The US Treasury Bill market remains notably inverted around the uncertain timing of the US debt limit debacle.
As Bloomberg reports, while Treasury bills maturing in October continue underperforming against November and December securities, the market has a murky view on the drop-dead date for the U.S. debt ceiling.
At the start of last week, concerns shifted to early October after the Treasury said in its 3Q refunding statement that it expects to be able to fund the govt through the end of September.
Focus then shifted back toward mid-October after the head of the House Freedom Caucus said he is ready to accept a debt ceiling increase without other conditions
However, one more worrisome market is starting to notably wake up to the reality of a deeply divided congress unable to agree on anything. The market for sovereign credit risk is flashing red with USA 5Y CDS now trading at its most extreme levels to German 5Y CDS since Lehman.
Note that the current credit-risk-premium for US Treasuries is higher than it was during 2013's government shutdown and 2015's down-to-the-wire debt ceiling debate.
But while Treasury and credit markets are flashing red anxiety levels, the VIX curve is doing the exact opposite and pricing in a relative drop in volatility… before a resurgence in the start of 2018…
So T-Bills worry about early October… VIX worries about year-end… and CDS confirm they have a problem. Who will be right?
Trump is not particularly popular among the billionaire crowd of Silicon Valley, to say the least. As such, when the billionaire co-founder of PayPal endorsed Trump for President, donated ‘bigly’ to his campaign and even agreed to speak at the Republican National Convention last summer, it was a ‘yuge’ deal.
But, at least if you’re willing to believe the anonymous sources of BuzzFeed News, the honeymoon phase between Thiel and Trump may have ended a few months ago. While Thiel has continued to support Trump in public, personal friends who have attended dinners with him in recent months say he has soured on the administration of late and even intimated to friends that “there is a 50% chance this whole thing ends in disaster.”
Donald Trump’s most prominent Silicon Valley supporter has distanced himself from the president in multiple private conversations, describing at different points this year an “incompetent” administration, and one that may well end in “disaster.”
Peter Thiel’s unguarded remarks have surprised associates, some of whom are still reeling from his full-throated endorsement of Trump at the Republican National Convention. And while the investor stands by the president in public — “I support President Trump in his ongoing fight,” he said in a statement to BuzzFeed News — his private doubts underscore the fragility of the president’s backing from even his most public allies. Thiel’s comments may sting in particular in the White House as they they come amid a series of hasty and embarrassed departures from the Trump train, as conservative voices from the Wall Street Journal’s editorial page to the floor of the US Senate have begun to distance themselves from the administration.
The sources who talked with BuzzFeed News spent time with Thiel in private group settings before and after the election at his homes in Los Angeles, San Francisco, and Hawaii, engaging in candid discussions on the PayPal cofounder’s politics and his backing of Trump. At one event with friends in January 2017, Thiel said of Trump’s presidency that “there is a 50% chance this whole thing ends in disaster,” according to two people who were in attendance. In other conversations, he questioned the president’s ability to be reelected.
Meanwhile, other personal friends have reportedly told BuzzFeed that Thiel never really had high hopes for the Trump administration describing it as “incompetent” and suggesting that Trump will most likely be a one-term president.
At a gathering at his home in Los Angeles the weekend before the election, a source in attendance said Thiel reiterated that point. But in at least one private conversation, Thiel admitted he didn’t have much confidence in either candidate. Whoever wins, he said, will likely be a one-term president, according to a person familiar with the discussion, with Thiel predicting that there would be a major financial catastrophe in the next four years.
Even with his low expectations and his views on possible failure, Thiel hasn’t completely hidden his disappointment. At an event in May in San Francisco, he was described by one guest who was in attendance as “annoyed” with the first months of Trump’s presidency. With little policy being established by the White House, Thiel worried that the the next four years would be defined by stagnation and stressed the notion that he didn’t think Trump would be reelected.
In describing the administration, Thiel used one defining word in front of his guests: “incompetent.”
And while Thiel refused to confirm the claims of BuzzFeed’s anonymous sources, leaving some level on doubt as to their accuracy, he also refused to deny them.
