Here we are again. The markets are within a few percentage points of their all-time highs, but just can’t seem to muster the momentum to break out above them.
We saw similar conditions back in March/April and then again in July. Both times, the S&P dropped sharply after failing to remain above 3,000.
Both situations presented profitable opportunities to short stocks, which we alerted our readers to at the time.
Widening out our perspective even farther, it’s becoming increasingly clear that the motive power pushing the markets higher over the past decade has lost its drive. Today, the S&P is nearly same price it was a year ago. And very close to where it was at the start of 2018.
In short, it hasn’t really gone anywhere for over 20 months:
source: Yahoo! Finance
And in those 20 months, the S&P has been forming a tightening wedge, with little room left in it for the status quo to continue. A break above or below must happen soon:
source: Yahoo! Finance
So which way will it break?
The Bull Case
To make the bull case, we have to ask: With stocks near their all-time highs, what’s not yet priced in to the market that can catapult prices higher from here?
Don’t look to earnings. With slowing global GDP, it’s little surprise that the upcoming Q3 2019 earnings season is expected to be a dud.
Total Q3 earnings are forecasted to be down -4.8% vs the same period last year. Zacks predicts that 12 of the 16 industry sectors it tracks will report negative earnings growth.
At this point, there are only two possible developments not yet fully priced in to today’s “priced-to-perfection” markets that could justify stocks vaulting higher from here. A happy-smiles-all-around trade agreement with China and massive new QE (aka, an injection of $trillions of newly-created money).
How likely is a successful resolution to the current trade war, one that will please all sides? Hey, anything’s possible; but a lot of ink has been spilled over the past year explaining why the Chinese are not going to roll over lightly. And with the next US presidential election now just a year away, time puts increasing pressure on the Trump administration to blink first.
[Update: about 20 minutes after writing the above paragraph, markets dived deeply into the red in response to a new threat from the administration to de-list Chinese companies from US stock exchanges. This is not a sign that a happy agreement is anywhere close.]
As for new QE, indeed it looks like the stage is being prepared for a return to net easing by the world’s central banks. Could that boost asset prices higher? Sure.
Would that be a “good” thing? Highly debatable. We are so deep into what used to be considered “emergency measures” to prop up the global economy that to any sane person, more QE should be looked at as a blatant admission that central planning has failed and that the world’s fiat currencies are in the process of being destroyed.
The Bear Case
Bears need to ask the opposite: What’s not yet priced in that could topple asset prices from their current highs?
Being frank, it’s a lot easier to answer this question.
For starters, the macro outlook is grim and looking worse every week. As we’ve been tracking all year, the signs of an unfolding global recession are all around us. While the US is still seeing positive GDP growth, the weak earnings expectations cited above indicate that companies are beginning to feel the bite of the slowdown.
Sentiment is souring. A majority of both CFOs and the general public expect a recession within the next year. Major market trend reversals require a change in investor sentiment. After a decade of “everything is awesome!”, concern is starting to trump euphoria.
The darlings are falling out of favor. The FAANGs stocks have been responsible much of the appreciation of the major stock indices for years. Because of this, they are among the top holdings of a huge percentage of ETFs and mutual funds. Now that these once-bulletproof companies are issuing lackluster earnings (and revenues!), being fined for privacy abuses, coming under anti-trust scrutiny, and being chided and mocked by their own employees, their stocks are starting to look vulnerable. If investors refuse to continue accepting the sky-high valuation multiples these companies currently demand, the carnage will ripple across the markets. And the numerous Tech IPO disasters this year (Uber, Lyft, We Work, Fiverr, Slack, Pinterest, Chewy, Peloton) are only adding fuel to the fire.
The game has changed for oil. The recent drone strike on the world’s largest oil processing facility showed that the global oil supply chain is much more vulnerable than previously appreciated. The cost of defense is now hugely asymmetrical. Billions of dollars of supply can be disrupted with drone swarm technology that costs only thousands. So far, the world has shrugged of the implications of the attack, but as they become fully appreciated, a material “vulnerability premium” is going to be added atop the price of oil, making the cost of everything more expensive adding a drag to global trade.
Impeachment? This week the circus in Washington ramped into high gear with House Democrats initiating impeachment proceedings against the President. Regardless of their odds for success, this is a destabilizing event for markets (and the country). One that will become much more so should they actually succeed.
The technicals are blinking “danger”. The chart below shows an increasingly clear “head and shoulders” topping formation for the S&P 500 with numerous unfilled gaps below. Given this, it would not be surprising in the least to see 100 points quickly vaporize:
Source: Northman Trader
Adding A New (Larger) Short Position
Personally, I find the logic underlying the bear case much more compelling.
Which is why I’ve moved a percentage of my “dry powder” cash savings into a new short position at this time, substantially larger than the one I placed back in March.
It’s not a move I take lightly (and as usual, this is NOT personal financial advice). I’m only doing it because, in my estimation, the preponderance of evidence for a near-term reversal is overwhelming my strong default risk-averse preference to sit on the sidelines.
In Part 2: Resuming The Crash Position I detail out the specifics of the new short position I’ve taken; which securities and why. I then revisit the wide range of options that investors skeptical of current market valuations can consider — for both protecting against a downturn and, for the more courageous, profiting from one.
We should know soon which way this market breaks. If it indeed breaks downward, make sure you’ve prepared in advance for it.
