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This article provides insight as to the way the Fed and all central banks think.

A worst-case scenario is a concept in risk management wherein the planner, in planning for potential disasters, considers the most severe possible outcome that can reasonably be projected to occur in a given situation.

The book Worst Case Scenario Extreme Edition provides hands-on strategies for surviving an elephant stampede, a 16-car pile-up, a mine collapse, and a nuclear attack. Discover how to take a bullet, control a runaway hot air balloon, break a gorilla’s grip, endure a Turkish prison, free a limb from a beartrap, chased by a pack of wolves, or buried alive.

Alas, the book does not cover worst case Fed scenarios brought about by Fed policies.

Insight into Central Bank Thought Processes

The following video explains the way the Fed thought in 2006 and thinks again today regarding “worst case scenarios”

Please play the video. It’s a real hoot.

The alleged “stress tests” in Europe and the US are bogus.

Currently, the ECB believes Italy will never leave the eurozone and the EU cannot break up.

The Fed does not believe they have blown another bubble.

The interesting thing is the Fed is the very purveyor of bubbles. They do not see it and never will.

The result is bubbles of increasing amplitude over time.

Fed Uncertainty Principle

Let’s do another flashback,. This time to April 3, 2008 to my article Fed Uncertainty Principle.

…click on the above link to read the rest of the article…

“What Happens When The Market Can No Longer Pretend”: Charting Today’s Minsky Moments Dynamics

October 28, 2017

“What Happens When The Market Can No Longer Pretend”: Charting Today’s Minsky Moments Dynamics

Back in July, Deutsche Bank’s derivative strategist Aleksandar Kocic believed he had found the moment the market broke, which he defined as a terminal dislocation between market and economic policy uncertainty: as he wrote 4 months ago, it was some time in 2012 that markets “lost their capacity to deal with uncertainty.”

It was also some time in 2012 that traders and market participants realized central banks have not only taken over the market, but have no intention of ever leaving as the alternative is a crash that wipes out 8 years of artificial “wealth effect” creation and puts the very concept of fractional reserve and central banking in jeopardy.

This intention was confirmed last week when as Kocic again wrote overnight, it became clear – once again – that Central Banks’ main agenda “is management of the risk of policy unwind” which has two different aspects, especially for those who still believe there is such as a thing as a “market.” Kocic explains:

On one hand, it is reassuring that Central Banks are cognizant of severity of the risk and are showing appropriate flexibility in adjusting their reaction functions to incorporate these realities.
On the other hand, this is less good because it does not allow the market to reposition and, thus, normalize. By soliciting feedback from the markets, Central Banks are further encouraging bad behavior making things potentially worse by postponing the resolution further into the future.

This is also the “nightmare scenario” envisioned by Eric Peters: a world in which central banks inject more and more liquidity and “stimulus”, and yet inflation does not rise, resulting in greater and greater financial inflation, i.e., asset bubbles, and a Fed chair who is confused about the “mystery” of inflation.

…click on the above link to read the rest of the article…

Systemic Uncertainty, Meet Fragility

August 30, 2017

Systemic Uncertainty, Meet Fragility

That’s the problem with fragility: everything looks fine on the surface until a crisis applies pressure. Then the whole rickety contraption collapses in a heap..

Life is inherently uncertain, but systems that were once considered certainties have increasingly become uncertain. Social Security is one example; recent polls reflect widespread doubts among Millennials and Gen-Xers that there will be any Social Security benefits left for them by the time they reach retirement age.

This doubt is fact-based; as the number of retirees swells, as Medicare costs soar ever higher and the number of full-time jobs paying into Social Security/ Medicare stagnates, these pay-as-you-go programs break down; Social Security is already paying out billions more than it collects from employers and employees.

Uncertainty is one thing, fragility is another. The socio-economic systems we rely on are also becoming increasingly fragile and prone to failure, for an entirely different set of reasons than those driving uncertainty.

Changing fundamentals drive uncertainty. The nation’s demographics and stagnant wages for the bottom 95% are extremely unfavorable for pay-as-you-go programs like Social Security and Medicare; their future is uncertain because the inputs and outputs are changing.

Fragility is a function of systems being thinned by cronyism, self-serving insiders, fraud, lack of transparency, lack of competition, monopolies, profiteering and a decline of quality. Systems that become too costly due to the above dynamics are hollowed out as everyone seeks some way to reduce the costs. Redundancies are stripped out, staff is slashed to the bone, senior managers with the most experience are pushed out to lower payroll costs, quality control is whacked, and inferior inputs are presented as equal to the higher quality inputs that they replace.

When these weakened systems are under pressure or face a crisis, they crumble. Shoddy materials fail, inexperienced managers make hasty, ill-informed decisions, the barebones staff is overwhelmed, equipment that wasn’t properly maintained to save money breaks down, and so on.

