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The Casino-fication Of Markets Is Pervasive & Permanent
Submitted by Ben Hunt via Salient Partners Epsilon Theory blog,
My favorite scene from Mad Men is the picnic scene from Season 2. The Draper family enjoys a lovely picnic at some park, and at the conclusion of the meal Don tosses his beer cans into the bushes and Betty just flicks the blanket and leaves all the trash right there on the grass. Shocking, right? I know this is impossible for anyone under the age of 30 to believe, but this is EXACTLY what picnics were like in the 1960’s, even if a bit over the top in typical Draper fashion. There was no widespread concept of littering, much less recycling and all the other green concepts that are second nature to my kids. I mean … if I even thought about Draper-level littering at a Hunt picnic today my children would consider it to be an act of rank betrayal and sheer evil. I’d be disowned before they called the police and had me arrested.
Like many of us who were children in a Mad Men world, I can remember the moment when littering became a “thing”, with the 1971 public service commercial of an American Indian (actually an Italian actor) shedding a tear at the sight of all the trash blighting his native land. Powerful stuff, and a wonderful example of the way in which Narrative construction can change the fundamental ways our society sees the world, setting in motion behaviors that are as second nature to our children as they were unthinkable to our parents. It’s barely noticeable as it’s happening, but one day you wake up and it’s hard to remember that there was a time when you didn’t believe that littering was a crime against humanity.
This dynamic of change in meaning is rare, but it takes place more often than you might think. Dueling and smoking are easy examples. Slavery is, too. Myths and legends turned into nursery rhymes and fairy tales is one of my favorite examples, as is compulsory public education … a concept that didn’t exist until the Prussian government invented it to generate politically indoctrinated soldiers who could read a training manual. Occasionally – and only when political systems undergo the existential stress of potential collapse – this dynamic of change impacts the meaning of the Market itself, and I think that’s exactly what’s taking place today. Through the magic of Narrative construction, capital markets are being transformed into political utilities.
It’s not a unique occurrence. The last time investors lived through this sort of change in what the market means was the 1930s, and it’s useful to examine that decade’s events more closely, in a history-rhyming sort of way. What’s less useful, I think, is to spend our time arguing about whether this transformation in market meaning is a good thing or a bad thing. It is what it is, and the last thing I want to be is a modern day version of one of those grumpy old men who railed about how Roosevelt was really the Anti-Christ. What I will say, though (and I promise this will be my last indication of moral tsk-tsking, for this note anyway), is that I have a newfound appreciation for why they were grumpy old men, and I feel keenly a sense of loss for the experience of markets that I suspect my children will never enjoy as I have. I suspect they will never suffer in their experience of markets as I have, either, but there’s a loss in that, as well.
It’s totally understandable why status quo political interests would seek to transform hurly-burly capital markets into a stable inflation-generation utility, as summed up in the following two McKinsey charts.
Both of these charts can be found in the February 2015 McKinsey paper, “Debt and (not much) deleveraging”, well worth your time to peruse. Keep in mind that the data used here is from Q2 2014, back when Greece was still “fixed”, the Fed had not proclaimed its tightening bias, and China was still slowing gracefully. All of these numbers are worse today, not better.
So what do the numbers tell us? Two things.
First, there’s more debt in the world today than before the Great Recession kicked off in 2008. All the deleveraging that was supposed to happen … didn’t. Sure, it’s distributed slightly differently, both by sector and by geography – and that’s critically important for the political utility thesis here – but whatever overwhelming debt levels you thought triggered a super-cyclical, structural recession then … well, you’ve got more of it now.
Second, it’s impossible to grow our way out of these debt levels. Japan, France and Italy would have to more than double their current GDP growth rates (and again, these are last year’s more optimistic projections) to even start to grow their way out of debt. Right. Good luck with that. Spain needs a triple. Even the US, the best house in a bad neighborhood, needs >3% growth from here to eternity to start making a dent in its debt. Moreover, every day you don’t achieve these growth levels is a day that the debt load gets even larger. These growth targets are a receding target, soon to be well out of reach for every country on Earth.
