Off the top, Universa's Mark Spitznagel explains that "high-frequency traders are making markets more jumpy" and the idea of HFT as a liquidity provider is a fallacy since as he notes "that liquidity won't be there when they most need it," especially when there is one-way order flow such as in the flash crash. Spitznagel then crushes the 'cash on the sidelines' meme but explaining that while corporate cash balances have soared, net debt has actually gone up beyond the highs of 2008. As we have previously discussed, "the idea that corporate balance sheets are so strong right now is entirely wrong," as investors are conveniently focusing in one piece of the balance sheet (assets not liabilities). Maria B just can't fathom it but Spitznagel's words are clear - scale the cash on the balance sheet against debt and we are as bad as we were in 2008.
"The market is an artificial fabrication," Universa's Mark Spitznagel warns in this brief but revealing interview, adding that "to think this can persist is simply naive." Talking to Maria B on FOX, Spitznagel thinks the market could be cut in half if the Fed stepped away now and points out the fallacy of a belief in any persistent tapering as the Fed will step right back if the market goes down. The gap between the market's "alternate reality" and actual reality is something that simply cannot persist and explains now is the time to be out, to prepare for when the market reprices (as opposed to suggesting people short the market) which is exactly what traders are not doing - as it would be irrational to think longer-term, "if they don't make their next week, month, quarter; they won't be around." "The reason for this is the Fed - the modern day Victor Frankenstein - who have created this thing that otherwise wouldn't live"
In 1928, just as income inequality was surging, stocks were soaring and monetary distortions were rearing their ugly head, the now infamous words "a chicken in every pot and a car in every garage" were integral to Herbert Hoover's 1928 presidential run and a "vote for prosperity,' all before the market's epic collapse. Fast forward 86 years and income inequality is at those same heady levels, stocks are at recorderer highs, the President is promising to hike the minimum wage to a "living wage" capable of filling every house with McChicken sandwiches and now... to top it all off - Maserati unveils their (apparent) "everyone should own a Maserati" commercial. It would seem that chart analogs are not the only reminder of the pre-crash era exuberance and its recovery mirage and massive monetary distortions.
"Today there is a tremendous amount of monetary distortion, on par with the 1929 stock market and certainly the peak of 2007, and many others," warns Universa's Mark Spitznagel. At these levels, he suggests (as The Dao of Capital author previously told Maria B, "subsequent large stock market losses and even crashes become perfectly expected events." Post-Bernanke it will be more of the same, he adds, and investors need to know how to navigate such a world full of "monetary distortions in the economy and the creation of malinvestments." The reality is, Spitznagel concludes that the 'recovery is a Fed distortion-driven mirage' and the only way out is to let the natural homeostasis take over - "the purge that occurs after massive distortion is painful, but ultimately, it’s far better and healthier for the system."
Nearly 100 years ago, on December 23, 1913, the Federal Reserve Act was signed into law, giving the U.S. exactly what it didn’t need: a central bank. Many people simply assume that modern nations must have a central bank, just as they must have international airports and high-speed Internet. Yet Americans had gone without one since the 1836 expiration of the charter of the Second Bank of the United States, which Andrew Jackson famously refused to renew. Not to be a party pooper, but as this dubious anniversary is observed, we should ask ourselves, Has the Fed been friend or foe to growth and prosperity? ... In actuality, the Fed’s modus operandi has been to trick capitalists into doing things that are not aligned with economic reality.
A major issue is the growing disparity between rich and poor, the 1% versus the 99%. While the president’s solutions differ from Republicans, they both ignore a principal source of this growing disparity. The source is not runaway entrepreneurial capitalism, which rewards those who best serve the consumer in product and price. (Would we really want it any other way?) There is another force that has turned a natural divide into a chasm… dun, dun, dun… the Federal Reserve. The relentless expansion of credit by the Fed creates artificial disparities based on political privilege and economic power.
In the midst of the epic dysfunction known as the 16-day government shutdown, we lost sight of the fundamental issue whose inescapable logic cuts across politics and party lines: We are feeding the rapacious appetites of our current selves (we want what we want now) at the dire and escalating cost to our future selves (whom, we assume, will somehow have the patience and resources to bear the burden). If that sounds unworkable and unsustainable, it is...
Never in US history have so many individuals earned over $50 million per year. Never before has the divide between the wealthy and the poor been so wide (never). The source of this catalyst for unrest in society, as Mark Spitznagel warned, is not runaway entrepreneurial capitalism, which rewards those who best serve the consumer in product and price. (Would we really want it any other way?) There is another force that has turned a natural divide into a chasm: the Federal Reserve. The relentless expansion of credit by the Fed creates artificial disparities based on political privilege and economic power.
