-passive, approx. 90% of investment strategies is doing the same thing in being either trend-linked or volatility-linked, a massive concentration in managers sees the first 3 asset managers globally controlling a mind-blowing USD 15 trillions (at more than 20 times the entire market cap of several G20 countries), approx. 80% of index performance in 2018 is due to 3 stocks only, a handful of tech stocks – so-called ‘market darlings’ – are disseminated across the vast majority of passive and active investment instruments. 

The morphing structure of the market, under the unequivocal push of QE/ZIRP new-age ideologism, is the driver of a simultaneous overvaluation for Bonds and Equities (Twin Bubbles) which has no match in modern financial history, so measured against most valuation metrics ever deemed reputable; a condition which further compounds potential systemic damages.

The market has lost its key function of price-discovery, its ability to learn and evolve, its inherent buffers and redundancy mechanisms: in a word, the market lost its ‘resilience’. It is, therefore, prone to the dynamics of criticality, as described by Complexity Science in copious details.

This is the under-explored, unintended consequence of extreme experimental monetary policymaking. A far-from-equilibrium status for markets is reached, a so-called unstable equilibrium, where System Resilience weakens and Market Fragility approaches Critical Tipping Points.

A small disturbance is then able to provoke a large adjustment, pushing into another basin of attraction altogether, where a whole new equilibrium is found. In market parlance, more prosaically, a market crash is incubating – and has been so for a while.

While it is impossible to determine the precise threshold for such critical transitioning within a stochastic world, it is very possible to say that we are already in such phase transition zone, where markets got inherently fragile, poised at criticality for small disturbances, and where it is increasingly probable to see severe regime shifts.

Fragile markets now sit on the edge of chaos. This is the magic zone, theorized by complexity scientists, where rare events become typical.

via RSS https://ift.tt/2xKysq4 Tyler Durden