Guest Post: 10 Factors In The Timing Of The Next Crisis

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Here are ten possible factors in why it's so difficult to predict the timing of crisis/reset.

Doom-and-gloomers (myself included) have been wrong for four years. The financial markets continue higher, and the excesses of the status quo continue expanding with little ill effect (so far).

Why is it so difficult to predict the timing of the onset of crisis/collapse? The question is equally valid for both bears and bulls; how could all the boosters of housing be so wrong in 2008 when they asserted that "housing is not a bubble"?

I've assembled ten possible factors in why it's so difficult to predict when the next crisis/reset will occur:

1. Everyone in the status quo has a stake in its survival. Every one of us wants to get our social security, our disability, maintain the freedom of a personal vehicle, have access to clean water and all the other goodies, and those becoming (or maintaining) wealthy and powerful in the current system want to retain their wealth and power.

There are titanic forces that will bend whatever needs to be bent to keep their share of the swag flowing to them. This is just as true of the welfare recipient as it is the global corporation or politico. We shouldn't underestimate the power of this desire to maintain the status quo and bend perceptions to make that appear as if it is not just possible but inevitable.

Consider the housing bubble and bust. Look at the forces benefiting from the bubble: the 2/3 of all U.S. households that owned homes, the entire financial/mortgage/Wall Street investment bank complex, mortgage brokers, realtors, the media that profited from housing/mortgage-related adverts, and last but not least the government, which reaped huge gains in property and income taxes as a direct result of the bubble.

On the other side of the bubble: a handful of marginalized analysts and bloggers, virtually none of whom would profit from the bubble's implosion. Guess which side had the momentum to inflate the bubble for years after it became obvious that a vast credit/real estate bubble was already in place?

2. Self-referential systems with numerous feedbacks are inherently difficult to predict because the forces we extrapolate into the future are adapting under various selective pressures that feed back into each other. Innovations that seem small can trigger outsized consequences (for example, the web, fracking, etc.).

In this context, it's worth recalling an anecdote about Bertrand Russell. A young critic detailed a previous position Russell had taken and noted an inconsistency with his current position. Russell declared, "Young man, I changed my mind." We're allowed to do that as new dynamics emerge and what we extrapolated as critical turns out to be less critical than some other factor we dismissed as minor.

3. Systems feed on the herd instinct of humanity. Real estate was visibly in a bubble in 2004, at least in key markets, yet the bubble continued expanding for 3 more years as the herd drew in skeptics. Those of us who declared the bubble in 2004 were wrong for three long years. The dynamics of the herd overpowered rationality and prudence. Humans will thunder over the cliff just like other herding animals. Just keeping the ability to make independent judgments and sort data without ideological filters should be a key goal.

4. There is a body of sociological study that looks at how what we perceive as risks defines our ideological/sociological world view. Risk assessment by groupthink is very powerful: we are moved by what we perceive to threaten our world view. Hierarchical types see different risks than egalitarian types, for example. This line of analysis goes by the academic name of "cultural cognition of risk."

5. The status quo is a dynamic system with many players. As I have often noted, just for one example, the US military/national security state does not necessarily share the same world view and priorities as other chunks of the empire. Various conspiracy theories neatly tie up the entire system with a bow, but I don't think it's that static and simple. If it was, it would be easier to predict. If we look at systems with few feedbacks, i.e. the sort of systems dominated by small cliques of the sort that all conspiracy theories require, we find systems like the former USSR. It imploded because it lacked the intrinsic ability to reform/adapt for systemic reasons.

6. As a result of #1, alternative systems have very little leverage. Why bust our behinds getting a local farmer's market going when every supermarket is bulging with produce and products engineered to satisfy our reward centers? Everything is an uphill battle to reach the critical 4% threshold of influence in terms of establishing alternative systems. Our own personal resilience only goes so far, but getting people to invest in systems beyond themselves is difficult for any number of reasons, including active suppression by those benefiting from the status quo. The need for real alternatives just isn't strong enough to change world views.

These systems are still nascent. We're still feeling our way forward in revolutionary alternatives (such as "accredit yourself" as an alternative to $100K college degrees in theater studies).

7. Nobody fully understands these complex systems such as the reserve currency, even though the systems have been functioning for decades. If we add up certain dynamics, we would feel very confident in saying this system should not exist–it should implode right now. Yet it continues on year after year. It is not just being perverse–it's very difficult to understand these systems because of the self-referential feedbacks and the motivations of the players to keep it going by whatever means are at hand.