“The night he won the election, I said President Trump would face an awesomely difficult task,” Thiel said in a statement. “Today it’s clear that resistance to change in Washington, D.C. has been even fiercer than I anticipated. We still need change. I support President Trump in his ongoing fight to achieve it.”
Attorney General Jeff Sessions recently ordered the Justice Department to increase the use of civil asset forfeiture, thus once again endorsing an unconstitutional, authoritarian, and increasingly unpopular policy.
Civil asset forfeiture, which should be called civil asset theft, is the practice of seizing property believed to be involved in a crime. The government keeps the property even if it never convicts, or even charges, the owner of the property.
Police can even use civil asset theft to steal from people whose property was used in criminal activity without the owners’ knowledge. Some have even lost their homes because a renter or houseguest was dealing drugs on the premises behind the owners’ backs.
Civil asset theft is a multi-billion dollar a year moneymaker for all levels of government. Police and prosecutors receive more than their "fair share” of the loot. According to a 2016 study by the Institute for Justice, 43 states allow police and prosecutors to keep at least half of the loot they got from civil asset theft.
Obviously, this gives police an incentive to aggressively use civil asset theft, even against those who are not even tangentially involved in a crime. For example, police in Tenaha, Texas literally engaged in highway robbery — seizing cash and other items from innocent motorists — while police in Detroit once seized every car in an art institute’s parking lot. The official justification for that seizure was that the cars belonged to attendees at an event for which the institute had failed to get a liquor license.
The Tenaha police are not the only ones targeting those carrying large sums of cash. Anyone traveling with "too much" cash runs the risk of having it stolen by a police officer, since carrying large amounts of cash is treated as evidence of involvement in criminal activity.
Civil asset theft also provides an easy way for the IRS to squeeze more money from the American taxpayer. As the growing federal debt increases the pressure to increase tax collections without raising tax rates, the IRS will likely ramp up its use of civil asset forfeiture.
Growing opposition to the legalized theft called civil asset forfeiture has led 24 states to pass laws limiting its use. Sadly, but not surprisingly, Attorney General Jeff Sessions is out of step with this growing consensus. After all, Sessions is a cheerleader for the drug war, and civil asset theft came into common usage as a tool in the drug war.
President Trump could do the American people a favor by naming a new attorney general who opposes police state policies like the drug war and police state tactics like civil asset theft.
Now that ISIS – the perpetual scapegoat for US intervention in the Syrian proxy war – is no longer viable, with the Qatar, Saudi-funded and Pentagon-equipped terrorist organization scattered and on the run, and there is no longer an imperative to remove Assad from power as the Qatar natgas pipeline to Europe is mothballed indefinitely while Russia and Iran are the de facto undisputed rulers of Syria, it is time to focus popular anger against ISIS elsewhere… like in the Philippines. And not wasting any time, NBC reports that the Pentagon is considering a plan allowing the U.S. military to conduct airstrikes on ISIS in the Philippines.
Unlike in Syria where the US arrived (and is now on its way out) to wage war against the Assad regime ISIS uninvited, the authority to strike ISIS targets as part of collective self-defense could be granted as part of an official military operation that may be named as early as Tuesday, said the anonymous officials who spoke to NBC. The strikes would likely be conducted by armed drones.
If approved, the U.S. military would be able to conduct strikes against ISIS targets in the Philippines that could be a threat to allies in the region, which would include the Philippine forces battling ISIS on the ground in the country’s southern islands.
Since the U.S. military has been sharing intelligence with the Philippines for years, according to Pentagon spokesperson Capt. Jeff Davis, the US drones will have no problem orienting themselves. “We have had a consistent CT [counterterror] presence in the Philippines for fifteen years now,” he said. And, like in Syria, there is already a small U.S. military presence on the ground supporting the counter-ISIS fight, called Joint Special Operations Task Force Trident. We expect the presence will get bigger.
An MQ-9 Reaper drone sits armed with Hellfire missiles and a 500-pound bomb
The news may explain the dramatic U-Turn by Philippines’ outspoken president Rodrigo Duterte, whoe just two weeks ago said he would never visit the U.S. because he’s “seen America and it’s lousy.”