…click on the above link to read the rest of the article…

Uncertainty and the Humility of Forecasting an Unknowable Future

April 5, 2017

Uncertainty and the Humility of Forecasting an Unknowable Future

While we’re being reassured that all these grandiose promises are resting on trends that are as reliably predictable as the tides, the next easily predictable crisis will very likely reveal the trends are speculative bubbles that will predictably burst in a devastating reversion.

Certainty and uncertainty come in a variety of flavors. “Certainty” seems rather definite, but lurking beneath certainty is the more scientifically verifiable notion of probability: the probability of outcomes can be high enough to qualify as certain and low enough to qualify as unlikely.

We can’t know with perfect certainty that our neighbor hasn’t invented a death-ray and may decide to test it on us due to that simmering feud over his dog Fluffy’s antics on our yard.

But we can make an assessment of the probability of this occurring, and conclude the probability is low with a high degree of certainty.

This assessment should change, of course, if we hear strange noises in his shop and notice shrubs in his back yard are now charred in peculiarly symmetric circles–and we learn he previously worked at a national lab on high-energy weapons but was dismissed for pursuing crazy ideas about developing handheld death-ray devices, i.e. phasers. (Star Trek fans, please raise a cheer.)

This brings us to a critical distinction between low-probability events, i.e. known unknowns a.k.a. highly unlikely “long-tail” events, and unknown unknowns, a.k.a. “black swans” made famous by author Nassim Taleb.

What is a known unknown? Death qualifies as a known unknown: we know with a high degree of certainty that the vast majority of living things eventually die (even cancer cells die once their host dies)–but the timing of their individual natural death is inherently uncertain, due to the great number of inputs, variables and causal factors intrinsic to life.

…click on the above link to read the rest of the article…

What Markets Are Telling Us

February 15, 2016

What Markets Are Telling Us

Last week US stock markets tumbled yet again, leaving the Dow Jones index down almost 1500 points for the year. In fact, most major world markets are in negative territory this year. There are many Wall Street cheerleaders who are trying to say that this is just a technical correction, that the bottom is near, and that everything will be getting better soon. They are ignoring the real message the markets are trying to send: you cannot print your way to prosperity.

People throughout history have always sought to acquire wealth. Most of them understand that it takes hard work, sacrifice, savings, and investment. But many are always looking for that “get rich quick” scheme. Monetary cranks throughout history have thought that just printing more money would result in greater wealth and prosperity. Every time this was tried it resulted in failure. Huge economic booms would be followed by even larger busts. But no matter how many times the cranks were debunked both in theory and practice, the same failed ideas kept coming back.

The intellectual descendants of those monetary cranks are now leading the world’s central banks, which is why the last decade has seen an explosion of money creation. And what do the central bankers have to show for it? Lackluster employment numbers that have not kept up with population growth, increasing economic inequality, a rising cost of living, and constant fear and uncertainty about what the future holds.

The past decade has been a lot like the 1920s, when prices wanted to drop but the Federal Reserve kept the price level steady through injections of easy money into the economy. The result in the 1920s was the Great Depression. But in the 1920s prices were dropping because of increased production.

…click on the above link to read the rest of the article…

Stretching Your Resources In Uncertain Times

December 23, 2015

Stretching Your Resources In Uncertain Times

money public domain With the cost of everything going up and the future uncertain, stretching your resources and re-purposing items becomes more of a necessity. I am always looking for new ways to get the “max for the minimum.”

Some recent posts here reminded me of some of these things. My grandparents and parents were a young family when the great depression hit. What kinds of things did they do to make ends meet when things were expensive or scarce?

Unfortunately, many of them who went through this period in time are no longer with us. However, I remember a few things they did or heard of them doing, that now, looking back, were obviously brought about by the times they lived in. Even after times improved somewhat, some still stuck to certain ways of doing things. Old habits are hard to break.

Hunting and gardening were basically a given back then. Most everyone outside the city limits did one or both of this along with bartering services for goods. A little carpentry or plumbing work for a couple of chickens.

I remember my grandfather mixing his old used motor oil with a little bit of kerosene and spraying the underside and inner fender wells of his pick up truck just before winter. He claimed it helped protect the truck from incurring rust damage over the winter months. Getting more serviceable years out of the truck.

I am sure environmentalists would have a cow over this nowadays, but it was a way of taking something that didn’t appear to have any usefulness left ,and yet, finding one more use for it. The county used to spray old used oil to keep the dust down on dirt roads during the spring and summer months. Don’t see that happening anymore.

…click on the above link to read the rest of the article…

Honey, I Broke the Markets

December 17, 2015

Honey, I Broke the Markets

“Donald Trump looks like the villain in a movie where the hero is a dog.”

