This Is An Extraordinary Time

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

It's as if we have two economies: the simulacrum one of stocks rising dramatically in a few months, and the real one of household earnings (down) and hours worked (down).

It is difficult to justify the feeling that we are living in an extraordinary moment in time, for the fundamental reason that it's impossible to accurately assess the present in a historical context.
 
Extraordinary moments are most easily marked by dramatic events such as declarations of war or election results; lacking such a visible demarcation, what sets this month of 2013 apart from any other month since the Lehman Brothers' collapse in 2008?
 
It seems to me that the ordinariness of June 2013 is masking its true nature as a turning point. Humans soon habituate to whatever conditions they inhabit, and this adaptive trait robs us of the ability to discern just how extraordinary the situation has become.
 
In my 59-year lifetime, the dramatic, this-is-history-happening moments are obvious: the Kennedy assassination, 9/11, and so on. Other tidal changes developed over a period of months or years: Watergate, which ballooned from a minor break-in to a constitutional crisis, is a good example. So is the financial meltdown of 2008, which actually began back in 2001 when the Federal Reserve chose a policy of super-low interest rates and super-abundant liquidity to lessen the post-dot-com recession.
 
I have an unavoidable sense that May-June 2013 is the high water mark of the political/financial response to the global financial meltdown of 2008. Nothing systemic has changed in the five years; the status quo financial and political systems have made cosmetic reforms, but the power structures have not changed at all.
 
The status quo has simply ramped up its traditional policies: since lowering interest rates didn't spark a strong recovery, then lower rates to zero, and so on: more money creation, more credit creation, more bond purchases, more subsidies for housing, more transfers of private debt to the public ledger--more of what has failed spectacularly.
 
That's what marks June 2013 as extraordinary: the Powers That Be have gone all-in. If their policies fail to ignite a self-sustaining recovery in the real economy, there are no policy options left.
 
Those who don't follow finance might not have noticed the extraordinary nature of recent financial events: Japan's stock market rose by 75% since December before reversing sharply, the U.S. S&P 500 climbed 24% in 2013, gold crashed by over $200 in a matter of hours, and the Japanese yen has lost a quarter of its value (in U.S. dollars) in a matter of months.
 
None of this makes sense in terms of the real economy: U.S. corporations didn't suddenly become 25% more profitable; Japan's economy did not expand by 75% in five months, and none of the fundamentals in the value of gold suddenly changed overnight.
 
These rapid, gargantuan fluctuations are disconnected from the real economy. This in itself is extraordinary. The financial press explains these bubble-like advances and collapses in terms that only make sense to financiers: the yen-dollar pair, the yen carry trade, etc.
 
That complex, abstract financier policies and trading strategies now dominate stocks, bonds and precious metals is also extraordinary.
 
I have endeavored to understand the fundamentals behind these wild fluctuations proposed by the media, and have concluded none of it makes any sense in conventional economic terms. To mention just one example: gold has traditionally been viewed as a hedge against inflation. Gold's collapse is being attributed to lower expectations of inflation. OK, so there's no inflation, ergo, the global economy is in slow-growth/no-growth mode, hence no inflation. Then what is powering global stocks higher? We're told "an improving global economy" is the driving force, but the data on this supposed recovery is mixed at best.
 
Some observers claim gold dropped because the yen dropped and the U.S. dollar strengthened, but a glance at the 10-year chart of gold and the dollar quickly disproves any correlation: gold rose when the dollar dropped and when it rose.
 
This is another extraordinary thing about the present: none of these moves make any sense. Pundits and analysts are seeking explanations after the fact, postulating correlations as causes with little historical backing. It's as if the financial media is incapable of confessing none of this makes sense, and instead the media piles one complex explanation on top of another to justify what is clearly an extraordinary disconnect between the real economy and asset valuations.
 
Bottom line: even if the global economy is improving (and there is ample evidence that data is being juiced or manipulated), it isn't improving enough to justify stocks rising by 25% to 75% in a matter of months.
 