Israel Believed Behind Overnight Attack On Iran’s ‘Land Bridge’ From Iraq To Syria
Another mystery airstrike was conducted over Iraq late Friday night, after a summer that’s witnessed Baghdad blame Israel for a series of unprecedented violations of its airspace to carry out alleged strikes on Iran-linked Shia militias in the country.
This newest incident involved an attack on Imam Ali base near the border with Syria, in an area which Israeli defense officials have voiced concern Iran is utilizing Iraq’s Popular Mobilization Forces (PMF) to aid Syrian forces in establishing a security corridor stretching along the Syrian-Iraq border, or so-called Iranian “land bridge”.
IAF file image
Israeli media has taken keen interest in each new ‘mystery’ attack on Iraq of late after last month Prime Minister Benjamin Netanyahu confirmed in public comments that he’s been forced to “defend” Israel’s security and “interests” even in faraway Iraq.
Unknown aircraft reportedly struck bases belonging to Iranian-backed militias in Iraq close to the Syrian border late Friday night.
The Shiite fighters in the Boukamal region responded with anti-aircraft fire, according to local media. There were no reported casualties.
The area has been hit by several airstrikes in recent weeks that some have attributed to Israel.
Earlier in the week Israeli media featured satellite images released by the private Israeli intelligence company ImageSat International which had revealed extensive construction underway on military compounds along the border.
Notably the attack came on the same day Iraq announced re-opening of the key al-Qa’im border crossing in Boukamal, which had once been controlled by ISIS.
Should there be proof or confirmation that Israel was indeed behind the overnight airstrikes, it could signal the start of a more aggressive Israeli campaign to ensure pro-Iranian forces can’t establish bases along the Syrian border. Such Israeli operations are likely to receive Washington’s tacit blessing.
Last month The New York Timesconfirmed that at least some among a spate of airstrikes on Shia militia compounds in and around Baghdad were carried out by Israel.
The US and Israel have long sought to thwart establishment of a continuous Tehran-Baghdad-Damascus-Beirut land bridge.
This after Netanyahu said during an Aug. 30 Facebook campaign live stream event to political supports that “I am doing everything to defend our nation’s security from all directions: in the north facing Lebanon and Hezbollah, in Syria facing Iran and Hezbollah, unfortunately in Iraq as well facing Iran. We are surrounded by radical Islam led by Iran.”
Similar attacks by unknown aircraft (involving either drones or jets) on Western Iraq and the border area came on Sept. 9, 19, and 22 — resulting in dozens of total casualties.
Currently there’s a move in Iraqi parliament to order all American troops in the country expelled, given the widespread accusation the US coalition is turning a blind eye to the intensifying Israeli strikes.
Brexit and UK Prime Minister Boris Johnson suffered yet another setback after the Supreme Court ruled his proroguing of Parliament illegal. I’m no British legal scholar, and I certainly don’t want to be, but from what I understand the arguments used seem incredibly dangerous.
In effect, the plaintiffs argued that if the Prime Minister can suspend Parliament for any length of time, say three days, it would be legally no different then him suspending Parliament for a year or, even, indefinitely.
That’s a dangerous line of argument given the more than 300+ year history of this process, with the Prime Minister proroguing Parliament under far more dubious conditions in the past. This does limit the role of the Government to conduct business and set the agenda, especially if and when the day comes that Parliament is not staffed by people who are loyal to their constituents and not the political elite.
Far be if for this anarcho-libertarian not to cheer at the ineptitude of this arrangement, but it does highlight what’s fundamentally wrong with putting your faith in systems run by men.
The speed with which this was pulled together is the clue that this was a ‘stitch-up’ from the very beginning. Time is running out to stop a No-Deal Brexit, or any kind of meaningful Brexit for that matter, and therefore everything must be turbo-charged.
That’s why I feel this ruling was baked into the pie before the trial even began.
There should be no question that when there is need of a procedural change to thwart Brexit, that procedural change occurs. Speaker John Bercow has rewritten Hansard to give Parliament unprecedented power and the Supreme Court just gave him and the vandals in Parliament even more.
The Remain coalition in the U.K. parliament have become vandals.
They would destroy everything about their government, traditions and what they know to be true outside the halls of Westminster to ensure the dreams of their paymasters are made real.
The fact that they would put forward a bill {Benn Bill} that hands absolute control over future negotiations with the EU to the European Commission is treason. Period.
That they would then hide from a General Election that they know would reverse their coup is an act of vandalism.
It is the height of arrogance for people who first stood on party manifestos to implement Brexit and then demanded a ‘People’s Vote’ to stop it, to simper and use their last remaining bits of power to deny those very people the opportunity to change their representation out of fear of Brexit.
And now they’ve co-opted the courts to ensure that the people are denied their say even while they virtue signal that they are ruling this way for the sake of democracy.
So, now with this ruling in place what’s next and what’s really going on tactically and strategically?
Johnson, for his part, refuses to resign. He can’t or won’t get anything past this hostile Parliament. This Parliament will reconvene to push more legislation to attempt to tie his hands against negotiating with the EU from any position of strength.
Remember what made this ruling necessary. Parliament doesn’t want any meaningful Brexit and refused to accept Johnson’s offer of a General Election to allow the people to form a new government to break the deadlock.
