Hallmark of an Economic Ponzi Scheme
hussmanfunds.com
hussmanfunds.com
"The lesson to be learned from quantitative easing, zero-interest rate policy, and the bubble advance of recent years is simple: one must accept that there is no limit at all to the myopic speculation and self-interested amnesia of Wall Street. Bubbles and crashes will repeat again and again, and nothing will be learned from them. However, that does not mean abandoning the information from valuations or market internals. It means refraining from a negative market outlook, even amid extreme valuations and reckless speculation, until dispersion and divergences emerge in market internals (signaling a shift in investor psychology from speculation to risk-aversion). A neutral outlook is fine if conditions are sufficiently overextended, but defer a negative market outlook until market internals deteriorate."
Basically, this can be read as a complaint about how distorted the financial markets become when we rely on the Fed to protect us from recessions. If Congress would do its job, and provide sufficiently large deficits to absorb the productive capacity of the modern economy, then there would be no need for the Fed to engage in such extreme behaviors, and we would not see this kind of distortion in the financial markets.
I'm not sure how you get that from the quoted passage, nor from the article.
I think the US needs the ability for recall elections. It also needs newer voting procedures.
Because strong presidents drive policy-making, this difference ("a few key states" vs. "the country as a whole") definitely shows up in Congressional behavior.
A much simpler (and more plausible) solution to chapium's problem is simply getting rid of the electoral college.
Perhaps the problem is federalism.
Which would then require that a candidate only pander to an even smaller number of densely populated cities.
It would be far better to revoke much of the power of the central government rather than to try and debug our way through to a mythical process by which all individual interests are considered. Because, in the end, minority interests will always be cast aside once the election is over anyway.
NYC/LA/Chicago combined is only 15M people. That's clearly not enough people to win a majority of a 300M+ population. Perhaps you mean a wider class of cities. But 80% of Americans live in cities! If you can't get elected by "pandering" to a whopping 80% of your electorate then something is terribly wrong. We have to choose a very "just right" definition of "city" for your assertion to be true.
But there's an even more important misunderstanding here.
When discussing this topic, many people get distracted by the fact that removing the electoral college would increase the voting power of Massachusetts residents and decrease the voting power of Montana residents in presidential elections.
This is a distraction because neither Massachusetts nor Montana is the winner in the current system! It's states like Pennsylvania and Wisconsin that have a truly distortionary amount of power in the current system. Those states are not particularly rural or particularly urban.
Here's the key observation that could make changes to the electoral college politically feasible: if you don't live in a presidential swing state, getting rid of the electoral college increases the power of your region in selecting the president regardless of the size of your state/city.
So, this is not a case of favoring one small set of states over another small set. Removing the electoral college would substantially weaken the power of 5-6 states over the Executive branch and increase the power of the other 45 states (some more than others, sure, but nearly everyone wins compared to the status quo).
> Because, in the end, minority interests will always be cast aside once the election is over anyway.
This is exactly why I favor keeping Congress as it is but reforming the electoral process for the Executive branch. Montana has a very loud voice in the Senate and House relative to its population. I do not suggest changing that.
> It would be far better to...
1. An omniscient and beneficent dictator would be even better; the point of my post was to suggest plausible alternatives :-)
2. There are many merits to federalism, but this is quite a bag of worms and we're already straying OT.
I strongly agree. I would go further. The idea of a regional representative might have made sense in an era before the Internet, before the telephone, before the telegram and even before railroads could ensure fast delivery of written mail, but it does it make sense now? Why not have a legislature where every member is chosen based on a vote of the whole nation? Some parliamentary democracies do this, and their policies do seem more focused on national interests, as opposed to a bunch of local interests. Also evaporates the problem of gerrymandering.
Because then whichever party currently has the support of the majority of the country would win every seat. Yes, you could do things like stagger elections, but overall I think it'd be worse: say each representative has a six-year term and there are six annual elections, you basically have six blocs in Congress instead of 435 members.
And of course the United States comprise a federal republic; most issues simply shouldn't be federal, and the vast majority are definitely not national. Who outside of Massachusetts cares if Massachusetts makes wearing a leek on St. David's Day compulsory or forbidden?
That is incorrect. Every democracy that I'm aware of, which uses national voting, also has proportional representation based on the vote. The rules vary from country to country, but generally speaking, if a party gets 10% of the vote, then it gets 10% of Parliament. If they get 43% of the vote, then they get 43% of Parliament.
About this:
"most issues simply shouldn't be federal"
This is a straightforward assertion of nostalgia, regarding an era that died out more than a century ago. Nowadays nearly all politics is either national or international. Small scale political divisions simply get in the way of efficient government.