Despite Ron Insana's insta-dismissal of all things "Austrian", and Maria Bartiromo's scoffing at his comments, Mark Spitznagel (who most recently discussed the problems we face here, here and here) ventured on to the unreality channel this afternoon and much eyebrow-raising ensued. Spitznagel, author of The Dao of Capital , explained why he believes "the market is setup for a major crash," and expects a 40% decline in stocks. The current market "entirely artificial" environment driven by zero-interest-rates and central bank asset purchases, along with valuations and sentiment, has distorted the 'markets' in the same way as "in all other major tops in history." His investing advice is simple, "step aside!" But doesn't expect many to heed his proven advice, because, "it is the hardest thing to do right now, "and makes you look like a fool."
Time is nearly up for Ben Bernanke, the chairman of the Federal Reserve who supposedly applied his scholarly knowledge of the Great Depression to steer the U.S. to safety after the financial crisis. In truth, Bernanke navigated a monetarist course that favored intensive intervention, following in the footsteps of many mainstream economists who grossly misunderstood the lessons of the Crash of 1929 and the ensuing malaise. That lesson is that when corrective crashes occur, intervention is far from the cure — it is the cause.
"When it comes to market events, there have been no impactful black swans - the so-called unexpected 'tail events," Mark Spitznagel notes in his excellent new book, The Dao Of Capital: Austrian Investing in a Distorted World, explaining that, "what were unseen by most, were indeed highly foreseeable" by others. The Fed planted the seeds for the last financial crisis and "when you prevent the natural balancing act, you get growth that shouldn't be happening."
The financial crisis of 2008 could have been the wake-up tall that, like the Yellowstone fires of 1988, alerted so-called managers to the dangers of trying to override the natural governors of the system. Instead, the Federal Reserve, with its head "ranger," Ben Bernanke, has deluded itself into thinldng ft has tamped down every little smolder from becoming a destructive blaze, but instead all it has done is poured the unnatural fertilizer of liquidity onto a morass of overgrown malinvestment making a even more highly flammable. One day - likely sooner than later, it will burn, and when that happens, the Fed will be sorely lackng in buckets and shovels and must succumb to the flames.
The U.S. stock market’s return to nominal all-time highs amid artificial zero interest rates is sending yield-hungry investors down a dangerous path, one they hope will continue to lead to quick and easy returns. Such pursuits ignore a reality grounded in some of the oldest human wisdom, dating back 25 centuries to the Daoist sages of ancient China, who eschewed the direct in favor of the indirect - the roundabout that leads to better strategic advantage. No matter how appealing the direct path, it will likely not best take us where we want to go. Most often it leads only to loss - the hare ultimately loses to the accelerating, roundabout tortoise.
As Detroit begins to sort through the ill-begotten public liabilities that have driven it to bankruptcy, an important opportunity is at hand to revitalize the city that was once the epicenter of American entrepreneurship and manufacturing, while setting an example for other municipal governments that appear to be headed toward a similar fate. Here is an “Austrian moment” in the making, a potential libertarian awakening guided by the market-oriented, non-interventionist principles of the Austrian school of economics. For years, Detroit’s expenditures vastly exceeded its revenues. But, as long as investors were willing to purchase risky bonds, neither politicians nor unions would admit how unsustainable Detroit’s situation was. Detroit’s bankruptcy is thus exactly what the financial system needs.
Amid all of this messy thinking we miss the simple truth behind our material wealth: It has been achieved through the accumulation, by us and inherited from our forefathers, of a stock of highly configured and embedded tools that make human effort more effective and things possible that never were before. And we turn our backs on this truth when we turn more and more of these tools over to government bureaucrats. Profits are but an intermediate end of capital investment. Its ultimate end, in fact, is the material progression of our civilization. How easily we lose sight of this, at our and our progeny's peril. We all want more economic growth, but we ignore the means to get there: the onerous choices and commitments made along the round-about path to those ends. We even confuse the means with the ends.
In the short run (and this is what is so insidious about the Fed’s artificially low interest rates), all we are seeing is an illusion of economic progress. The choice for the status quo made in last week’s presidential election was an uninformed one—at no fault of the voters—made in the fog of monetary distortion and Federal Reserve Chairman Ben Bernanke’s continuous campaign of disinformation. Thus, investment in this illusory economy is malinvestment, or investment that always unravels with the intervention’s inevitable end, due to either untenable credit levels (such as today’s corporate debt-to-asset ratio, still at historic highs) or a resource crunch (rising commodity prices) that eliminates any advantage from printing money; and one or both of these scenarios is unavoidable. This is our grievous position in the United States today, trapped in the status quo by first consequences, by what we can see, due to a cause that we cannot even see. And so we are left to learn from experience, an eventual tragic unfolding of our collective malinvestment. As Bastiat said, “Experience teaches effectually, but brutally.”