Why? Because they know that a new Parliament would be decidedly more Leave than Remain. The polls are perfectly clear on this. Neither Jo Swinson of the Liberal Democrats nor Jeremy Corbyn of Labour have a prayer in hell of becoming Prime Minister.
If they did, they would have accepted Johnson’s offer. In fact, his offer was derided as a cheap political trick.
If Johnson were to resign here, he would be replaced by a caretaker government under Corbyn, most likely, which would then table a Second Referendum with two versions of Remain on the ballot.
This strategy neatly bypasses the original referendum to ensure the threat to the European Union is nullified.
If he doesn’t resign, the wrangling goes on to neuter Johnson and make him a laughingstock. The EU doesn’t budge on the terms of the deal and Johnson holds onto power in the same way that Parliament does.
Johnson not resigning, however, is his only leverage. So, if he wants to be the Hero of Brexit he has to force Parliament to remove him via a Vote of No Confidence, which he clearly doesn’t have, and go for a General Election first.
In essence, Johnson wants an election first and the Remain camp want a Second Referendum offering a non-choice first. An election would very likely grant him a majority in a coalition with Nigel Farage’s Brexit Party and allow him to get the deal he wants.
Farage, of course, wants the No-Deal option because he rightly believes Johnson doesn’t want a much different deal than the horrific one Theresa May was handed by Angela Merkel.
For the Remain crowd, going for the Second Referendum first would render a general election irrelevant because the new government, no matter how strongly pro-Brexit, would be tied to the terms of the referendum.
That’s the Remain gambit and that’s why the court was always going to rule against the government. It is the British elite and civil service who do not want Brexit. They are all EU-firsters and traitors to the British people they represent.
Their willingness to upend all conventions of civilized governance is the clue you need to realize just how big the stakes are.
Because, make no mistake, losing the UK from the EU’s budget would be catastrophic for an EU staring at massive capital outflows as helicopter money happens and bond yields reverse from their current bubble levels.
Brexit is emblematic of the West’s decline from the rule by law to the rule by men. Gaming the rules to entrench power that does not have the will of the people is a recipe for revolution of the type that ends very badly for those doing it.
The opinion of Parliament in Britain cannot sink any lower. That anger will now be transferred to the courts. The entire Brexit process has been a layer by layer unmasking of the autocratic prerogatives of the ruling class. With each setback in the Brexit process the British people are getting an object lesson in just how corrupt their system is and how badly they have been betrayed.
The hope by The Davos Crowdis that they will get fed up and tune it all out, that they’ll give up and let the UK be steamrolled. The polls tell a far different story.
Last month, it was reported that the State University of New York at Binghamton (often referred to as Binghamton University or SUNY Binghamton) implemented its first schoolwide food policy. According to the B.U. Pipe Dream, a student paper, the policy, which was developed with input from student groups and university officials and put in place before students returned for the fall semester, is intended “to guarantee that food on campus will be served safely.”
At first glance, that sounds fine. Good, even. But the devil is in the details.
The Pipe Dream reported that the policy “requires student organizations tabling on campus to only offer pre-packaged and low-risk food items.” The policy also covers both food that’s to be sold and food given away free of charge. Penalties for violations of the food policy can be severe, and may “include[e] suspension or expulsion from the University.”
Supporters had predicted the policy would go almost unnoticed. But student groups on campus that rely on bake sales to raise money are now complaining loudly that they’ve been forced “to react and rethink their fundraising options.”
“We are celebrating our 50th year, and this year was pivotal for us because we wanted to do a lot more in terms of fundraising,” Jahmal Ojeda, president of the Latin American Student Union, told the Pipe Dream earlier this month. “I feel like this new food policy is setting us back.”
What problem or problems, if any, was the new policy intended to address?
“[S]tudents had no reference as to what they can and can’t prepare on campus for others,” senior Paul Zakrepine, co-president of the Student Culinary Council, told the Pipe Dream. “This, in turn, led to unsafe food-handling practices that put others at risk for contracting a foodborne illness.”
The new policy, which actually appears to focus far more on who handles food than it does on how food is handled, does include some exceptions. But they don’t exactly swallow the rule.
For a student group to obtain a waiver to sell some cookies on campus requires a willingness on the part of students to wade through a good deal of red tape.
“[We’re] known for our fried Oreo sales, which we sell when we table,” Alexa Macleod, a senior and member of a multicultural group on campus, told the Pipe Dream. “Instead, now we are doing a raffle, which will try to supplement not being able to do these Oreo sales anymore. We are going to try to do a waiver.”
If her group can’t obtain that waiver, Macleod tells the paper they will be forced to sell prepackaged food instead—a prospect that doesn’t make her enthusiastic. “I’m not going to buy a bag of chips on campus if I could just buy a bag of chips at the grocery store,” Macleod says.
A university official defends the move.
“The new policy may be causing campus groups to think differently about fundraising opportunities, which could result in favorable outcomes for groups,” Deanne Ellison, director of Auxiliary Services, told me this week. “What you refer to as a ‘controversy,’ I would consider healthy and constructive channels of communication.”
To be fair, Binghamton University’s school food policy doesn’t appear to be an extreme outlier. For example, Michigan Tech’s food policy mandates that “only food prepared by the Memorial Union or Residential Services shall be permitted to be distributed or sold on campus.” The University of Kansas’s food policy declares that all “food/snacks sold or given away on campus must be obtained through and/or prepared by KU Dining Services, the University’s licensed, health-inspected facilities[,] or by the licensed caterers and concessionaires contracted by Kansas Athletics.” The KU policy also goes into tedious detail over the types of potluck meals that may be served on campus.