I disagree. Just the politics you hear about. The rest of it is happening all around us, but your local paper went bust.
https://fivethirtyeight.com/features/all-politics-is-nationa...
You'd end up with the Senator from Southern Baptist arguing with the Senator from Postmodern Counterculture, or the Representative in Hispanic-American seat 5 hashing things out with the Representative from Secular Scientists. Mergers and schisms could cause the representation to track with changes in the population. Perhaps Iroquois Confederacy would have to merge with Algonquian Peoples and Five Civilized Tribes to stay politically relevant. Anglo Male Landowners might split into Urban-Industrial and Southern Whites.
It never could have happened, though. The only cultural group with representation back then was Anglo Male Landowners, and they were unlikely to share power voluntarily.
Anglo Male Landowners are still over-represented in US federal government.
I don't think an "at large" position would actually represent the whole country. It would give more power to the one of two political parties with support of the majority that election. You really need a mechanism to ensure minority positions can get more representation, such that any majority blocs have to seek consensus with at least one minority bloc to get anything done. The two-party system is washing out a lot of voices that never even get lip service from anybody, ever.
This is a larger scale version of the same psychological factors that power Las Vegas. Go to a Vegas casino's slots section and you'll see people sitting for hours and hours and hours staring blankly into slot machines. They're kept there by those hits of dopamine they get when they occasionally win, and the slots are calibrated so as to time those wins so as to slowly empty their wallets over time.
https://en.wikipedia.org/wiki/Operant_conditioning_chamber
Gamified social media, grinding-based MMORPGs, adversarial bullshit jobs, and many other things share similar characteristics.
Should we expect humans to behave differently on Wall St.?
Source: Working as a bank teller near the Reno strip and having people of all walks of life come by day after day to get cash before going to the casino
edited last sentence for clarity
Are you serious? How about letting the productive capacity of the economy work for consumers rather than for politicians?
Of course I agree that there should be no bailouts for Wall Street firms, but I would also argue that the business cycle itself is induced by the lack of a sound money in the economy. Easy money tricks entrepreneurs into investing in long-term capital projects prematurely and causes malinvestment.
So Wall Street is not to blame for business cycles. It's the soft-money fiat system that causes so much economic calamity. When the Fed steps in to stop recessions, nobody asks why we had the boom that preceded the bust, which was fueled by the Fed itself.
The big downfall with recessions is that people with little or no savings can end up in a very bad place economically. Not sure how or if our consumer culture could change to a saving culture, but I'd be interested in reading a book that compares the two.
What problems would it improve? if we have a recession, how would the govt help keep things going (ie print dollars)? Most people wouldn't have been better off if most large banks had failed then.
Seriously, what are you talking about? If the government gives a large tax cut to every citizen, that citizen is also a consumer. When they take that tax cut money and they go spend it, then the large deficit is being put to work for consumers rather than for politicians.
Last time I checked, the Federal government was the consumer of about 1/3rd of the Federal budget. The rest of the budget is income transfers that are spent by someone else (for instance, Social Security, and also the money transfers to state and local governments, who then become the final consumers).
There are situations where it makes sense for the government to be the consumer of goods and services -- building bridges and ports and airports and such. Also, running the military. One can make the case that the USA would benefit from infrastructure spending right now. However, my original comment was completely neutral on the subject of who should spend the deficit. I only made the point that when productive capacity is going to waste due to lack of demand (in the context of this article, following a catastrophic shock to the financial system) then Congress should ensure a deficit sufficient to ensure the use of that productive capacity.
Both conservatives and progressives subscribe to this theory, so your time will not be wasted.
There's no such thing as sound money, it's always being manipulated. This is by design.
Yes. It's only been since 2008 since the US economy tanked, it took five years to dig out of that one, and real wages never fully came back. That wasn't long ago.
It's about time for Silicon Valley to tank. There's nothing big in the pipeline comparable to the Internet or smartphones. Laptops, notebooks, tablets, and phones have all passed peak sales. The businesses that assume endless growth are maxing out.
The next big thing may be solar, wind, and storage taking over the energy industry, which is a good thing. That's a slow, capital-intensive, heavy-industry infrastructure upgrade, driven by manufacturing cost reduction. It's going to happen, but it's not a go-go business.
OTOH, Big Deep Artificial Learning Data Intelligence.
It would be a blockchain-based neural network which people can sell training data to (in exchange for the underlying cryptocurrency) and which other people can use via an API to do pattern recognition on their own user data (by paying in the same cryptocurrency).
It would be a decentralized, autonomous AI.
1) It costs more and isn't as performant as tuned machines. 2) The training data is very valuable and shouldn't be shared on a blockchain and restricted to a closed network.
