Guest Post: What If The Consensus Is Wrong?

Tyler Durden's picture

Submitted byCharles Hugh Smith from Of Two Minds

What If the Consensus Is Wrong?

We all know the mainstream consensus is wrong, but what about the non-mainstream consensus? Maybe it's equally misguided.

There are a variety of consensus views floating around the Mainstream Media and the blogosphere. The two sets of consensus don't align on much, as might be expected: the financial MSM is still spouting the Federal Reserve/Wall Street's "happy story" about how the recovery is weak but muddling forward with "uneven growth" (i.e. someone else got laid off, you still have a job) but corporate profits (the only metric of "growth" that counts) will still be rising forever (as usual).

The financial blogosphere consensus is more or less that the fiscal-stimulus/Fed-goosed "recovery" is obviously rolling over here, and since inflation and fear are baked in, gold will continue its steady climb towards $3,000 an ounce and beyond. Oil, meanwhile, is poised to rise as suppliers either lose production to depletion or ratchet production down to support prices.

We all know about confirmation bias, the tendency to seek evidence which supports our views after they have hardened into conviction.

Seasoned traders practice the opposite: they actively seek out arguments against their current views. If these "Devil's Advocate" arguments are more compelling than their current convictions, then they change their minds and their trading positions (or at least slap on a nice thick hedge).

Which leads me to play Devil's Advocate: what if both consensus camps are wrong?

Again, this is a thought experiment which traders go through to avoid confirmation bias.

1. What if the economy rolls over hard? The Fed and mainstream economists are expecting a "soft patch" based on "mixed data," i.e. the top 20% are still "consuming" while everyone below the top 20% whithers on the vine.

Expect a hard rollover to show up all over the place in July and August data: container shipments, gasoline consumption, retails sales, auto sales, Christmas orders, tax collections, etc.

2. If the dollar rises substantially, then corporate profits will tank. Much of the big jump in corporate profits came not from actual net but from overseas sales converted into a weakening dollar.

Zero Hedge presented an excellent technical case by John Noyce for the dollar rising as the euro falls to 1.15 or lower: The Charts That Matter Next Week.

Recall that the DXY dollar index is essentially a see-saw, with the USD on one end and the euro on the other, and the other currencies adjusting to the primary trend in the see-saw.

Does anyone seriously expect the euro to rise from here? Based on what? A rescue of Greece by Alpha Centaurians bearing quatloos?

3. Gold is looking kinda heavy here (technical pun intended). Gold is in a long-term uptrend, but it has occasionally swooned for long chunks of time without threatening the long-term trendline.

We might ask: what happened in 2008 when the whole bogus fraud-ridden scheme of leverage, debt, propaganda and risk-trades imploded? Both oil and gold also tanked as debtors with margin calls or equivalent scurried out to unload whatever assets still retained some value, with a preference for selling those which retained the most value, i.e. gold and oil.

If all the world has done is push the cleansing that started in 2008 forward three years, then December 2008 is a pretty good model of what to expect going forward
as the exact same forces will eventually unleash their creative destruction again, only this time with greater force and at higher levels of non-linearity.

Depending on what you look at technically, there are some major divergences popping up in gold's chart as MACD, RSI and other indicators have been sagging even as price held on until recently.

4. Oil and gasoline are also looking toppy. The consensus is watching the shaky supply situation and seeing all sorts of reasons for supply to decline, but if the global economy rolls over hard, then demand could fall faster than supply, pushing prices off a cliff.

One feature of the "oil curse" is that the oil exporters have no other revenue stream to fund their regimes and welfare states.
Saudi Arabia has enough other investments in the West to weather a downturn, but the rapid rise in the cost of extraction, population and welfare has pushed up the fiscal pain point even for the Saudis.

Iran and other exporters have a wafer-thin fiscal break-even point: if oil slumps to $50/barrel, the Iranian government budget is in serious shortfall.