Still, the debate over Binghamton University’s food policy illustrates a larger point I’ve made many times: food safety rules are often at odds with food choices—particularly locally produced ones.
As I detailed in a 2015 column, advocates for locally produced food and advocates for stricter food safety regulations may appear from afar to be playing together happily in the same sandbox. But a closer look reveals they’re really fighting over what to do with the same toy.
“Disconnect between staunch supporters of rigid, process-oriented food safety regulations and advocates for local food is palpable,” I wrote. “Their goals are simply at loggerheads.“
Ultimately, the Binghamton University policy doesn’t ban any student group from selling homemade food at a bake sale on campus. Rather, it bans some foods and discourages students from selling any homemade foods at all by erecting a series of irritating and time-sensitive hoops through which students must jump before they may do so.
Last year, the Binghamton University Food Sustainability Group, a student group at the university, hosted a vegan buffet around the Thanksgiving holiday. Will that group be able to hold that same meal celebration this year? I reached out to the group through its Facebook page this week but did not hear back. They’re busy at work, I suspect, on a waiver request.
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Panic In Emerging Markets: South African Stocks On Track For Worst 3Q Since 2011
The world is on the cusp of an economic storm, and most global investors haven’t strapped on their rain boots nor deployed their umbrellas for what is coming in 2020. As we note in this piece, the most vulnerable fall first, all eyes on emerging markets for the next domino to drop.
Bloomberg examines South African financial markets, where the Johannesburg Stock Exchange (JSE) is about to record the worst third quarter since 2011, an ominous sign that the global recovery this year is only a myth.
Bloomberg notes property and construction sectors of the JSE were the weakest performing sectors, along with technology, telecommunications, retailers, agriculture, education, and financial services.
South Africa barely avoided a recession in the second quarter, and economists are warning that unless the economy substantially expands in the quarter ahead, below-trend growth will return in 2020.
“South African needs a minimum of 2.5% growth consistently to cause the unemployment rate to fall and to stabilize public debt and at least structurally we’re some distance away from that milestone,” said Standard Bank chief economist Goolam Ballim.
South Africa faces ever-worsening economic and social problems heading into 2020; a slew of factors are driving the country towards collapse: increasing government debt, disintegrating infrastructure, collapsing education standards, widespread crime and violence, currency volatility, and investment outflows.
JSE, weighed down by domestic issues of an imploding country, is also dealing with a global economic downturn that is heavily weighing on emerging markets.
The South African rand is likely to break above the 15.2 level as the country’s socio-economic crisis continues to expand into 2020.
Investors are dashing into South African credit default swaps to hedge their credit portfolios.
And with the global economy faltering, it seems that South Africa, and most of emerging markets, will continue to deteriorate well into 2020.
Last month, it was reported that the State University of New York at Binghamton (often referred to as Binghamton University or SUNY Binghamton) implemented its first schoolwide food policy. According to the B.U. Pipe Dream, a student paper, the policy, which was developed with input from student groups and university officials and put in place before students returned for the fall semester, is intended “to guarantee that food on campus will be served safely.”
At first glance, that sounds fine. Good, even. But the devil is in the details.
The Pipe Dream reported that the policy “requires student organizations tabling on campus to only offer pre-packaged and low-risk food items.” The policy also covers both food that’s to be sold and food given away free of charge. Penalties for violations of the food policy can be severe, and may “include[e] suspension or expulsion from the University.”
Supporters had predicted the policy would go almost unnoticed. But student groups on campus that rely on bake sales to raise money are now complaining loudly that they’ve been forced “to react and rethink their fundraising options.”
“We are celebrating our 50th year, and this year was pivotal for us because we wanted to do a lot more in terms of fundraising,” Jahmal Ojeda, president of the Latin American Student Union, told the Pipe Dream earlier this month. “I feel like this new food policy is setting us back.”
What problem or problems, if any, was the new policy intended to address?
“[S]tudents had no reference as to what they can and can’t prepare on campus for others,” senior Paul Zakrepine, co-president of the Student Culinary Council, told the Pipe Dream. “This, in turn, led to unsafe food-handling practices that put others at risk for contracting a foodborne illness.”
The new policy, which actually appears to focus far more on who handles food than it does on how food is handled, does include some exceptions. But they don’t exactly swallow the rule.
For a student group to obtain a waiver to sell some cookies on campus requires a willingness on the part of students to wade through a good deal of red tape.
“[We’re] known for our fried Oreo sales, which we sell when we table,” Alexa Macleod, a senior and member of a multicultural group on campus, told the Pipe Dream. “Instead, now we are doing a raffle, which will try to supplement not being able to do these Oreo sales anymore. We are going to try to do a waiver.”
If her group can’t obtain that waiver, Macleod tells the paper they will be forced to sell prepackaged food instead—a prospect that doesn’t make her enthusiastic. “I’m not going to buy a bag of chips on campus if I could just buy a bag of chips at the grocery store,” Macleod says.
A university official defends the move.
“The new policy may be causing campus groups to think differently about fundraising opportunities, which could result in favorable outcomes for groups,” Deanne Ellison, director of Auxiliary Services, told me this week. “What you refer to as a ‘controversy,’ I would consider healthy and constructive channels of communication.”
