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Speculation has its own expiration dynamics, and they don’t depend on us recognizing speculative excess for what it is. They will unravel the excesses regardless of what we think, hope or deny.

The Federal Reserve has so completely normalized speculative excess that these extremes are no longer even recognized as extremes. Rather, they are simply “the way the world works.” This Empire of Speculation is complex and plays out on multiple levels.

The primary mechanism is obvious to all: whenever the equity market falters, the Fed unleashes a flood tide of liquidity, i.e. fresh currency, that rushes into the market at the top–corporations, banks and financiers–because the Fed distributes the fresh liquidity solely into the top tier of market players.

The Fed’s ability to conjure up liquidity in a variety of ways appears limitless: expand its balance sheet (QE), use the reverse repo market and bank reserves, launch new lending mechanisms, and so on.

The Fed has long relied on useful fictions to mask its agenda. One useful fiction is that the Fed is independent and apolitical. Despite being risibly shopworn, this mirth-inducing fiction is still dutifully trotted out by every Fed chairperson.

Another useful fiction is that the Fed’s mandate focuses on promoting stable expansion of the economy, not the equity market. This masks the reality everyone knows and acts on, which is the market isn’t a reflection of the economy, it is the economy.

This is why the Fed will pursue ever greater policy extremes to rescue the market from any decline and keep equity markets lofting higher: should the market falter, the economy will quickly follow, as the animal spirits of the market are now the primary engine of expansion.

…click on the above link to read the rest…

«The Fed Reminds Me of a Speculator Who Is on the Wrong Side of the Market»

November 20, 2021

«The Fed Reminds Me of a Speculator Who Is on the Wrong Side of the Market»

Jim Grant, editor of Grant’s Interest Rate Observer, warns of the rampant speculation in the stock market. He worries that the central banks are underestimating the threat of persistently high inflation and explains why gold has a bright future.

The financial markets are «high». In the U.S., the S&P 500 is up for seven straight days, closing on another record at the end of last week. Particularly in demand are red-hot stocks like Tesla and Nvidia with fantastically rich valuations. Together, the two companies have gained around $600 billion in market value in the past three weeks alone.

For Jim Grant, this is an environment that calls for increased caution. According to the editor of the iconic investment bulletin «Grant’s Interest Rate Observer», investors have to beware of an explosive cocktail combining exceptionally easy monetary policy, a pronounced appetite for speculation, and the high degree of leverage. He also thinks that central banks are underestimating the risk of persistent inflation.

«We have one of the most speculative Zeitgeists on record»: Jim Grant.

(Photo: Bloomberg)

«The Fed reminds me of a speculator who is on the wrong side of the market», says Mr. Grant. The fact that the Federal Reserve is now beginning to taper its bond purchases makes little difference in his view. «It’s like pouring a little less gasoline on the fire,» he thinks.

In this in-depth interview with The Market/NZZ, which has been edited and condensed for clarity, the outspoken market observer and contrarian investor compares today’s environment with the second half of the 1960s and explains why he expects persistently high inflation rates. He explains what this means for the dollar as well as for gold, and where the best investment opportunities are with respect to the challenge of global warming.

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

Ponzis Go Boom!!!

March 29, 2021

Ponzis Go Boom!!!

For the past few years, I have been critical of the Ponzi Sector. To me, these are businesses that sell a dollar for 80 cents and hope to make it up in volume. Just because Amazon (AMZN – USA) ran at a loss early on, doesn’t mean that all businesses will inflect at scale. In fact, many of the Ponzi Sector companies seem to have declining economics at scale—largely the result of intense competition with other Ponzi companies who also have negligible costs of capital.

I recently wrote about how interest rates are on the rise. If capital will have a cost to it, I suspect that the funding shuts off to the Ponzi Sector—buying unprofitable revenue growth becomes less attractive if you have other options. Besides, when you can no longer use presumed negative interest rates in your DCF, these businesses have no value. I believe the top is now finally in for the Ponzi Sector and a multi-year sector rotation is starting. However, interest rates are only a small piece of the puzzle.