“There will never be a time that I will go to America during my term, or even thereafter,” Duterte said. “So what makes that guy think I’ll go to America?” Duterte told reporters. “I’ve seen America and it’s lousy … it would be good for the U.S. Congress to start with their own investigation of their own violations of the so many civilians killed in the prosecution of the wars in the Middle East. Otherwise I will be forced to investigate you also. I will start with your past sins.”
But that pales in comparison to Duterte’s comments about former President Obama, whom he called “son of a whore” on more than one occasion and told to “go to hell.”
Fast forward to today when in an abrupt reversal, Duterte said on Monday that Secretary of State Rex Tillerson, who is currently in Manilla, should consider him a “humble friend” as the two met. “I am your humble friend in Southeast Asia,” Duterte said to Tillerson at the Association of Southeast Asian Nations (ASEAN) forum in Manila, according to the network.
On Monday Tillerson said the U.S. was providing the Philippines government with “intelligence capabilities” in the fight against ISIS, including “some recent transfers of a couple of Cessnas and a couple of UAVs (drones) to allow to them to have better information with which to conduct the fight down there.”
“We’re providing them some training and some guidance in terms of how to deal with an enemy that fights in ways that are not like most people have ever had to deal with, so it’s a tragic situation down there. I see no conflict at all in our helping them with that situation and our views of other human rights concerns we have with respect to how they carry out their counternarcotics activities.”
As the Hill reported earlier, Tillerson and Duterte reportedly discussed their joint military efforts to combat militant fighters in the southern Philippines island of Mindanao.
Also on Monday, Tillerson dismissed the notion that working with the controversial leader would create a “big contradiction.”
“We see no conflict at all in our helping them with that situation and our views of the human rights concerns we have with respect to how they carry out their counter narcotics activities,” Tillerson said, NBC News reported.
As a business, if you want to promote equality, the first thing you need to do is make sure you treat your customers unequally based on their gender.
I love when people empower themselves by becoming business owners. Running a business is certainly not easy, but it still frees you from certain constraints. For instance, pay is not decided arbitrarily by a boss, it is based on the services you provide.
Ironically, one business owner in Australia is using her success to promote inequality.
The cafe in Australia touts their discriminatory practices. An article about the cafe on The Mirror reads: Cafe charges men more than women – for a very powerful reason.
Yes, for a powerful reason. Their discrimination is powerful because statistically, women earn 18% less than men in Australia. That is why it is okay to discriminate in hiring as well; the cafe called Handsome Her only hires women. And they also give preferential seating to women. Men must get to the back of the bus–or cafe, whatever.
The 18% “man tax” is technically optional during the one week per month the tax applies, with the proceeds going towards women’s causes. I wonder how many women volunteer to pay the tax, seeing as it is for a cause they presumably agree with.
Also ironic: the fact that it is all women working at the cafe. About 81% of workers in the category, “Hosts and hostesses, restaurant, lounge, and coffee shop,” are women. This gives us a glimpse into the true issue of the pay gap. Sometimes is not actually a pay gap, it is a work choice gap.
But hey, if this cafe owner wants to discriminate against men, I fully support her right to do so. She will probably face legal challenges, and that is too bad in my opinion. I don’t think the government should interfere with businesses. No one is forced to patronize the coffee shop.
Likewise, I wish all proponents of fixing the wage gap would take up the issue in the private sector. But when you start advocating legal repercussions, you are limiting the freedom of others.
The media promotes certain types of discrimination. Discrimination is only okay when it corrects a historical wrong.
One headline from a 2015 Huffington Post article reads: Ethnic Minorities Deserve Safe Spaces Without White People.
“Our” ancestors kept slaves, so affirmative action, all black schools, and white free zones are all now acceptable. Nevermind that my ancestors were in Italy and Scotland in 1865. In fact, likely the majority of white Americans descend from post Civil War immigrants. Not that it should matter anyway; since when are we responsible for the sins of our relatives?
Private organizations should absolutely be allowed to discriminate. I wouldn’t want to force a black tailor to sew the white robes for a KKK outfit. Nor do I wish to force a baker or a florist to provide services for a gay wedding if they don’t want to.
