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The Black Elephant in the Room

July 20, 2021

The Black Elephant in the Room

ALMOST EVERYONE KNOWS WHAT YOU MEAN NOW WHEN YOU TALK ABOUT BLACK SWANS

That unexpected event, which upends all the plans you had and turns your life – or everyone’s – upside down. An apparent surprise, but which, once the event has happened, is rationalized, making it seem predictable and giving the impression that it was expected to happen. Weirdness, extreme impact and the ability to understand in retrospect are the three defining features. There are many examples, such as World War I or the 1918 flu.

The concept refers to the fact that it was thought it impossible to see a black swan, until one day, the first one was found. It was popularized by the Lebanese economist and essayist Nassim Nicholas Taleb in 2007, who with his work “The Black Swan” -translated into more than 30 languages- got the timing right, since in a certain way, he predicted the Lehman Brothers crisis and how it was going to submerge the world economy into chaos in the following years. Then came the film by Darren Aronofsky and Natalie Portman playing the dancer.

There is debate about the pandemic we are living through: Taleb himself recognizes that it could be seen as a black swan by some people, although he thinks it is not, since it was quite predictable before it happened. As, for example, Rob Wallace had done in his magnificent essay “Big Farms Make Big Flu” or Bill Gates himself in a TED talk. If it is predictable, the event is considered more like a Gray Rhinoceros, because of its obviousness. The Gray Rhinoceros is something in front of you and coming at you, according to Michele Wucker -the author of the book that popularized the idea-, who warns: “We should look at the three Gray Rhinoceros I always talk about: inequality, climate change and financial products”.

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

Things Are Only Going To Get Weirder

November 1, 2019

Things Are Only Going To Get Weirder

Things are getting stranger and stranger. If you would have told someone ten years ago that Dennis Rodman would one day be helping to negotiate peace between North Korea and President Donald Trump, they would have assumed you were describing some weird movie cooked up in the mind of Mike Judge or the South Park guys. But in this timeline it’s an actual news story.

Everything about the last few years has been weird. The mass media’s behavior has been weird, Russiagate was weird, Ukrainegate is weird, a former presidential candidate accusing a current presidential candidate of working for the Kremlin was weird, people constantly accusing strangers on the internet of being Russian agents is weird, factions of the US government constantly leaking information against other factions of the US government is weird, the DNC getting caught rigging their primary was weird, Hillary Clinton losing the election was weird, the Skripal poisoning was weird, US government officials openly tweeting about their Venezuela coup is weird, the breakdown of the entire mainstream Syria narrative is weird, Assange’s arrest was weird, the campaign to censor the internet is weird, and this is just stuff off the top of my head from the areas I’ve been looking at in my own narrow spectrum of focus. Anyone else could list dozens of other weird new developments from their own slice of the information pie.

I often hear people in my line of work saying “Man, we’re going to look back on all this crazy shit and think about how absolutely weird it was!”

No we won’t. Because it’s only going to get weirder.

It’s only going to get weirder, because that’s what it looks like when old patterns start to fall away.

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

Can Expectations Undo the Validity of the Mises’s Business Cycle Theory?

July 15, 2019

CAN EXPECTATIONS UNDO THE VALIDITY OF THE MISES’S BUSINESS CYCLE THEORY?

According to Ludwig von Mises’s Austrian Business Cycle Theory (ABCT), the artificial lowering of interest rates by the central bank leads to a misallocation of resources due to the fact that businesses undertake various capital projects that prior to the lowering of interest rates weren’t considered viable. This misallocation of resources is commonly described as an economic boom.

Once the central bank reverses its stance this sets in motion an economic bust. It follows then that the artificial lowering of interest rates sets a trap for businessmen by luring them into unsustainable business activities that are revealed as such once the central bank tightens its interest rate stance.

Critics of the ABCT maintain that there is no justification that businessmen should fall prey repeatedly to an artificial lowering of interest rates. Businessmen are likely to learn from experience, the critics argue, and not fall into the trap produced by an artificial lowering of interest rates. Consequently, correct expectations will undo or neutralize the whole process of the boom-bust cycle that is set in motion by the artificial lowering of interest rates.[1]  Hence critics are questioning the validity of the ABCT.

Even Mises himself had conceded that it is possible that some time in the future businessmen will stop responding to loose monetary policy thereby preventing the setting in motion of the boom-bust cycle. In his reply to Lachmann he wrote,

It may be that businessmen will in the future react to credit expansion in another manner than they did in the past. It may be that they will avoid using for an expansion of their operations the easy money available, because they will keep in mind the inevitable end of the boom. Some signs forebode such a change. But it is too early to make a positive statement.[2]

Do Expectations Matter?

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

Unrealistically Great Expectations

May 9, 2019

Unrealistically Great Expectations

Our expectations have continued ever higher even as the pie is shrinking..