Conventional wisdom says that the internet bubble blew up due to increasing interest rates. This may partly be true, but bubbles are irrational—rates shouldn’t matter—it is the psychology that matters. I believe two primary forces were at play that finally broke the internet bubble; equity supply and taxes. Look at a deal calendar from the second half of 1999. The number of speculative IPOs went exponential. Most IPOs unlock and allow restricted shareholders to sell roughly 180 days from the IPO. Is it any surprise that things got wobbly in March of 2020 and then collapsed in the months after that? Line up the un-lock window with the IPOs. It was a crescendo of supply—even excluding stock option exercises and secondary offerings…

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

adventures in capitalism, ponzi, interest rates, bubble, financial markets, psychology, speculation,

The Central Bank War – Nobody Notices

December 20, 2018

The Central Bank War – Nobody Notices

QUESTION: Mr. Armstrong: I have watched in amazement how you connect all these elements. Everyone I spoke to agreed this was your best WEC ever. You have said the Fed needed to raise rates because of the pension crisis and it would have nothing to do with inflation but it has to normalize rates to help pensions. Then we have the ECB refusing to raise rates. Would you please comment on the Fed’s actions yesterday? Is this a central bank war?

ANSWER: I understand this can get confusing because there are so many people who talk without any real-world experience. The Fed MUST raise rates to help the crisis in Pension funds. It raised the Fed Funds Rate (what banks charge each other) 25 basis points to 2.25-2.5%. While the Fed indicated there would be two more rate hikes in 2019, what has gone over everyone’s head is exactly what I have been warning about. We are witnessing indeed not a Currency War that people claim over trade since I do not see any actual counter-trend manipulation attempts as was the case with the G5 back in 1987.

This is a brand new Central Bank War that nobody seems to get I suppose since I may be the only person who actually speaks to central banks outside the USA. All the various central banks and the IMF have been lobbying the Federal Reserve since 2014 pleading with it NOT to raise rates. I have stated many times that the rate hikes by the Fed have NOTHING to do with economic growth, inflation, or trying to stop a speculative bubble in stocks.

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

We’re All Speculators Now

September 18, 2018

We’re All Speculators Now

When the herd thunders off the cliff, most participants are trapped in the stampede..

One of the most perverse consequences of the central banks “saving the world” (i.e. saving banks and the super-wealthy) is the destruction of low-risk investments: we’re all speculators now, whether we know it or acknowledge it.

The problem is very few of us have the expertise and experience to be successful speculators, i.e. successfully manage treacherously high-risk markets. Here’s the choice facing money managers of pension funds and individuals alike: either invest in a safe low-risk asset such as Treasury bonds and lose money every year, as the yield doesn’t even match inflation, or accept the extraordinarily high risks of boom-bust bubble assets such as junk bonds, stocks, real estate, etc.

The core middle-class asset is the family home. Back in the pre-financialization era (pre-1982), buying a house and paying down the mortgage to build home equity was the equivalent of a savings account, with the added bonus of the potential for modest appreciation if you happened to buy in a desirable region.

In the late 1990s, the stable, boring market for mortgages was fully financialized and globalized, turning a relatively safe investment and debt market into a speculative commodity. We all know the results: with the explosion of easy access to unlimited credit via HELOCs (home equity lines of credit), liar loans (no-document mortgages), re-financing, etc., the hot credit-money pouring into housing inflated a stupendous bubble that subsequently popped, as all credit-asset bubbles eventually do, with devastating consequences for everyone who reckoned their success in a rising market was a permanent feature of the era and / or evidence of their financial genius.

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

Silver Looks Way Better Than Gold Right Now

March 4, 2018

Silver Looks Way Better Than Gold Right Now

Normally the action in the gold and silver futures markets tends to be pretty similar, since the same general forces affect both precious metals. When inflation or some other source of anxiety is ascendant, both metals rise, and vice versa.

But lately – perhaps in a sign of how confused the world is becoming – gold and silver traders have diverged. Taking gold first, the speculators – who tend to be wrong at major inflection points – remain extremely bullish. Commercial traders, meanwhile – who tend to be right when speculators are wrong – are extremely bearish, with short positions more than double their longs. Historically that’s been a setup for a big drop in gold’s price.

