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The Fed Has Created A "Clockwork Orange" Market

Tyler Durden's picture




 

Via Scotiabank's Guy Haselmann,

As an 18-year old college freshman taking ‘Pysch 101’, I watched the highly-disturbing Stanley Kubrick film-version of A Clockwork Orange.  The story takes place in a dystopian futuristic London and exposes the extreme battle of good versus evil.

 

After the sociopathic and violent gang leader Alex was captured, the government decided to deploy a modern behavioral modification method to reform him.  This experimental treatment was  highly-controversial.

 

The government’s idea was to use the cruelest members of society to control everyone else.  While well intentioned, the unintended consequences were poorly understood.

Extracting out the violence, I can’t help but notice the symbolic similarities of the motif-ridden story with the 2008 financial market fallout and subsequent attempts at economic rehabilitation.  Leading up to 2008, unsavory behavior of both borrowers and lenders conspired with lax rules to provide the conditions for the crisis to manifest.  Today, there are daily articles about how restrictive regulations are stifling banks and market-makers and causing a deleterious impact on market liquidity.  The intention of regulators is to deter risk taking in the banking system with the goal of preventing a similar banking-style crisis from ever re-occurring.

The film forces the viewer to weight the values and danger of both individual liberty and state control.  It forces us to consider how much liberty we are willing to give up for order, and how much order we are willing to give up for liberty.  The central idea of the film has to do with the freedom of the individual to make free choices, but free choice becomes problematic when it undermines the safety and stability of society. It reminds me of the markets price discovery mechanisms (or lack thereof).

Bond rates and stocks are in the midst of the greatest detachment of prices from economic reality in history.  Even during the Great Depression of the 1930’s, when unemployment was 25% and there was confirmed deflation, the US 10-year rate never traded below 2.00% yield.  How then is it possible that the US 10-year note traded below 2.0% last month with the US economy near full-employment and inflation relatively stable near 1.5%?

  • The answer to the question is that price levels have become influenced by regulatory rules and central bank hoarding.  They are also a function of shifts in investor behavior to the ‘respondent conditioning’ of central bank policies that foster moral hazard and risk seeking activity.  

By promising to ‘do whatever it takes’, central banks have conditioned investors to buy the dip and over-weigh the riskiest assets.   Despite the Fed being possibly out of fire power, the ‘classical conditioning’ response remains strong.  However, it can wear off.   In the movie, Alex was actually ‘cured of the cure’; he had so much of the ‘medicine’ that it eventually became ineffective.  In the end, the experiment failed:  the state replaced Alex’s violence with its own; he was freed; and eventually the original problem resurfaced in a different form.

  • This seems analogous to the Fed trying to eradicate systemic risk in the banking system.  Yet, in the process, the Fed has fomented large asset price inflation; compromised market liquidity; and as Richard Fisher says, “the Fed is now the largest hedge fund in the world”. 

Prior to being ‘cured of the cure’, side-effects materialized or became counter-productive to the process (as they were in experiments by B.F. Skinner or Ivan Pavlov).  For global central banks, the long term problems of financial repression are clear. Any policy that punishes savers and frugality, and rewards borrowers and profligacy is not prudent in the long-run.  Moral hazard and reduced investor discipline results from debt monetization.  It also reduces incentives for politicians to control public finances.

Any process that is unsustainable will eventually end.  Ever-growing reliability on debt-driven consumption and increases in levels of entitlements in order to drive economic growth, boost living standards, or manage inequality concerns, is untenable and a ruinous direction.  Even Keynes said that a government should borrow money to close the GDP gap and get the economy back on track, but once it is back on track, the borrowed money should be paid back.  Seven years into this crisis, the level of debt in major economies has increased.

There is no “free lunch”.  At some point the underlying issues will have to be addressed with the correct policy tools.  The end to political polarization in Washington may require a financial crisis.  QE4 will never happen as it would compromise the Fed’s independence, so the next financial burden will require a congressional response.

Regardless, at this point, Fed policies and its $4.5 trillion balance sheet have reached their practical limit and may have even become a source of systemic risk and market uncertainty.  In this light, it is time to pull back.  I suspect the Fed will hike rates no later than the July FOMC meeting.

“What is it going to be then, eh? – Anthony Burgess, A Clockwork Orange

 

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Wed, 05/20/2015 - 18:39 | 6115294 falak pema
falak pema's picture

the Fed is only the instrument of Oligarchy gone viral with no checks and balances.

Wed, 05/20/2015 - 19:44 | 6115449 Anusocracy
Anusocracy's picture

Why give up liberty when all you have to do is exclude criminals.

All that it takes for evil to triumph is for good men to include psychopaths in society.