The intractable problem with these inconvenient facts is that there are only three ways to get out from under a massive debt. You can grow your way out, you can inflate your way out, or you can shrink your way out through austerity and/or assignment of losses. Door #1 is now effectively impossible for most developed economies. Door #3 is unacceptable to any status quo regime. So that leaves Door #2. The ONLY way forward is inflation, so that’s what it’s going to be. There is no Plan B. What sort of inflation is most amenable to modern political influence? Financial asset inflation, by a wide margin. Inflation in the real economy depends on real investment decisions by real businesses, and just as in the 1930s most business decision makers are sitting this one out, thank you very much. Or just as in the 1930s they’re “investing” in stock buy-backs and earnings margin improvement, which doesn’t help real world inflation at all. What political institutions are most capable of promoting inflation? Central banks, again by a wide margin. Just as in the 1930s, almost every developed economy in the world has a highly polarized electorate and an equally polarized legislature. The executive may be willing, but the government is weak. Far better to wage the inflation wars from within the non-elected walls of the Eccles Building rather than the White House.
Now … how to wage that inflation war with the proper Narrative armament? No one wants inflation in the sense of “runaway inflation”, to use the phrasing of doomsayers everywhere. In fact, unless you’re speaking apparatchik to apparatchik, you don’t want to use the word “inflation” at all. It’s just like Roosevelt essentially banning the word “regulation” from his Cabinet’s vocabulary. Don’t call it “regulation”. Call it “cooperation”, Roosevelt said, and even the grumpy old men will applaud. So today China calls it a “market malfunction” when their stock market deflates sharply (of course, inflating sharply is just fine). Better fix that malfunctioning machine! How can you argue with that language? But at least the political mandarins in the East are more authentic with their words than the political mandarins in the West. Here we now call market deflation by the sobriquet “volatility”, as in “major market indices suffered from volatility today, down almost one-half of one percent”, where a down day is treated as something akin to the common cold, a temporary illness with symptoms that we can shrug off with an aspirin or two. You can’t be in favor of volatility, surely. It’s a bad thing, almost on a par with littering. No, we want good things and good words, like “wealth effect” and “accommodation” and “stability” and “price appreciation”. As President Snow says in reference to The Hunger Games version of a political utility, “may the odds be always in your favor”. Who doesn’t want that?
There are two problems with the odds being always in your favor.
First, the casino-fication of markets ratchets up to an entirely new level of pervasiveness and permanence. By casino-fication I mean the transformation of the meaning of market securities from a partial ownership interest in the real-life cash flows of real-life companies to a disembodied symbol of participation in a disembodied game. Securities become chips, pure and simple. Now there’s nothing new in this gaming-centric vision of what markets mean; it’s been around since the dawn of time. My point is that with the “innovation” of ETF’s and the regulatory and technological shifts that allow HFTs and other liquidity game-players to dominate the day-to-day price action in markets, this vision is now dominant. There’s so little investing today. It’s all positioning. And in a capital-markets-as-political-utility world, the State is now actively cementing that view. After World War I, French Prime Minister Georges Clemenceau famously said that war was too important to be left to the generals, meaning that politicians would now take charge. Today, the pervasive belief in every capital in the world is that markets are too important to be left to the investors. These things don’t change back. Sorry.
Second, if you’re raising the floor on what you might suffer in the way of asset price deflation, you are also lowering the ceiling on what you might enjoy in the way of asset price inflation. That’s what investing in a utility means – you’re probably not going to lose money, but you’re not going to make a lot of money, either. So to all of those public pension funds who are wringing their hands at this fiscal year’s meager returns, well below what they need to stay afloat without raising contributions, I say get used to it. All of your capital market assumptions are now at risk, subject to the tsunami force of status quo politicians with their backs up against the debt wall. Their market-as-utility solution isn’t likely to go bust in a paroxysm of global chaos, any more than it’s likely to spark a glorious age of reinvigorated global growth. Neither the doomsday scenario nor the happy ending is likely here, I think. Instead, it’s what I’ve called the Entropic Ending, a long gray slog where a recession is as unthinkable as a 4% growth rate. It’s a very stable political equilibrium. Sorry.
