Too often it’s as if I’m analyzing an altogether different world than conventional analysts. My strong preference is to be viewed as an adept and determined analyst, as opposed to some wacko extremist. I have always tried to distinguish my analysis from the “lunatic fringe.”
It’s my overarching thesis that the world is in the waning days of a historic multi-decade experiment in unfettered finance. As I have posited over the years, international finance has for too long been effectively operating without constraints on either the quantity or the quality of Credit issued. From the perspective of unsound finance on a globalized basis, this period has been unique. History, however, is replete with isolated episodes of booms fueled by bouts of unsound money and Credit – monetary fiascos inevitably ending in disaster. I see discomforting confirmation that the current historic global monetary fiasco’s disaster phase is now unfolding. It is within this context that readers should view recent market instability.
It’s been 25 years of analyzing U.S. finance and the great U.S. Credit Bubble. When it comes to sustaining the Credit boom, at this point we’ve seen the most extraordinary measures along with about every trick in the book. When the banking system was left severely impaired from late-eighties excess, the Greenspan Fed surreptitiously nurtured non-bank Credit expansion. There was the unprecedented GSE boom, recklessly fomented by explicit and implied Washington backing. We’ve witnessed unprecedented growth in “Wall Street finance” – securitizations and sophisticated financial instruments and vehicles. There was the explosion in hedge funds and leveraged speculation. And, of course, there’s the tangled derivatives world that ballooned to an unfathomable hundreds of Trillions. Our central bank has championed it all.
Importantly, the promotion of “market-based” finance dictated a subtle yet profound change in policymaking. A functioning New Age financial structure required that the Federal Reserve backstop the securities markets. And especially in a derivatives marketplace dominated by “dynamic hedging” (i.e. buying or selling securities to hedge market “insurance” written), the Fed was compelled to guarantee “liquid and continuous” markets. This changed just about everything. Continue reading
The destruction of honest financial markets by the Fed and other central banks has created a class of hedge fund hot shots that are truly hard to take. Many of them have been riding the bubble ever since Alan Greenspan got it going after the crash of 1987 and now not only claim to be investment geniuses, but also get downright huffy if the Fed or anyone else threatens to roil the casino.
Leon Cooperman, who is an ex-Goldman trader and now proprietor of a giant fund called Omega Advisors, is one of the more insufferable blowhards among these billionaire bubble riders. Earlier this week he proved that in spades.
It seems that his fund had a thundering loss of more than 10% in August during a downdraft in the stock market that the Fed for once took no action to counter. But rather than accept responsibility for the fact that his portfolio of momo stocks took a dive during a wobbly tape, Cooperman put out a screed blaming the purportedly unfair tactics of other casino gamblers:
Lee Cooperman, the founder of Omega Advisors, has joined the growing chorus of investors blaming last week’s stock market sell-off — and his own poor performance in August — on esoteric but increasingly influential trading strategies pioneered by hedge funds like Bridgewater.
Well now. Exactly how was Bridgewater counting the cards so as to cause such a ruction at the gaming tables?
In a word, Ray Dalio, the storied founder of the giant Bridgewater “All-Weather” risk parity fund, has been doing the same thing as Cooperman, and for nearly as many decades. Namely, counting the cards held-out in plain public view by the foolish monetary central planners domiciled in the Eccles Building.
To be sure, Dalio’s fund has had superlative returns and there is undoubtedly some serious algorithm
Subsequently, we met, and I got to know him. He is educated as a philosopher, a non-drinker, non-smoker, athletic, a self-taught polyglot, an accomplished musician and sound technician, but he was also, by virtue of his economic situation, working as a day-laborer at the time.
Since that time, Yevgeny has returned to Russia. I recently wrote to him and asked him to write an update, which he was kind enough to provide. Below is the original article, followed by his update.
I hope you don’t mind that this is in Russian. I think that this way I can be more completely honest. I am a relatively recent graduate of one of the many faceless post-Soviet institutions of higher learning, with a degree in philosophy. Last year I moved to the USA and married an American woman.