I still don’t understand why a gay couple would want to give their business to a florist or a baker who is anti-gay. Ironically the same people understand that boycotting Chick-Fil-A is the proper response if you don’t like the organizations to which they donate.
I want to know who doesn’t want my money so that I don’t fund the promotion of something with which I disagree. I am glad the cafe is vocal against their anti-man stance. Otherwise, I might accidentally spend my money there.
I want to know about “white free zones.” I will feel much safer staying far away from them.
Of course, we need to stay vigilant about the legal action taken against honest business owners. But the true solution is obviously only supporting businesses which match up with your values.
Another thought; is humor a good way to combat these media driven cultural memes? I think the tv show Portlandia does a pretty good job of that. Check out the video below, and let me know what you think.
While the growing woes facing the auto sector are well-known by now (see “Carmageddon: Ford & GM Sales Tank Despite Record July Incentive Spending“) and boil down to excess capacity, insufficient demand and just a tiny – if one listens to the experts – subprime lending bubble, one key culprit has emerged as the biggest catalyst behind the chronic weakness among US carmakers: a moribund fleet, or rental, industry which has been devastated in recent years from Uber’s juggernaut of disruption.
A painful reminder of that was presented moments ago when Avis Budget reported its Q2 earnings. The company reported Q2 revenue of $2.24 billion, just barely making the low end of the consensus range, while earnings were slashed in half, tumbling from $0.63 a year ago, to just $0.30 in Q2, a huge miss to the $0.52 expected. Also, that was non-GAAP: the company’s GAAP EPS was barely positive at $0.04.
Making matters worse, while CAR reported a modest 2% decline in revenue in the Americas, adjusted EBITDA in the same region crashed by 41% to $96MM from $163MM a year ago, leading to a 31% drop in overall company EBITDA, from $204MM to $140MM.
In the company’s discussion of Q2 results, the CEO did everything he could to sound upbeat, but he didn’t quite get there. In a nutshell, everything that could go wrong for CAR did, excess capacity or “industry over-fleeting”, surging costs i.e., “higher per-unit fleet costs”, and a plunge in used-vehicle prices.
“Our second quarter results in the Americas reflected both a 4% reduction in pricing resulting from industry over-fleeting and higher per-unit fleet costs due to lower used-vehicle values. Consequently, we have identified $25 million of additional savings opportunities globally, bringing our total expected savings this year to $75 million, and have lowered our full-year earnings guidance to reflect the difficult first half,” said Larry De Shon, Avis Budget Group President and Chief Executive Officer. “Industry fleet levels in the Americas normalized to demand towards the end of the second quarter. This enabled us to transition to improved pricing, with revenue per day up more than 1% in July. Looking forward, I am now more optimistic that the industry issues we’ve been contending with should be behind us.”
Reported revenue of $2.2 billion was unchanged compared to the prior year, with an increase in overall rental days being offset by a decrease in pricing. Strong International revenue growth offset lower revenue in the Americas. The pricing environment together with higher per-unit fleet costs in the Americas, net of early benefits from the cost reduction initiatives, resulted in a $33 million decrease in net income to $3 million (or $0.04 per share). Adjusted EBITDA was $140 million compared to $204 million in the prior year, and adjusted net income was $25 million ($0.30 per diluted share) in the quarter.
“Our recently announced partnerships with both Waymo and RocketSpace are providing opportunities to pilot scalable new business models as we start to execute on our strategy to leverage our fleet management and logistics capabilities in the rapidly developing mobility space,” said Mr. De Shon. “I’m also excited about all of the innovative growth initiatives we’ve announced this year, including enabling Avis customers to transact with us through Amazon Alexa and Google Home.”
If that’s what Larry is excited about we would hate to ask him what he thinks about Uber, which has led to a dramatic collapse in Avis (and Hertz’) pricing power as he himself admits. As much is evident from the company’s downward revised guidance, which sees FY adjusted EPS $2.40 to $2.85, sharply down from $2.85 to $3.50, and below the consensus estimate of $2.78, despite keeping its revenue guidance flat at $8.80 billion – $8.95 billion, and above the consensus estimate of $8.78 billion.