We’ve been down this road before in the 1930s. But the historical rhyming I see is not so much in the New Deal policies that directly impacted the stock market as it is in the policies that established a real-life utility, the Tennessee Valley Authority (TVA). That’s because the nature of the existential threat posed by overwhelming debt to the US political system was different in the 1930s than it is today. When FDR took office, the flash point of that systemic threat was the labor market, not the capital market. Sure, the stock market took its hits in the Great Depression, but the relevance of the stock market to either the overall economic health of the country or – more importantly to FDR – his ability to remain in office was dwarfed by the relevance of the labor market. It’s another one of those changes in meaning that seems bizarre to the modern eye or ear. What, you mean there wasn’t 24/7 coverage of financial markets in 1932? You mean that most Americans didn’t really know what a stock certificate was, much less own one? To succeed politically, Roosevelt had to change the meaning of the labor market, not the capital market, and that’s exactly what he did with the creation of the TVA.
The TVA was only one effort in an alphabet soup of New Deal policies that FDR rammed through in his first Administration to change the popular conception of what the labor market meant to Americans. Other famous initiatives included the National Recovery administration (NRA) and the Civilian Conservation Corps (CCC), and the common thread in all of these efforts was a VERY active Narrative management embedded in their process from the outset, with photographers and journalists hired by the White House to document the “success” of the programs. Everything I write in Epsilon Theory about today’s pervasive Narrative construction also took place in the 1930s, in amazingly similar venues and formats, down to the specific words used.
The Narrative effort worked. Not necessarily in the permanence of the institutions FDR established (the Supreme Court declared the NRA unconstitutional in 1935, and the CCC faded into obscurity with the outbreak of World War II), but in the complete reshaping of what the labor market meant to Americans and what government’s proper role within the labor market should be. Yes, there were important things lost in FDR’s political achievements (and plenty of grumpy old men to complain about that), but let’s not forget that he was re-elected THREE times on the back of these labor market policies. If that’s not winning, I don’t know what is. And if you don’t think that lesson from history hasn’t been absorbed by both Clinton™ and Bush™, you’re living in a different world than I am.
One last point on the TVA. It’s still around today as a very powerful and oddly beloved institution, and I think its lasting political success is due in large part to the fact that it – unlike the other alphabet soup institutions – was explicitly a utility. Who doesn’t like the stability of a utility in the midst of vast inequality? Who doesn’t like the odds being ever in their favor? The more that I see today’s policy impact on markets described in utility-like terms – words like “stability” and notions like “volatility is bad and a thing to be fixed” – the more confident I am that the TVA political experience of the 1930s is coming soon to the capital markets of today. Scratch that. It’s already here.
So, Ben, let’s assume you’re right and that current events are rhyming with the historical events of the last time the world wrestled with an overwhelming debt load. Let’s assume that a politically popular shift in the meaning of markets to cement its public utility function is taking shape and won’t reverse itself without a political shock of enormous proportions. What’s an investor or allocator to do, other than become a grumpy old man? Look, the hardest thing in the world is to recognize structural change when you’re embedded in the structure. If reading Epsilon Theory has given you a new set of lenses to see the relationship between State and Market, then you’ve already done the heavy lifting. From here, it’s a matter of applying that open-eyed perspective to your portfolio, not of buying this or selling that! Everyone will be different in their particular application, but I think everyone should have three basic goals:
- shake out the category errors in your investment assumptions, understanding that we humans are terrible judges of causality, particularly when something has worked recently;
- re-evaluate your capital market assumptions for a further transformation of those markets into state-run casinos and political utilities, understanding that whatever crystal ball you’ve used in the past is almost certainly broken today;
- adopt an investment process or find investment strategies that can adapt to the structural changes that are already underway in capital markets, understanding that the patterns of belief and meaning we think are “natural” today can change in the blink of a central banker’s eye.
