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Beneath the illusory stability of rising GDP, the extremes of debt, leverage, stimulus and speculative frenzy required to keep the ‘phantom wealth bubble’ from imploding are all rising parabolically.

Imagine being at a party celebrating the vast wealth generated in the last ten months in stocks, cryptocurrencies, real estate and just about every other asset class. The lights flicker briefly but the host assures the crowd the generator powering the party is working perfectly.

Being a skeptic, you slip out on the excuse of bringing in more champagne and pay a visit to the generator room. To your horror, you find the entire arrangement held together with duct tape and rotted 2X4s, the electrical panel is an acrid-smelling mess of haphazard frayed wire and the generator is over-heated and vibrating off its foundation bolts. Whatever governor the engine once had is gone, it clearly won’t last the night.

The party is the U.S. economy, and the generator room is the Federal Reserve, its proxies and the U.S. Treasury, all running to failure. What we’re experiencing in real time is the illusion of stability and the inevitability of collapse. I’ve prepared a few charts to illuminate this reality graphically.

Here’s the illusion of stability in a nutshell: while the broadest measure of the economy, gross domestic product (GDP) has continued marching higher (in both nominal and real/inflation-adjusted terms), the amount of Federal Reserve stimulus and Federal debt required to keep pushing GDP up at the same rate has exploded higher and is tracking a parabolic blow-off.

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Fed Up with the Fed’s Abuse of Power

August 28, 2021

Fed Up with the Fed’s Abuse of Power

One phrase describes the Fed’s pillaging of the nation to benefit the few at the expense of the many: abuse of power.

To confess that the fate of the entire global economy now rests on the mumblings of a fossilized Politburo fanatically devoted to making the rich richer is to 1) state the obvious and 2) admit the extreme fragility of the global financial system. That it has come to this– all global markets soar or collapse in unison based on the addled spew of the fossilized Politburo’s chairman–is overwhelming evidence that 1) the system is broken and 2) the fossilized Politburo has way too much power and 3) the fossilized Politburo is abusing its power by enriching the already-rich, decade after decade, to the detriment of the bottom 90% and systemic stability.

Let me translate the incoherent ramblings of Chairperson Powell: let them eat cake (or more precisely, let them eat brioche), for increasing wealth and income inequality has been the Fed’s prime directive since The Maestro Alan Greenspan began the Fed’s manipulation–oops, I mean management–of the stock, bond and risk markets in the early 1990s.

The fatal synergies unleashed by the Fed’s abuse of power were already apparent to Greenspan by December 5, 1995 when he issued his famous warning that equities were exhibiting “irrational exuberance.” The irrational exuberance of those early days of the Fed’s abuse of power–stripmining the middle class to boost the wealth of America’s top tier–now look positively quaint compared to today’s Fed-fueled speculative mania which has poisoned the entire society and hoisted the economy on a rickety ladder to the sky that will crush everything below when it finally snaps.

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

Why the Global Economy Is Unraveling

August 17, 2021

Why the Global Economy Is Unraveling

Global supply chain logjams and global credit/financial crises aren’t bugs, they’re intrinsic features of Neoliberalism’s fully financialized global economy.

To understand why the global economy is unraveling, we have to look past the headlines to the primary dynamic of globalization: Neoliberalism, the ideological orthodoxy which holds that introducing market dynamics to sectors that were closed to global markets generates prosperity for all.

This is known as Neoliberalism, as liberalizing markets means opening up sectors that had previously been restricted. Neoliberalism holds that global market forces introduce efficiencies and opportunities that then pave the way for growth. Global market forces include not just new buyers and sellers of goods and services but the introduction of vast new markets for credit and risk that far exceed what was available in local marketplaces.

So far so good: opening markets creates efficiencies and prosperity, blah blah blah. But the real dynamic behind this happy-story shuck-and-jive is unprecedented prosperity for those with access to low-cost credit generated out of thin air by central banks.