Needless to say none of the above bodes well for the US OEM sector as the fleet segment will be focusing on “rationalizing”, i.e., hacking and slashing, existing business for months if not years to come, removing virtually all fleet demand from US automakers for the foreseeable future.
And as the market digests the combination of collapsing margins, lack of pricing power, “over-fleeting”, higher per-unit fleet costs, and tumbling used-vehicle values, it is not happy as the plunge in both CAR and HTZ stocks demonstrates.
Trump drew first blood this morning in what appears to be a growing twitter feud with Connecticut’s Richard Blumenthal when he called the a Senator a “phony Vietnam con artist.” Within an hour, Blumenthal launched a counter strike calling Trump a “bully.” It had all the makings of a heated 1st grade Battle Royale.
But, Trump has just taken things to a whole new level with the following tweet which seemingly confirms that the President is now locked in his first official Twitter War.
“I think Senator Blumenthal should take a nice long vacation in Vietnam,
where he lied about his service, so he can at least say he was there.”
I think Senator Blumenthal should take a nice long vacation in Vietnam, where he lied about his service, so he can at least say he was there
For those who missed it, here is our overview of the tweet exchanged between Trump and Blumenthal earlier today.
Just an hour after being attacked by President Trump in an early morning tweet storm, Senator Richard Blumenthal of Connecticut has now responded with a few snarky jabs of his own.
“Mr. President: Your bullying hasn’t worked before and it won’t work now. No one is above the law.”
“This issue isn’t about me – it’s about the Special Counsel’s independence and integrity.”
This issue isn’t about me – it’s about the Special Counsel’s independence and integrity.
Of course, Blumenthal’s response comes after Trump labeled him a “phony Vietnam con artist” in an early-morning twitter rant that covered a litany of topics from the “failing NYTimes” to the renovation schedule at the White House.
“Interesting to watch Senator Richard Blumenthal of Connecticut talking about hoax Russian collusion when he was a phony Vietnam con artist!”
“Never in U.S.history has anyone lied or defrauded voters like Senator Richard Blumenthal. He told stories about his Vietnam battles and conquests, how brave he was, and it was all a lie. He cried like a baby and begged for forgiveness like a child. Now he judges collusion?”
Interesting to watch Senator Richard Blumenthal of Connecticut talking about hoax Russian collusion when he was a phony Vietnam con artist!
Meanwhile, the whole scuffle was apparently triggered by the following appearance by Blumenthal on CNN this morning in which he accused the Trump administration of “weaponizing” the Justice Department for “personal ends.”
Blumenthal on CNN: “Politicizing” the DOJ is “potentially a violation of the spirit of the First Amendment.” https://t.co/z06epLwyyp
I added the dashed blue line for ease in comparison to the dot-com bubble peak. Here are some snips from Hussman.
“One of the things that you may have noticed is that our downside targets for the market don’t simply slide up in parallel with the market. Most analysts have an ingrained ‘15% correction’ mentality, such that no matter how high prices advance, the probable maximum downside risk is just 15% or so (and that would be considered bad).
Factually speaking, however, that’s not the way it works… The inconvenient fact is that valuation ultimately matters. That has led to the rather peculiar risk projections that have appeared in this letter in recent months. Trend uniformity helps to postpone that reality, but in the end, there it is…
Over time, price/revenue ratios come back into line. Currently, that would require an 83% plunge in tech stocks (recall the 1969-70 tech massacre). The plunge may be muted to about 65% given several years of revenue growth. If you understand values and market history, you know we’re not joking.”
That’s not from today. It’s what Hussman wrote on March 7, 2000.
Hussman notes “The S&P 500 followed by losing half of its value by October 2002, while the tech-heavy Nasdaq 100 lost an oddly precise 83%.”
In regards to today, and of the chart posted above, Hussman has this to say, emphasis his:
The distinction between today and the 2000 peak is in the breadth of overvaluation across individual stocks. Back in 2000, the most extreme speculation was centered on a fraction of all stocks, largely representing technology, and accounting for a large proportion of the total market capitalization of the S&P 500 Index.