To be fair, Binghamton University’s school food policy doesn’t appear to be an extreme outlier. For example, Michigan Tech’s food policy mandates that “only food prepared by the Memorial Union or Residential Services shall be permitted to be distributed or sold on campus.” The University of Kansas’s food policy declares that all “food/snacks sold or given away on campus must be obtained through and/or prepared by KU Dining Services, the University’s licensed, health-inspected facilities[,] or by the licensed caterers and concessionaires contracted by Kansas Athletics.” The KU policy also goes into tedious detail over the types of potluck meals that may be served on campus.
Still, the debate over Binghamton University’s food policy illustrates a larger point I’ve made many times: food safety rules are often at odds with food choices—particularly locally produced ones.
As I detailed in a 2015 column, advocates for locally produced food and advocates for stricter food safety regulations may appear from afar to be playing together happily in the same sandbox. But a closer look reveals they’re really fighting over what to do with the same toy.
“Disconnect between staunch supporters of rigid, process-oriented food safety regulations and advocates for local food is palpable,” I wrote. “Their goals are simply at loggerheads.“
Ultimately, the Binghamton University policy doesn’t ban any student group from selling homemade food at a bake sale on campus. Rather, it bans some foods and discourages students from selling any homemade foods at all by erecting a series of irritating and time-sensitive hoops through which students must jump before they may do so.
Last year, the Binghamton University Food Sustainability Group, a student group at the university, hosted a vegan buffet around the Thanksgiving holiday. Will that group be able to hold that same meal celebration this year? I reached out to the group through its Facebook page this week but did not hear back. They’re busy at work, I suspect, on a waiver request.
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The deployment will include a number of US soldiers, tanks, and fighting vehicles, and will be an “extended mission.”
The deployment is being presented by Lithuanian officials as proof of a “larger, long-term US military involvement in Lithuania,” while others say it is meant to deter Russian aggression.
The deployment is part of the US Army’s Atlantic Resolve campaign, which has been ongoing since 2014, and has focused on sending more and more US military assets to Baltic states and other nations near the Russian frontier.
The new US troops will be stationed in Pabrade, a town along the border with Belarus. They say over 500 troops, 30 Abrams tanks, 25 Bradleys, and 70 other vehicles will be involved.
Erdogan: “Impossible” For Turkey To Stop Its Iranian Oil & Gas Imports
Returning from the United Nations General Assembly in New York, Turkish President Tayyip Erdogan told reporters Friday that it remains “impossible” for Turkey to halt its oil and gas purchases from Iran in conformity to US sanctions. He affirmed commitment to continuing to buy oil and gas from Iran despite US threats, with no plans to halt or even reduce imports in the future.
He said further he was “not afraid” of possible US sanctions over continued dealings with Tehran, Reuters reported. This as the Trump administration has gone after Chinese shipping companies this week over alleged sanctions busting activity related to Iranian oil imports to China and other east Asian ports.
Image via Fars News
No doubt Erdogan has to be taking note of the lengths to which Washington is prepared to go, which included rattling the global shipping industry this week by sanctioning Chinese firms China Concord Petroleum Co., Kunlun Shipping Co., Pegasus 88 Ltd., and COSCO Shipping Tanker (Dalian) Seaman & Ship Management Co, in its long-haul campaign to see Iranian oil exports go to “zero”.
Turkey has long been exclusively reliant on imports to meet the growing energy needs of its 80 million citizens.
Turkish media sources note that even the country’s electrical grid is heavily tied to natural gas imports, as “almost 40 percent of its electricity is produced in gas-fired plants.”
Under the terms of long-term supply contracts signed by Ankara and Tehran before the new round of sanctions, Turkey was set to buy 9.5 billion cubic meters of gas over the period up to 2026.
Ankara has from the very beginning of Trump pulling out of the 2015 nuclear deal and imposing sanctions remained defiant, which Turkish officials have consistently framed as a matter of economic survival.
Turkey’s Economy Minister said from the start of the first round of Washington’s Iran sanctions following the JCPOA pullout that US dictates on Iran “are not binding for us” and further that “we will only follow our own national interests.”
“Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”
While true, it doesn’t go far enough. The problem isn’t simply defunct economists or “scribblers of a few years back.”
We are in the grip of economists who, far from being defunct, hold great power. Whether they hear voices in the air (or Twitter), I can’t say, but they are indeed madmen in authority.
Not all economists are in that category. Many provide valuable insight or are at worst harmless. They don’t pretend they can change human nature or prevent the inevitable.
Unfortunately, some economists do believe those things. Worse, they are in places from which they can wreak havoc, and they are.
Last weekend I received two emails referring me to articles about the economics profession that stirred my writing juices.
I don’t agree with everything in the articles. They are, however, important because they try, at least, to describe and possibly fix the problem Keynes identified.
We have to address them, not just economically but politically. We can’t just put our heads in the sand and think this will go away.
Better to think about that now, while we can still act and maybe even change things.
False Assumptions
The first item is a July 2019 TED talk by Nick Hanauer, a self-described Seattle “plutocrat” who founded and sold several companies.
He is now a venture capital investor. Hanauer is far to my left politically, but his thinking reminds me a bit of Ray Dalio, and as we will see, some of the proponents of neo-Keynesian “new economics.”
