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Everything Is Broken

March 10, 2021

Everything Is Broken

Broken Credit
Broken Retirement
Broken Stocks
Broken Data
Broken Unemployment System
Puerto Rico, Vaccines, and Some Good News

Broken lines, broken strings,
Broken threads, broken springs,
Broken idols, broken heads,
People sleeping in broken beds

—Bob Dylan, “Everything is Broken” from the album Oh Mercy, 1989

I was on a client call earlier this week with Steve Blumenthal. The gentleman is at that stage in life where he needs cash income and not risk. Steve commented, “The bond market is broken.”

And indeed, the traditional fixed income bond market is broken, thanks to the Fed. We were able to suggest some alternatives (they are out there) that could help solve his problem.

But it got me to thinking… What else is broken? And the more I thought, the more I realized that the data that we use every day, the very systems that we are forced to work with, are indeed in various stages of being broken.

There is a great scene in the fabulous movie The Princess Bride where the criminal “mastermind” Vizzini keeps uttering the word “inconceivable.” After the nth time, Inigo Montoya turns to him and says, “You keep using that word. I don’t think it means what you think it means.”

Today we are going to look at data from the standpoint of Inigo Montoya. I don’t think that data means what you think it means. Indeed, much of the data in the way we use it is simply broken.

(In a few weeks, I will do a letter on things that aren’t broken, which are in fact incredible. I am an optimist, but I’m also realistic. I am “long” on the human experiment. Government? Not so much…)

Our economic and financial systems are badly broken in multiple ways. Some of the cracks are enormous, maybe beyond anyone’s ability to repair. Step one is admitting they are broken.

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

 

Brexit, EU, Germany, China and Yellow Vests In 2019 – Something Wicked This Way Comes

January 21, 2019

Brexit, EU, Germany, China and Yellow Vests In 2019 – Something Wicked This Way Comes 

– “Something wicked this way comes” warns John Mauldin
– Shaky China: Chinese landing could be harder than expected
– Brexit and EU Breakage: “I have long thought the EU will eventually fall apart”
– Helpless Europe: If Germany sneezes, their banks & the rest of continent catches cold
– We may see “yellow vests” spread globally: Economics is about to get interesting …


Source: TradingEconomics.com

For a couple of years now, the economic narrative has shown a comparatively strong US against weakness in Europe and some of Asia (NOT China). The US, we are told, will stay on top. I agree with that, as far as it goes… but I’m not convinced the “top” will be so great.

Americans like to think we are insulated from the world. We have big oceans on either side of us. Geopolitically, they serve as buffers. But economically they connect us to other important markets that are critical to many US businesses. Problems in those markets are ultimately problems for the US, too.

Last week I gave you my Year of Living Dangerously 2019 US forecast, but I didn’t discuss important events overseas. Summarizing last week quickly, I think the base case is that the United States economy slows down but avoids recession in 2019. That said, there are significant risks to that forecast, mostly to the downside.

Today we’ll make another literary metaphor to frame our discussion. “Something Wicked This Way Comes” is a 1962 Ray Bradbury novel about two boys and their horrifying encounter with a travelling circus. Later it was a movie.

In our case, something wicked most certainly is coming this way. Several somethings, in fact, approaching from all directions. The real question is how much damage this circus will do before it leaves town.

Shaky China

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

Debt Alarm Ringing

October 31, 2018

Debt Alarm Ringing

Addicted to Debt
Lost Exorbitant Privilege
Trigger Points
Frankfurt, Cleveland, Golf, and Here and There

Is debt good or bad? The answer is “Yes.”

Debt is future spending pulled forward in time. It lets you buy something now for which you otherwise don’t have cash available yet. Whether it’s wise or not depends on what you buy. Debt to educate yourself so you can get a better job may be a good idea. Borrowing money to finance your vacation? Probably not.

Unfortunately, many people, businesses, and governments borrow because they can, which for many is possible only because central banks made it so cheap in the last decade. It was rational in that respect but is growing less so as the central banks tighten their policies.