Real estate is also back in bubble territory, in those markets with plentiful capital and limited inventory: we're back to bidding wars and dozens of people competing for the right to buy an ordinary home.
 
The bond prices of fatally insolvent European governments have fallen, as if these economies have suddenly been restored to health and fast growth by European Central Bank (ECB) intervention. European stock markets are roaring higher as well. Neither makes any sense in terms of traditional risk-pricing, price-earnings ratios and so on.
 
We are living in an extraordinary global financial experiment, in which financier tricks (zero interest rates and massive injections of credit and liquidity) have been pushed to their red-line limit in the hopes that these extraordinary measures will finally, after five long years, trigger a self-sustaining expansion of the real economy.
 
Those in charge of the experiment are constantly reassuring us it has already succeeded. I think the data shows the experiment is in the final blow-off stage in which the beaker full of toxic ingredients is bubbling with dangerous vigor.
 
There is one last extraordinary feature of this time: the data "proving" the experiment is successful is self-referential: drop interest rates to zero and subsidize housing, and voila, you get a surge in building permits. Take one full-time job and turn it into 1.5 part-time jobs, and voila, the unemployment rate declines and the number of jobs increases.
 
Then take these metrics (higher permits and jobs), weigh them heavily in your measure of leading indicators, and then declare the leading indicators "prove" the recovery is self-sustaining.
 
All this leads to a question: what would happen to the economy if all the financier tricks were stopped, and the price of risk, credit, assets, etc. were discovered by the marketplace?
 
It's as if we have two economies: the simulacrum one of stocks rising 75% in a few months, and the real one of household earnings (down) and hours worked (down). Eventually these two economies will have to merge into one. I sense 2013 will be the critical year when the schizophrenia is resolved one way or the other.
 
This essay is excerpted from Musings Report 20. The Musings Reports are basically a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books.
 
The Musings Report includes an essay and three other sections: Market Musings, on the financial markets and trading, The Best Thing That Happened This Week and From Left Field.
 

 

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

go to print edition1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy


Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Kindle edition: $9.95       print edition: $24 on Amazon.com
To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)

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LetThemEatRand's picture

All this leads to a question: what would happen to the economy if all the financier tricks were stopped, and the price of risk, credit, assets, etc. were discovered by the marketplace?

Insane laugh inserted here.

SafelyGraze's picture

<-- to cash check at bank, had to show driver licence

<-- have never been required to do so

DaddyO's picture

Went to the local Sheriff's Office Compound yesterday and had to show ID, get photo'd and place paper ID badge on my chest to enter the compound...

Can you say "POLICE STATE" kids?

DaddyO

Skateboarder's picture

Papers? Where we're going, we don't need... papers.

BigJim's picture

Don't worry sir, if you don't like papers we'll just implant a nice little RFID here, in the back of your neck.

Right next to the ol' spinal cord so if you try to remove it you risk severing it.

Ocean22's picture

I can see this actually happening. Get rid of cash and look at how much more taxes you get !!

Manthong's picture

CHS.. I think you might be a little off on the timing and critical event..

The Clinton/Summers/Greenspan/Gramm CFMA 2000 set the stage for the debacle.

The bucket shop was made legal in the form of unregulated, naked insurance bets .. the rest is a quadrillion dollars worth of history.

And now, default is nothing more than seven worthless letters of the alphabet.

http://www.ritholtz.com/blog/2012/03/credit-default-swaps-cds-are-insurance-products-not-tradeable-assets/

NoDebt's picture

I was in a Wells Fargo the other day where my mother's Estate account is.  Next to the pen at the teller windown was a little black box.  I asked what it was.  Teller flipped it open and I immediately recoginzed it as a fingerprint blotter (don't ask how I know what that is- story for another day).  She proceeded to tell me that anyone cashing a check at a Wells Fargo bank who doesn't have an account there now gets FINGERPRINTED.  She told me not to worry because the ink was made out of vegetable oil and wipes right off after they take your print.  Nice.

jbvtme's picture

i tried to wire $ recently and the bank wanted to set up a "profile" and require that i explain what was the nature of the wire.