Hanauer’s latest TED talk is titled “The dirty secret of capitalism—and a new way forward.”He begins by describing the widening inequality problem we have discussed before, then quickly zeroes in on what he thinks is the problem: neoliberal economics.
Economics has been described as the dismal science, and for good reason, because as much as it is taught today, it isn’t a science at all, in spite of all of the dazzling mathematics. In fact, a growing number of academics and practitioners have concluded that neoliberal economic theory is dangerously wrong and that today’s growing crises of rising inequality and growing political instability are the direct result of decades of bad economic theory.
What we now know is that the economics that made me so rich isn’t just wrong, it’s backwards, because it turns out it isn’t capital that creates economic growth, it’s people; and it isn’t self-interest that promotes the public good, it’s reciprocity; and it isn’t competition that produces our prosperity, it’s cooperation.
What we can now see is that an economics that is neither just nor inclusive can never sustain the high levels of social cooperation necessary to enable a modern society to thrive.
I know, those are fighting words to most free-market defenders, but hear this out. Hanauer blames the sad state of modern economics on three false assumptions.
It describes how our astronomically complex modern economy is anything but an equilibrium. It is a growing sandpile whose collapse is certain. As Hyman Minsky wrote, stability breeds instability.
If, as too many economists believe, you think you can manage an economy toward equilibrium, you simply help the sandpile grow bigger so its eventual collapse is even more violent. That’s how we get crises like 2008, and the one we will have again in due course.
The second false assumption is that price always equals value. That’s the heart of the efficient market hypothesis, that stock prices always reflect all available information. Clearly, they don’t, since we have all seen both overvalued and undervalued markets.
In fact, we have economist-run institutions like the Federal Reserve working to make sure prices don’t equal value.
They intentionally distort prices, starting with the most important one: the price of money, what we call “interest rates,” with all kinds of harmful effects (and often benefits to those who already own assets).
The third false assumption is that humans are rational, utility-maximizing machines who look out for our own interests first. It’s just not true.
Humans are social animals, and we will, in the right conditions, sacrifice our own interests for others. Soldiers don’t heroically jump on grenades because they’re selfish. Parents and friends often sacrifice for their children and their friends.
People accept lower returns to invest in ways they think improve the world, or pursue behaviors they feel are in the common and general interest but not their own individual interests. Happens all the time.
If we were all so naturally self-maximizing, there would be no such thing as love, which is a choice to place someone else’s good ahead of your own. If you have some hidden selfish motive, it’s not really love, is it? Not in the way any religion I know describes it.
Yet many economists persist in believing we are all competitive, all the time, and this somehow leads to equilibrium and prosperity.
That is false and if it is your base assumption, all your other answers are going to be wrong. This is not an embrace of human nature, but a denial of it.
Meanwhile, another Seattle billionaire had some words on the same subject recently. Bill Gates didn’t say exactly “economists know nothing,” but that’s clearly what he meant in this Quartz interview.
“Too bad economists don’t actually understand macroeconomics,” the Microsoft co-founder said. Asked what he meant by that, Gates continued:
“It’s not like physics where you take certain inputs and you predict certain outputs. Will interest rates ever return to normal, and why aren’t they returning to normal? You won’t get a consensus between economists quite the way that if you dropped a ball out your window and called up physicists and asked, ‘What the hell happened?’ There’s so many factors including what [economist John Maynard] Keynes called ‘animal spirits’ in the economic equation that we don’t have predictability.
Even today, people are still arguing about what happened in 2008. So it’s even harder to look forward. [Look at] the role of the bond rating agencies in 2008, which is completely unreformed. Why would that be? Well, there must be a lack of consensus.”
Both Hanauer and Gates make a point. Economists began assuming equilibrium must exist early in the 20th century. General equilibrium was wonderful because it let them model the economy on paper (and later, computers).
Economists have physics envy. In essence, they assume away whatever doesn’t fit the model. Unsurprisingly, the models don’t work when put to the test, because the assumptions are not anchored in reality.
The entire premise of equilibrium economics is false. The world is a complex system. To model it requires complexity mathematics and theory. Sadly, but not unsurprisingly, we are decades away (if ever) from actually being able to model the economy as long as one continues to assume equilibrium at some point.
Of course we can make observations and theories and propose policies. But we shouldn’t do so under the illusion that some mathematical model allows us to know what we’re doing. “Lies, damn lies and models” should have been the quote. So when Gates and Hanauer and others, including me, say that economists don’t understand economics, our real point is that they rely on incorrect models and assumptions.
It gets worse when the politicians get economists to create models for them. These economists are every bit as trained as any circus animal and they don’t even need a whip.
The economists’ assumptions inevitably lead to the conclusions the politician wants. Of course, they all have “neutral data and facts.” What would a model be without facts and data?
Necessary Debate
The second article came to me from a person who thought it ridiculous. He sent it along with a lengthy preface warning about its (in his view, false) claims.
I appreciated the thought but I am also trying very hard to break out of the tribal box. I now often say that I’m neither Republican nor Democrat, but American.
I don’t automatically reject ideas simply because of their origin. If I reject them, it’s because I have studied them and concluded they are wrong.
That said, this one has a lot of problems but is still worth reading. The author is Jared Bernstein, an economist who once advised Vice President Joe Biden. In this piece he describes what he calls a “new economics” that will create a more “just” America.