Maybe there is one advantage though. Crypto people have bought up all the GPU's.
2) People get paid to provide quality training data... So yeah it's valuable but if there is a built-in financial incentive to share data with the system then people will do it. Also, other people could get paid to verify/curate the training data. The system just needs to setup the right incentives.
As I grew older I start to feel that tech community have the responsibility to stop everything from turning into marketing buzzwords.
I think the ZTE dispute may be the inflection point here. Despite their evident complacency to date China isn't going to allow itself to remain vulnerable to US semiconductor embargoes. Silicon Valley will see its core competency commoditized.
> The next big thing may be solar, wind, and storage taking over the energy industry
That, and perhaps also space. If half of the plans on the board are realized we're going to increase the number of operating satellites by an order of magnitude, for starters.
It's been a long time since semiconductors were Silicon Valley's core competence.
how about autonomous cars, weapons, and everything else in between?
>That's a slow, capital-intensive, heavy-industry infrastructure upgrade, driven by manufacturing cost reduction.
manufacturing cost reduction would come from those autonomous systems and overall tech based approach (when Musk succeeds with his Model 3 production goals it will be only light preview of autonomous manufacturing of the future), and as result the "infrastructure upgrade" will be faster and less capital-intensive.
In general, the SV starts to move beyond the pure computing tech and into the other industries. Again, Musk as an example, with Tesla and SpaceX being more of tech companies in car and space business and less of just car and space companies. Or Uber - a tech company in taxi business. One can also see a rise of a tech company in agriculture, be it farm-in-container or autonomous fleet of tractors doing its stuff on huge people-less farms (kind of next iteration of transition like that described in Grapes of Wrath)
And the "solar, wind, and storage taking over the energy industry" also will be done based on tech, if not by a tech company, as the distributed and less predictable nature of those sources would require orders of magnitude better monitoring of the whole energy grid, real-time prediction, planning and redistribution.
Real median usual weekly earnings for full-time Americans 16 and over went from 332 1982-84 CPI-adjusted U.S. dollars in Q4 2007 to 350 in Q1 2018 [1]. Americans are in the midst of record high real wages.
Hourly wages for manufacturing employees haven't recovered to their 2004 peak, but they too are well above where they were pre-crisis [2].
Broadly, the country's balance sheet is healthier in 2018 than it was in 2008. Savings are higher, banks are plumper and then economy's productive capacity has grown. The next recession will be a regular one, not a full-blown crisis.
> It's about time for Silicon Valley to tank
Wall Street may beat us to it:
"Christopher Ricciardi, a former Merrill Lynch banker, was known as the 'grandfather of CDOs' for helping popularize these complex structured products that blew up during the financial crisis.
Now, he is bringing his experience to another corner of the financial world with mounds of debt: student loans" [3].
[1] https://fred.stlouisfed.org/series/LES1252881600Q
[2] https://fredblog.stlouisfed.org/2018/02/are-wages-increasing...
[2] https://www.wsj.com/articles/grandfather-of-cdos-trying-to-d...
[1] https://fredblog.stlouisfed.org/2018/02/are-wages-increasing...
I completely agree. That said, we have enough data to conclude that real wages are higher today than they were pre-crisis for the vast majority of Americans. The uncertainty is more pronounced if one were to ask the same question in respect of the last 4 or 5 years, in which case I'd have to say "we don't know".
That isn't quite right. Labor force participation fell after 2008, and it has never recovered. While wages might have seen a revival for those lucky enough to have a job, there remains a large block of people who were pushed out of the work force and never found a way back in. See the chart here:
http://www.smashcompany.com/business/labor-force-participati...
Labor force participation is age dependent. If someone is 45 they expect to work another 20 years. But if they lose their job, they have little hope of finding another job that pays as much as their previous job. Generally, an unemployed 50 year old would be lucky to get a minimum wage job. Presumably they made more than that during their career. They won't get back what they used to make (exceptions for those at the peak of their professions).
So folks with jobs are seeing slightly higher wages, but you also need to take into account all the folks who lost their jobs permanently.
Another group that needs to be taken into account is the younger generation that is having problems even starting a career.
My sister graduated from university a few years ago, and - like almost everybody else she knows in her generation - is bouncing between unemployment and terrible minimum wage jobs (some are de facto lower than minimum wage due to wage theft).
Heres how it could be fixed: http://www.slate.com/blogs/moneybox/2014/02/24/housing_infla...
Real wages have not gone up as much as productivity. And their gains have been unequally distributed. But it is important, in such discussions, to maintain objectivity. Most Americans are better off than they were before the crisis.
