On Dec. 1, when I came back from Brazil through Houston, the WSJ headline at the airport kiosk was on the markets rallying in response to the FED/ECB bailout of European Banks. I commented to friends and family at the time that this is exactly the wrong read of this infomation. In a Dec. CNBC interview, Bass remarks how the markets have misinterpreted a solvency issue as a liquidity issue.
Subtitle: "How suppressing volatility makes the world less predictable and a more volatile place."
"What can be said, however, is the more constrained the volatility, the bigger the regime jump is likely to be."
While written from a US foreign policy perspective this certainly captues what I have been saying about central bank behaviour.
I quote myself.
"We are in a new age of volatility. The central banks, particularly the FED, have been managing the market levels, providing accommodation that may have short term benefits but serves to increase systematic risk and volatility in the economy. This means all asset managers are now risk managers."
Here is a critique of the ERCI call from a recent post. My thanks to Brent, who provides me with many useful and interesting links.Here is another link where the same blogger evaluates the models used by my favorite bears. As I will be on the academic job market next year, I hope my fears and those of Rosenberg, ERCI’s and Hussman’s are proven wrong.
For now, my personal opinion about the US being able to dodge the Euro/Japan-bullet remains unchanged (and of course its own structural unemployment issue).
But, as scientists and investors, we must always be open to new information. And I love my kids and wife.
While working on my latest research paper, I was listening to Jordan Peterson’s Maps of Meaning series on TVO. In episode 7 (approx. minute 7), he references Mircea Eliade’s interpretation of the universality of the Flood Myth as follows.
“The idea of the flood myth goes something like this. If societies deviate from a necessarily emergent kind of morality, a morality that takes the viewpoint of all the inhabitants of the society into account. If society deviates from that viewpoint sufficiently-it dooms itself to annihilation. That annihilation being represented mythologically by the flooding of society by the pre cosmogonic waters the primordial element or chaos. Societies that are tyrannical therefore doom themselves to annihilation by chaos
–a simple equation. But made more complicated by Eliade’s observation that more than one factor plays a role in the establishment of the tyranny.
On the one hand, there is the straight degeneration of cultural presuppositions, in that if you establish a state or a game which has particular rules, because the environment is constantly transforming itself the rules by necessity become out of date. So merely as a consequence of the progression of time the presuppositions upon which any state are founded tend to become less and less relevant to the current environment over time. So there is this aging and senility merely as a consequence of thermodynamic processes.
But then Eliade points out that there is one additional factor that has to be attributed not to society but to individuals that make up that society. Which is to say that the strictures and rules on which society is founded, can be constantly and carefully updated, when necessary, if all the individuals that make up that society are perfectly willing to confront exemplars of emerging chaos in their own lives - When those exemplars emerge. ….. What Eliade points out is the individual that removes him or herself from the responsibility of confronting their own anomaly speeds the process at which the state decays.”
I suppose the reason for my pessimistic tone on many of these pages is that neither the state nor individuals seem to be responding to the changes in the underlying economic environment in any substantial manner. That both individual responsibility and societal responsibility (think of the root of the word ability to respond) seem to be waning. For instance, the yearning of the Tea Party for the good old days of the 1700’s, seems to be dangerously rooted in a fantasy past.
Some things such as the nature of global competition, inequaility, social mobility, financial innovations change and require repsonses at both a societal and individual level. Others such as values of work ethic and family remain vital ingredients to the potential sustainability of our society; these messages, however, are often delegitimized when they are delivered from politicians or corporate elites whose personal and professional behaviour belie loyalty to either family or community.
The solutions lie at a symbiotic nexus between individual and social responsibility, but are we ready for the required changes?
“Billionaire investor George Soros warned that the global economic system could collapse and street riots “moving” throughout the United States. On the other hand, Europe is also struggling against something that would drive them to chaos and
Meanwhile the central banks are “flooding” the world with cash as they expand their monetary bases at unprecedented levels. They are fighting today's crisis as if it were the Great Depression. No matter how much money they print they will not be able to make up for the mistakes of the 1930s. This isn't the 1930s, we need more nuanced responses from our leaders.
Otherwsise, expect chaos to continue to increase..
Peter Gabriel sings
When the night shows
the signals grow on radios
All the strange things they come and go, as early warnings
Stranded starfish have no place to hide
still waiting for the swollen Easter tide
There's no point in direction
we cannot even choose a side.
The market cheerleaders for the US economy are going to have to drop their pom poms very soon. Check out this report on Squawkbox by Lakshman Achuthan, of ECRI, of the coincident indicators; he says we have not seen a deterioration of this type without a recession for the past 50 years. Once again the consensus view is way too optimistic.
