Archive - Sep 18, 2010 - Story

The aim of this paper is to show that the essential problem of the current monetary regime is the mismatch of durations of financial assets and liabilities. The shorter mismatch of durations presents perennial problems for the monetary system. Combined with perpetual debt the problem is exponentially amplified. This outcome is a direct consequence of abandoning that physical substance, which has the propensity for its utility at the margin to decline the least, as the monetary unit of account.

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A funny thing happened on the way to American central planning: normal distributions became abnormal. To wit - the classical, Gaussian distribution chart, which lies at the  basis of all modern statistics and offshoots thereof, such as quant theory, apparently is not good enough for the wonderful data aggregators and distributors at the all important Bureau of Labor Statistics, which is in charge of such key economic metrics as the unemployment rate, CPI, PPI, home sales, and virtually everything that tends to have a huge headline impact on stock futures (because let's face it, nobody trades during regular hours anymore). Curiously of the 25 or so data items tracked by the BLS, the vast majority have been revised over 50% of the time over the past decade. All, that is, expect for the most important, and politically critical ones: the unemployment rate (easily the only number the vast majority of the population understands), and consumer prices (which is the only number to direct impact the federal budget). In other words, as the chart below demonstrates, while the BLS has the track record of a blind and retarded monkey throwing a dart at a wall full of numbers when presenting initial economic data, something which Gaussian distributions would say is perfectly normal when running a $13 trillion economy, it has perfected confidence intervals and data estimates when dealing with the most economically sensitive and critical data. Whether the BLS has hired the same oracular prop traders that allowed Goldman to lose money on zero days in Q1 when calculating some numbers (but not others), or whether the BLS just spews forth what some excel model dictates (possibly the same used by Moody's that would crash upon imputing negative growth assumptions), while pretending to use traditional "ecostat" sampling, estimating and adjustments may be worthy of far more debate than currently afforded. Because the last thing an increasingly more cynical American public would want to believe is that the government is, gasp, lying to it.

By now everyone 'knows' that the US consumer is hunkering down, paying down debt and performing other mythological tasks. Alas, as the WSJ points out today, this is not exactly true... In fact not true one bit. The reality is that over the past two years, US consumers have not been deleveraging as a voluntary act of eliminating debt, but have been actually aggressively leveraging more and more until the bank providing them credit puts them into involuntary bankruptcy, cutting off the money spigot. This is a startling realization, confirming that the average American is actually hyperleveraging to the point where all available credit is forcefully eliminated by a lender institution!

The difficulty with modeling markets in a dynamical way is that their essence is free human choice, while
the central core of dynamical systems is determinism. “Determinism” means that the past determines
the future and as will be demonstrated, vice versa. This implies that zero topological entropy is a
requirement for predictability. This will take some unpacking.

Is Oracle the canary in the collapsing coalmine? Or is it just the best lagging indicator in the tech space...

One can just smell the revulsion emanating from the pages of David Kostin's writings these days. While his predecessor, Joseph Cohen, can serve the crazy juice on CNBC on a daily basis, Goldman's strategist is forced to follow the grand master plan and telegraph to clients just how ugly the future seems. And with prop allegedly no longer a main revenue driver, and thus holder of securities, Goldman better hope volume makes up for the loss in directional bias - what better way to score volume than to incite some fear and loathing. As Kostin said: "We shifted to a more defensive sector allocation this week in anticipation of slowing economic growth indicators and downward revisions to consensus earnings and real GDP forecasts. These changes put us at odds with bottom-up consensus EPS and large cap core mutual funds, particularly in our Consumer Staples Overweight vs. Discretionary Underweight where mutual funds hold the opposite position." Goldman's 2011 earnings forecasts are most below consensus in growth-sensitive sectors such as Consumer Discretionary which is 23% below bottom-up consensus while both Energy and Materials stand 10% to 15% lower. Whether this means to buy every Consumer Discretionary share or sell, depends on just how quickly the Goldman prop roll off is proceeding. All this and all the other must see weekly charts included.