In other words, introducing market forces leads to the dominance of those who control those forces –banks and corporations. Once a local economy is exposed to global capital, those with the most expansive access to the lowest-cost credit can outbid local buyers, snapping up the most productive assets and dominating the local economy to their own benefit.

Since the core mechanism of Neoliberalism is access to low-cost credit, Neoliberalism concentrates financial power and risk in a handful of financial nodes which every market participant unknowingly becomes dependent on. When a developing-nation village was largely self-sustaining and not exposed to global markets, it was largely unaffected by global financial crises.

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How Breakdown Cascades Into Collapse

July 20, 2021

How Breakdown Cascades Into Collapse

Maintaining the illusion of confidence, permanence and stability serves the interests of those benefiting from the bubbles and those who prefer the safety of the herd, even as the herd thunders toward the precipice.

The misconception that collapse is an all or nothing phenomenon is common: Either the system rights itself with a bit of money-printing and rah-rah or it collapses into post-industrial ruin and gangs are battling over the last stash of canned beans.

Neither scenario considers the fragility and resilience of the socio-economic system as a whole. It is both far more fragile than the believers in the permanence of the waste is growth model grasp and more resilient than the complete collapse prognosticators grasp.

The recent relatively mild logjams in global supply chains of essentials are mere glimpses of precariously fragile delivery-supply systems. These can be understood as bottlenecks that only insiders see, or as unstable nodes through which all the economy’s connections run. Put another way, the economy’s as a network appears decentralized and robust, but this illusion vanishes when we consider how the entire economy rests on a few unstable nodes.

One such node is the delivery of gasoline and fuels. It’s such an efficient and reliable system that 99.9% of us take it for granted: there will always be plenty of gasoline at every station, the tanks of jet fuel will always be topped off, and so on.

The 0.1% know that this system, once disrupted, would knock over dominoes all through the economy.

Hyper-efficiency and hyper-globalization has reduced the number of producers of essentials to the point that disruptions cannot be overcome with redundant sources. We see this everywhere in the global economy: a handful of plants and companies (sometimes a single source of essential components) process or manufacture essential components in much larger systems.

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

Welcome to the 21st Century Sequel of the Catastrophic 1600s

July 17, 2021

Welcome to the 21st Century Sequel of the Catastrophic 1600s

As the chart below on ‘how systems collapse’ illustrates, the loss of stabilizing buffers goes unnoticed until the entire structure collapses under its own weight.

Disruptive extremes of weather: check

Rising geopolitical tensions with no diplomatic resolution: check

Multiplying scarcities in essential commodities: check

Domestic disorder accelerates as extreme positions harden into irreconcilable conflicts: check

Welcome to the 21st century sequel of the catastrophic 1600s, an extended period of mutually reinforcing crises that overturned regimes and empires from England to China and triggered unremitting misery across much of the human populace. (Global Crisis: War, Climate Change and Catastrophe in the 17th Century is a riveting overview of this complex era.)

What can we learn from the catastrophic 1600s? Leading the list: humans don’t respond well to scarcities. They get crotchety, argumentative, and prone to finding ways to become disagreeable rather than agreeable. Their derangement deepens as they form self-reinforcing echo-chambers of the like-minded, and the source of their misfortune shifts from fate to equally fixated human opponents.

Three extended quotes come to mind: the first bitter satirical rant from Mark Twain, the second from Patrick Henry and the third from James Madison:

Mark Twain: “O Lord our Father, our young patriots, idols of our hearts, go forth to battle — be Thou near them! With them — in spirit — we also go forth from the sweet peace of our beloved firesides to smite the foe. O Lord our God, help us to tear their soldiers to bloody shreds with our shells; help us to cover their smiling fields with the pale forms of their patriot dead; help us to drown the thunder of the guns with the shrieks of their wounded, writhing in pain; help us to lay waste their humble homes with a hurricane of fire…

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

Crisis, Crash, Collapse

July 5, 2021

Crisis, Crash, Collapse

We have a fine-sounding word for running with the herd: momentum. When the herd is running, those who buy what the herd is buying and sell what the herd is selling are trading momentum, which sounds so much more professional and high-brow than the noisy, dusty image of large mammals (and their trading machines) mindlessly running with the herd.

