Max Keiser | Financial War Reports
http://www.maxkeiser.com/
If “Everybody Knows the Economy’s Doing Better,” What Is That Information Worth?
Posted on August 8, 2016 by Charles Hugh Smith — No Comments ↓
One investment truism holds that information known to everyone has no value. The reason is that there’s no trading edge in information everyone knows. Trading edges result from information asymmetry, when a limited set of traders has information that is unavailable to other traders/ investors.
Insider trading is one form of information asymmetry, and it is illegal because it gives those with knowledge known only to insiders an immense advantage in terms of exploiting market moves that will manifest once the news becomes public.
Insiders who know a company will report an unexpectedly disappointing earnings report, for example, could buy put options that will gain in value should the company’s stock tank once the news becomes public.
Suspicions of insider trading rise when unusually large options positions are purchased before earnings reports are announced–and those options pay off handsomely.
A recent article by Nick Colas of Convergex speculated that some of the most successful traders of the era may be holding an information asymmetry edge:What Has The Smartest Investors So Spooked? (Zero Hedge).
Colas poses the question: what might they know that the rest of us don’t?
The problem with what “everybody knows” is the world’s central planners manage perceptions by gaming the statistics that supposedly reflect the economy’s health. The goal of central planners is to manage what “everybody knows” so the supposedly factual metrics will stimulate confidence in the economy’s progress (and thus confidence in central banking / planning).
This confidence in the “numbers” encourages investors and speculators to stay fully invested in stocks and bonds. This willingness to stay fully invested pushes stocks higher, a dynamic that generates the so-called wealth effect: as households and corporations see their net worth rise, they feel incentivized to invest and spend more than they would if their confidence in future returns was lower.
Central planners rely on the mainstream media to propagate a rosy interpretation of the heavily spun “numbers.” Thus the low unemployment number is presented as solid proof that the economy is improving (or “recovering,” much as alcoholics are in “recovery”).
The mainstream financial media dutifully presented completely bogus earnings reports as legitimate “beats,” despite the fact that even a cursory glance at the reports reveal the “profits”are largely or totally the result of “one-time charges” and other accounting gimmicks.
The success of central planners’ rigged numbers and the credulous mainstream media’s parroting of central planning spin is designed to manage “what everybody knows.” Even skeptics of the rigged numbers must buy into the resulting stock rallies, lest they be left behind and end up being pink-slipped by investors or their employers.
In effect, central planners have turned the truism about information asymmetryon its head: the only thing a money manager or investor needs to know is what “everybody else knows,” i.e. whatever the central planners are distributing.
The reason this has worked so well is the self-reinforcing nature of central planner’s perception management: since “central banks have our back,” bad economic news means central planners will redouble their stimulus efforts, guaranteeing higher stock valuations, and if the news is positive, well, stocks will respond by soaring higher: you see, central planning works! The economy is “recovering” nicely.
No matter what the news, central planning works: it will reverse any dip in stocks due to bad news, and good news proves central planning is working splendidly.
This suggests any information asymmetry would have to relate to forces that are beyond the control of the central planners’ rigged-statistics / spin machines or a breakdown in the central planners’ rigged-statistics / spin machines–in other words, a massive, sustained loss of confidence in the rigged stats and mainstream media spin.
Consider what these three charts are saying about central planners’s supposed success. The Federal Reserve’s balance sheet is pinned at a “permanently high plateau.” Does this suggest confidence in future economic growth?
Productivity gains have flowed virtually exclusively to the top 5%. Recent studies have found that 81% of U.S. households have experienced declines in real income since 2000. Does this suggest confidence in future economic growth?
The growth of new businesses is a core trait of broad-based expansion. New business growth has stumbled since 2008. Does this suggest confidence in future economic growth?
What could the most successful investors know that the rest of us don’t? First, we have to factor in “talking their book,” i.e. encouraging others to take actions that would profit their portfolio. If they are shorting the market, it behooves them to make their positions known so others might sell, pushing the market down.
But this doesn’t answer why they have built short positions in the first place.
Perhaps they are betting on the collapse of confidence in rigged numbers and false media narratives about the strength of the “recovery.” Perhaps they have access to the real numbers, and they are betting that the gap between reality and the central planners’ rigged numbers is now so wide that a collapse of confidence in BS is baked in, regardless of how the mainstream media spins the resulting implosion.
It wouldn’t surprise me if stocks hit a few more new highs and then cratered. Maybe the “smart money” knows that the real numbers are now so far from the central planners’ rigged statistics that the carefully constructed narrative of “recovery” is doomed to an unwelcome intrusion of reality.