Wed, 05/20/2015 - 19:54 | 6115466 BoredRoom
BoredRoom's picture

what's it going to be then eh?.....

 

and we sat in the Korova Milkbar making up our rassoodocks what to do with the evening, a flip dark chill winter bastard though dry

Wed, 05/20/2015 - 18:40 | 6115298 Robot Traders Mom
Robot Traders Mom's picture
The Fed Has Created A "Clockwork Orange" Market

 

-I guess this means we're the woman in the rape scene? 

Wed, 05/20/2015 - 18:52 | 6115325 Winston Churchill
Winston Churchill's picture

Not so lucky I'm afraid.

Wed, 05/20/2015 - 18:54 | 6115330 J S Bach
J S Bach's picture

"Lovely, lovely Ludwig Van."

Wed, 05/20/2015 - 19:55 | 6115468 MayIMommaDogFac...
MayIMommaDogFace2theBananaPatch's picture

"No time for the old in and out"

Wed, 05/20/2015 - 20:26 | 6115548 duo
duo's picture

It means a giant ceramic dick is about to come down on the market.

Wed, 05/20/2015 - 21:39 | 6115735 Magnum
Magnum's picture

Who then gets smashed in the face with a glass bottle of milk?

Wed, 05/20/2015 - 18:45 | 6115311 Babaloo
Babaloo's picture

As I said when I read this piece this morning - the analogy is tortured, and he spends way too many words telling us what we already know.

Oh, and I don't think July is really in the cards either.

Wed, 05/20/2015 - 18:49 | 6115317 kaiserhoff
kaiserhoff's picture

Every form of refuge,

  has its price.

Wed, 05/20/2015 - 18:50 | 6115319 Budnacho
Budnacho's picture

"Hi Hi Hi there my little Draghi's!"......

Wed, 05/20/2015 - 19:56 | 6115474 MayIMommaDogFac...
MayIMommaDogFace2theBananaPatch's picture

+10 Draghi as a Droogie

Wed, 05/20/2015 - 21:08 | 6115649 Freddie
Freddie's picture

https://www.youtube.com/watch?v=YABw-ksikLA

Funeral for Queen Mary by Henry Purcell (played by Walter/Wendy Carlos)

I loved the fight scene at the Marina.

https://www.youtube.com/watch?v=HtRGeyznv7k

Clockwork Orange looks so tame today compared to the mindless brainwashing shit that TV and Hollywood spew today.   Conditioning the sheep for Spec Ops/SWAT/Jade Helm police state.

Wed, 05/20/2015 - 21:35 | 6115729 Budnacho
Budnacho's picture

The older I get the more I simply love Kubricks work. I remember back in the 80's that if it wasn't Dungeons and Dragons that would corrupt the youth, it was Clockwork Orange.

 

So tame now but that film I think foresaw the true future in many ways. Kubrick was a great futurist....

Thu, 05/21/2015 - 00:37 | 6116221 SixIsNinE
SixIsNinE's picture

The other day I  watched  a youtube clip of Kubrick's daughter, Vivienne, at the Dallas protest @ JFK's 50th assassination anniversary, Nov. 2013.   The weather was horrible, very cold and rainy.  She had been pushed rather unkindly by the Dallas PD who had decided that it was time for the wet, but unapproved, to move on.  If you remember, the authorities had the ceremony VIP only, pre-approved, meaning that if you did not believe the lone-nut Oswalt theory, you were not welcome.  Anyway, she spoke for a good 15+ minutes there about 1st amendment rights, and general disappointment in the growing police-state apparatus.  She said she lives in Dallas, seems like a very intelligent and delightful, caring woman. 

The OTHER Kubrick mystery, or enigma, which seems to loom larger and larger, is the 1969 Moon landing and the relation to the filming of 2001: a Space Odyssey.  Here is the youtube link to  "Dark Side of the Moon : Stanley Kubrick and the Fake Moon Landings" .... Donald Rumsfeld is IN the doc, and you've got to hear what he says about Tricky Dick !  

https://www.youtube.com/watch?v=26EicKfNYPg       No spoilers here, but take a shot or two, read between the lines, bong hits may be appropriate also.... enjoy the show     Then remember that in 2006 the Smithsonian admitted to losing ALL evidentiary film footage of the moon landing event,   see   www.davesweb.cnchost.com/apollo1.html

Wed, 05/20/2015 - 18:51 | 6115323 PrimalScream
PrimalScream's picture

HERE'S THE QUESTION THAT YOU SHOULD BE ASKING.