The question of when the modern capitalist system is going to collapse has interested me since my student years, and I have approached it from various directions: from the commonplace conspiracy theories to the serious works of Oswald Spengler and Noam Chomsky. Unfortunately, I still can’t fathom what it is that is keeping this system going.
My wife is a very pleasant woman, but a typical white conservative American. Whenever any political question comes up, she starts ranting about the Constitution and calling herself a libertarian conservative and a constitutionalist. I used to think that she is well-educated and understands what she is talking about. In fact, she is the one who introduced me to the US, and I once believed everything she told me about it. But as I found out later, she understands nothing about politics, and just repeats various bits of populist nonsense spouted by Severin, O’Reilly, Limbaugh and other mass media clowns. Well, I am not going to try to prove to my wife that she is wrong on a subject that I don’t quite understand myself. After all, she is a good wife. And so I try to steer clear of any political questions when I am with the family, although I do not always succeed. Perhaps if I had a copy of your book, it would help me explain myself to her better, but our family was one of the first to be flattened by the real estate market collapse. My wife went bankrupt, lost her bank account, house, job and the rest a while before I came here, and so we can’t buy anything online.
In the talk you gave at the conference in Ireland you mentioned that there are certain regions of the US where the common people only eat garbage food from places like Walmart, which consists of artificial colors and flavors and corn, and that such a diet makes them “a little bit crazy.” To my utter disappointment, I have to entirely agree with you. Various witty Russian commentators love to heap ridicule on the “dumb Americans” and on the USA as a generally stupid country. But if they spent a bit of time living here and paid closer attention, they would realize that it is not the low cultural level that distinguishes Americans from, say, Russians: both are, on average, quite beastly. But even when I’ve visited here before, as a student, my first impression was of a country that is full of madmen, ranging from somewhat mentally competent to total lunatics. And the further south I traveled, the more obvious this became. At first I even marveled at this, thinking, look at how intoxicating the spirit of liberty can be! But now I understand that this is a catastrophe, that American society is brainwashed and alienated in the extreme, and that all that’s left for Americans to do is to play each other for the suckers that they have become.
Unfortunately, I feel the pernicious influence of all this on my own family right here and now. You don’t have to be a brilliant visionary to realize that in the current situation all these endless suburbs, built on the North American model, are slowly but surely turning into mass graves for the millions of former members of the middle class. Those that do not turn into mass graves will become nature preserves – stocked with wild animals that were once human. My family is turning feral under my very eyes. Lack of resources has forced us to live according to the Soviet model – three generations under one roof. There are six of us, of which only one works, who is, consequently, exasperated and embittered. The rest of the household is gradually going insane from idleness and boredom. The television is never turned off. The female side of the family has been sucked into social networks and associated toys. Everyone is cultivating their own special psychosis, and periodically turns vicious. In these suburbs, a person without a car is as if without legs, and joblessness does not allow any of us to earn money for gas, and so the house is almost completely isolated from the outside world. The only information that seeps in comes from the lying mass media. And I understand that millions of families throughout America live this way! This is how people turn into “teabaggers,” while their children join street gangs.
For me, as for you, this is the second collapse. You had left USSR before it happened, while I was there to observe it as a child. I saw what happened when people were finally told that they were being had for seventy-odd years, and were offered a candy bar as consolation. Now, after all this, Russian society is finished. It grieves me to see the faces of Americans, who still believe something and wave their Constitution about, and to know that the same thing is about to happen to them. I think that the model which you have proposed will allow us to confront and to survive this collapse with dignity.
We always keep a close eye on industries that are in trouble (as our countless articles on the gold industry probably demonstrate), because this is where bargains usually emerge. We have a simple rule of thumb: Investment success depends primarily on one thing, namely how cheaply one buys.
Show us a stock market with a single digit P/E ratio (like the Russian or Greek markets these days) and we will begin to look at it as a potential opportunity. We don’t care much for tech stocks with triple digit P/Es, even though we may acknowledge their worth as successful companies and even use their products.