My new book is #7 on Kindle short reads -> politics and social science: Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle ebook, $8.95 print edition)For more, please visit the book’s website.
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Max Keiser | Financial War Reports
http://www.maxkeiser.com/
Could Inflation Break the Back of the Status Quo?
Posted on August 5, 2016 by Charles Hugh Smith — No Comments ↓
That inflation and interest rates will remain near-zero for a generation is accepted as “obvious” by virtually the entire mainstream media. The reasons for this are equally “obvious”: central banks have the power to suppress interest rates indefinitely by creating money out of thin air and using this new cash to buy bonds in unlimited quantities; and the commoditization/ globalization of labor, capital and production has generated a global backdrop of over-capacity and near-zero pricing power.
But suppose for a moment that this confidence in near-zero interest rates and inflation as far as the eye can see is wrong. As I have demonstrated this week,rising interest rates and inflation would break the back of the status quo.
What makes inflation difficult to grasp is its multi-faceted character. Inflation is a monetary dynamic, to be sure, as creating new fiat currency in excess of increasing production / productivity reduces the purchasing power of the currency.
But as I have shown this week, inflation is also one result of cartel capitalism, in which politically powerful cartels can raise prices and reduce quantity and quality without fear of consumers going elsewhere because the cartels have effectively eliminated competition via regulatory capture, lobbying and the immense advantages of unlimited credit from central banks.
Inflation is also tied to the incentives for fraud in our system: lowering quality as a means of Inflation Hidden in Plain Sight increases profits at the expense of consumers who have few means to detect and measure the reduction in the value of what their money buys.
No Wrongdoing Here, Just 6,300 Corporate Fines and Settlements (May 2015)
Inflation is also the result of revenue-hungry governments which jack up junk fees, stealth taxes and outright taxes while delivering lower quality services.
As I have noted many times, inflationary forces are built into urbanization and modern systems of production. Socio-historian Immanuel Wallerstein listed three dynamics that raise costs while delivering little additional direct value to consumers:
1. Urbanization increases the cost of labor (a reality since the 1400s).
2. Externalized costs (dumping private waste into the Commons, environmental damage and depletion, etc.) eventually must be paid one way or another.
3. Rising taxes as governments responds to unlimited demands by citizens for more services (education, healthcare, etc.) and economic security (pensions, welfare).
Financialization also feeds inflation in a variety of subtle ways. The wealthy can keep abreast of real inflation via Asset Inflation while the bottom 95% struggle to pay higher prices for everything from burritos to healthcare.
Financiers and corporations with unlimited credit lines at near-zero rates can buy up rental housing and jack up rents, for example, while asset inflation has pushed housing out of reach of moderate-income households living in job-rich desirable areas.
Meanwhile, small businesses without access to unlimited credit at near-zero interest rates struggle to stay afloat as prices and overhead costs weigh ever more heavily:
So how could inflation rise despite near-universal faith that central banks can inflate credit and assets forever without triggering inflation? History suggests that rampant creation of fiat currency far in excess of increases in GDP eventually catches up with central planners. Consider this chart of inflation in Venezuela:
Another widely held truism holds that inflation cannot rise until wage inflation takes hold. Given the pressure of automation on human labor (and the rising costs of laboir-related overhead such as healthcare), the belief that labor costs will remain subdued makes sense.
But it isn’t quite that simple. Ironically, as automation replaces lower-value labor, the work that cannot be automated becomes more valuable. Difficult-to-automate labor generally requires a high level of education and experience, and often requires working knowledge of multiple fields.
The number of workers with these skills is limited by these high hurdles. There might be 1,000 unemployed people seeking a job but only 200 possess the skillsets that are in demand. (THe Pareto Distribution–the 80/20 rule–suggests 20% of the workforce generates 80% of the productivity gains and profits.)
This is as true of skilled tradespeople as it is of high-level managers.
The net result of these trends is eventual wage inflation as employers who need these high-level skills will have to bid for the relatively few workers with the requisite skills.
Though it may appear counter-intuitive, these dynamics inevitably generate an economy in which low-skill labor is in over-supply and millions are unemployed because low-skill work is scarce and those able to perform the work are abundant, while those able to perform high-skill labor are scarce.
In this scenario, wages for the top 20% of the workforce rise due to supply-demand imbalances while wages for the lower-skill 80% rise due to political pressures such as we’re seeing now with demands for higher minimum wages.
The imminent retirement of millions of experienced Baby Boomer workers will only exacerbate these wage inflation pressures.
Tens of millions of workers have removed themselves from the workforce or have been removed by restrictive disabled-benefits statutes. Millions more get by on welfare or welfare benefits supplemented with cash income earned in the burgeoning black market economy.