Viewed as a chart with the gray bars representing speculators and red bars the commercials, and where divergence is bearish and convergence bullish, the result is pretty ugly.

But now check out silver. Where gold futures speculators’ long positions are three times their short bets, silver spculators are actually more short than long. In other words, the people who are usually wrong are bearish. The commercials, meanwhile, are almost in balance, which is usually bullish for silver’s subsequent action.

Shown graphically, speculators and commercials are meeting the middle at zero, something that’s both very rare and very positive.

What does this mean? One possible explanation is that silver has gotten too cheap relative to gold and needs to be revalued. That could happen in several ways, with both metals rising but silver rising more, or both falling but silver falling less. Or with gold dropping while silver rises, as improbable as that seems.

As the chart below illustrates, gold has recently been rising relative to silver (or silver has been falling relative to gold) with the gold/silver ratio now close to 80, meaning that it takes 80 ounces of silver to buy one ounce of gold.

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

Sucker Traps and the Arithmetic of Risk

March 4, 2018

Sucker Traps and the Arithmetic of Risk

John Hussman has another excellent article out this week but it will be ignored. Mathematically, it must be ignored.

In the Arithmetic of Risk, Hussman posted the above chart. I added the anecdotes regarding where we are. Here are some pertinent snips.

At present, I view the market as a “broken parabola” – much the same as we observed for the Nikkei in 1990, the Nasdaq in 2000, or for those wishing a more recent example, Bitcoin since January.

Two features of the initial break from speculative bubbles are worth noting. First, the collapse of major bubbles is often preceded by the collapse of smaller bubbles representing “fringe” speculations. Those early wipeouts are canaries in the coalmine.

In July 2007, two Bear Stearns hedge funds heavily invested in sub-prime loans suddenly became nearly worthless. Yet that was nearly three months before the S&P 500 peaked in October, followed by a collapse that would take it down by more than 55%.

Observing the sudden collapses of fringe bubbles today, including inverse volatility funds and Bitcoin, my impression is that we’re actually seeing the early signs of risk-aversion and selectivity among investors. The speculation in Bitcoin, despite issues of scalability and breathtaking inefficiency, was striking enough. But the willingness of investors to short market volatility even at 9% was mathematically disturbing.

See, volatility is measured by the “standard deviation” of returns, which describes the spread of a bell curve, and can never become negative. Moreover, standard deviation is annualized by multiplying by the square root of time. An annual volatility of 9% implies a daily volatilty of about 0.6%, which is like saying that a 2% market decline should occur in fewer than 1 in 2000 trading sessions, when in fact they’ve historically occurred about 1 in 50.

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

Flying Blind, Part 2: The Destruction Of Honest Price Discovery And Its Consequences

January 26, 2018

Flying Blind, Part 2: The Destruction Of Honest Price Discovery And Its Consequences

In Part 1 we noted that the real evil of Bubble Finance is not merely that it leads to bubble crashes, of which there is surely a doozy just around the bend; or that speculators get the painful deserts they fully deserve, which is coming big time, too; or even that the retail homegamers are always drawn into the slaughter at the very end, as is playing out in spades once again. Daily.

Given enough time, in fact, markets do bounce back because capitalism has a inherent urge to grow, thereby generating higher output, incomes, profits, wealth and stock indices. That means, in turn, investors eventually do recover from bubble crashes—notwithstanding the tendency of homegamers and professional speculators alike to sell at panic lows and jump back in after most of the profits have been made—or even at panic highs like the present.

Instead, the real economic iniquity of central bank driven Bubble Finance is that it destroys all the pricing signals that are essential to financial discipline on both ends of the Acela Corridor. And as quaint at it may sound, discipline is the sine qua non of long-term stability and sustainable gains in productivity, living standards and real wealth.

The pols of the Imperial City should be petrified, therefore, by the prospect of borrowing $1.2 trillion during the upcoming fiscal year (FY 2019) at a rate of 6.o% of GDP during month #111 through month #123 of the business expansion; and doing so at the very time the central bank is pivoting to an unprecedented spell of QT (quantitative tightening), involving the disgorgement of up to $2 trillion of its elephantine balance sheet back into the bond market.