We also have a fine-sounding phrase for anticipating where the herd is running: front-running. So when the herd is running into stocks, those who buy stocks just ahead of the herd are front-running the market.

When the Federal Reserve announces that it’s going to make billionaires even wealthier with some new financial spew, those betting that stocks will never go down because the Fed has our back are front-running the Fed.

There are two remarkable assumptions at the heart of momentum and front-running: The momentum herd and those front-running the herd base their behavior on the assumption that there will always be other rich people who will sell all the shares they want to buy at today’s prices before the run-up to new highs.

Front-running and the Greater Fool Theory

Since only rich people own stocks, we know that those selling stocks are selling to other rich people and those buying stocks are buying from other rich people. So the assumption of those front-running the market is that there is a large enough sub-herd of rich people who for whatever reason aren’t smart enough to front-run the herd, and who will foolishly sell their stocks just before they double in value.

The second assumption is that there will also be a large enough sub-herd of rich people who will buy all the shares they want to sell at the top, just before the bubble pops and the value of the newly purchased shares falls in half.

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

When Expedient “Saves” Become Permanent, Ruin Is Assured

June 28, 2021

When Expedient “Saves” Become Permanent, Ruin Is Assured

The Fed’s “choice” is as illusory as the “wealth” the Fed has created with its perfection of moral hazard.

The belief that the Federal Reserve possesses god-like powers and wisdom would be comical if it wasn’t so deeply tragic, for the Fed doesn’t even have a plan, much less wisdom. All the Fed has is an incoherent jumble of expedient, panic-driven “saves” it cobbled together in the 2008-2009 Global Financial Meltdown that it had made inevitable.

The irony is the only thing that will still be rich when the whole rotten, corrupt, fragile financial system of illusory stability collapses in a heap of runaway instability. The irony is that the Fed’s leaky grab-bag of expedient “saves” was not designed to ensure systemic stability, though that was the PR cover story.

The Fed’s leaky grab-bag of expedient “saves” had only one purpose: save the fat-cats, skimmers, scammers, fraudsters and embezzlers who had gotten rich off the Fed’s cloaked transfer of wealth: the purpose of all the 2008-2009 extremes was not to impose the discipline required to truly stabilize the financial system; the purpose was to elevate moral hazard— the separation of risk from the consequences of risk–to unprecedented heights, backstopping every skimmer, scammer, fraudster and embezzler from well-deserved losses as the entire pyramid of fraud collapsed under its own enormous weight of risky bets gone bad.

To save its cronies from the catastrophic losses that should have been taken by those making the bets, the Fed instituted one expedient “save” after another: backstopped global banks with $16 trillion, dropped interest rates to zero, eliminated truthful reporting by ending mark-to-market pricing of risk, flooded the financial system with free money for financiers, all designed to signal that the Fed will never let its cronies suffer the consequences of their risky bets, i.e. the perfection of moral hazard.

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

USA 2021: Capitalism for the Powerless, Crony-Socialism for the Powerful

June 18, 2021

USA 2021: Capitalism for the Powerless, Crony-Socialism for the Powerful

The only dynamic that’s even faintly “capitalist” about America’s Crony-Socialism is the price of political corruption is still a “market.”

The supposed “choice” between “capitalism” and “socialism” is a useful fabrication masking the worst of all possible worlds we inhabit: Capitalism for the powerless and Crony-Socialism for the powerful. Capitalism’s primary dynamics are reserved solely for the powerless: market price of money, capital’s exploitive potential, free-for-all competition and creative destruction.

The powerful, on the other hand, bask in the warm glow of socialism: The Federal Reserve protects them from the market cost of money–financiers and the super-wealthy get their money for virtually nothing from the Fed, in virtually unlimited quantities–and the Treasury, Congress and the Executive branch protect them from any losses: their gains are private, but their losses are transferred to the public. The Supreme Court ensures the super-rich maintain this cozy crony-socialism by ensuring they can buy political power via lobbying and campaign contributions–under the laughable excuse of free speech.