Photo via telegraph.co.uk
One market sector that has suffered a bout of destruction like few others is the coal industry. This chart of the coal miners ETF KOL should convey a rough idea of just how bad things have become:
Many well-known coal companies (e.g. Patriot Coal and Alpha Natural Resources) have gone bankrupt. There are several reasons for this. For one thing, there has been huge malinvestment in all sorts of commodity-related industries, as monetary pumping by the Fed and the PBoC has artificially inflated demand for commodities and driven their prices to unsustainable levels.
In the course of this, many coal companies have taken on more debt than they were able to support in the event of a sharp decline in coal prices. Given that at its peak, the “China story” about unceasing demand for commodities apparently sounded very convincing to many people, they probably didn’t expect that a huge slump in coal prices was imminent. And yet, this is precisely what happened.
Setting aside wholesale financial reasons and implications, the crash now in the Brazilian real is not good for anyone. It is, obviously, a disaster for Brazilians but the utter implosion heading toward disintegration in the world’s seventh largest economy (and what once was third in terms of marginal expansion) is both a warning and reflection. The economy there isn’t going down on its own, but even it if was this would be a verytroubling sign.
Brazil’s industrial production plummeted in July and fell well below economists’ expectations, in the latest sign that Latin America’s largest economy is entering a tailspin.
Industrial output fell 1.5% from June in seasonally adjusted terms and was down 8.9% from July 2014, the Brazilian Institute of Geography and Statistics, or IBGE, said on Wednesday.
The median forecast in a survey of economists by the local Agência Estado newswire had called for a 0.1% contraction in July from June. The worst estimate foresaw a drop of just 0.6%.
The mainline narrative will be that Brazil is just Brazil or even that emerging markets have their own bright dividing line, but the fact that of the nation’s close relation to both China and the “dollar” demonstrates how wrong that assumption. At some point, even the most resolute of closed-system monetarists might notice the unified correlations of the “rising dollar” and gaining global depression to the point of frequent and unrelenting financial “anomalies.” While that admission will no doubt take form of “hot money” flows, it is only a step further to realize in the wholesale system this isn’t a zero sum game – Brazil’s decline is monetarily and economically our own. In many ways, this is worse than the Great Recession as the contraction is both severe and unrelenting (industrial production has declined for 17 consecutive months and 20 out of the last 21; in contrast during the Great Recession Brazil’s IP fell for only 12 months before sharply rebounding).
• US Stocks End Sharply Lower After Jobs Report (MarketWatch)
• China’s Central Banker Says His Nation’s Bubble ‘Burst’ (Bloomberg)
• 100% Risk Of A 50% Stock Crash (Paul B. Farrell)
• The Bible Is Clear: Let The Refugees In, Every Last One (Guardian)
• UK Must Emulate Kindertransport To Aid Refugee Crisis: Lord Sacks (Guardian)
• Grant Visas To Refugees Before They Take The Death Route (ThePressProject)
• The March of Shame (Irate Greek)
• Migrants Stream Into Austria, Swept West By Overwhelmed Hungary (Reuters)
• Over 1,000 Exhausted Migrants Reach Austria Border (AP)
• Hungary Provides 100 Buses To Take Refugees To Austrian Border (WaPo)
• This Refugee Crisis Is Too Big For Europe’s Broken Institutions (Paul Mason)
• European Union Cracking Under Pressure Of Migrant Crisis (Globe and Mail)
• The Poisoned Chalice (James Galbraith And J. Luis Martin)
• On CNBC Discussing Greece And Europe – Full Transcript (Varoufakis)
• You Never Want a Serious Crisis to go to Waste (Legrain)
• Capital Outflow From China Adds Another Layer Of Worry (MarketWatch)
• Canada, Australia Feel Squeeze In Wake Of Chinese Economic Slowdown (Guardian)
• South Korean Exports Fall 14.7%, GDP Forecasts Cut (WSJ)
• Scientists Find Mathematical Secret To How Nature Works (WaPo)
A Search for Truth Amongst the Madness
THOUGHTS FOR THE POST-2008 WORLD
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