Even as a matter of economics 101, the forthcoming $1.8 trillion of combined bond supply from the sales of the US Treasury ($1.2 trillion) and the QT-disgorgement of the Fed ($600 billion) is self-evidently enough to monkey-hammer the existing supply/demand balances, and thereby send yields soaring.

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

“Canada: Irrational Exuberance?” Wild Housing Speculation Drives Entire Economy

April 10, 2017

“Canada: Irrational Exuberance?” Wild Housing Speculation Drives Entire Economy

Everyone is afraid of breaking the addiction.

Here’s another data point on the Canadian housing bubble, how immense it really is, and how utterly crucial wild housing speculation has become to the Canadian economy.

Housing starts surged to 253,720 units in March seasonally adjusted, the highest since September 2007, according to Canada Mortgage & Housing Corp. Of them, 161,000 were multi-family starts of condos and rental units in urban areas. In Toronto, one of the hot beds of Canada’s house price bubble, housing starts jumped by 16,600 units, all of them condos and apartments, defying any expectation of a slowdown.

Housing starts are an indication of construction activity, a powerful additive to the local economy with large secondary effects. Housing construction gets fired up by the promise of ever skyrocketing housing prices, and thus big payoffs for developers, lenders, real estate agents, and the entire industry.

National home price data covers up the real drama in certain cities, particularly Vancouver (British Columbia) and Toronto (Ontario), but it does show by how much Canadian housing prices have overshot the already lofty US housing prices.

The chart below by Stéfane Marion, Chief Economist at Economics and Strategy, National Bank of Canada, compares US home prices per the Case-Shiller 20-City index to Canadian home prices per the Teranet-National Bank 26-market index. Both indices are based on similar methodologies of comparing pairs of sales of the same home over time. The shaded areas denote recessions in Canada. Note that during the housing crisis in the US, there was only a blip in Canada’s housing market:

Marion added in his note today:

Home price inflation has become THE hot topic of discussion in Canada. Surging prices are no longer confined to greater Toronto and Vancouver. As today’s Hot Chart shows, we estimate that close to 55% of regional markets in Canada are reporting price inflation of at least 10%.

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

Please Don’t Pop My Bubble!

June 24, 2016

Please Don’t Pop My Bubble!

So ride your bubble of choice up–stocks, bonds, housing, bat guano, take your pick–but it’s best to keep your thumb on the sell button.

One person’s bubble is another person’s “fair market value.” What is clearly an outrageously overvalued asset perched at nosebleed levels of central-bank fueled speculative euphoria is to the owner an asset at “fair market value.”

But beneath the euphoric confidence that valuations can only drift higher forever and ever is the latent fear that something could stick a pin in “my bubble”— that is, whatever bubblicious asset we happen to own and treasure as a source of our financial wealth could be popped, destroying not just our financial bubble but our psychological bubble of faith in permanent manias.

Consider housing prices, which are clearly in an echo-bubble of the Great Housing Bubble of 2000-2007. (Chart courtesy of Market Daily Briefing.)

The psychological underpinning of all bubbles and echo bubbles is on display here. In the first bubble, those benefiting from the stupendous price increases are not just euphoric at the surge in unearned wealth–they believe the hype with all their hearts and minds that the bubble is not a bubble at all, it’s all just “fair market value” at work.

In other words, the massive increase in unearned personal wealth is not just temporary good fortune–it is permanent, rational and deserved.

Alas, all bubbles, no matter how euphoric or long-lasting, eventually pop. All the certainties that seemed so obviously true and timeless to the believers melt into air, and their touching faith that the bubble valuations were permanent, rational and deserved dissipates in a wrenchingly painful reconciliation with reality.

The agonized cries of those watching their bubble-wealth vanish do not fall on deaf ears.