The article shows a different view: total wages dropped as a percentage of GDP from 50% post-WWII to 42% in 2011. This is the basis for the Ponzi-economy argument:
consumption is largely financed by accumulating debt liabilities to supplement inadequate wages and salaries, where government runs massive fiscal deficits, not only to support the income shortfalls of its citizens, but increasingly to serve and enhance corporate profits themselves
The article and I are in agreement on this narrow point. Wages as a fraction of GDP are down. Wages, themselves, are up.
Broadly, I disagree with the assertion that our economy's growth is unusually debt-fueled. Total debt as a fraction of GDP is worryingly high [1]. Strip out financial sector indebtedness, however, and we're where we were in the 80s. Household debt explains a relatively narrow slice of recent GDP growth.
[1] https://en.wikipedia.org/wiki/Financial_position_of_the_Unit...
https://www.statista.com/statistics/192398/employment-rate-i...
Employment rate in the United States from 1990 to 2017. 63% in 07 60% in 2017. So we still have not gotten back, and it's still down.
PS: On very long timescales employment rate is a poor metric, but over the short term it says a lot more about the economy than 'unemployment' rate or employed wages. It for example very clearly shows the last 2 recessions unlike employed wages.
Talk a walk around MIT 20 years ago and this year and there would be a MASSIVE build-out of biotech companies. That alone is evidence to refute your claim.
based on my time in the industry, the typical biotech company lives with one foot in the grave -- and we're talking about the ones which have a product on the market.
Data from the Venture Capital Association show that annualized returns from biotech investments were double that of the tech startup scene at 8% to 4% with comparable investment volume. Throw in the biotech companies that have multibillion dollar IPOs with zero revenue and you're just looking at a higher risk, higher reward version of tech.
https://www.washingtonpost.com/news/wonk/wp/2015/02/11/big-p...
The consumer advertising change did contribute to this though, by allowing pharma companies to concentrate their core competency on acquisition, distribution, and marketing instead of R&D.
is a product of the extreme brevity of political memory. These people know exactly what they are doing.
Nowadays I'm worried more about what I as a person can actually do to circumvent that. And sadly the only reliable thing I can see is becoming part of the sharks and selling junk, thereby drastically increasing my private cash budget. Everything else, like raw resources, real estate, stocks, start-ups are all so overvalued with the b.s. that it's not really worth to put money in because of so many people continuing to buy despite knowing that the stuff they buy is overvalued by a margin.
That really makes one sad, you know...
Why? Because they are a ponzi scheme, and they are legal by the virtue of being run by the government.
There are different laws that govern what an individual or a corporation can do, and what a government can do. We give the government a limited right to do lots of things (in certain circumstances) which we don't let individuals and corporations do:
- kill people (military, capital punishment) - kidnap people (police arrests) - imprison people (jail, prison) - run protection rackets/extortion (taxation) - gambling (state lotteries) - run ponzi schemes (social security system, fractional reserve banking)
We agree to all of this as a society. Therefore, it is not illegal.
We should always keep an eye on the extent to which those special rights are exercised by the government. We should actively discuss and modify laws that govern these special rights we grant to the government, so that they reflect the will of the people. However, just yelling "Ponzi scheme! Illegal!" is ignorant. It's as if someone stood up all of a sudden and yelled "The government is killing people in wars! That's illegal". Of course they are, and to a large extent it is legal, because we have implicitly granted the government that right as society.
A Ponzi scheme is "an investment system where the investment profits are paid with the money from other investors, and those who experience profit believe the profits come from non-investors such as business activities, or the earnings and growth of a company." (Wikipedia)
The author makes a clear attempt at analogy: "Debt-financed prosperity is typically abetted by central banks that encourage consumers and speculators to borrow (the demand side of Ponzi finance) and also encourage yield-seeking demand among investors for newly-issued debt securities that offer a “pickup” in yield (the supply side of Ponzi finance)."
Thanks for listening to me rant.
The number of ‘wealth managers’ who add value for their clients (which can also be done by reducing risk in exchange for lower yields or in several other ways) is very small and the remainder are leeches.
Somewhere in article, the point is made that one's paper wealth will be hit hard by the coming crash. My thought there is, "So what?". My present investments in securities are long term; I'm not planning on having to touch them for a few decades. In that time period, if the economy stays crashed for so hard so long that they make no gains over those decades, I'm very likely to have more pressing immediate problems that I won't have the time or energy to care about my securities investments.