Cronies get the best political system money can buy and you–well, you get to carry a sign on the street corner, just before you’re hauled off to jail for disturbing the peace (and you’re banned by social media/search Big Tech, i.e. privatized totalitarianism, for good measure).

The Federal Reserve is America’s financial Politburo: cronies get a free pass, the powerless get nothing. While the three billionaires who own more wealth than the bottom 165 million Americans can borrow unlimited sums for next to nothing thanks to the Fed (i.e. Crony-Socialist Politburo), the 165 million Americans pay exorbitant interest on payday loans, used car loans, student loans, credit cards and so on.

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

Systemic Risks Abound

May 28, 2021

Systemic Risks Abound

If you wanted to design a system guaranteed to collapse in a putrid heap, you’d make moral hazard ubiquitous and you’d make the system 100% dependent on a hubris-soaked faux savior.

For the past 22 years, every time the stock market whimpered, wheezed or whined, the Federal Reserve rushed to soothe the spoiled crybaby. There are two consequential results of the Fed as savior:

1. The Fed has perfected moral hazard: everyone from the money manager betting billions to the punters gambling their stimmy money is absolutely confident I can’t lose because the Fed will always push the market higher.

What happens when participants are confident they can’t possibly lose? They make ever-riskier and ever-larger bets. The entire nation is in the grip of a moral hazard mania, all based on the confidence that the Fed will always push every market higher–always, without fail.

2. Organic (i.e. non-manipulated) market forces have been extinguished. There is now only one consequential force, the Fed. All markets are now 100% dependent on the Fed responding to every bleat from every punter who’s recklessly risky bet is about to go bad.

The Fed is now the perfect union of quasi-religious savior and Helicopter Parent: oh dear, our little darling got high and crashed the Porsche? Quick, let’s save our precious market from any consequences!

Every day, Fed speakers take to the pulpit to spew another sermon about the Fed’s god-like power and wisdom. The true believers soak up every word: golly-gee, the Fed is better than any god–it’s guaranteeing I can get rich if I just leverage up any bet in any market!

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

Here’s How ‘Everything Bubbles’ Pop

May 10, 2021

Here’s How ‘Everything Bubbles’ Pop

But weirdly, and irrationally, bubbles pop anyway.

At long last, the moment you’ve been hoping for has arrived: you’re pitching your screenplay to a producer. Your agent is cautious but you’re confident nobody else has concocted a story as outlandish as yours. Your agent gives you the nod and you’re off and running:

Writer: Two guys start a cryptocurrency as a joke to parody the crypto craze, and they name it KittyCoin. It goes nowhere but then the greatest speculative bubble of all time takes off, it’s the dot-com and housing bubble times 100 but in everything, and within a couple months the entire economy is dependent on this bubble, and the bubble is dependent on KittyCoin, which has shot up 15,000 percent in a few weeks. A celebrity CEO who’s been promoting KittyCoin is invited to host a failing TV variety show, and now the whole economy depends on KittyCoin soaring even higher.

Producer: So it’s ‘The Big Short’ plus ‘Network’.

Writer: Something like that, only zanier.

Producer: I get the zaniness but it’s so implausible — it’s preposterous.

Writer: It’s an absurdist comedy.

Producer: But it ends with everyone being wiped out.

Writer: OK, a tragi-comedy.

And here we are, in the Greatest Bubble of All Time (GBOAT) hanging on the thin thread of speculators rotating out of one bubble into another even more improbable bubble. If there is no heir-apparent for the rotation, then players rotate back into an asset that already reached bubblicious heights and is awaiting the next booster.

The Everything Bubble is one for the ages, but alas, even the most glorious global Tulip Bulb manias crash back to Earth. So how do Everything Bubbles end? Like every other bubble ends:

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

If You Don’t See Any Risk, Ask Who Will “Buy the Dip” in a Freefall?

April 17, 2021

If You Don’t See Any Risk, Ask Who Will “Buy the Dip” in a Freefall?