As I noted in Oil: One Last Head-Fake? (May 9, 2008), despite brave talk to the contrary, exporters have no choice politically but to pump and sell every barrel they can, as oil revenue is the foundation of the government's spending and legitimacy.

As demand crashes in a global rollover, oil plummets below fiscal break-even for exporters, who must then pump even more to keep revenues from destroying their domestic legitimacy and power base.

Supply won't drop as fast as demand, and that will push prices down hard at the margin, where prices are set. And as the U.S. dollar shoots up, then oil will cost a lot more in weaker currencies. That will further suppress demand and thus price.

Those two dynamics will reinforce each other in positive feedback loops, pushing prices down lower than the consensus thinks possible.

"Impossible"? Where have we heard that before? Lehman going belly-up was impossible, as I recall, and so was the housing bubble bursting, to name but two previously "impossible" financial events.

Confirmation bias has its own positive feedback called the herd instinct. When the herd reaches a consensus, it's hard not to follow along with what is "obvious."

Sometimes what's obvious isn't "obvious" at all.

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Ancona's picture

That light in the tunnel you see is not daylight, it's the headlights of the train that is on target to crash.


Time to put on some big-boy pants and buckle up.

Ahmeexnal's picture

Alpha Centaurian quatloos are worthless paper too.

Zeta Reticuli trakkans however, are .9999 gold coins!!!

DoChenRollingBearing's picture

C. H. Smith writes a nice piece here.  The Bearing is a well known physical gold advocate, I believe the upward price potential is enormous.

But, nothing is for sure.  That's why I like articles like this (as well as hearing about alien money)...  Makes you re-think...

Since the future is so unpredictable, I am diversified.  Diversification!  One of your very best friends.

FEDbuster's picture

Make sure to include some five gal. pails of oatmeal and ammo cans stuffed with .223 in your basket of S.H.T.F. investments.

C.H. Smith is worth reading on a regular basis.  Most of his articles are posted here at ZH, but just in case you missed a couple:

sgt_doom's picture

Either you read really oooollldd sci-fi, or you are ancient like me?

Interesting short SF story, that one!

monkeyshine's picture

I share much of the Devil's Advocate views here. I cannot see Euro strenghtening much and am short via EUO though I worry that ECB rate rise (they are simply inflation hawks they won't print Europe's wat out of debt e.g. they do Germany's bidding by design). 

I believe Gold and Silver don't have room to run here and the idea that gold $3000 is inevitable is unfounded based on the idea that QE is over, EU will fall and dollar will rise.  No reason, without more QE, to believe dollar will fall more or euro will rise more.

KSA does have room to increase production by 40% to 14 million bbl/day. They would do this as part of their geopolitical war with Iran. Cost to produce KSA oil is much lower than Iranian oil so the lower oil prices go the less profit Iran has and the more pressure the Iranian goverment faces internally. Iran is playing games in every corner of MENA but the KSA wants them isolated. Drying up their funds of course inhibits their ability to fund others in that they must choose where to put money - domestically or abroad. KSA would love to see more internal protests in Iran. Together with GCC states they may raise output though I see this could take until December before the markets realize what is going on as that is when Russian production tends to be inflexible due to winters. 

I have given up trying to predict where the market indexes will move they have been divorced from reality for too long thanks to QE and as noted by forex profits, but I will say the market has been quick to respond to the topping of the Euro, which leads me to wonder if I should get out of short euro and into short market... except as I said I decided to give up predicting the index movements.


SWRichmond's picture

No reason, without more QE, to believe dollar will fall more or euro will rise more.

Disagree.  The dollar will fall as the ability of U.S. fed dot gov to actually simultaneously pay interest AND pay the (Denninger's aptly-named) free shit army to sit around and vote to enslave me, as this realization pans out in the face of ever-lower tax revenues.  The capital is gone; we ate it.  Then, we borrowed more, and ate that, too. 

malikai's picture

We didn't eat it all. There's loads of it in the landfills.

tip e. canoe's picture

yes, but you have to wait for it to compost.  that means making peace with the worms & flies, otherwise, the shit starts to smell somethin fierce.