Put simply, it’s time for some good new thinking on some good old ideas like diversification. It’s time to recognize the world as it is rather than lose ourselves in nostalgia for the world that was. Most of all, it’s time to call things by their proper names and stop demonizing words like “leverage” and “volatility”. These are tools, for god’s sake, neither good nor bad in and of themselves, and they’re tools we are all going to need to learn how to use if we want to be survivors in the Golden Age of the Central Banker. It’s time to get to work.
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u think inflated health care costs r high now...
just u wait...thank your fucking bought and paid for government - again...cause the Insurance and pharmacutical companies r.....
"The health insurer Anthem said on Friday that it had agreed to acquire its rival Cigna for $48.3 billion in a deal that would further concentrate the United States market to just a few major players. The combined company would have estimated revenue of about $115 billion and serve more than 53 million people with medical coverage. A flurry of deals are reshaping the industry. Earlier this month Aetna agreed to acquire Humana, the smallest of the big five insurers, for $37 billion in cash and stock. If both transactions are completed, the number of major health insurers in the United States will shrink to three.
Health insurers are seeking to consolidate to gain greater scale to reduce costs and capitalize on growing opportunities in the government and individual markets. A major force has been the Obama administration’s health care overhaul, which has bolstered revenues. But greater transparency in pricing and less generous funding of government plans have also put profit margins under pressure."
http://www.nytimes.com/2015/07/25/business/dealbook/anthem-cigna-health-...
im off topic as well...butdont care cause im fucking pissed
This article assumes the application of logic by market participants. In reality, the current financial system is more akin to religion, a form of fundamentalism anchored in faith rather than reason. So it's more of a church than a casino. At the point when bad news became good for stocks due to central bank expectations, it was clear to everyone that the emperor had no clothes.
Check out my recently updated blog on Australian and international financial crime:
http://drbenway.blogspot.com/ncr
Good article Benny. It seems to half-answer a question that I wondered a long time ago, but I still feel something is missing. I'll read the article again, but here is my question:
What does all that superannuation money really do? Where does it go?
You see, before super was made compulsory, a few smart people invested in super voluntarily. And the economy got along fine. Companies still managed to raise capital and build stuff that people bought. Super investors could pick and choose and only invest in the companies that gave the greatest return ( or best risk/reward profile ). So, pre-1990s, super funds could cherry-pick for the best returns. Then the govt made super compulsory. Suddenly huge bucket-loads of money were entering the system. The super companies have to invest all that money somewhere. So now they have to settle for lesser returns. With all that money entering the system, we should see heaps more companies starting up or existing companies getting larger. And with all those extra companies, we should see consumers buying heaps more crap ... except, of course, that the consumers don't have heaps more money with which to buy more crap. In fact, workers supposedly gave up pay-rises in return for increased super contributions.
I guess that if heaps of new Australian companies started up but only sold stuff overseas, that would solve the problem. Ha, ha, ha, do you know of any explosion of Aussie exporting manufacturers due to an increase in available investment capital? Hard to ask that one with a straight face. Or perhaps there is a huge increase in the amount of Aussie super that is invested overseas. Or perhaps the super money is a primary driver for lower interest rates, and over-priced stocks with low dividends.
For me, it is amazing to think that with compulsory super rate set at 12%, then in 9 years time, for every dollar I earn there is a dollar in investment-land - err, plus the compounding returns - supposedly financing companies that get their profits from the stuff I buy. On the first level, it looks like the old, "Give everyone a billion dollars and we'll all be rich" where, of course, then no-one works, nothing gets produced, rampant inflation and suddenly a billion dollars ain't what it used to be. Thinking a little harder, we see that in 45 years time, just before people retire, they have well over 5 investment dollars (plus the compounding! Don't forget 45 years of compounding ) sitting in companies that have to share one dollar of income amongst themselves. This is the very definition of a pyramid scheme that is guaranteed to fail. Okay, perhaps now I should work out how many children we each should have over our life times so that they can keep the pyramid going :P
Err, what's that demographic graph look like again?