Nobody thinks a euphoric rally could ever go bidless, but as Greenspan belatedly admitted, liquidity is not guaranteed.

The current market melt-up is taken as nearly risk-free because the Fed has our back, i.e. the Federal Reserve will intervene long before any market decline does any damage.

It’s assumed the Fed or its proxies, i.e. the Plunge Protection Team, will be the buyer in any freefall sell-off: no matter how many punters are selling, the PPT will keep buying with its presumably unlimited billions.

If this looks risk-free, ask who else will be “buying the dip” in a freefall?Former Fed Chair Alan Greenspan answered this question in his post-2008 crash essayNever Saw It Coming: Why the Financial Crisis Took Economists By Surprise (Dec. 2013 Foreign Affairs):

“They (financial firms) failed to recognize that market liquidity is largely a function of the degree of investors’ risk aversion, the most dominant animal spirit that drives financial markets. But when fear-induced market retrenchment set in, that liquidity disappeared overnight, as buyers pulled back. In fact, in many markets, at the height of the crisis of 2008, bids virtually disappeared.”

For the uninitiated, bids are the price offered to buyers of stocks and ETFs and the ask is the price offered to sellers. When bids virtually disappear, this means buyers have vanished: everyone willing to buy on the way down (known as catching the falling knife) has already bought and been crushed with losses, and so there’s nobody left (and no trading bots, either) to buy.

When buyers vanish, the market goes bidless, meaning when you enter your “sell” order at a specific price (limit order), there’s nobody willing to buy your shares at the current price. The shares remains yours all the way down.

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

The Hazardous Detour in the Road to “Recovery” Few Foresee

March 29, 2021

The Hazardous Detour in the Road to “Recovery” Few Foresee

As the level of Fed smack and crack needed to maintain the high increases, system fragility increases geometrically.

You know the plot point in the horror film where the highway is blocked and a detour sign directs the car full of naive teens off onto a rutted track into the wilderness? We’re right there in the narrative of “the road to recovery”: the highway that everyone expected would be smooth and wide open is about to be detoured into a rutted track that peters out in a wilderness without any lights or signage.

Oops–no cell coverage out here either. Is that the road over there? Guess not–we just careened into a canyon alive with the roar of a raging river. Our vehicle keeps sliding downhill, even with the brakes locked… this trip to “recovery” was supposed to be so quick and easy, and now there’s no way out… what’s that noise?

You know the rest: the naive, trusting teens are picked off one by one in the most horrific fashion. Substitute naive punters in the stock market and you have the script for what lies ahead.

The “recovery” has an unfortunate but all-too accurate connotation: recovery from addiction. The “recovery” we’ve been told is already accelerating at a wondrous pace does not include any treatment of the market’s addiction to Federal Reserve free money for financiers; rather, the “recovery” is entirely dependent on a never-ending speedball of Fed smack and crack and a booster of Fed financial meth.

The addiction to Fed speedballs had already turned the entire financial sector into a casino of lunatic junkies who delusionally believe they’re all geniuses. Beneath the illusory stability of the god-like Fed has our back, the addiction to free money has completely destabilized America’s social, political and economic orders by boosting wealth and income inequality to unprecedented extremes.

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

charles hugh smith, of two minds, fed, us federal reserve, covid, pandemic,

Do We Really Think a Band-Aid Will Heal a Tumor?

March 27, 2021

Do We Really Think a Band-Aid Will Heal a Tumor?

Borrowing a quarter of the nation’s entire economic output every year to prop up an ineffective, corrupt status quo is putting a Band-Aid over a tumor.

If we misdiagnose the disease, our treatment won’t work. We’re all familiar with medical misdiagnoses, which lead to procedures and prescriptions that can’t possibly fix the patient’s illness because the source has been missed or misinterpreted.

Medical diagnoses are often tricky, as many general symptoms can arise from a variety of sources.

Social and economic ills can also be tricky to diagnose, and the diagnosis is hindered by political polarization and sacrosanct orthodoxies which make it difficult to have a rational discussion in public about many difficult issues.

