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Published on Economic Undertow on December 4, 2013
Discuss this article at the Economics Table inside the Diner
As another year-ending holiday season oozes into view the current conversation is about how the economy has improved … rather, how well various market swindlers are doing. Seems they are doing very well indeed, (Investment Week):
“I can’t look at myself in the mirror”: Hendry reveals why he has turned bullish
Dan Jones
Eclectica hedge fund manager Hugh Hendry has said he has been forced to leave his bearish outlook behind as he faces up to a market “which only makes sense through the prism of trends”.
Speaking at Harrington Cooper’s 2013 conference this morning, Hendry said he is no longer fighting the “two-way feedback loop” which is continuing to boost risk assets.
Hendry’s two-way feedback loop is QE-driven dollar-carry trade and the Chinese capital investment. The real prime movers are moral hazard and institutionalized greed. With the mad rush to money underway there is no place for restraint, or caution … or integrity. The establishment — run by
con men
rich men — has unsurprisingly decided the solution to our current economic misery is to give more money to those who already have too much of it … (David Rosenberg/CNBC):
Not David Rosenberg: within the trickle-down, comic-book zeitgeist we’ve cobbled into a ‘home’, Americans and their imitators world-wide live vicariously through their betters. Consequently, the good fortunes of the wealthy have become a convenient ‘leading indicator’ for the rest of us! We don’t actually improve along with our betters, we wish we do which is enough! We possess a ‘New American Dream’; that anyone from even the most ordinary background who works hard can become Al Capone …
Rosenberg bizarrely asserts the US government has recently been holding back the wealthy by embracing a stringent fiscal strategy. It seems the government isn’t buying everything after all, only faking it! Nevertheless, Rosenberg assures us a more relaxed fiscal approach is on its way and will arrive tomorrow … there will then be far fewer limitations to how rich the very wealthy can become.
Another noted ‘bear’ Jeremy Grantham, has changed spots and become bullish … It’s hard for analysts who have in the past lamented stock market excesses to resist gorging themselves on excesses that are spooling out in front of them on CNBC! The apostate returning to orthodoxy is a central narrative within modernity; the chastened bears eagerly surrender themselves to the raging, animal-spirited excess like holiday shoppers rioting at Walmart! That’s clearly part of the bezzle, (ZeroHedge):
My personal guess is that the U.S. market, especially the non-blue chips, will work its way higher, perhaps by 20% to 30% in the next year or, more likely, two years, with the rest of the world including emerging market equities covering even more ground in at least a partial catch-up. And then we will have the third in the series of serious market busts since 1999 and presumably Greenspan, Bernanke, Yellen, et al. will rest happy, for surely they must expect something like this outcome given their experience.
20% to 30% more! the rising tide lifts only the largest boats. Get out there and buy that … Bitcoin!
2013’s best performing asset classWill Bancroft – The Real Asset Company
With the price of bitcoin rising from $14 at the beginning of 2013 to $1,045 today, holders of bitcoin have seen their holdings grow in value nearly 75 times this year.
Those are eye-popping numbers!
And, it’s not just Bitcoin surging. Other crypto-currencies have been on the run too, some appreciating by hundreds of percent in a day. This makes the US stock markets much herald 22% gain this year look trivial.
Whilst the media focus might be mainly on bitcoin, the limelight is slowly widening to cover other interesting new names like Litecoin, Feathercoin, Namecoin and many more.
The 21st century’s precious ‘innovators’ and ‘entrepreneurs’ grasp at shadows; the best they can come up with during the longest period of economic uncertainty since the Great Depression is an imaginary tulip bulb. Perhaps reality is too difficult to cope with …
Figure 1: Triangle of Doom: December’s Brent cost convergence from (CommodityCharts.com) Drillers’ costs relentlessly increase while their customers go broke … this last being the consequence of too-high oil prices. What makes this graph useful is that the unit of account — US dollar — is the same for both drillers and their soon-to-be-penniless customers.
This chart represents the nexus between credit- and energy prices. Drillers’ expenses are determined by geology and ongoing consumption; the hundreds of billions of barrels already extracted can never be burned again. At any given instant there is a finite amount of credit, as the share allocated to drillers increases, the share for the customers diminishes … the shrinkage on the customer side adversely affects the economy as a whole and ultimately rebounds against the drillers.
Because of the difficulty accessing supplies in harder-to-reach less productive plays, each new dollar lent into existence returns less petroleum. Drillers are indirectly their own worst enemies; they are dependent upon their customers’ credit to meet their own costs even as each competes against the other for loans … at the same time drillers must also compete for funds against their own lenders and the super-rich speculators who front-run every transaction. This tug-of-war is disruptive … it adds to the cost of funds which are effectively rationed => less-solvent customers cannot borrow => the prices of all goods including petroleum decline. When prices decline there is generally a crisis somewhere; our world only works in one direction; toward ‘growth’.