Earlier this year, I wrote a series of articles (synopsis and links here) predicting a debt “train wreck” and eventual liquidation—an event I dubbed The Great Reset. I estimated we have another year or two before the crisis becomes evident.

That’s still my expectation… but I’m beginning to wonder again. Several recent events tell me the reckoning could be closer than I thought just a few months ago. Today, we’ll review those and end with a few suggestions on how to prepare.

Addicted to Debt

As noted, debt can be appropriate—even government debt, in some (rare) circumstances. I am glad FDR issued war bonds to help defeat the Nazis, for instance. Now, however, governments go into debt not because they face existential threats, but simply to keep their citizens and benefactors comfortable.

Similarly, central banks enable debt because they think it will generate economic growth. Sometimes it does, too. The problem is they create debt with little regard for how it will be used. That’s how we get artificial booms and subsequent busts.

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

China for the Trade Win?

October 3, 2018

China for the Trade Win?

Empire of Debt
Debt in Pictures
Wargaming the Trade War
Some Thoughts on Getting Through the Great Debt Reset
San Francisco, Frankfurt, and Puerto Rico?

With all the trade war talk, we all ask the obvious question: Who will win? President Trump says the US will win. Chinese business leaders say no, we will win. Free-traders on both sides say no one will win. Few stop to ask, “What does a ‘win’ look like?”

This makes discussion difficult. People are chasing after a condition they can’t even define. Victory will remain elusive until they know what they want. Regardless, you can score me on the “no one wins” side. I believe, and I think a lot of evidence proves, that free trade between nations is the best way to maximize long-run prosperity for everyone.

However…

As Keynes famously said, we’re all dead in the long run. Trade war may end with no winners, but the parties will be better and worse off at various times as it progresses. So we have to distinguish between “winning” and “holding a temporary lead.”

On that basis, I think the US will have the upper hand initially, and could hold it for a year or two. This is because, for now, our economy is relatively strong and we can better withstand any Chinese retaliation. Beyond that point I think our current policies will begin to backfire, maybe spectacularly.

Remember, too, China has growing trade surpluses with much of the world. One Chinese insider told me that within four years China can replace lost US exports via increased trading with the rest of the world. I can’t verify that but looking at general statistics it certainly seems plausible. That doesn’t mean lost US trade won’t be felt, but China is not entirely helpless.

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

“This Will Be The Mother Of All Minsky Moments”

September 12, 2018

“This Will Be The Mother Of All Minsky Moments”

We have all had the fun as kids of going to the beach and playing in the sand. Remember taking your plastic bucket and making sandpiles? Slowly pouring the sand into ever bigger piles, until one side of the pile starts to collapse?

In his very important book Ubiquity, Why Catastrophes Happen, Mark Buchamane wrote about an experiment with sand that three physicists named Per Bak, Chao Tang, and Kurt Wiesenfeld conducted in 1987.

In their lab at Brookhaven National Laboratory in New York, they started building sandpiles, piling up one grain of sand at a time. It’s a slow process, so they wrote a computer program to do it. Not as much fun but a whole lot faster.

During this experiment, they learned some interesting things that can help us understand how all sorts of calamities, including market crashes, unfold.

Critical State

What is the typical size of an avalanche? After a huge number of tests with millions of grains of sand, they found out there is no typical number:

Some involved a single grain; others, ten, a hundred, or a thousand. Still others were pile-wide cataclysms involving millions that brought nearly the whole mountain down. At any time, literally anything, it seemed, might be just about to occur.

The pile was completely chaotic in its unpredictability.

Now, let’s read this next paragraph. It is important, as it creates a mental image that helps us understand the organization of the financial markets and the world economy. (emphasis mine)

To find out why [such unpredictability] should show up in their sandpile game, Bak and colleagues next played a trick with their computer. Imagine peering down on the pile from above and coloring it in according to its steepness.

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

Olduvai IV: Courage
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Olduvai II: Exodus
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