I have been looking at the USD reserve currency for years and am humbled to realize nobody really has a firm grasp of all its dynamics. (At least I haven't found any such source.) There are widely disparate descriptions of its mechanisms and costs/problems, none of which totally accounts for its continued resilience.

8. I tend to think John Michael Greer's concept of catabolic collapse is likely to be the most correct in terms of predicting future dynamics. Things keep following the same vectors for all the reasons stated above until something gives
and they reset at a lower level of complexity/energy consumption. Everyone with a stake in the current system takes a hit to their desires but they still retain a meaningful share of the swag. Those who lose their share are too marginalized to threaten the majority who still gain by participating in the status quo.

This stairstep-down process can continue for quite some time, Rome being a pretty good example and various corporate/nation-state failures being more recent examples.

9. It is fairly self-evident that we are in an unprecedented era–just looking at energy, debt and the Internet is enough to reach that conclusion. This means the past is not a very reliable guide. As a result, many people look to behavioral models of economics to explain everything in terms of human emotions and cognitive deficiencies. This also has limits, as systems include forces that may originate in human psychology but psychology and cognitive flaws do not account for the system's full dynamics.

10. New models of doing things are emergent, but that is not a passive process. Some individuals actually have to make this happen by thinking things out, proposing systems, setting up a network of like-minded people, etc. etc. etc. My goal is to part of the process of building alternative structures at least conceptually so people who are completely wedded to the status quo have some alternative framework to grasp when the stairstep down finally breaches their confidence/faith that the system is eternally sustainable as-is.

This occurs when they discover the status quo has deemed them inconsequential enough that their share of the swag can be reduced with no negative consequences to those still at the trough.


    



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Thorstein Heins Mangles BlackBerry, Walks Away With $16 Million Severance

The last time we looked at Thorsten Heins’ potential “golden parachute” farewell gift from Blackberry for, well, completing the destruction of the company started by former Co-CEOs Mike Lazaridis and Jim Balsille when he took over in early 2002, the amount could have been as gargantuan as $55 million. This number has subsequently been revised modestly lower, and while nobody is precisely sure just what Heins is entitled to, according to the Globe and Mail’s latest calculation, the golden parachute in question could be as large as $16 million. Then again, considering RIMM stock back then was $18/share and by the time Heins left BBRY will be just over $6, one wonders if instead of any bonus Heins shouldn’t instead be paying the company’s long suffering shareholders for virtually destroying what was once the world’s dominant smartphone brand.

From Globe and Mail:

Outgoing BlackBerry Ltd. chief executive officer Thorsten Heins could leave the company with about $16-million (U.S.) in severance payments and shares under the terms of a new employment agreement he signed with the company in April, regulatory filings show.

 

The company’s latest shareholder proxy circular, filed in May, says Mr. Heins would have been eligible to receive as much as $55.6-million in severance if the company was sold and he was dismissed. But he is also eligible for a large severance payout – as much as $22-million based on March figures – if he is simply terminated with no sale of the company.

 

However, his final severance amount will vary from the March calculation included in the proxy circular because much of the pay comes from equity holdings, which have changed since the chart was done in March.

 

BlackBerry announced Monday it has ended takeover talks with Fairfax Financial Holdings Ltd., and said Mr. Heins is leaving the company. A company spokeswoman said BlackBerry could not comment on Mr. Heins’s severance payments “at this time.”

 

Under the terms of the severance agreement, Mr. Heins is eligible to receive two times his base salary – worth $3-million in total – as well as a portion of his annual bonus for the current year, based on his standard corporate and individual performance factors. As of March, that was estimated to be worth $2.8-million, but it is unknown what his bonus payout is currently worth.

 

The equity components of his severance are the largest piece, however, estimated at $16-million as of March.

His current equity holdings in BBRY, aside from incentive option grants, amount to a tiny 180k shares of stock.

Mr. Heins also has share units acquired previously, which are currently worth about $4-million based on BlackBerry’s share price of $7.10 on Monday morning, and has 813,000 stock options, which are underwater and not exercisable based on the company’s current share price.

 

Both the old share units and his stock options will continue to vest for 24 months, which means the final payout under his severance agreement will not be determined for two years.

 

He also owns 179,504 common shares, worth about $1.3-million based on Monday’s share price.

 

Based on the current value of his common shares and share units, along with the $5-million payout for his new share units and his eligible salary and bonus payments, Mr. Heins could leave BlackBerry with about $16-million.