I remember looking at graphs of the stock market and realizing that, while the 2008/2009 downturn would have been a terrifying time to begin investing, if I had begun investing then, and ridden out the cycle. I would have come out ahead. If today's market conditions are the boom of another boom/bust cycle, why would that not still be true?
https://finance.yahoo.com/quote/HSGFX?p=HSGFX
What I take away from this is that understanding macroeconomic trends is different than being a successful investor.
Ask yourself, "if his understanding of markets and economics is correct, how come he is consistently wrong, over and over, in his investment decisions?"
This guy has been weaving stories about economics for years and years and been consistently wrong for years and years.
His understanding of how economics and markets work is simply incorrect (even if it sounds compelling).
notably, he makes no specific suggestions on what kind of stuff people should buy or what they should do to take advantage of both the upside (the bubble) and the downside (the crash). it might be because there is some law stopping him from giving that advice, i'm not sure.
On the otherside, Bullish banks/etc will make small profits consistently for long periods of time on bullish bets but when the black swan happens, will lose everything they made over the years and more, to the shorters (in 2008 banks had record profits until they lost more money than banks ever made in the history of modern banking).
Gabish?
1. Determining skill from luck is difficult if we have a very small sample of successful trades (e.g. shorting banks correctly in 2008, but getting everything else wrong)
2. In order for a diversified investor (e.g. into FTSE World, some bonds and precious metals) to lose everything would require one hell of a black swan. Some kind of forceful expropriation of their assets is much more likely.
The problem for the shorters now is that the exact same arguments they are making now could have been made 5 years ago.
Taking an average for corporations that includes Apple and Alphabet is sort of like taking average wealth for a small number of people that includes Bill Gates.
So, I'm not sure how seriously to take this? A company with very high, durable profit margins doing a stock buyback or taking on debt at low interest rates doesn't seem like much of a problem either now or in a recession?
Other companies may be in a much more risky position. It seems important to analyze them in separate groups.
Zero or even negative interest rates don't mean money is worthless. Money money, as in cash, always yields zero.
And even in a zero or negative rate environment, there are still assets (including debt) which have a positive yield. The point of lowering interest rates is to drive capital to those riskier ventures.
i don't understand how this is even possible.
$1 loaned for one year at 10% means, after 1 year, you get $1 back plus 10¢ of interest. $1 loaned for one year at -10% means, after 1 year, you get back $90. This is reality in multiple economies [1].
Traditionally, monetary policy hit a zero bound with rates. Why would one deposit money at -10% when one can hold cash at 0%? But modern finance sometimes means it's better to hold bonds yielding -1% than it is to withdraw physical cash. (For example, to use as collateral.) The ultimate goal of these policies is to make holding cash so uncomfortable that investors have to deploy the capital.
Essentially all debt has a maturity (there are rare exceptions). What you're saying is only true if interest rates are 0%, and will be forever more. If someone borrows a lot of money at 0%, they face the risk that eventually they're going to have to refinance at a higher rate.
It's pretty simple; create a corporation with yourself as CEO, make that corporation take a huge loan using overvalued corporate assets (paid for by someone else) as collateral, then as the CEO, give yourself huge paychecks and bonuses and then run the corporation into the ground over the course of a few years. The lower the interest rate, the more time you have to enrich yourself before the company goes belly up.
After you ponder that a bit, and if you still believe it, send us your money.
I once visited a friend in London, his family had a really nice property, worth millions for sure. And then in this kitchen some really funny ancient oven and toaster stuff. It still worked fine. So why replace it? North Americans just keeping buying new, we're the epiphany of that culture.
But at some point in your career you might connect the dots and realize you need people to 'buy buy buy' in order for your sales to remain healthy and for you to keep your job so you can support your family etc. etc..
It's a weird vicious/virtuous circle and I don't thin UBI etc. will solve it. There are innumerable actual innovations and advancements that come out of the rat race :).
This reverses cause and effect. For most of human history, real productive capacity didn't change from generation to generation. Elites fought to sit on more stuff; there was no point bringing peasants into the mix.
The industrial revolution (and the Black Plague, in Europe) changed that dynamic. Real economic growth became a thing. And workers needed to be competed for. That gave them bargaining power in the economy, which they converted into re-tooling it away from solely making toys for the elites and towards producing goods and services for the masses.
It's always comforting to imagine some disembodied "elites" calling the shots and making a plan. In reality, our systems are more chaotic.
*epitome
Sounds like an AGA [1], they are still a consumer culture signal even if they don't look it to an outsider.
If the AGA is new (within the last decade or two), those people spent tens of thousands of dollars on a freaking oven. That's more than most people would spend on an entire kitchen remodel.
If the AGA is not new (from before 1990 or so), it's horrendously energy inefficient. A modern sub-$1,000 oven would pay for itself in energy savings in no time.