 

Let's suppose, hypothetically, that the market takes a big dive, and this happens in a Sudden way.  So the Dow plunges by 40%, and the descent is relatively sharp.  And let's suppose that an investigation subsequently decides that the "hiccup" is due to the behavior of algorithms.  In other words, something similar to how the market behaves when Spoofing is done on the market.  Only the market drop appears to be more pervasive than in a normal Spoofing incident.

In that case, is it OK for "market investigators" to RULE that the market drop was a "numerical instability" and then re-set all of the stocks BACK TO THEIR ORIGINAL VALUES before the market plunged?

This may sound like something from an Orwell novel, applied to the financial system, but we are not far from this event taking place.  So the question is - is a LARGE DROP in the market simply a "big mistake" and it's OK if everything is PUT BACK to its original value?  Hence, there are NO LOSSES!!

Therefore, everything is OK on "Animal Farm Wall Street", because we will simply re-adjust all of the stock indexes back to their "happy state".

 

 

Wed, 05/20/2015 - 18:54 | 6115331 Winston Churchill
Winston Churchill's picture

Why would they care what happens to the dumb money ?

Sheep are for shearing and mutton.

Wed, 05/20/2015 - 19:15 | 6115378 TheAntiProgressive
TheAntiProgressive's picture

Then the question comes into play "What is Value?", not too different than the eternal question to the FED from Ron Paul, "What is money?".

Wed, 05/20/2015 - 20:37 | 6115580 Alex DeLarge
Alex DeLarge's picture

 That is an excellent question. 

 My guess is they will only reset back to pre crash prices as long as the Squid is not the counter party earning all the short action.

 If the Squid and friends are making money on the way down, and I am certain they will be, then I think it will be allowed to fall as is.

 If the Squid and friends are somehow caught out, then they will cry runaway algos caused this, we demand a refund or else.

 Back to a little bit of the Ole Ultraviolence. 

 

  The even more relevant question is, which one of us are they going to blame for causing the crash?

Wed, 05/20/2015 - 19:13 | 6115372 TheAntiProgressive
TheAntiProgressive's picture

A wee bit of the ultra violence all to Ludwig Vans' 9th, the glorious 9th.

Wed, 05/20/2015 - 19:21 | 6115394 Counterpunch
Counterpunch's picture

The Fed is doing exactly what its ownership wants.

Which is why that ownership should be dragged from their beds and executed like the Tsar and his family who were shot and stabbed by 'Bolsheviks.'

http://upload.wikimedia.org/wikipedia/commons/8/8e/Family_Nicholas_II_of...

Would be fitting, actually.

Wed, 05/20/2015 - 19:24 | 6115403 buzzsaw99
buzzsaw99's picture

I've just come from the hospital; your victim has died.

Wed, 05/20/2015 - 19:25 | 6115408 Fun Facts
Fun Facts's picture

They'll have us fornicating in the street before this is over.

Thu, 05/21/2015 - 02:09 | 6116333 SixIsNinE
SixIsNinE's picture

you may not be wrong there Mr Fun Facts, I follow the Alan Watt's (apostrophe, not Alan Watts) investigations into what we people are doing on this planet (his site is cuttingthroughthematrix.com)  and he goes way back into the ruling folks having some rather, oh, how to say it, maybe unkind and perverse ideas as to where the serfs should end up.   I don't feel up to typing the perversions out here now, but strange enough there are reports here and there of it happening already. 

Wed, 05/20/2015 - 19:33 | 6115422 Wookie
Wookie's picture

"No time for the old in out, in out love, just checkin the Fed meter!"

Wed, 05/20/2015 - 19:33 | 6115425 Omen IV
Omen IV's picture

so they publish some phony Osama Bin Ladin docs created in a basement in Arlington, VA along with the well timed conviction of the Kid in Boston  with the Uncle in the CIA so that the Patriot Act gets renewed and on the heels of Seymour Hersh calling Obama a liar for the reporting of the raid in Pakastan and the phony movie reporting same

what is true anymore no longer matters it is too infrequent an event - the days of truth are over -  time to drop out of this contrivance

 

 

Wed, 05/20/2015 - 22:44 | 6115949 Chuck Knoblauch
Chuck Knoblauch's picture

Consider yourself an East German before the Soviet empire collapsed.

It's only a matter of time.

Wed, 05/20/2015 - 20:27 | 6115554 Whelk
Whelk's picture

read the book its a bit deeper at the end

Wed, 05/20/2015 - 21:47 | 6115758 Magnum
Magnum's picture

Obama the eunuch jelly hasn't got the yarbles to stop the devil trombones...

Wed, 05/20/2015 - 22:09 | 6115826 Dixie Flatline
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Yellen gives you the olde, in out, in out.

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