In order to appraise the actual state of affairs in this global village, let me break the ice by crudely exposing the three main ideas of this post.
On the after-effects of inequality:
“An imbalance between rich and poor is the oldest and most fatal ailment of all republics.” Plutarch (senior priest of Apollo at the Oracle of Delphi)
“The causes which destroyed the ancient republics were numerous; but in Rome, one principal cause was the vast inequality of fortunes.” Webster
On the hangover post debt accumulation:
“Blessed are the young, for they shall inherit the national debt.” Herbert Hoover
“Interest on debts grows without rain.”
This concept, brilliantly outlined by Eccles, is a part of our actual society. It is economic metastasic cancer, terminal stage. And now let’s go for the kind of wording you used to expect from a chairman of the Federal Reserve:
“As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth … to provide men with buying power. … Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. … The other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”
On inadvertently playing the common knowledge game (that the global central bank put will at all times save risk assets):
“An error does not become truth by reason of multiplied propagation, nor does truth become error because nobody sees it.” Mahatma Gandhi
Joseph Goebbels really explains it all. This is exactly what they are doing up at the top; conforming our opinion as if we were acolyte “moonies” in the Unification Church (Sung Myun Moon sect) . Bernanke is thrilled.
“It is the absolute right of the state to supervise the formation of public opinion.”
About time we quit philosophy and get back to sex. “Financial survival” is the name of the wealth preservation game. I hate playing games, whether it’s the wealth preservation game, or the more popular common knowledge “moonie” game. But that is, as a matter of fact, the one and only game we non-believers have available today. Otherwise, no sex. And a boat racing addiction is not an alternative, because it’s not very helpful with wealth preservation.
Ignorance is soothing; brainless “moonies” in are oblivious to the risks involved in their portfolios. They live a happy life, as summarized buy the cartoon underneath (published in “El Confidencial”). They have been living in a Central Bank protected environment for the last two decades or more. ¿Why should they worry? They don’t even scent anything troublesome in the neighborhood. At most, they know the real economy is not doing well, and by now quite a few are even convinced the global financial crisis is over.
Wall Street is a bloated sector today (twice the GDP weighting it had two decades ago), and portfolio managers need the income stream, so they just want to dispatch “comforting lies”. They have a long client line to go for. The alternative counter is kind of lonely … and boring. And the people in “Quantum sails” (very good friends on the other hand) insist in no discounting for “unpleasant truth philosophers”, no matter how long the relationship. I wish they were more flexible. So that puts me square into that lousy space left between a rock and a hard place. I’m sure John Hussman would agree to that.
We non believers live in anguish. Moonies are like catholics in medieval Spain. They are everywhere. We are on our own (no sympathies) and our financial survival implies a terrible binary option, the “risk on” “risk off” dilemma (as summarized by the economic press). Pick your poison. Any choice is OK with me. Once any individual realizes that this is -both financially and socially- a really dangerous game that’s being played (no oblivious ignorance to the risks of being a moonie), there is no superiority of one investment option versus the other. Both are intelligent and legitimate. Financially speaking, why not let it roll, baby roll (all day and night long). That song was really good wasn’t it? Sex must have been good as well.
You can try to play both sides (risk on-off) simultaneously. Rather unconventionally, I think such a strategy would be ill advised. The alternative outcomes of that binary option are so extreme, that they belong to different galaxies. I concede that hedging your bets is always a balanced -if somewhat primitive- solution to a quandary. To be sure, king Solomon would do just that. The Hebrew Bible states that “The whole world sought audience with Solomon to hear the wisdom God had put in his heart.”
My wisdom still needs substantial improvement, and my ego hates primitive balanced solutions. I have nearly always picked sides in life. I understand such a disposition invalidates me as a potential politician. Maybe in my next reincarnation.
Seriously now. This time around, the negative scenario is so dramatic, that it is difficult for the income generated on the safe outlook to compensate risk-on generated loses in a relevant way. Conventional Solomonic wisdom is not applicable with such extreme tail risks.