Last but certainly not least, political resistance to the oligarchy’s financialization skimming operations will eventually cripple central bank giveaways to the financial sector and corporate oligarchs. There is no other honest word to describe central bank policies other than giveaway, as free money for financiers has greatly expanded wealth and income inequality and handed financiers and corporations essentially unlimited funds to expand cartels and buy political power.
The mainstream financial media is blind to the reality that finance is always political. The privileged few with access to unlimited central bank giveaways can profit in ways that are not available to the bottom 99.9%. Once the political winds of resistance to the oligarchy rise, central banks and the state agencies that enable the dominance of the financial oligarchy will face limits that did not exist in the years of bogus “recovery” (2009-2016).
Unprecedented expansion of credit, wage inflation and much-needed limits on the power of central banks to give away billions to oligarchs will generate inflation. The central planners have successfully masked real inflation behind a smokescreen of official statistics, but eventually a wind will rise that blows the smokescreen away, and the reality of rising inflation will break the back of the financial-political status quo.
Of related interest:
Is This the Terminal Phase of Global Capitalism 1.0? (February 8, 2013)
How the Middle Class Lifestyle Became Unaffordable (May 7, 2014)
Recommended books on these topics:
Civilization & Capitalism, 15th to 18th Centuries (3 volumes):
The Structures of Everyday Life (Volume 1)
The Wheels of Commerce (Volume 2)
The Perspective of the World (Volume 3)
The Long Twentieth Century: Money, Power and the Origins of Our Times
World-Systems Analysis: An Introduction
My new book is #7 on Kindle short reads -> politics and social science: Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle ebook, $8.95 print edition)For more, please visit the book’s website.
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Max Keiser | Financial War Reports
http://www.maxkeiser.com/
What Happens When Rampant Asset Inflation Ends?
Posted on August 4, 2016 by Charles Hugh Smith — No Comments ↓
Yesterday I explained why Revealing the Real Rate of Inflation Would Crash the System. If asset inflation ceases, the net result would be the same: systemic collapse. Why is this so?
In effect, central banks and states have masked the devastating stagnation of real income by encouraging households to take on debt to augment declining income and by inflating assets via quantitative easing and lowering interest rates and bond yields to near-zero (or more recently, less than zero).
The “wealth” created by asset inflation generates a “wealth effect” in which credulous investors, pension fund managers, the financial media, etc. start believing the flood of new “wealth” is permanent and can be counted on to pay future incomes and claims.
Asset inflation is visible in stocks, bonds and real estate:
The sources of asset inflation are highly visible: soaring central bank balance sheets, credit expansion that far outpaces GDP growth and ZIRP (zero interest rate policy):
Destroying the return on cash with ZIRP and NIRP (negative interest rate policy) has forced capital to chase any asset that offers any hope of a positive yield. As asset inflation takes off, the capital gains attract more capital (never mind if yields are low–we’ll make a killing from capital gains as the asset inflates further) which creates a self-reinforcing feedback: the more assets inflate, the more attractive they become to capital seeking any kind of return.
In effect, gambling on additional future asset inflation is the only game in town.Institutional money managers are buying bonds that yield less than zero not because they’re pleased to lose money, but because they anticipate rates dropping further.
As bond yields decline, the value of existing bonds paying higher interest rises. As crazy as it sounds, buying a bond paying -0.01% will be a highly profitable trade if the yield on future bonds drops to -0.1%.
With the cost of borrowing less than zero once the loss of purchasing power (i.e. consumer price inflation) is factored in, it makes sense to borrow money to increase speculative asset purchases to leverage up any gains from future asset inflation.
Look at how margin borrowing and stock prices move in lockstep:
The question that few ask is: what happens to pension funds that need 7.5% annual returns to remain quasi-solvent when asset inflation turns into asset deflation, i.e. assets decline in value? Take a look at the S&P 500’s rise to the stratosphere and ponder the monumental losses that would accrue to any institution that thought asset inflation was a permanent feature of modern life:
There are only two ways to keep asset inflation alive: one is for central banks and states to buy up major chunks of all asset classes, i.e. hitting every higher bid regardless of the risks of such a strategy, and the second is to pay households to borrow money to chase future asset inflation, for example, paying households to buy a house with a mortgage:
The insanity of these two strategies is no hindrance to their implementation.The collapse of asset inflation will implode all the fiscal and financial promises based on ever-inflating assets and reveal the unsustainability of the status quo’s strategy of substituting debt and asset bubbles for stagnating real income.
My new book is #7 on Kindle short reads -> politics and social science: Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle ebook, $8.95 print edition)For more, please visit the book’s website.