Let’s see if we can tie together four social dynamics: the elite college admissions scandal, the decline in social mobility, the rising sense of entitlement and the unrealistically ‘great expectations’ of many Americans. 

As many have noted, the nation’s financial and status rewards are increasingly flowing to the top 5%, what many call a winner-take-all or winner-take-most economy.

This is the primary source of widening wealth and income inequality: wealth and income are disproportionately accruing to the top slice of earners and owners of productive capital.

This concentration manifests in a broad-based decline in social mobility: it’s getting harder and harder to break into the narrow band (top 5%) who collects the lion’s share of the economy’s gains.

Historian Peter Turchin has identified the increasing burden of parasitic elites as one core cause of social and economic collapse. In Turchin’s reading, economies that can support a modest-sized class of parasitic elites buckle when the class of elites expecting a free pass to wealth and power expands faster than what the economy can support.

The same dynamic applies to productive elites: as I have often mentioned, graduating 1 millions STEM (science, technology, engineering, math) PhDs doesn’t magically guarantee 1 million jobs will be created for the graduates.

Such a costly and specialized education was once scarce, but now it’s relatively common, and this manifests in the tens of thousands of what I call academic ronin, i.e. PhDs without academic tenure or stable jobs in industry.

This glut is a global: I’ve known many people with PhDs from top universities in the developed world who have struggled to find a tenured professorship or a high-level research position anywhere in the world.

In other words, what was once a surefire ticket to status, security and superior pay is no longer surefire.

No wonder wealthy parents are so anxious to fast-track their non-superstar offspring by hook or by crook.

There is an even larger dynamic in play. As I explained here recently, the economic pie is shrinking, not just the pie of gains that can be distributed but the pie of opportunity.

Expectations and the Austrian Business Cycle Theory

May 9, 2018

EXPECTATIONS AND THE AUSTRIAN BUSINESS CYCLE THEORY 

According to the Austrian Business Cycle Theory (ABCT) the artificial lowering of interest rates by the central bank leads to a misallocation of resources because businesses undertake various capital projects that prior to the lowering of interest rates weren’t considered as viable. This misallocation of resources is commonly described as an economic boom.

As a rule businessmen discover their error once the central bank—that was instrumental in the artificial lowering of interest rates—reverses its stance, which in turn brings to a halt capital expansion and an ensuing economic bust. From the ABCT one can infer that the artificial lowering of interest rates sets a trap for businessmen by luring them into unsustainable business activities that are only exposed once the central bank tightens its interest rate stance.

Critics of the ABCT maintain that there is no reason why businessmen should fall prey again and again to an artificial lowering of interest rates. Businessmen are likely to learn from experience, the critics argue, and not fall into the trap produced by an artificial lowering of interest rates. Correct expectations will undo or neutralise the whole process of the boom-bust cycle that is set in motion by the artificial lowering of interest rates. Hence, it is held, the ABCT is not a serious contender in the explanation of modern business cycle phenomena.

According to a prominent critic of the ABCT, Gordon Tullock,

One would think that business people might be misled in the first couple of runs of the Rothbard cycle and not anticipate that the low interest rate will later be raised. That they would continue to be unable to figure this out, however, seems unlikely. Normally, Rothbard and other Austrians argue that entrepreneurs are well informed and make correct judgments. At the very least, one would assume that a well-informed businessperson interested in important matters concerned with the business would read Mises and Rothbard and, hence, anticipate the government action.[1]

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

Are Inflationary Expectations the Heart of Inflation?

January 18, 2018

ARE INFLATIONARY EXPECTATIONS THE HEART OF INFLATION?

For most economic commentators the underlying driving force of inflation is inflationary expectations[1]. For instance, if there is a sharp increase in the price of oil, individuals may form higher inflationary expectations that could set in motion spiraling price inflation, or so it is held.

If somehow expectations could be made less responsive to various price shocks, then over time this would mitigate the effect of a price shock on price inflation, it is argued.

If we were to accept that inflation expectations are the driving force of the inflationary process, is there a way to make these expectations less sensitive to various price shocks?

Most commentators are of the view that by means of suitable central bank policies it is possible to bring peoples inflationary expectations to a state of equilibrium.

At this state it is held expectations are perfectly anchored or not sensitive to changes in various economic data.

According to various economic experts once inflationary expectations become anchored, various price shocks such as sharp increases in oil or food prices are likely to be of a transitory nature.  This means that over time price shocks are unlikely to have much effect on the rate of inflation.

Note that what matters in this way of thinking is the underlying price inflation. It is for this reason that Federal Reserve policy makers and many economists are of the view that to be able to track the underlying inflation one must pay attention to core inflation – percentage changes in the consumer price index less food and energy.

To make inflation expectations well-anchored individuals must be clear about the monetary policy of central bank policy makers. According to this way of thinking as long as individuals are unclear about the precise goal with respect to inflation that policy makers are aiming at it would be difficult to bring inflationary expectations to a state of equilibrium.