Abi Normal's picture

Indeed I had to cash a check at Wells Fargo and they wanted me to do th thumb print thing.  I respectfully declined.

qqqqtrader's picture

I've been married for more than 10 years using the same healthcare provider for my family. Last year I had to prove I was married to my wife and prove my daughter was my daughter. Filled out 3 pages of required information (with the previous years tax return cover page) and a copy of the marriage cert and a copy of the "Birth Certificate" for my daughter. Received a letter in a few weeks saying the birth certificate wasn't a valid document, they needed a "certificate of birth". So $39.95 and 3 weeks later I received the cert and sent it in. All this crap just to keep my health insurance going... wtf?

jbvtme's picture

obviously barry isn't shopping with that health care provider

TheFourthStooge-ing's picture

Papers? Don't need 'em, I brought a bong.

Bearwagon's picture

Excellent! Come on over here, I've brought all the rest, and I'll shirley prefer a hit from yours to this endless non-shit from the Oblamabong ...   ;-)

jbvtme's picture

please don't call me shirley

nmewn's picture

Went to the local DMV last year carrying papers & documents I rarely gather together in order to prove I am who I am...lost my SS card and number in the process to who knows who.

Now someone is the benficiary of that number...but so am I, in a sense...cuz it ain't me.

I may (or may not, no one knows but me) have three more numbers, welcome to the matrix ;-)

thisandthat's picture

If it's a nominal check, you have all interest it's only cashed to the right person; if it's to the bearer, there's no reason for any of that, but here's a story:

Last time I bought gold, ups guy just says recipient's name and delivers to the person answering the door without verifying their id/signature. Luckily it was a relative, but at this point could be anyone, since by now they'd even know the name and wouldn't be verified - heck, ups guy could even fake delivery, if he wanted!

So which would you rather have - that or require a valid id and check if it matches, as with the post office? When talking about thousands/tens of thousands in merchandise (or anything important), you probably rather be safe by validating your id, than risk being sorrow testing the validity of non-contractual assurances...

SafelyGraze's picture

<-- had to show driver license to receptionist at public school

<-- never had to do so

SafelyGraze's picture

<-- had to show driver license at doctor's office

<-- never had to do so

BoNeSxxx's picture

True story:  Last time I went to see my doc, the receptionist told me she needed to scan my driver's license as part of my permanent record.  She said it was mandatory under HIPPA/FLIPPA/SMIPPA - some bullshit acronym.

Anyway, I replied to her thusly, "I've been seeing Dr. ----- for over 10 years and he's had his fingers up my ass at least as many times.  If he doesn't recognize me by now, how the fuck is a driver's license going to help?"

I walked in unmolested and as far as I know she is still sitting in that chair as speechless as she was when I left her...

Oldrepublic's picture

speaking of IDs, I was recently driving in Mexico, no hotel/motel asked for any ID!

BigJim's picture

It's almost as if they don't care about terrism!