Ultimately, drillers are stranded by costs they cannot meet. As the supply of petroleum is diminished so is economic activity which further erodes credit in a self-reinforcing cycle. Because Rosenberg & Co. haven’t examined energy affordability, they miss entirely what is wrong with the economy and the markets and they don’t have any idea why!
http://video.cnbc.com/gallery/?video=3000210298
Examining the economy from the standpoint of energy affordability, leads to unorthodox conclusions. Meanwhile, finance = ‘buy the dip’ schemes. “Don’t forget to tell all your friends.” If this is the best that capitalism has to offer then we are at the end of it!
“The rock is reality. The squishy place is the illusion that pervasive racketeering is an okay replacement for an economy.
— James Howard Kunstler
The ‘Brand X’ analyst might suggest that the energy industry be directly subsidized to a greater degree than it is now. Lenders would offer more cost-free loans to drillers leaving customer credit unaffected. There are four ways for economic agents such as firms and customers to borrow: a) against their own accounts such as from their own banks or lines of credit or from those of their share-holders; b) against the accounts of their customers; c) against the account of the state by the way of currency or by direct subsidies, and d) against foreign exchange. The lenders to all of these categories except foreign exchange** … are the same lender! If a greater proportion is lent to the driller, a smaller proportion is lent to everyone else.
Keep in mind, any credit would be unsecured as the fuel ‘collateral’ is converted into atmospheric CO2 … just as it has been after all the previous rounds of loans. Eventually, dear lender is sans-collateral, over-leveraged and insolvent. Not even the state can borrow endlessly. Contrary to what some economists suggest, the state loses credibility as its borrowing increases. Whatever collateral worth the state represents evaporates along with its fuel supply! Ultimately, the state renders its lender insolvent … the state competes against its fuel suppliers even as it endeavors to support them. This disconnect between intention and outcome is why there is a credit crisis in the first place … why the graph is called ‘The Triangle of Doom’ not ‘Triangle of Laughs’ or ‘Triangle of Empty Conjecture or Wishful Thinking’. Managers can fool themselves not the people all the time with wives’ tales of unearned income/endless growth. There is a limit or ‘margin’ to credit and we are there!
Figure 2: Fooling the people: a Ponzi scheme is the transfer of funds from individuals to a promoter who promises larger than ordinary returns: it’s a non-violent form of robbery. (From ‘Enter Mr. Conduit’, October, 2011):
Ponzi schemes have very simple structures and depend on human greed. The promoter lures speculators with promises of ‘secret investment strategies’ or ‘finance insider knowledge’ or ‘high-tech shortcuts’ to unearned wealth. The promoter is often someone or some entity that is trustworthy such as the head of a bank, a business or a government administrator (or a respected finance analyst). Often Ponzi operators are infamous criminals offering shares of ill-gotten gains. The promoter will spend enough funds to put on a convincing ‘front’ and craft a compelling narrative. Ponzis come in all varieties: some involve salting real estate parcels with gold or silver, others involve some new technological marvel. As speculators line up, the promoter diverts a small percentage of the incoming flow of funds toward shills who loudly advertise their success within the scheme. Once speculators see real money in the hands of other ‘investors’ they cannot be restrained from putting up their own funds, often offering their entire life-savings. Outside of initial expenses and the small payments to shills, the promoter keeps all the speculators’ money: he either leaves town with it or the scheme collapses under its own weight.
This happens when the speculators start asking questions about their lack of returns. Mature schemes end when new contributors cannot be found, when all speculators are ‘fully invested’. In both instances, the promoter has absconded with the funds.
Ponzi schemes include all ‘money-for-nothing’ speculations in stocks and bond, commodities and real estate, Bitcoins and even gold/silver. Pyramid schemes can be a harmless form of direct marketing. Ponzi-like conduit schemes are extraordinarily destructive.
Description
Ponzi
Pyramid
Conduit
Beneficiary
Promoter
Early entrants
Promoter in collusion w/ lender
Source of funds
Speculators
Speculators
Lender; banks-finance w/ government guarantees
Responsible for repayment funds*
—
—
Conduits
Coercion
None
None/tax collection
Debt collection, prison, denial of services to those outside the scheme
Promised returns
In kind
Goods or $$$
Empty abstractions: medical ‘care’, ‘security’, ‘solidarity’, etc.
Flow of funds
Speculators to promoters
Late entrants to early entrants
Lenders to promoters, conduits repay lenders
Investment methodology
‘Secret’
Time/compound interest
Aims to position conduits within Ponzi schemes
* Conduits are liable for repayment of loans directed toward 3d party recipients. Conduit schemes are more elaborate- and difficult to erect than Ponzi schemes and generally require some form government complicity. This can take the form of loan guarantees, enabling legislation, borrowing capacity or police power. At least one form of the scheme is against the law. Conduit schemes are pernicious and as such, difficult to recognize, they have taken root across the Western economy outside of Ponzi-fied markets. For example, the Affordable Care Act is a massive conduit scheme.