Like Dalio and Hanauer, I think Bernstein correctly identifies many of our problems. It is not the case that everything would be peachy if government just got out of the way; we have deeper issues. I completely endorse Bernstein’s first sentence: “The American economy has some serious, structural problems—and the economists are partly to blame.” He goes on:
It is not a coincidence that the new economics is in ascendency at this moment. Though by some measures, inequality has not grown much in recent years, it remains at levels as high as the late 1920s, which, for the record, didn’t end well. In one of the most disturbing developments emerging from recent research, the inequality of income and wealth is increasingly associated with the inequality of life expectancy.
The assumption that self-interested firms would self-regulate gave rise to repeated rounds of deregulation that gave us what I call the “shampoo economy”: bubble, bust, repeat. The old economics wrongly claimed we couldn’t have persistently low unemployment without spiraling inflation, yet that’s precisely what we’ve enjoyed in recent years.
In other words, the new economics isn’t arising just because we want “better” outcomes from our markets. It’s also arising because a lot of the old stuff has turned out to be just plain wrong.
That is mostly true but I think it’s because deregulation hasn’t gone far enough. Large companies use political influence to have government protect them from competition.
The solution, in my opinion, is not for government to further regulate private business, but for it to stop picking winners and losers. Consumers could then decide what works.
Of course, there’s room for reasonable regulation; we all want safe vehicles, clean food, etc. But regulations should promote competition, not suppress it.
I think many of Bernstein’s policy ideas won’t have the desired results, and some would be disastrous, but these are debates we need to have. We will achieve better results if we engage in them civilly and sincerely. That is hard in today’s polarized environment… but avoiding it will be even harder.
Keynesian Sense?
That brings us back to Lord Keynes. Many now regard him as one of the “defunct economists” he himself blamed for the problems of his time.
In certain quarters, “Keynesianism” is as unpalatable as socialism. In fact, while Keynes was a leftist by today’s standards, he wasn’t against capitalism.
Recently I ran across a 2009 article by Bruce Bartlett with the provocative headline, Keynes Was Really a Conservative. That overstates it, but Keynes was more conservative than you might think. Here’s Bartlett.
Keynes completely understood the central role of profit in the capitalist system. This is one reason why he was so strongly opposed to deflation and why, at the end of the day, his cure for unemployment was to restore profits to employers. He also appreciated the importance of entrepreneurship: “If the animal spirits are dimmed and the spontaneous optimism falters… enterprise will fade and die.” And he knew that the general business environment was critical for growth; hence business confidence was an important economic factor. As Keynes acknowledged, “Economic prosperity is… dependent on a political and social atmosphere which is congenial to the average businessman.”
Indeed, the whole point of The General Theory was about preserving what was good and necessary in capitalism, as well as protecting it against authoritarian attacks, by separating microeconomics, the economics of prices and the firm, from macroeconomics, the economics of the economy as a whole. In order to preserve economic freedom in the former, which Keynes thought was critical for efficiency, increased government intervention in the latter was unavoidable [at least to him]. While pure free marketers lament this development, the alternative, as Keynes saw it, was the complete destruction of capitalism and its replacement by some form of socialism.
“It is certain,” Keynes wrote, “that the world will not much longer tolerate the unemployment which… is associated—and, in my opinion, inevitably associated—with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom.”
In Keynes’ view, it was sufficient for government intervention to be limited to the macroeconomy—that is, to use monetary and fiscal policy to maintain total spending (effective demand), which would both sustain growth and eliminate political pressure for radical actions to reduce unemployment. “It is not the ownership of the instruments of production which is important for the State to assume,” Keynes wrote. “If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary.”
One of Keynes’ students, Arthur Plumptre, explained Keynes’ philosophy this way. In his view, Hayek’s “road to serfdom” could as easily come from a lack of government as from too much. If high unemployment was allowed to continue for too long, Keynes thought the inevitable result would be socialism—total government control—and the destruction of political freedom. This highly undesirable result had to be resisted and could only be held at bay if rigid adherence to laissez-faire gave way, but not too much. As Plumptre put it, Keynes “tried to devise the minimum government controls that would allow free enterprise to work.”
There’s actually a lot to like here. A government that focuses on keeping the “macro” playing field level while letting producers and consumers control the “micro” economy would be a vast improvement over what we have now.
That last quote from Plumptre is well said. Keynes wanted “the minimum government controls that would allow free enterprise to work.”He sought a balance between central planning and anarchy. He saw a lot of room between the extremes.
Likewise, by establishing conditions in which market forces could work, Keynes sought to prevent the kind of radical policies some of his modern followers want.
Today we’re still seeking the balance Keynes wanted. We need an economics profession with clear thinkers. They’re out there. We have to amplify their voices.
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Trump and Johnson’s populism have shaken the old Establishment, and raised some very interesting questions about who is and who is not nowadays inside the Establishment and a beneficiary of the protection of the liberal elite.
This week, two startling examples in the news coverage cast a very lurid light on this question, and I ask you to consider the curious cases of Hunter Biden and Brendan Cox, two of the most undeserving and unpleasant people that can be imagined.
The BBC news bulletins led on the move to impeach Donald Trump for, as they put it, his efforts to get the President of Ukraine to undermine a political opponent. To be plain, I think Trump was quite wrong to get personally involved in this, but please park the entire subject of Donald Trump to one side for the next ten minutes.