Compulsory super is now 12% of everyone's income. On average, what percent of income was voluntary super back before 1990? Where does all that extra money go?
"You can grow your way out, you can inflate your way out, or you can shrink your way out through austerity and/or assignment of losses. "
Please notice the author incorrectly states that Door # 2, inflation, is the only way out. This is wrong on the prima facie evidence that austerity (Door # 3) is the policy the status quo is enforcing alongside inflation. So it's Doors 2 and 3 then. And resource constraints/depletion can structurally enforce Door # 3 over the whole of it, while structurally precluding Door #1 from being possible. Since resource constraints/depletion can structurally enforce Door #3, if that does occur, or is occurring, then the status quo may have no choice but to get on board with that, since it would happen irregardless. It's better for them to have some say in how that delta change occurrs.
Hi PT, thanks for your kind words. To answer your question of where the money has gone that was forcefed into the financial system, it's easy. It was stolen by the 1% that control this scheme. How did you think banksters, fundies and crony CEOs could collect salaries in the double digit of millions? Did you think that was a "market-based" outcome lol?
The Casino...I am out. Off Topic..Sorry. You have to see this. Enjoy TRUMP crush Anderson poop Shoot cooper.
https://www.youtube.com/watch?v=4dyngfj6kAY
In every market, there are winners and losers. We have been chosen to be the losers. That's it. No more, no less.
You got to love how Anderson Cooper pretends he doesn't know how Washington DC works yet admits he worked for the CIA.
I'll be of topic as well
https://www.youtube.com/embed/_T-F_zfoDqI?rel=0
Folding lawn chair, card table, and a shoebox..Don't forget Nike shoes to make your getaway. /ROFL (Banking derivative con game)
Three Shell Game - Learn This Easy Con Artist Game Magic Trick ...
The Ministry of Truth has many tentacles, including, I heard this week, into the sacred warehouses of n0t-4-profit Amzan.
Go figger
Policies are only permanent until the different creeds, genders, and races decide colectively that enough is enough.
If the terms are reversed on the moneychangers, they're equally open to "forced bargaining".
Keep your head on a swivel for false flags.
These are tools, for god’s sake, neither good nor bad in and of themselves...
Um, yeah, wasn't that Blythe Masters' excuse when her credit default swaps blew everything to shit the last time around?
oops dbbl post
Capitalism Requires 3 Things --
1) Underlying everything is a large reservoir of ethical behavior.
We kicked God out of School, Government, and our Homes. Howis that working for everybody?
2) Crony Capitalism is at a minimum.
Paid off Goverment reprsentatives everywhere, elected and appointed. No longer we the people, but we the lobbyists and banksters.
3) Monopolistic behavior subdued.
Gone are the days of reasonable scale viewed from the correct domestic view. Now its from the international viewpoint, essentially justifying unlimited size.
ZERO out of three. Sorry folks, until we get this ugly Genie back into the bottle, there is not much hope for the middle class.
I recently read China will have more Christians than the USA within the next 15 years, its never too late to turn your life around.
speaking of "may the ods always be in your favor", what about insiders from NSA etc. knowing beforehand about GOOG and AMZN 10+% ups beginning right in the after hours market
speaking of "may the ods always be in your favor", what about insiders from NSA etc. knowing beforehand about GOOG and AMZN 10+% ups beginning right in the after hours market
The fiat system will fail because it is built on lies and truth always wins.
Mostly agree, if the entire point he made is only that we are NEVER going back to the old normal. The New Normal of perpetual bank interventions just to prevent a complete collapse, is here to stay. Its spill-down effects such as stock buybacks and people buying crap they don’t need and can’t afford, will only keep some illusionary 1% GDP growth going, but will prevent -10% “volatility” and a total collapse. The markets will go nowhere and federal deficits will balloon ever higher. Bears will remain frustrated as every market melt-down will be met with more interventions and promises of more stimulus. From time to time retirement funds will need bailouts, as will banks. The Fed will eventually fail with QE, but the Dow bouncing between 9K and 11k can be tolerated for a decade or more.