At the March 2000 bubble peak, an understanding of market history (including the outcomes of prior speculative episodes) enabled my seemingly preposterous but accurate estimate that large-cap technology stocks faced potential losses of approximately -83% over the completion of the market cycle.
At the 2007 market peak, by contrast, stocks were generally overvalued enough to indicate prospective losses of about -55% for all but the very lowest price/revenue decile. That risk was realized in the form of widespread and indiscriminate losses across all sectors during the market collapse that followed, even though financial stocks were hardest hit.
In my view (supported by a century of market cycles across history), investors are vastly underestimating the prospects for market losses over the completion of this cycle, are overestimating the availability of “safe” stocks or sectors that might avoid the damage, and are overestimating both the likelihood and the need for some recognizable “catalyst” to emerge before severe market losses unfold. We presently estimate median losses of about -63% in S&P 500 component stocks over the completion of the current market cycle. There is not a single decile of stocks for which we expect market losses of less than about -54% over the completion of the current market cycle, and we estimate that the richest deciles could lose about -67% to -69% of their market capitalization. As in 2000 and 2007, investors are mistaking a wildly reckless world for a permanently changed one, and their re-education in the concept that valuations matter is likely to be predictably brutal.
Placing the Blame
Hussman accurately places the blame on central banks as well as investors who believe the central bank is in control.
Central banks possess no concealed, mysterious knowledge that is somehow obscure to mortals. If anything, one might question whether some FOMC governors have ever carefully examined historical data at all, given that many of their propositions can be refuted by even the most basic scatterplot.
One thing should be clear: policy makers have not become “smarter.”
What they have become, with each bubble-crash cycle, is more reckless and arrogant in their willingness to extend speculative financial conditions by encouraging yield-seeking, compressing prospective future investment returns, amplifying the destructive consequences that inevitably result, and ironically, using those same consequences to justify fresh intervention.
Error Admission
Hussman admitted his errors, as have I. Neither of us anticipated:
The jaw-dropping lengths of central bank recklessness in this half-cycle
The ability of yield-seeking speculation to defer the implications of even the most extreme “overvalued, overbought, overbullish” conditions
The importance of prioritizing the uniformity of market internals in a zero-interest rate environment
@hussmanjp notes “fear of missing out is becoming increasingly evident in the major indices, particularly the Dow." I concur. Add Bitcoin.
In an era of political polarization, here’s one item that’s rapidly emerging as a rare bipartisan consensus: President Trump doesn’t deserve credit for the stock market boom since his election.
“Can we thank Trump for the stock market boom? Short answer, no,” a scholar at the center-right American Enterprise Institute, Desmond Lachman, wrote in a piece published by Newsweek.
The pollster to Hillary Clinton’s presidential campaign and to President Obama, Joel Benenson, tweeted: “Truth about @realDonaldTrump’s ‘record’ stock mkt: he inherited from @BarackObama 2nd longest bull mkt in history.”
But as with most items on which there is rare bipartisan consensus, writes Ira Stoll, this one deserves a skeptical look.
Several days after Paul Singer released his much anticipated letter to investors (key excerpts here), the founder of Elliott Management was profiled on Bloomberg as the “most feared activist investor in the world—by hedge fund rivals, companies and even countries”, and for good reason. Singer’s Elliott Management, which manages $34 billion of assets, has not only rarely been out of the headlines the past 18 months – in the process targeting the world’s biggest mining company, taking on Warren Buffett, ousting CEOs on both sides of the Atlantic and setting off a chain of events that led to the impeachment of South Korea’s president – but as shown in the table at the bottom, has generated unprecedented and consistent returns, putting the rest of the activist sector to shame.
Some more details:
… his impact is undeniable. He started with just $1.3 million from family and friends in 1977, and the fund’s investments in equity and debt have since led to at least $93 billion in corporate asset sales and share buybacks, according to data compiled by Bloomberg.
While he’s been scorned for employing bullying tactics at times, Singer doesn’t worry about his tough reputation. He sees it as a selling point for his investors.