What I find deeply reprehensible in all the BBC coverage is their failure to report the facts of the case, and their utter lack of curiosity about why Joe Biden’s son Hunter was paid $60,000 a month by Burisma, Ukraine’s largest natural gas producer, as an entirely absent non-executive director, when he had no relevant experience in Ukraine or gas, and very little business experience, having just been dishonorably discharged from the Navy Reserve for use of crack cocaine? Is that question not just little bit interesting? That may be the thin end of it – in 2014-15 Hunter Biden received US $850,000 from the intermediary company channeling the payments. In reporting on Trump being potentially impeached for asking about it, might you not expect some analysis – or at least mention – of what he was asking about?
As far as I am aware, the BBC have not reported at all the other thing Trump was asking Zelensky about – Crowdstrike. Regular readers will recall that Crowdstrike are the Clinton linked “cyber-security” company which provided the “forensic data” to the FBI on the alleged Russian hack of the DNC servers – data which has been analysed by my friend Bill Binney, former Technical Director of the NSA, who characterises it as showing speeds of transfer impossible by internet and indicating a download to an attached drive. The FBI were never allowed access to the actual DNC server – and never tried, taking the DNC’s consultants word for the contents, which itself is sufficient proof of the bias of the “investigation”.
Crowdstrike also made the claim that the same Russia hackers – “Fancy Bear” – who hacked the DNC, hacked Ukrainian artillery software causing devastating losses of Ukrainian artillery. This made large headlines at the time. What did not make any MSM headlines was the subsequent discovery that all of this never happened and the artillery losses were entirely fictitious. As Crowdstrike had claimed that it was the use of the same coding in the DNC hack as in the preceding (non-existent) Ukraine artillery hack, that proved Russia hacked the DNC, this is pretty significant. Trump was questioning Zelensky about rumours the “hacked” DNC server was hidden in the Ukraine by Crowdstrike. The media has no interest in reporting any of that at all.
It is plain in that case that Trump is the media’s villain and the Bidens, father and son, are therefore heroes being protected by the Establishment media.
Now let us look at the case of Brendan Cox.
Boris Johnson’s behaviour in the Commons this week was reprehensible. Watching the unrepentant and aggressive braying of the Tory MPs, I was genuinely concerned about the consequences for democracy should these empowered right wingers ever get a majority. Johnson has removed the social restraint which used to cloak their atavistic instincts.
This Tory display also very much reinforced what I have been saying for years, that we will not gain Scottish Independence through a repeat of 2014. We were allowed a referendum with only moderate cheating by the British state purely because they believed there was no chance we could win. They have been disabused. There will never be a Section 30 order an an agreed referendum again. We will have to seize Independence by means which the British state will deem unlawful. Anybody not prepared to do that is not serious about Independence.
I digress. Johnson’s behaviour is appalling and he is at an interesting stage where the Establishment and its media is unsure whether to embrace or repudiate him, the calculation depending on whether they think he will win, and on the impact of Brexit on their personal financial interests. But as with Trump, I ask you to set aside your judgement on Johnson and not think of him for a moment.
Yesterday BBC news programmes brought us repeated appearances of Brendan Cox to comment on Boris Johnson and other MP’s parliamentary behaviour. This Brendan Cox:
One such allegation was that Cox pinned a co-worker to a wall by her throat while telling her ‘I want to fuck you’. Cox left the organisation before being subjected to scrutiny on this and other allegations. However, another woman, a senior US official who met him at a Harvard University event, made similar allegations against him, ‘of grabbing her by the hips, pulling her hair, and forcing his thumb into her mouth’ ‘in a sexual way’.
In contrast to Assange’s treatment, and despite a social-media furore, for nearly three years there was largely a media blackout on the story. At last, in February 2018, a right-wing tabloid broke the embargo and reported the allegations, and other news organisations had to follow suit. Finally, ‘Cox apologised for the “hurt and offence” caused by his past behaviour’ and announced he was withdrawing from public life.
I strongly recommend you to read that last linked article.
Cox is very much on the wavelength of the Establishment media, a full member of the New Labour neo-liberal elite who shuttled between jobs in the Labour Party and in high paying neo-liberal propaganda organisation Save the Children. Cox was personally pocketing £106,000 a year plus expenses from donations to the “charity”. A serial unfaithful sexual aggressor, his wife’s murder sees him recast by the media as the grieving survivor of a perfect marriage. Precisely his strongest political supporters – Jess Phillips, Stella Creasy etc – are Julian Assange’s bitterest opponents due to far flimsier, hotly denied and less attested sexual allegations than those against Cox. But neo-liberals get a free pass from the modern feminist movement (cf Bill Clinton).
Boris Johnson’s behaviour was a disgrace. But that is no reason for the BBC rehabilitation of the “retired from public life” sexual predator.
The fascinating thing is the binary, good versus evil, narrative which is being pursued in the liberal media. Trump and Johnson are bad. Therefore Hunter Biden and Brendan Cox must be good. The truth, of course, is much more complex than that. I am afraid to say that if you want an excessive simplification, a more accurate one would be that the entire political elite on all sides are self-serving and venal.
There is a more interesting story inside that, where significant portions of the public have lost respect for the Establishment, due in large part to the vast and increasing wealth gap in society, but this disillusion has been battened on by populist charlatans, and particularly directed against immigrants. This feels like an extremely unstable phase in society and politics. But instability brings the possibility of radical change, which is indeed much needed. We must all work for good from it.
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