 

That total is not the final payout value, however, because his options and share units will not fully vest for two years and the final bonus amount payable is not yet known.

It is known: it is too high. And the poetic irony? If Heins ends up being hired as a bankruptcy advisor by a company that may one day advise BBRY on its potential chapter 11 or 7 filing. That would be the definition of true “full lifecycle” service coverage.


    



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SAC Confirms It’s Not Guilty Of Being Guilty Of The Things For Which It Admitted Guilt

Via an emailed statement, the soon to be jailed SAC logo (since nobody else is actually going to jail) proudly proclaims:

We take responsibility for the handful of men who pleaded guilty and whose conduct gave rise to SAC’s liability.

 

The tiny fraction of wrongdoers does not represent the 3,000 honest men and women who have worked at the firm during the past 21 years.”

aka the textbook definition of “just us” justice.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/q0cEF-r5OAI/story01.htm Tyler Durden

SAC Confirms It's Not Guilty Of Being Guilty Of The Things For Which It Admitted Guilt

Via an emailed statement, the soon to be jailed SAC logo (since nobody else is actually going to jail) proudly proclaims:

We take responsibility for the handful of men who pleaded guilty and whose conduct gave rise to SAC’s liability.

 

The tiny fraction of wrongdoers does not represent the 3,000 honest men and women who have worked at the firm during the past 21 years.”

aka the textbook definition of “just us” justice.


    



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Who Said It? “You Can Measure America’s Bottom Line By Looking At Caterpillar’s Bottom Line”

It’s been three months since we discussed in depth the ‘problems’ that CAT faces. Recent earnings were a disaster and the CEO offered little to no hope for short-term recovery. Today, things got a little worse…

  • *CATERPILLAR TO CLOSE UNDERGROUND-MINING EQUIPMENT PLANT
  • *CATERPILLAR SAYS DECISION AFFECTS ABOUT 40 PEOPLE

Of course, the irony is not lost on us as we rhetorically ask, who said the following: “You Can Measure America’s Bottom Line By Looking At Caterpillar’s Bottom Line.” Let’s hope not for the nation’s sake.

 

 

The Curse of the Obambino?


    



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Who Said It? "You Can Measure America's Bottom Line By Looking At Caterpillar's Bottom Line"

It’s been three months since we discussed in depth the ‘problems’ that CAT faces. Recent earnings were a disaster and the CEO offered little to no hope for short-term recovery. Today, things got a little worse…

  • *CATERPILLAR TO CLOSE UNDERGROUND-MINING EQUIPMENT PLANT
  • *CATERPILLAR SAYS DECISION AFFECTS ABOUT 40 PEOPLE

Of course, the irony is not lost on us as we rhetorically ask, who said the following: “You Can Measure America’s Bottom Line By Looking At Caterpillar’s Bottom Line.” Let’s hope not for the nation’s sake.

 

 

The Curse of the Obambino?


    



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Preet Bharara’s SAC Capital Press Conference – Live Webcast

Having discussed the "unprecedented" scale of their law-breaking previously, we expect Bharara to bring a little gloat with the SAC press conference today…

 

Bharara from July:

 

 

Live Stream from BBG (click here if embed not functioning):

 


    



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Preet Bharara's SAC Capital Press Conference – Live Webcast

Having discussed the "unprecedented" scale of their law-breaking previously, we expect Bharara to bring a little gloat with the SAC press conference today…

 

Bharara from July:

 

 

Live Stream from BBG (click here if embed not functioning):

 


    



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Peak Obesity?

Obesity rates have increased at least slightly so far in 2013 across almost all major demographic and socioeconomic groups, according to Gallup's latest study. The largest upticks between 2012 and 2013 were among those aged 45 to 64 and those who earn between $30,000 and $74,999 annually – which 'coincidentally' is perfectly in the cohort that is 'disincentized' to work by the growing shadow of bought votes and entitlements. So, the question then becomes, is the considerable spike in 2013 that is so evident below the "peak" in obesity rates as the government is forced to introduce more haircuts on its foodstamp program? Time will tell…

US Obesity rate is spiking (along with the Fed's balance sheet and stocks…)

(h/t @Not_Jim_Cramer)

 

Via Gallup:

The U.S. obesity rate thus far in 2013 is trending upward and will likely surpass all annual obesity levels since 2008, when Gallup and Healthways began tracking. It is unclear why the obesity rate is up this year, and the trend since 2008 shows a pattern of some fluctuation.