francis_sawyer's picture

I got you all beat... I buy yards of shredded mulch from the landfill [way cheaper]... But the county just took over the operation... So now you have to fill out forms [in triplicate], show ID & get your truck weighed...

~~~

For a yard of fucking shredded mulch...

Abi Normal's picture

I got you beat, in my county, the landfill GIVES AWAY mulch FREE and no paperwork!

azzhatter's picture

Why are there advertisements for cocksucker Obama on this site?

TheFourthStooge-ing's picture

Because Google AdSense, or whatever the fuck it's called, knows about the contribution you made to Debt Bro's presidential campaign.

lolmao500's picture

Questioning anything is treason citizen!

Cangaroo.TNT's picture

+1 for the Starship Troopers reference.

criticalreason's picture

might just b a liquidity squeeze made in china...rippling round the world...doubt we are in the final blow off top just yet.

 

bit pointless writing end of the world books if u predict the end is nigh IMO.

Spastica Rex's picture

Impossible to say.

To me, feels like a metaphorical thunderstorm is brewing.

I'm almost always wrong, however.

Skateboarder's picture

Yes, Rex, and the topic is "question everything" vs. "don't question anything, or else."

Spastica Rex's picture

Fuck - we are in a bad place culturally.

new game's picture

but, if you get yourself in a position to move freely, the cultural thingy can change by GTFO.

beam me to the 40 year ago lifestyle. When people were real people - respect of the fellow man and woman kind.

2nd world of real living - say small town usa...

aint happenin in da big city sludge pots of desparation.

too many low-life trailer trash blame society handout mentality fucks...

my theory is simple:freedom ultimatly self corrupts due to human nature.

and the end result is domination by a tyranical few...

time to seriously consider a new country.

but where?

hmmmm

 

holgerdanske's picture

Ha ha, I know the feeling! The trouble is the "almost". If you were just wrong at all times, it would be very useful. The "almost" is the fly in the soup.!

chubbyjjfong's picture

The volatility and volume is accelarating. Ominous overload. I just can't see this thing getting stabilized. If they taper it blows, if they accelarate printing its catastrophic. Not many options left. I can now only expect the unexpected. I agree, historical year. Historians will look back at 2013 with WTF??!

Real Estate Geek's picture

Dynamic instability; just like what caused the destruction of the Tacoma Narrows bridge:

https://www.youtube.com/watch?v=nFzu6CNtqec

 

rsnoble's picture

What would happen? Disaster obviously.  And a lot of lost seats in DC.  Oh lord!

worbsid's picture

The uneasy feeling that we are on the cusp of something unknown is wide reaching in the general public too.  The other old geezers I have coffee with in the morning wouldn't know ZH or financials from zip.  They have this uneasy feeling too.  Our middle age, middle income kids feel it. The neighbors I know feel it. 

BTW:  I wonder why the DOW volumn on Friday was three times the 90 day average.  http://money.cnn.com/data/markets/dow/  IF that many people were BTFD, why didn't the dead cat bounce higher. 

We live on a fixed planet, with fixed resources.  The lies are rampant about US oil production, North Dakota is good but is like a pimple on a fat gal's butt.

I guess we will see what happens and if you don't have your caca assembled when it hits the fan, TS for you.     

chubbyjjfong's picture

+1. I have to agree with the work and friend chatter. It started when mortgage rates started to go up. People took notice, it seemed to be the only thing that "woke" them up. I female collegue even asked me about bonds yesterday. I seriously nearly spat out my coffee. Another asked me why it was that the gold price had plummetted yet he couldn't buy gold for that price (he was asked for a massive premium). I thought I was just the lunatic fringe guy.

A collegue of mine got cold called by an apartment investment shark and, being perhaps the most gullible (and nicest) guys on the planet he signed up.  Now he has 500k loan with a 50k base salary, 3 kids, and things don't look good. When interest rates started to climb the look on his face was sickening, he knows he just got scammed. I can tell he is in panic mode now.

Perhaps the masses are slowly coming around to the house of cards.

flacon's picture

The volume was high everywhere because JUNE 22 is Option Expiry - and this is a (significant) mid-year expiry.

Ocean22's picture

Wtf is a caca. I wish you guys would explain more in your post so dummies could understand. Great stuff but I don't know wtf your saying sometimes.

TheFourthStooge-ing's picture

Ocean22 said:

Wtf is a caca. I wish you guys would explain more in your post so dummies could understand.

http://www.urbandictionary.com/define.php?term=caca

Just tryin' to help.

worbsid's picture

'assemble your caca' = 'get your shit together'

When in mixed company and you want to say WTF, instead say "Where's the fruit?"  The only one who will know what that means is your teenage grandson. DAMHIKT  :-)  There's another one for you Ocean. 

BurningBetty's picture

the volume was caused by option expirations. The expirations were on Saturday, but Friday was the last trading day for the week. Just ignore the volume spike.