– The internet.

Which four letter word still has an amazing capacity to cause offence, anxiety and aggravation ? In the world of investment, that word would have to be
R-I-S-K.

Do we even have a workable definition of what it means ?

Author Guy Fraser-Sampson, in ‘The Pillars of Finance’, points out that before the Second World War, financial thinkers had a somewhat humbler perspective on the subject:

“..while before the War there was eager discussion as to what risk might be, and whether it was the same thing as uncertainty, there was total agreement that whatever it was it was probably too complex an animal ever to be fully understood and, in particular, that it was incapable of mathematical calculation.” [Emphasis ours.]

The American academic Frank Knight published ‘Risk, Uncertainty and Profit’ in 1921. As he wrote, some forms of uncertainty are measurable. There is, for example, empirical observation with regard to the occurrence of a number of discrete outcomes, such as the rolling of dice.

Then there is ‘true uncertainty’, such as the chances of a house in a particular area catching fire in any given year. The probability of dice throws is capable of mathematical calculation – albeit the outcome is still not guaranteed – whereas the chance of a house burning down is not. In relation to fire insurance, we can only use statistical inferences drawn from prior observation.

“The import of this distinction.. is that the first.. type of probability is practically never met with in business, while the second is extremely common. It is difficult to think of a business ‘hazard’ with regard to which it is any degree possible to calculate in advance the proportion of distribution among the different possible outcomes. This must be dealt with, if at all, by tabulating the results of experience. The ‘if at all’ is an important reservation.”

…click on the above link to read the rest of the article…

Imagine If Exxon Had Told the Truth on Climate Change

October 31, 2015

Imagine If Exxon Had Told the Truth on Climate Change

Like all proper scandals, the #Exxonknew revelations have begun to spin off new dramas and lines of inquiry. Presidential candidates have begun to call for Department of Justice investigations, and company spokesmen have begun to dig themselves deeper into the inevitable holes as they try to excuse the inexcusable.

(Worst idea: attack Pulitzer prize-winning reporters as “anti-oil and gas activists”)

As the latest expose installment from those hopeless radicals at the Los Angeles Times clearly shows, Exxon made a conscious decision to adopt what a company public affairs officer called “the Exxon position.” It was simple: “Emphasize the uncertainty.” Even though they knew there was none.

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Someone else will have to decide if that deceit was technically illegal. Perhaps the rich and powerful have been drafting the laws for so long that Exxon will skate; I confess my confidence that the richest company in American history can be brought to justice is slight.

But quite aside from those questions about the future, let’s take a moment and just think about the past. About what might have happened differently if, in August of 1988, the “Exxon position” had been “tell the truth.”

That was a few months after Nasa scientist James Hansen had told Congress the planet was heating and humans were the cause; it was amid the hottest American summer recorded to that point, with the Mississippi running so low that barges were stranded and the heat so bad that corn was withering in the fields. Imagine, amid all that, Exxon scientists had simply said: “Everything we know says Hansen is right; the planet’s in serious trouble.”

…click on the above link to read the rest of the article…

Gold & War

October 3, 2015

Gold & War

QUESTION: Does war boost gold prices?

ANSWER: No. The only impact that war will have on gold is confined to either prolonged inflation or the uncertainty of the victor — the hedge against government survival. War by itself is a non-event. Gold will rise ONLY when there is uncertainty because the currency of the government will not survive a loss or a win if it is Pyrrhic victory.

So be careful. The gold promoters will tout that gold will soar if a war takes place. They did that with Russia’s invasion of Afghanistan back in the 1980s. But war means nothing unless there is a rise in uncertainty as to who will win or the cost changes the economic trend in a Pyrrhic victory. The Romans closed or opened the door of the Temple of Janus for whom the month of January is named after based upon the existence of war. When the doors were closed, there was no war, so political uncertainty did not exist. When Rome was at war, the doors remained open as a symbol of political uncertainty. So this is a very familiar concept that has ancient roots.

Gold rose in value expressed within the local currency of any nation where its future existence came into question in both World War I and World War II. Capital will also attempt to move away from wherever the crisis might be. So war in Europe and the dollar rises. The Cuban Middle Crisis and the dollar declined as capital fled to Europe. Just because there is war somewhere, which there often is, has no impact upon gold unless your country is impacted with respect to confidence.

Progress in an Uncertain World

August 19, 2015

Progress in an Uncertain World

Strong Towns is often accused of offering doom-and-gloom diagnoses of problems but being light on solutions. “You don’t tell us what we can actually DO to fix our insolvent cities,” goes the response. “You’re just so negative all the time.” This is not true, but I also don’t think it’s true that these criticisms are made in bad faith.