 

 

Blacks, those who are middle-aged, and lower-income adults continue to be the groups with the highest obesity rates. The healthcare law could help reduce obesity among low-income Americans if the uninsured sign up for coverage and take advantage of the free obesity screening and counseling that most insurance companies are required to provide under the law.

 

With the biggest rise in the cohorts that are dominated by the disincentized-to-work…"the single mom is better off earnings gross income of $29,000 with $57,327 in net income & benefits than to earn gross income of $69,000 with net income and benefits of $57,045."

 

So one wonders… with the foodstamp program being cut – will that mean higher obesity rates or lower?


    



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JPM Warns The Biggest Risk To The “Bull Market” Is… Growth?

‘Another week, another high for equities’ is the resigned way JPMorgan’s Jan Loeys begins his discussion of “bubbles” this week – the massive gains in equity markets, in a month and a year of lower economic growth and earnings expectations, are raising a warning flag for many investors that easy money and liquidity are creating serious asset bubbles that threaten future growth and investment returns. Simply put, “a bubble view is a view that the Fed will stay easy for too long” and will then have to stamp on the brakes when growth and inflation suddenly react to easy money; and “a sudden spurt in growth is the biggest risk to asset reflation.”

 

Via JPMorgan’s The View,

What is a bubble? Bubbles are extreme asset price inflation and overvaluations; typically as easy money leads to exaggerated price gains on initially positive fundamentals that leverage then brings to a boil, before a reversal of conditions induces a crash as everyone tries to sell at the same time. The easy money is surely here this time, and so are the big price gains. The question is now whether markets are truly overvalued to fundamentals and whether conditions could reverse soon. We would like to say No to both. And we do not see that much evidence of leverage, either, at least not in DM, while recognizing that it is the unseen or underappreciated leverage that has done the most damage in past bubbles.

Starting with basic finance, a high asset price means high expected future cash flows and/or a low discount rate (low internal rate of return). An overvaluation must thus mean that cash flow expectations are too optimistic, or that they are discounted at too low a discount rate. Over the past two years, global growth and earnings expectations have been falling, and look realistic to us. Higher asset prices can thus only come from a lower discount rate. The most important market participants in setting this discount rate are the central banks, as they set the return on cash, which is the benchmark for everything else. The US Fed is most important here, as USD assets make up half the global security universe and a number of other central banks keep their currency close to the USD and thus follow the Fed’s policy.

 

 

 

Other asset discount rates, or IRRs, on equities and bonds are greatly affected by the Fed, but do not seem too low to us. The charts above show the risk-return trade off line of USD assets, and the slope of this line over the past 60 years. The average risk premium of bonds and equities over cash remains one standard deviation above its historic mean, and seems high relative to our judgment of future uncertainty. But the all-in IRRs on bonds and equities can only stay low, and prices high, if the Fed holds the return on cash near zero. A view that assets are in a bubble is thus a view that the Fed is keeping interest rates too low, relative to the outlook for growth and inflation.

By our measures, global growth is set to cruise at a trend pace of near 3% over the next year. A trend-like growth rate pace does not imply that policy rates should also be at neutral, though, as the world economy continues to operate well below capacity. Our economists judge that the DM economies are operating 3% below capacity, while EM is only 0.5% below capacity. A bubble view is a view that the Fed will stay easy for too long and will then have to stamp on the brakes when growth and inflation suddenly react to easy money.

There is little in US data that suggests a serious risk of a sudden spurt in private sector growth beyond the fading in fiscal drag from the public sector. But we cannot dismiss such risk as funding is extremely easy. The best we and the Fed can do is to monitor economic conditions and to adjust strategy and policy if growth were to accelerate suddenly. Investors should continue to overweight assets whose IRRs are least dependent on easy money. That supports our strategy since mid 2009 of overweighting equities versus bonds.

Paradoxically, low growth does not contradict higher asset prices, but is at its roots, as a weak recovery induced policy easing, which boosted asset prices. This summer’s taper-talk crisis highlights that a sudden spurt in growth is the biggest risk to asset reflation. A gentle grind up is our preferred scenario.

 

 

ZH: So there you have it – the biggest risks are “unseen and under-appreciated leverage” (margin debt at all-time highs, rehypothecation at extremes, ETFs enabling it) and the catalyst for a popping bubble “growth” – once again good news truly is bad news…


    



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