The aim of the conduit promoter is identical with that of the Ponzi promoter; to steal as much money as possible. As such it is another ‘money-for-nothing’ endeavor. Conduit schemes include restructuring within the European Union which leave citizens and bank depositors on the hook for banker bailouts, higher education lending in the US — where students must retire hundreds of billions borrowed by schools from outside lenders and financiers ostensibly on the students’ ‘behalf’. Restructuring of the Muni market in the US is a conduit scheme, so are government subsidy programs with the citizens as conduits, (from ‘Enter Mr Conduit):
– The payments from a contributor to a final recipient are loans directed through a conduit, who is labeled as a ‘beneficiary’. Unlike Ponzis which require voluntary participation, conduits are coercive, gate-keeping regimes. Whether the participant borrows from the contributor or not, the costs to access the scheme’s services are set by the scheme, neither the conduits nor ordinary cash customers seeking the beneficiary’s services have any ‘bargaining power’.
– The benefit promised to the conduit is an abstraction: a common good such as ‘higher education’, ‘Homeland Security’ or ‘medical insurance’ which is unrelated to the actual funds-transfer.
– The transfer from the contributor (lender) to the recipient (promoter) is always money, often in stupendous amounts.
– The contributors are always entities with large capacity to generate funds such as banks/finance sector(s) and/or governments.
– Both contributors and recipients are aware of the scheme at hand and both actively promote it: falsely to the conduit (and the public), accurately to each other. A critical component of any conduit scheme is collusion between lender and promoter.
– The final recipients who are part of the scam have no investment ‘method’, they simply accept the free money offered in the conduit’s name and spend it.
The conduit is incapable of acting in any interest other than those of the contributor/recipient. Taking on loans and accompanying repayment obligations are conditions of using the system in question. Those who are unwilling or unable to act in the scam promoter’s interest exclude themselves if possible. The recipients/promoters gain enormous amounts of money, what the conduits receive has little- or no worth outside of what they brought to the scam in the first place.
Figure 3: Capitalism and free enterprise are nothing more than reliance upon the price signals where the unit of account is the same for buyers and sellers. Marx was wrong; workers are not alienated from the means of production, costs are purposefully alienated from those who are compelled to bear them. Within this scheme and others like it, the price signal ceases to exist.
System managers do not like the signal, they don’t want it because it represents breaking costs. They paint over the signal with cheap credit, propaganda and market swindles. Like pressure within a boiler with the relief valve closed, the costs associated with industrialization’s surpluses have been building for a long time even as they have been obscured. They are set to emerge explosively at the point where they cannot be met at all.
Analysts excuse the absence of investment in ‘productive enterprises’ but but there are no such things. Industry is loss-making, its product is (a surplus of) waste. It cannot be otherwise, if industry could retire its own loans it would certainly have done so already. There would be no need for frauds, only self-sufficient industries raising all boats. There would be no dips to buy, everyone would be rich.
Instead … capitalism’s cupboard is bare; its inventory is scams, QE, capital waste, bribery and propaganda campaigns; mortgage fraud, the manipulation of libor, fixing and front running currency exchange, cornering precious metals; there are policy errors and miscalculations that are compounded. The end of empire brings capitalism full circle; its schemes can only be made effective by way of violence and coercion. Capitalism is undone by the capitalists themselves.
‘Worst’ is the product of twilight capitalism. Managers expect nothing of us but our worst behavior … they rely upon it; our position within the marketplace is ‘fools’. We are never asked what we can do for our country or anyone or anything other than ourselves. It is, ‘What’s in it for me right now?’. The Invisible Hand runs amok: we are children. To satisfy ‘now’ we have become purposefully ignorant, greedy, corrupt and ruthless: these most ‘efficiently’ exhibiting these characters are rewarded, everything outside is excluded. We are encouraged to be as complacent as possible, to ignore risk, to accept falsehoods at face value, become judgmental, impatient, irrational and filled with fear and self-loathing as if all these are virtues; to believe violence and waste represent ‘freedom’.
Character cannot be bought in a store, it is the product of careful husbandry. We need our best … we need courage, restraint, in the place of innovative novelty and ‘entrepreneurial scheming we need patience and creativity … These things not for sale, capitalism is unable to provide them.
* (See conduit repayment obligation above)
** The central bank of a country will issue domestic-currency loans against foreign exchange held as collateral (which is how mercantile states increase their broad money supply). These loans become unsecured as the forex is swapped for petroleum that is burned up for nothing.