Internet Tough Guy's picture

What are those saudi investments in the west worth if the west doesn't have reliable cheap oil?

kato's picture

why bother a) write this b) publish this? it is simply saying pourquoi? pourquoi non?

SheepDog-One's picture

Someone writing on a napkin while sipping a latte...

WonderDawg's picture

Maybe the author wrote it in hopes that it would stimulate some thought. You know, get you to use your fucking brain for something other than posting assinine comments?

sgt_doom's picture

Doubtful, WonderDawg, as it is replete with some pretty mindless assumptions.

First, this claptrap about this so-called "MainStreamMedia" --- now just where in perdition is this mythical creature?

There is essentially one corporation which now controls the bulk of the American media, which those several corporations which are supposed to be managing/owning it (officially five at last count, down from over 1,000 back in 1960) laughingly refer to -- in their private inhouse memos -- as the American Media Corporation, or AMC.

Don't think any such "MainSteamMedia" or MSM, exists.

WonderDawg's picture

I think you missed the point, Sgt, but you described it very well. The American Media Corporation, as you describe it, is the MainStreamMedia, or MSM. MSM is used to describe the corporate owned propoganda machine employed by the .gov and the banksters. The "mythical creature" is the one corporation that controls the bulk of American media, aka, the MSM.

americanspirit's picture

Then there's all those potential outlier events - Monju, New Madrid, Armageddon, Fort Charles, the Cascadian Plate, Yellowstone, Straits of Hormuz, etc, etc. BTW - anybody seen all that Sarin that disappeared from Lybia a few months back? I think it's pretty clear that both concensus worldviews are pretty fragile. Interesting times.

SheepDog-One's picture

Nebraskashima nuclear meltdowns about to take place, while Soros buys midwest farmland hand over fist. Even the smart people in the room are so far off on their concensus its surreal.

Uncle Remus's picture

Hmmm. I heard it as Fukomaha.

Sokhmate's picture

fukuyu ..fukumi .. what's the difference! it's all Japanese

vamoose1's picture

Joe Granville said it best in 1980  to wit "the obvious is obviously wrong".

sgt_doom's picture

A play on Thorstein Veblen's "What is, is wrong" and well done at that!

Economic surplus....surplus revenues....Other People's Money (OPM)...public funds for private use.

Civilization is just about over....


vamoose1's picture

Joe Granville said it best in 1980  to wit "the obvious is obviously wrong".

Salah's picture

Libya had (past tense) hundreds of Russian made, shoulder-fired SAMs.  That's why we're there; you might want to think twice on going to Europe in the next few years, and flying around that southern Mediterranean air corridor.

"Missing SAMs in Libya alarms the West" (6/23/11)

Estrella's picture

The link you mentioned states, as I thought, SA-7s. First generation type stuff, very limited, if even operable (batteries have a limited life and SA-7s are old). Never a good thing to lose control of a weapon, but, this is not a particularly potent weapon.

SheepDog-One's picture

I dont know what 'the concensus' is, but the reality is all systems are about to be imploded, all pensions, 401K's, IRA's seized due to the sudden economic state of emergency, and the planned 1 world govt 1 world currency will be implemented and no one will do jack shit about it because theres no IPhone app for it.

Version 7's picture

"Absolutely SheepDog-One"



Uncle Remus's picture

Translation: No bag limit, any means.

DaveyJones's picture

wonder how many people in history have said it can never happen here  

sgt_doom's picture

Well said, more or less.