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

Expectations and Business Cycles

December 16, 2015

Expectations and Business Cycles

According to the Austrian Business Cycle Theory (ABCT) the artificial lowering of interest rates by the central bank leads to a misallocation of resources because businesses undertake various capital projects that prior to the lowering of interest rates weren’t considered as viable. This misallocation of resources is commonly described as an economic boom.

As a rule businessmen discover their error once the central bank—that was instrumental in the artificial lowering of interest rates—reverses its stance, which in turn brings to a halt capital expansion and an ensuing economic bust.

From the ABCT one can infer that the artificial lowering of interest rates sets a trap for businessmen by luring them into unsustainable business activities that are only exposed once the central bank tightens its interest rate stance.

Critics of the ABCT maintain that there is no reason why businessmen should fall prey again and again to an artificial lowering of interest rates.

Businessmen are likely to learn from experience, the critics argue, and not fall into the trap produced by an artificial lowering of interest rates.

Correct expectations will undo or neutralise the whole process of the boom-bust cycle that is set in motion by the artificial lowering of interest rates.

Hence, it is held, the ABCT is not a serious contender in the explanation of modern business cycle phenomena. According to a prominent critic of the ABCT, Gordon Tullock,

One would think that business people might be misled in the first couple of runs of the Rothbard cycle and not anticipate that the low interest rate will later be raised. That they would continue to be unable to figure this out, however, seems unlikely. Normally, Rothbard and other Austrians argue that entrepreneurs are well informed and make correct judgments. At the very least, one would assume that a well-informed businessperson interested in important matters concerned with the business would read Mises and Rothbard and, hence, anticipate the government action.[1]

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

Dear Janet, Seriously!!

October 31, 2015

Dear Janet, Seriously!!

The Fed’s confidence trick this week was, once again, the Keyser Soze gambit (via Beaudelaire)-  “convincing the world of Yellen’s hawkishness, when no such character trait exists.” However, unlike the movies, stocks and FX markets have already seen through the con, leaving Fed Funds futures alone to believe the hype. As we noted previously, “The Fed Can’t Raise Rates, But Must Pretend It Will,” repeating its pre-meeting hawkishness to dovishness swing time and again in a “Groundhog Day” meets “Waiting For Godot”-like manner. Time is running out Janet, tick tock…

This is what we are to believe a “data-dependent” Federal Reserve is thinking…

Source: @Not_Jim_Cramer

And for now, Fed Funds Futures are falling for it…

 

But the broad equity markets aren’t…

Nor are Financials…

And nor is The Dollar…

Because, as we noted previously, the market (and The Fed) know perfectly well that raising short-term rates would be like taking away the punch bowl just as the party gets going. As rates rise, the economy’s production and employment structure couldn’t be upheld. Neither could inflated bond, equity, and housing prices. If the economy slows down, let alone falls back into recession, the Fed’s fiat money pipe dream would run into serious trouble.

This is the reason why the Fed would like to keep rates at the current suppressed levels. A delicate obstacle to such a policy remains, though: If savers and investors expect that interest rates will remain at rock bottom forever, they would presumably turn their backs on the credit market. The ensuing decline in the supply of credit would spell trouble for the fiat money system.

To prevent this from happening, the Fed must achieve two things.

First, it needs to uphold the expectation in financial markets that current low interest rates will be increased again at some point in the future. If savers and investors buy this story, they will hold onto their bank deposits, money market funds, bonds, and other fixed income products despite minuscule yields.

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

 

The Fatal Blindness of Unrealistic Expectations

October 29, 2015

The Fatal Blindness of Unrealistic Expectations

We are damned to fail when we avoid hard truths

My old employer, Yahoo!, has been in the news again of late.

Its latest CEO (and former Googler), Marissa Meyer, is currently at the World Economic Forum in Davos, Switzerland, where she has just given her first televised interview detailing her strategy for the beleaguered web giant.

I wish her and the current team at Yahoo! well with their plans, I really do. The saga of Yahoo!’s descent over the past decade was heartbreaking to watch and experience from the inside. I’d love to see the company find a way to become a leader again.

But I don’t have faith.

In my opinion, the company can’t be “fixed.” At least not the way the tech pundits and the past parade of Yahoo! CEOs have touted it can.

Why? Because of a congenital failure to define its identity, paired with a chronic refusal to be honest with itself.

I get asked a lot for my opinion regarding Yahoo!’s fall from grace. I believe the seeds of its failure were sown from the beginning, and I’ve come up with the following analogy to make it as intuitive as possible. It all starts at the very formation of the company.

The Importance of Clear Vision

First, look at Google. When the founders Sergey Brin and Larry Page first started collaborating, the Internet had been around for a while and they were insightful enough to realize that the data on the Web was growing exponentially. They reasoned that the company who made it possible to sift through all this data and find the most useful content, when needed, would create immense value.

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

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