“It doesn’t bother me anymore,” Singer told Carlyle Group LP co-CEO David Rubenstein in a Bloomberg TV interview. “It’s good when a corporate executive listens with the understanding that we are real, that we have the capacity to carry through.”
The above also explains why investors of all ideological persuasions find Singer’s periodic letter such an enthralling read. Below we repost the most controversial excerpt from his latest note, wherein the billionaire investor lashes out at “safe spaces” not only across countless U.S. university campuses, but also into the context of the “intellectual fragility” and “fetal position” which “extends to the vast community of global investors” courtesy of central banks who have become terrified of letting the market trade on its own two feet.
Safe Spaces
Fifty or so years ago, campuses across America raged in support of free speech. Fast forward to the present, and we rub our eyes to see a 180-degree turnabout in rage-worthiness. Currently, many students on a variety of campuses are rallying against free speech. The “diversity” that almost all. American colleges and universities claim to covet does not really exist, at least with respect to viewpoints, due to the ideologically extreme tilt (to the left) on virtually every “elite” campus. This bias is unfortunate, because intellectual and ideological diversity would be an effective tool in the creation of new generations of citizens and leaders who think for themselves, not just march in lockstep with the orthodoxy of the day.
But alas, intellectual and ideological diversity does not seem to have a high priority on many campuses. Philosophical and political imbalance is so extreme at a number of such institutions that a growing movement seeks to create “safe spaces” (both geographically and in terms of acceptable speech) so that the apparently fragile-as-eggshells students are not “assaulted” by opinions or thoughts that differ from those in their “Little Red Books.” At many colleges today, the enforcement of the 2017 version of Mao’s Little Red Book is by peer pressure, shouting down, and, on the vanguard of the “Free Speech If You Dare” movement, actual violence.
This fragility, an intellectual fetal position of sorts, apparently extends to the vast community of global investors. We make that assertion on the evidence that almost nine full years after the GFC, central bankers and policymakers are treating every single hiccup and little twitch in global stock markets as worthy of calming words and the promise of action “as needed.” This treatment of markets as being perpetually an inch away from a fatal attack of the vapors is remarkable at a time which is so long after the actual emergency period. As in the case of university students, protection against both the nonconforming ideas of others and freely determined prices (the capital markets version of safe spaces) will lead inevitably to more — not less — vulnerability, dysfunction and ultimate risk.
In fact, central bankers who are desperately attempting to keep asset prices well above their free-market values serve to create the very opposite of a “safe space.” It is actually a brittle and unsustainable space — brittle because nobody knows when the artificial constraints on volatility and price-discovery will suddenly and tectonically shift and return closer to historically-normal levels.
One has only to curl up for a few hours with some readings from pre-historic times (1995, 1998, 2000, 2005, 2007 and 2008) to see the massive shifts in the perceptions of investors, policymakers, economists and over-educated and under-sentient central bankers about riskiness versus safety, extreme versus reasonable government measures, and consequences that can flow from any set of leverage, fiscal policy mix and interest rate policy. The near-universal attitude today seems clearly to be that central bankers have it all under control, that market volatility is a thing of the past, and that the continuation of unprecedentedly low interest rates and constant building of central bank balance sheets (far more extreme than the monetary policies which delivered the GFC to the world) is not a source for worry. There is no significant constituency shouting for the central bankers to stop what they are doing. In a way, this reticence is understandable to anyone who lived through the GFC and who has read the statements of policymakers and pundits in the years leading up to the 2008 crisis. Unfortunately, as usual, there are no real insights as to when the landscape will jolt and toss people from their comfortable seats, shocked by the (re-discovered) reality that central bankers and policymakers know very little that is worth knowing about the future. Policymakers and investors would be well-advised to substitute sound, conservative monetary policies for their smug belief in the “sophisticated” programs, models and opinions of the highly trained so-called “experts” in the art of economics.
You think we are exaggerating in our undisguised disdain for central bankers and what they actually know? Consider this: Fed Chair Yellen recently stated that there will be no new financial crisis in our lifetimes. We feel faint.