Evidently the blog post author believes that the hedge funds (American Enterprise Institute), the oil cartel (Pew various frigging outlets and the Cato Institute), the Heritage Foundation, and all the other foundations which are owned by the same few, and forever quoted as the news by Foxtard and that Fox Stealth Network (NPR), constitute the "consensus" in this author's view????

alexwest's picture

2. If the dollar rises substantially, then corporate profits will tank. Much of the big jump in corporate profits came not from actual net but

actually they already did..
corp taxes paid are jsut 5% y/y, strip profits of oil/finance companies, well rest of is in negaive territory..

i dont give a flying fuck about earning reported, its jsut bunch of lies, but paid taxes are real money ..


SheepDog-One's picture

Yea I also could give a flying fuck about how the transparent Ponzi is going to be floated further. Anyone with half a brain should be revolting from this system, but denial is a powerful thing indeed.

DoChenRollingBearing's picture

+ 100

"...transparent Ponzi is going to be floated further."

Action is needed to protect yourself from all of the lies.  Buy gold.  Stay out of debt.  DIVERSIFY!  Get off the grid to the extent you can.

Denial is indeed a powerful thing.  Swimming upstream is harder, but staying in the Sheeple Herd is very dangerous.  Prepare...

Apocalicious's picture

Or even better, buy gold on credit cards. Default on cards, abscond with gold, exit stage left. Stay off the grid and fuck the banksters.

Bastiat's picture

Yep old helicopter Ben could just push the stick forward and fly the sucker right into the ground.  When the smoke clears fiat will be worth nothing. 

Re-Discovery's picture

I tend to agree that the likelihood of the Rosenberg/This Post deflationary outcome is growing daily.  QE did not inflate incomes.  As such, many Americans are forcibly going cold turkey on spending.  Even the Gov't can only do so much. 

SheepDog-One's picture

Funny how broke unemployed people cant pay more for things, scratching the 'hyperinflation' theory off the board.

sasebo's picture

The guvmunt can't do nothing. They're too stupid. Or we wouldn't be here

Cole Younger's picture

I have difficulties grasping some of this like " Saudi's investment in the west " because if the west takes a dump. so does the Saudi's. A 2008 crash would hurt the Saudi's and being that there only real export is oil, they would have to push the price up in terms of U.S. dollars to survive.

AnAnonymous's picture

More. If the Saudis do not input what is needed to fuel  the West, their papers are worth nothing.


With US victimology, this simple point is near impossible to get through as in the mind of US citizens, they have the wrong bargain side, they are pushing money paper against resources and goods. In US mind, people on the right side of the bargain are people who receive paper money against resources and goods.

Yep, the US citizens nature is eternal.

richard in norway's picture

i thought this article would trash the zerohedge consensus, not that it needs trashing, but sometimes i wonder if I've fallen in love with gloom and doom

qussl3's picture

We're all closet masochists.


DaveyJones's picture

I like to close the door on my hand every time I go in.

TheMerryPrankster's picture

I prefer banging my head on the door frame on the way in and out. The blue sparks quiet the voices for a moment and create an immediate sense of transition. I also have problems remembering to duck my head.

r101958's picture

Perhaps you just prefer reality.....which to some is 'gloom and doom'.

qussl3's picture

Dupe. Banana Ben printing inflation in cyberspace too.


Gully Foyle's picture

Hey now Billy ever watch Rashomon?

The Rashomon effect is the effect of the subjectivity of perception on recollection, by which observers of an event are able to produce substantially different but equally plausible accounts of it.

We forget everything is true/false/meaningless in some sense and only our relative subjective observation/interpretation carries any weight in our reality grid.

Or to paraphrase Bobby Goren " Everyone lies all the time".



billwilson's picture

- And I want US$???? No end in sight to new issuances of debt. Got to love a currency where the government spends $20 billion a year air conditioning tents in Iraq and Afghanistan.

- Godl will go where it wants to go. Don't want $, don't want Euros, get me physical. 

- Much more liquidity this time around, the money ahs to flow somewhere.


Bananamerican's picture

"Got to love a currency where the government spends $20 billion a year air conditioning tents in Iraq and Afghanistan."