The big danger is the oligarchs demanding greater returns and deciding war is the way to get it. The hoi polloi will remain content with their I-Toys so long as government handouts don’t stop, and they won’t. Greece is trying and is a mess. America is now on the down-side of the empire curve but few are willing to admit it. More and more immigration does NOT mean new consumers and borrows to “grow” our way out of debt. It means more of a burden on the system. Americans will continue to lose jobs to cheaper foreign and immigrant labor. Our hyper-inflated standards of living are not sustainable and will fall dramatically. Goodbye over-sized wasteful McMansions and hello tiny Obamaville apartments. A scooter instead of an SUV, an no more traffic jams. Will that all be so bad?
The author is the first person to suggest my spending every waking moment of the past 4 yrs, after being unemployed for another 4, teaching myself to trade leveraged versions of equity indices intraday based on the interplay of dozens of purely technical factors using FreeFuckingStockCharts.com was a smart move. Oddly enough, I think I finally mastered it, and will ride the back of the Virtu whale like a waterbug, sucking in enough scraps to survive. Thanks for validating my humble existence. [And no, I’m not kidding, as Interactive Brokers charts suck, though ChartTrader rules :) ]
This economy is dying from the outside IN...from the marginal participant, the little people, to the centre. It's actually SHRINKING as more and more people lose wealth and lose discretionary income. Most of our expenditure these days is on food, shelter and energy and that's all...if that isn't a shrinking economy I don't know what one is.
It is DOOMED.
Good post Tyler, but fundamentally flawed. He almost sounds like he would be comfortable in in a "New World Order", one that he understands that isn't too challenging.
While some of the theories postulated by this article make sense, because they are in alignment with observed current trends, they also suffer from the same vulnerabilities that all theories that have been derived substantially by extrapolation from current trends do – which arise from the dynamics of society and the tendency for trends to dramatically change.
The author assumes a comforting outcome (at least from his perspective), one which moves our society into “permanent plateau” mode – you know, less pleasant, but safe.
He ignores the growing and increasingly militant body of the white European middle class that will become a white European warrior class when conditions get bad enough. If he thinks peoples of white European descent will sit idly by as they are slowly exterminated at the hands of the cabal, so that his “complacency theory” can take effect, I think he is sadly mistaken.
I don’t like the prospect of civil war, but I think that the acceptance, for example, of some of the comments by Donald Trump as a “refreshing change”, is evidence of this beginning ground swell – if for no other reason that when the reforms he advocates do not materialize quickly enough, the white European middle (warrior) class will awaken. Every revolution in history has started with the 10% that have nothing left to lose, the next 50% join once momentum is established.
This conclusion results from the study of history, not the extrapolation of trend.
10% who have nothing to lose usually is too weak due to hunger and have no energy to start revolutions. Revolutions, believe it or not, are usually started by the priveleged 1% who co-opt the bottom 10% to overthrow and usurp power from the .01% The new overlords then behave just like the old overlords and keep the 99% deprived.
You understate the power of our people and our will to survive in times of adversity. The cabal has been thrown out of countries in 103 instances throughout history, our people will do it again in a hearbeat - when the conditions are right and favor success.
I say this not because we are predisposed to initiate violence, but because any people when confronted with genocide would react honorably and properly with force if left with no other alternative.
yes, teutonicate, the author seems to think that the tail will just continue to wag the dog. As if the casino at the top of the pyramid will levitate when the rest of the pyramid is strewn across the ground in ruins. Add resource depletion, environmental degradation, global warming, and 500 potential Fukushima's w/o backup electricity to keep them cool. It will be fortuitous to survive as a grumpy but nevertheless nourished old man.
Good article. I disagree however, when he says deflation won't bring an epic crash rather a stable political equilibrium.