If you wish to muddle through, I think you are a loser. You will not make enough money with the 50% invested “risk-on” to handle the losses that could be generated in a short period of time. And even risks do not materialize, the return on your 50% investment is going to be nearly halved by the return on your “risk-off” portfolio. Anyway you look at it, I think it is a lose-lose proposition.
I’s heads or tails then. Do I play the “common knowledge game and jump on the bandwagon, regardless of the market manipulation, the lies, and the inherent financial instability of it all ? Or do I proceed with a cash is king strategy, waiting for collapse and trying guerrilla warfare on different, specific, and timely financial targets as they appear?
One option has to be discarded beforehand: no outright fighting the tape (or the FED), unless suicide is your ultimate destiny. Only try to beat the central Banks (if you have the spirit and the endurance required) with guerrilla warfare. Short and intense “coups de force“, and immediate retreat. And no bad feelings about fighting the system. As Ghandi once said, when law and the establishment are unfair, the correct option is to disobey. I have no plans for a weekend out with Thomas Jordan, so I don’t care if he’s happy or not with my CHF longs. And I am certain that politicians are not happy about people like me suggesting that debt will not be paid. Sorry for that inevitable collateral damage (Oh my God, I am beginning to sound like Ben Bernanke). David can’t possibly fight Goliath, and try to win at least some partial victories, being compassionate about him at the same time. My emotional system is not so refined. And we are not fighting this battle on fair grounds anyway.
If you decide to “roll” I wish you luck, and good sex. As David Rosenberg (Gluskin Sheff), Goldman Sachs, Morgan Stanley, Julian Emanuel (UBS) or Andrew Gartwrite (CS) say, barring an unforeseen shock or a recession, there is no reason for not remaining overweight risk, and specifically, equities. Central Banks are in control, liquidity is abundant, ZIRP is part of the landscape, printing continues, and public deficits (kalecki equation) and low financial costs continue to push up profits. Central Bank put has been underwritten various times in size. What’s not to like about a global picture like that?
Profits may certainly revert to the mean (Hussman, Montier) or not (Jesse Livermore -pseudonym), but right now they are 11% of GDP. ¿Who knows? (I am sure they will revert with a vengeance). And next year the S&P 500 profit might grow to 126, for an index level of 2035 at this time. Expensive? Yes. But considering ZIRP they are not that expensive. Why stand aside?
And yes, war is always a risk. And Ebola, and the European periphery, secesionism, or ISIS. Or the new cold war … But they are all uncontrollable black swans. There is always going to be one or another of them circling the pond. Late experience says you should remain firm and buy the dips whenever any of those risks gains prominence in the media. Black swans will always exist, and that fact should be made compatible with a high risk asset allocation strategy.
My alternative is “risk off” wealth allocation. Not because valuations are high short term (they are), and certainly not because there might be an unforeseen black swan (such as Ebola for example). It is not a black swan or a high valuation that concerns me. It is and end of the game perspective that I think has a 100% chance of taking place.
I just do not know when. Soros called the end of the Japanese equity bubble three years early, back in the late eighties. I am not going to try to outwit him this time. It would be an unfair equalizing of his superior expertise (and access to first hand information). But the combination of unsustainable debt and cruel inequality are certified game changers. I am not brave or smart enough to play the timing of the endgame, meaning I have to stick to the guerrilla warfare methodology, and wait.
If debt sustainability concerns do not ruin the show, and money printing continues to grease the system, inequality will burn the theater down.
That’s not a black swan, it’s a black rhino charging towards you. You have to see him coming. We do not know when or how he will charge, but we know he will. He is restless, hungry, and angry. His name could very well be Syriza, Le Pen, “Podemos”, or ISIS. Or a Catalonian massive violent outcry reacting to the Madrid the foul play. Inequality and poverty always ruin the show in the end (if the theatre is not closed down beforehand on other grounds).
In the meantime, people who have been to Africa will understand that it may be a long wait to see the Lion pound on the Zebra drinking in the water hole. If he is hungry, he will find the right time to do so. If you find the instrument, you can take leveraged bets on that. No real risk. Better than trying to outwit Jordan.
Unless we feed and water the animal inside us, it will come charging for revenge. It´s a lost cause.
Debt sustainability, or inequality, will end the show.