One of my professors in undergraduate once told me that "there are more positions than geniuses". I think the returns to mediocrity seem to be diminishing and this has some severe implications for the society. It seems more and more of our economic activity is organized around a tournament structure where a small minority receive enormous payoffs and the rest benefit very little.
Reality televison is the cultural canary in a coal mine that marks this broader employment trend with shows like 'The Apprentice', 'The Amazing Race', 'American Idol', 'Survivor', 'The Bachelor','The Bachelorette','The Biggest Loser' etc...
As recently reported by the NY Times,
"Now, many economists fear that the comfortable Plan B jobs are disappearing. Technology and cheaper goods from overseas have replaced many of the not-especially-creative professions. A tax accountant loses clients to TurboTax; many graphic designers have been replaced by Photoshop; and the small shopkeeper by Home Depot, Walmart or Duane Reade. Though a lottery economy is valuable to various industries, the thought of an entire lottery-based economy, in which a few people win big while the rest are forced to toil in an uncertain and not terribly remunerative dead-end labor pool, is unfair and politically scary. If large numbers of people believe they have no shot at a better life in the future, they will work less hard and generate fewer new ideas and businesses. The economy, as a whole, will be poorer."
This is not new, Frank and Cook identified this emerging trend 17 years ago. Robert Shiller advocates redistribution to prevent inequality from increasing.
The world is in love with the China story and the all too human tendency to extrapolate recent performance (regardless if it is dubious) far into the future is the norm for those forecasting Chinese growth.
China is a commnist country that allocates capital very inefficiently. Too much of the economy is SOEs and the size of the banking sector (with its exposure to a real estate bubble) rivals that of the US, a mature economy.
Caixin on China's State Owned Enterprises(SOEs).
“In October 2011, the State-Owned Assets Supervision and Administration Commission of the State Council (SASAC) released a breakdown of state-owned assets and earnings information for 102 for-profit SOEs. This showed that in 2010, the capital of 102 central-level SOEs was equivalent to 61.4 percent of GDP, and their earnings equaled 42.2 percent of GDP.
This information is representative of only those central-level SOEs that can be published. There are actually 120 for-profit SOEs authorized by SASAC. Fifteen percent of them are legally prohibited from releasing this kind of information. If you include industries outside of those legal requirements, like the tobacco and finance industries, the scope of SOEs is even more alarming. The second national economic census taken in 2008 reported profits of nearly 900 billion yuan by finance industry central-level SOEs. Banks accounted for 64 percent of that profit.”
Here is a link to The Economist's (Newspaper) Democracy index.
Notice that China sits in the lowest category, as one of the worst countries in the world, 141 out of 167.
Russia is in the same category as China, only higher at 117. Brazil is 45, South Korea is 22, United States is 19, Japan 21, Malaysia is 71. So who is China more likely to evolve towards in the next century?
Here is a Time article discussing that Malaysia has fallen into a middle income trap. How then is it that China, one of the most oppressive corrupt centrally planned economies in the world, is going to do as well, or better than Malaysia? Malaysian GDP is $8,600- Chinese is $5,200 in 2011 according to IMF.
It seems to me the most reasonable assumption is that China will follow a path of crony capitalism as Russia did when the Soviet Union collapsed.
She says "Oh baby, just you shut your mouth!"
With a new host. He lost most of his last 6 months of posts. Here is a vintage post on the US/China Trade deficit and the Fed choosing to allow imbalances to persist.
"Now if the initial cause was the PBoC capital exports, of course the Fed could possibly have foiled the capital impact of the PBoC intervention by raising interest rates and forcing up unemployment in the US.
This is the point that Martin Wolf has often made, and if the Fed had done so it might have caused private businesses to cut back on their investment more quickly than the resulting decline in savings, and the US could have effectively blocked capital
imports. The rising unemployment would have reduced US consumption and US imports, which would have reduced the US current account deficit. Remember, these are just the opposite sides of the same coin and one automatically implies the other. If the excess of investment over savings declines, so does the current account surplus.
For whatever reason, right or wrong, the Fed didn’t do this. The result was that the US had to run a capital account surplus. In the US, however, there are two ways the capital account surplus must resolve itself. Since the capital account surplus is equal to the excess of investment over savings, if the capital account surplus rises, broadly speaking, either savings must decline, or investment must rise (or some appropriate combination of both in which the excess of investment over savings rises)."
We all have the tendency to look for evidence that supports our world view and dismiss items that run contrary. Here are a couple of posts by blogger Noahpinion, one on the general tendency for macro models/papers to have a conservative policy bias, the other a specific critique on the weak criticism by Tyler Cowen, of Marginal Revolution, on Keynesian economics.
As to my own confirmation bias, I once again say that those cheerleaders for the FED/ECB, US Economic recovery, and current valuations of the stock market are incredibly premature and most likely self-delusional.
Just saying its them -not me.