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

Noam Chomsky and The War on Straight Answers

March 14, 2016

Noam Chomsky and The War on Straight Answers

In the wake of Donald Trump’s shocking pledge: “You will find out who really knocked down the World Trade Center,” many Americans may find themselves staring into the abyss. The implication has reached the mainstream, that we do not exactly know who was behind the September 11th attacks, which are trotted out to justify every policy enacted ever since.

“Because they have papers in there that are very secret,” continued Trump, “you may find it’s the Saudis, okay? But you will find out.”

It was genuinely a surprise that Trump would commit to uncovering the truth of the September 11thattacks, while the de facto leader of the American left, Professor Noam Chomsky of MIT, had long ago and repeatedly dismissed the 9/11 attacks as holding no importance whatsoever.

“Who cares?” was Noam Chomsky’s now infamous 2007 quote.

“I mean even if it [a September 11th government conspiracy] were true, which is extremely unlikely, who cares? I mean it doesn’t have any significance.”

In an email to Professor Chomsky I demanded he answer one very direct, albeit surprisingly controversial question. His non-response speaks volumes. My public debate challenge stands unanswered.

That vital question I posed to Chomsky, a cornerstone question for our age, concerns reality as we know it today (or as many do not). It is a “yes” or “no” proposition, and so without the opportunity for any fanciful verbal contortions.

Is there a US government cover-up of the facts of the September 11th attacks?

YES or NO?

You may want to ask Professor Chomsky this question yourself (chomsky@mit.edu). Don’t expect a response, although he may double down on “who cares?”

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

Do Any of the Current Rallies Pass “The Sniff Test”? No.

March 10, 2016

Do Any of the Current Rallies Pass “The Sniff Test”? No.

But you can’t tame the monster of speculative, legalized looting and financialization.

Everything from iron ore to copper to the Baltic Dry Index to stocks to bat guano is rallying. The problem is not a single rally passes “the sniff test:” is the rally the result of changing fundamentals, or is it merely short-covering and/or speculative hot money leaping from one rally to the next?

Every one of these rallies is bogus, a travesty of a mockery of a sham of price discovery, supposedly the core function of markets. What shift in fundamentals drove this rally? Higher profits? No, profits are declining, especially once the phony adjustments are stripped away. Is the global economy strengthening? Don’t make us laugh!

As Chris Martenson and many others have noted, “price discovery” is a joke now, as markets are either propped up by central bank “we got your back” guarantees or outright asset purchases, or driven up and down by speculative hot money flows.

Even the recent (and overdue) run-up in gold has a speculative-fever feel. Whatever the market, the game is the same: traders goose the markets higher with futures purchases, pile on with buying that attracts latecomers, who are then sold the rally at the top and left holding the bag when the rally inevitably deflates, once the speculative hot money exits.

This is not capitalism, or a functioning market: this is the end-game of legalized looting and financialization. What’s the value of real estate? If interest rates are pushed negative, then that gooses housing demand, as the cost of interest on a mortgage declines to near-zero in real terms.

What would the value be at 5% mortgage rates? What would the interest rate be in a truly private mortgage market, one that wasn’t dominated by government agencies and central banks? Nobody knows.

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

Something’s Gone Horribly Awry

January 29, 2016

Something’s Gone Horribly Awry

The S&P 500 has fallen 7.37 percent so far this year. What to make of it…

Naturally, some people find falling stock prices to be unpleasant. Others find them distressing. Another way to look at falling stock prices, however, is like a high-fiber diet. The effect is necessary to a healthy functioning system.

The simple fact is that stock prices, fueled by speculative liquidity, have long since outrun the real economy. The disconnect between the two has been widely observable. The economy’s lagged, incomes have stagnated, yet stocks have soared.

Thus the present, ever so slight reduction in liquidity, and the subsequent lowering of stock prices, is having a cleansing influence. For it will serve to eliminate marginal businesses, and trim the fat from larger businesses.

Consequently, business owners, managers, and workers of marginal undertakings will have to redirect their efforts into something new…something that’s of greater value. For example, Walmart recently announced it would be closing 269 stores and laying off 16,000 workers. Obviously, we don’t wish any harm to hard working Walmart employees. But we’re also confident many of these 16,000 people will now find a new, more meaningful, and more prosperous purpose in life.