If we can’t even discuss a problem, then that creates another problem, because problems that can’t be discussed openly cannot be solved.

There’s also a human tendency to choose the diagnosis with the easiest-at-hand solution. This allows us to quickly apply an approved solution and then declare the problem solved.

The current flood of financial stimulus is an example of this misdiagnosis and application of an easy solution which fails to address the underlying disorder.

The conventional diagnosis of the post-pandemic economy is that the only problem is people don’t have enough money, and so giving them money to spend will cure the financial damage the pandemic inflicted. (Never mind that the economy was rolling over in 2019 long before the pandemic, which served as a catalyst in a sick, unstable status quo.)

Creating $1.9 trillion out of thin air and distributing it is painless: who doesn’t like free money? But is a scarcity of cash the source of America’s economic malaise?

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

Too Busy Frontrunning Inflation, Nobody Sees the Deflationary Tsunami

March 8, 2021

Too Busy Frontrunning Inflation, Nobody Sees the Deflationary Tsunami

Those looking up from their “free fish!” frolicking will see the tsunami too late to save themselves.

It’s an amazing sight to see the water recede from the bay, and watch the crowd frolic in the shallows, scooping up the flopping fish. In this case, the crowd doing the “so easy to catch, why not grab as much as we can?” scooping is frontrunning inflation, the universally expected result of the Great Reflation Trade.

You know the Great Reflation Trade: the world has saved up trillions, governments are spending trillions, it’s going to be the greatest boom since the stone masons partied at the Great Pyramid in Giza. It’s so obvious that everyone has jumped in the water to scoop up all the free fish (i.e. stock market gains). Only an idiot would hesitate to frontrun the Great Reflation’s guaranteed inflation.

Unless, of course, what we really have is a tale of reflation, told by an idiot, full of sound and fury, signifying nothing. Everyone frolicking in the shallows scooping up the obvious, easy, guaranteed gains is so busy frontrunning inflation that nobody sees the tsunami rushing in to extinguish the short-sighted frolickers. ( When Does This Travesty of a Mockery of a Sham Finally Implode? 3/3/21)

Gordon Long and I discuss The Deflationary Tsunami racing toward the frolickers in a new video program. It’s not that there aren’t inflationary dynamics in play; there are. The issue is that not all the dynamics in play are inflationary, and the deflationary dynamics have been building for the past two decades.

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

The Global Financial End-Game

March 5, 2021

The Global Financial End-Game

The over-indebted, overcapacity global economy an only generate speculative asset bubbles that will implode, destroying the latest round of phantom collateral.

For those seeking a summary, here is the global financial endgame in fourteen points:

1. In the initial “boost phase” of credit expansion, credit-based capital ( i.e. debt-money) pours into expanding production and increasing productivity: new production facilities are built, new machine and software tools are purchased, etc. These investments greatly boost production of goods and services and are thus initially highly profitable.

2. As credit continues to expand, competitors can easily borrow the capital needed to push into every profitable sector. Expanding production leads to overcapacity, falling profit margins and stagnant wages across the entire economy.

Resources (oil, copper, etc.) may command higher prices, raising the input costs of production and the price the consumer pays. These higher prices are negative in that they reduce disposable income while creating no added value.

3. As investing in material production yields diminishing returns, capital flows into financial speculation, i.e. financialization, which generates profits from rapidly expanding credit and leverage that is backed by either phantom collateral or claims against risky counterparties or future productivity.

In other words, financialization is untethered from the real economy of producing goods and services.

4. Initially, financialization generates enormous profits as credit and leverage are extended first to the creditworthy borrowers and then to marginal borrowers.

5. The rapid expansion of credit and leverage far outpace the expansion of productive assets. Fast-expanding debt-money (i.e. borrowed money) must chase a limited pool of productive assets/income streams, inflating asset bubbles.

6. These asset bubbles create phantom collateral which is then leveraged into even greater credit expansion. The housing bubble and home-equity extraction are prime examples of these dynamic.

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

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