One of the biggest mistakes that investors make is falling prey to cognitive biases that obfuscate rising investment risks. Here are 5 counter-points to the main memes in the market currently...
In the Golden Age of the Central Banker it is impossible to distinguish fundamental economic reasons for asset class price movements from politically-driven strategic reasons. When words are used for strategic effect rather than a genuine transmission of information you create a virtual stalking horse. It’s a focus on how something is said as opposed to what is described. It’s a focus on form rather than content, on truthiness rather than truth. It’s why authenticity is as rare as a unicorn in the public world today.
August gold GCQ14 and September silver SIU14 contract purchases spiked the exact moment Malaysia Airlines reported MH17 missing. Coincidence or tragedy profiteering? You decide.
With U.S. rates higher than those of major foreign markets, investors are provided with an additional reason to look favorably on increased investments in the long end of the U.S. treasury market. Additionally, with nominal growth slowing in response to low saving and higher debt we expect that over the next several years U.S. thirty-year bond yields could decline into the range of 1.7% to 2.3%, which is where the thirty-year yields in the Japanese and German economies, respectively, currently stand.
"Of all the economic bubbles that have been pricked, few have burst more spectacularly than the reputation of economics itself." – From The Economist, July 16, 2009.
Mainstream economists continue to dominate their profession and wield huge influence on public policies. They merely needed to close ranks after the financial crisis and wait for people to forget that their key theories and models were wholly discredited. Meanwhile, heterodox economists who stress credit market risks and financial fragilities – the Austrians, the Minskyites – remain stuck on the fringes of the field. It doesn’t much matter that the crisis validated their thinking. Nonetheless, we’ll continue to explain why we think a shake-up is overdue...“Mythbusting” the theories of mainstream economists.
Financial markets are complex in normal times. When government is actively supporting them, they only become more so and more dangerous. If today’s financial markets were rated like movies, they would be rated “R” (perhaps, “X”). Whether the “R” stands for risky or restricted is immaterial.
Sometimes, with the stock market doing its best imitation of the Energizer bunny, we forget just how extraordinary are the times in which we live. We’ve been lulled to sleep by the relentless and mesmerizing march higher of stocks and all manner of risky assets. Maybe it’s just that having lived through two booms and busts already that people have come to believe that another boom in risky behavior is not just the new normal but the old one as well. And having survived the last two busts, none the wiser apparently, everyone figures we’ll survive the next one too. Maybe. Or maybe people just don’t realize how truly weird things are right now. Some suggest there is no reason prices can’t continue to go higher; however, the supply of greater fools however is not unlimited and at some point reality and rationality will return, likely with a vengeance.
Cynicism is popular. Cynicism is popular these days. It's what passes off as wisdom. But cynics didn't put a man on the moon. Cynics never won a war. Cynics didn't cure a disease, or start a business, or feed a young mind. Cynicism didn't bring about the right for women to vote, or the right for African Americans to be full citizens. Cynicism is a choice. Hope is a better choice.
And so, as President, I'm going to keep a promise that I made when I first ran: Every day, I will keep asking the same question, and that is, how can I help you? And I'll keep treating your cares and your concerns as my own. And I will keep fighting to restore the American Dream for everybody who's willing to work for it. And I am going to need you to be right there with me. (Applause.) Do not get cynical. Hope is the better choice.
The overpowering and incessant statist economic management of the American economy, as reflected in the Ex-Im extension mobilization now underway, is causing the engines of capitalist prosperity to shutdown. The main culprit, of course, is our monetary central planners in the Eccles Building. But they are only the leading edge - the exemplar that tells Washington day in and day out that without constant ministrations by agencies of the state, our capitalist economy would continuously under-preform and tumble into the ditch. So what is at stake in the Ex-Im battle is the future of market capitalism itself. If Washington lacks the capacity to say no to the shareholders of a few big US corporations that can be counted on one hand, then the statist predicate will triumph finally and for ever more.
A nervous peace prevails in the financial markets as central banks sit on their throne, fingers at the ready on the liquidity switch. As UBS' Bhanu Baweja notes, most volatility buyers have been 'rolled' into their graves. As they have explicitly targeted risk premia in addition to rates, a lot more hangs on the monarchs of monetary policy today than it has in previous cycles. While growth and inflation are both low, they are not necessarily uncertain; and although every crisis is different, certain patterns tend to repeat and certain events have reliably driven volatility higher.
A repeated theme on financial-TV in recent weeks is that there cannot be a recession without a yield-curve inversion first because in each of the last 6 recessions stretching back 50+ years, short-term rates rose above long-term rates before the recession. However, if you study the period after The Great Depression and even in Japan's last 25 years (that are the best examples of balance sheet recessions), it is very common to have a recession without a yield curve inversion first. In-fact, there were 6 of them following The Great Depression into the 1950's.
Here’s a radical suggestion to help counter to the pro-crony forces: be upfront about the true sinister nature of organizations like the Ex-Im Bank. Let’s call a spade a spade, and finally describe the Ex-Im Bank what it truly is: fascism. Such a word comes off as a boogey man term used to rile up emotions. But in the battle of ideas, sophistry always comes up short. Just as the shortest distance between two points is a straight line, precise words are better than vague words when it comes to making a point.
"The system we have now is one in which the Fed decides, through a Politburo of planners sitting in Washington, how much liquidity is necessary, what the interest rate should be, what the unemployment rate should be, and what economic growth should be. There is no honest pricing left at all anywhere in the world because central banks everywhere manipulate and rig the price of all financial assets. We can’t even analyze the economy in the traditional sense anymore because so much of it depends not on market forces, but on the whims of people at the Fed."