Rather, I think we have articulated a vision of what should be done to build Strong Towns, and done so in great detail. But that vision is heavy on experimentation and small-scale risk-taking (with potentially great rewards). It is heavy on civic engagement and grassroots action. And it is notably light on technocratic policy interventions: to the extent we talk about policy, it’s often about what policy makers should NOT do, not what they should.

There is a good reason for this, and those with a technocratic mindset (i.e. that the problems of cities will be fixed by top-down, data-driven policy tinkering) would do well to consider it.

The City as Ecosystem

Chuck occasionally has called mathematician and risk analyst Nassim Nicholas Taleb the “patron saint of Strong Towns thinking.” I strongly urge anyone who has not read Taleb to pick up his books—Antifragile if you’re only going to read one, but also Black Swan and Fooled by Randomness. They are deeply intellectual and cross-disciplinary, but not overly wonky: accessible and entertaining for non-academic readers.

The central thesis of Taleb’s work is that complex systems are inherently unpredictable and prone to “Black Swan” events: unforeseeable and unprecedented cataclysmic changes. It’s not that we haven’t figured out yet how to completely predict their behavior; it’s that it is far from even mathematically possible for us to do so. Think of a natural ecosystem. Global weather patterns. The stock market. The human body. A city.

…click on the above link to read the rest of the article…

FOURTH TURNING – THE SHADOW OF CRISIS HAS NOT PASSED – PART FOUR

February 14, 2015

FOURTH TURNING – THE SHADOW OF CRISIS HAS NOT PASSED – PART FOUR

In Part One of this article I explained the model of generational theory as conveyed by Strauss and Howe in The Fourth Turning. In Part Two I provided an overwhelming avalanche of evidence this Crisis has only yet begun, with debt, civic decay and global disorder propelling the world towards the next more violent phase of this Crisis. In Part Three I addressed how the most likely clash on the horizon is between the government and the people. War on multiple fronts will thrust the world through the great gate of history towards an uncertain future.

War on Multiple Fronts

“The risk of catastrophe will be very high. The nation could erupt into insurrection or civil violence, crack up geographically, or succumb to authoritarian rule. If there is a war, it is likely to be one of maximum risk and effort – in other words, a total war. Every Fourth Turning has registered an upward ratchet in the technology of destruction, and in mankind’s willingness to use it.” – Strauss & Howe –The Fourth Turning

The drumbeats of war are pounding. Sanctions are implemented against any country that dares question American imperialism (Russia, Iran). Overthrow and ignominious imprisonment or death awaits any foreign leader questioning the petrodollar or standing in the way of America spreading democracy (Iraq, Libya, Syria, Ukraine, Egypt). The mega-media complex of six corporations peddle the government issued pabulum about ISIS being an existential threat to our freedoms; Russia being led by the new Hitler and poised to take over Europe; Syria gassing innocent women and children; and Iran only six months away from a nuclear bomb (they’ve been six months away for the last fourteen years). Hollywood does their part with patriotic drivel like American Sniper, designed to compel low IQ unemployed American youths to swell with pride and march down to enlistment centers, located in our plentiful urban ghettos.

The most disconcerting aspect of Fourth Turnings is they have always climaxed with total destructive all-out war. Not wars to enrich arms dealers like Iraq, Afghanistan, and Syria, but incomprehensibly violent, brutal, wars of annihilation. There are clear winners and losers at the conclusion of Fourth Turning wars. Leaders mobilize all forces, refuse to compromise, define their enemies in moral terms, demand sacrifice on the battlefield and home front, build the most destructive weapons imaginable, and employ those weapons to obtain victory at any cost.

…click on the above link to read the rest of the article…

Anxiety and Interest Rates: How Uncertainty Is Weighing on Us

February 8, 2015

Anxiety and Interest Rates: How Uncertainty Is Weighing on Us

Anxiety and uncertainty are weighing on individuals even where the overall economy is growing.

Some of this angst is the fallout from advances in information technology. The Internet, ubiquitous computing, robotics, 3-D printers and the like are wonderful advances, yet they may also be personal threats: For some, the technologies may eliminate our jobs or potential future jobs, or make them less lucrative. For others, they may bring new riches.

Even people with moderately high incomes have reason to be uncertain. Some college professors, tenured or not, might lose their jobs in the face ofmassive open online courses, while others prosper from them. Lawyers might find less demand for services that can be supplanted by computerized legal research tools. News and entertainment media have already faced huge technology-related job losses.

Such fears are not measured by the usual consumer confidence indexes. The University of Michigan Consumer Sentiment Index reached its highest level since 2004 in January. But this index, and others like it, look ahead only into the short term and report about perceived aggregate conditions rather than individual risks.

…click on the above link to read the rest of the article…

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