Though it can be painful at times, eliminating and minimizing wasteful activities is how the world becomes more affluent. On the other hand, propping up negligible endeavors with cheap credit ultimately subtracts wealth from the world.

Mean Reversion

How much more stocks will fall, no one really knows for sure. Perhaps they’ve already fallen as far as they will. But we wouldn’t bet our life savings on it.

This is merely conjecture, of course. But we do recognize that even with the 7.37 percent drop year-to-date, the S&P 500’s Cyclically Adjusted Price Earning (CAPE) Ratio is 23.97. We also recognize that the CAPE Ratio’s mean, going back to 1881, is 16.65.

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

My Financial Road Map For 2016

January 5, 2016

My Financial Road Map For 2016

Happy New Year to All! May 2016 bring peace to you and your loved ones.

Over the holidays, I had the opportunity to stay away from airports and hike Runyon Canyon with my dogs. For those of you that have never traversed Runyon’s peaks and dips, they are nature’s respite from the urban streets of Los Angeles, yet located in the heart of the City of Angels. It’s a place in which to observe, reflect, and think about what’s coming ahead.

As a writer and journalist covering the ebbs and flows of government, elite individual, central bank and private industry power, actions, co-dependencies, and impacts on populations and markets worldwide, I often find myself reacting too quickly to information. As I embark upon extensive research for my new book, Artisans of Money, my resolution for the book – and the year – is to more carefully consider small details in the context of the broader perspective. My travels will take me to Brazil, Mexico, China, Japan, Germany, Spain, Greece and more. My intent is to converse with people in their respective locales; those formulating (or trying to formulate) monetary, economic and financial policy, and those affected by it.

We are currently in a transitional phase of geo-political-monetary power struggles, capital flow decisions, and fundamental economic choices. This remains a period of artisanal (central bank fabricated) money, high volatility, low growth, excessive wealth inequality, extreme speculation, and policies that preserve the appearance of big bank liquidity and concentration at the expense of long-term stability. The potential for chaotic fluctuations in any element of the capital markets is greater than ever.

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

Our “Star Wars” Economy: The Fed-Farce Awakens

December 18, 2015

Our “Star Wars” Economy: The Fed-Farce Awakens

The Fed’s hubris has led it to the Dark Side.

It’s not just a movie, it’s real life: the Fed-Farce awakens. Now that the Federal Reserve has finally voted to “restore order to the galaxy” with a tiny .25% rate increase, the true measure of our travesty of a mockery of a sham economy–in a phrase, The Fed-Farce–has been revealed.

Here’s a snapshot of the Fed meeting, “restoring order to the galaxy” in a show of unanimous galactic-scale hubris:

If we had to list the fatal wounds inflicted on the economy by the Fed-Farce’s financial repression, we might start with: the Fed’s flood of cheap credit has not boosted productivity, it’s only boosted speculation. Why is this fatal?

Productivity is the engine of wealth creation. Speculation is the engine of wealth inequality and devastating boom/bust cycles. This is self-evident, but unfortunately the Dark Side can also conjure mind-tricks in the weak-minded (for example, Congress, the mainstream media, etc.): the Fed has successfully conned the weak-minded into believing that speculative frenzies of mal-investment and Fed-fueled asset bubbles are the sources of healthy growth.

A funny thing happens when you give unlimited borrowing power at near-zero interest rates to financiers and corporations: they use the free money not to hire more people (that would be incredibly dumb–employees cost money!) but to buy up shares in their own companies and snap up income-producing assets such as rental apartment complexes.

$1 trillion in stock buybacks creates zero jobs. Borrowing $1 trillion to buy back shares (and thus boost the personal wealth of managers and owners) does not create a single job. Repurchasing the company’s stock reduces the number of shares outstanding, which increases your earnings per share without increasing sales or net profits.

In other words, stock buybacks are just another Dark Side mind-trick.

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

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«We have one of the most speculative Zeitgeists on record»: Jim Grant.

Is there a US government cover-up of the facts of the September 11th attacks?

YES or NO?

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