The Economic Doomsday Clock Is Closer To Midnight

Tyler Durden's picture

Excerpted from Artemis Capital Management letter to investors,

Prisoner’s Dilemma describes when two purely rational entities may not cooperate even if it is in their best interests to do so, thereby replacing known risks for unknown risks. In an arms race when two superpowers possess the ability to destroy each other, the optimal solution is disarmament and peace. If the superpowers do not trust one another completely, the natural course of action is proliferation of conflict through nuclear armament despite great peril to all. This non-cooperation, selfishness, and conflict, ironically results in an equilibrium of peace, but with massive risk.

Global central banks are engaged in an arms race of devaluation resulting in suboptimal outcomes for all parties and greater systemic risk.  In this year alone 49 central banks have cut rates or devalued their currencies to gain a competitive edge and since 2008 there have been over 600 rate cuts worldwide. Globally we have printed over 14 trillion dollars since the end of the financial crisis.  The global economy did not de-leverage from the 2008 crash but instead doubled down as global debt has increased a staggering 40% since 2007. The pace of global growth is slowing with the World Bank lowering GDP projections from 3% to 2.5%, and emerging economies from China to Brazil are struggling. Global currency reserves outside the US have declined over $1 trillion USD from their peak in August 2014 as foreign central banks have sold dollars to offset the ill effects of capital flight and commodity declines.

The last time the world economy experienced declines in reserves of this magnitude was right before the crash of 2008. Cross-asset volatility is rising from the lowest levels in three decades yet markets remain complacent with the expectation that central banks will always support asset prices.

Volatility regime change is happening now and is a bad omen for a global recession and bear market.


As global central banks compete in an endless cycle of fiat devaluation an economic doomsday clock ticks closer and closer to midnight. The flames of volatility regime change and an emerging markets crisis ignited on the mere expectation of a minor increase in the US federal funds rate that never came to be. The negative global market reaction to this token removal of liquidity was remarkable.

Central banks are fearful and unwilling to normalize but artificially high valuations across asset classes cannot be sustained indefinitely absent fundamental global growth. Central banks are in a prison of their own design and we are trapped with them. The next great crash will occur when we collectively realize that the institutions that we trusted to remove risk are actually the source of it. The truth is that global central banks cannot remove extraordinary monetary accommodation without risking a complete collapse of the system, but the longer they wait the more they risk their own credibility, and the worse that inevitable collapse will be.

In the Prisoner’s Dilemma, global central banks have set up the greatest volatility trade in history.

Moral Hazard in the Prisoner’s Dilemma

A pre-emptive war describes a violent action designed to eliminate a perceived threat before it even materializes. Since 2012, the Federal Reserve have been engaged in a pre-emptive war against financial risk, and other central banks are forced to follow suit in a self-reinforcing cycle of devaluation and a mad game of Prisoner’s Dilemma. This unofficial, but clearly observable policy has the unintended consequence of socializing risk for private gain and introduces deep ‘shadow’ risks in the global economy.

Pre-emptive central banking is a very different concept than the popular idea of the “central bank put”. The classic “central bank put” refers to policy action employed in response to, but not prior to, the onset of a crisis.  Rate cuts in 1987, 1998, 2007-2008, and Quantitative Easing I and II (“QE”) programs were a response to weak economic data, elevated financial stress, and large drawdowns in credit and equity markets. To differentiate, pre-emptive central banking refers to monetary action in anticipation of future financial stress to avert a market crash before it starts, even if markets appear healthy and volatility is low. In executing a pre-emptive strike on risk, policymakers rely on changes in faster moving market data (e.g. 5yr-5yr breakeven inflation) rather than slower moving fundamental economic data (e.g. CPI and unemployment). Although well intentioned, their actions have created dangerous self-reflexivity in markets by artificially suppressing volatility and encouraging rampant moral hazard. Central banks have exchanged ‘known unknowns’ for ‘unknown unknowns’ creating the potential for dangerous feedback loops.



A central bank reaction function is now fully embedded in risk premiums. Markets are pricing the supportive policy response before action is even taken. Bad news is good news and vice versa because the intervention is more important than fundamentals. Pre-emptive strikes on risk are contributing to the massive growth and popularity of any asset or strategy with a short convexity or mean reversion return profile. The unintended consequences of this massive short convexity complex will be born from phantom liquidity, shadow gamma, and self-reflexivity. In the past year alone, we have experienced 10+ sigma movements in the CBOE VIX index, US Treasury Yields, German Bunds, Oil, Chinese Equity Markets, and the Swiss Franc. Markets continue to exhibit bi-polar behavior as they struggle to gauge the level of anticipated forward invention by central banks against declining global growth.

The market has ceased to become an expression of the economy… it is the economy. The purpose of a pre-emptive strike on financial risk is to manipulate market psychology to affect fundamental reality. The global shift toward pre-emptive central banking occurred in the summer 2012: first with Mario Draghi’s pledge to do “whatever it takes” to save the Euro on July 26th; and followed thereafter by Bernanke’s QE3 speech at Jackson Hole on August 30th. At the time, risk assets had completely rebounded from the 2008 crisis and the VIX was in the mid-teens. Despite calm financial markets and falling financial stress, central banks on both sides of the pond added new doses of radical monetary policy. Since the summer of 2012, every period of rising financial stress has resulted in either direct monetary action by a major central bank or dovish commentary by a key official (see chart above). The result has been one of the best three-year volatility-adjusted performances for stocks in over 200 years of data!


Moral hazard is institutionalized in the price of risk. A new generation of traders has learned to buy every stock market dip, short every volatility spike, and re-leverage at the mere hint of government intervention. Yield starved investors are forced to chase the expectation of government response rather than fundamental returns and good business models. If central banks are constantly reacting to market conditions rather than economic conditions the net effect is to crowd out value investors (please see Kaleidoscope Capital’s excellent thought piece “The Fed is the New Value Investor” for more on this topic). It explains why great value investors like David Einhorn are experiencing their worst months since the 2008 crisis as value underperforms momentum; and why great contrarian investors like Hugh Hendry have been chasing leveraged beta in whichever market central banks are most actively propping up and making good returns doing it. Most importantly, it explains why the top 1% of income earning households that are most exposed to the market economy are dramatically outperforming the remaining 99% that are exposed to the real economy.

Pre-emptive central banking is analogous to Bush Doctrine foreign policy. The US foreign policy response to the 9/11 terror attacks involved a pre-emptive war against Iraq to prevent future terrorism. The Iraq war appeared successful at first, but soon after the fall of Baghdad dangerous ‘unknown unknowns’ emerged. In the aftermath of 2003 invasion, a rising insurgency and sectarian war led to a continuous and costly occupation and the deaths of 4.5k American soldiers and an estimated 500k Iraqi combatants and civilians.  The cost of the war ballooned to $2 trillion and this limited our ability to respond fiscally to the 2008 recession. President Obama, who started as an underdog candidate in the primaries, was victorious over Clinton and then McCain largely because he was credible in his opposition to the war. By 2011 Obama made good on a promise to withdraw US troops from Iraq. The chaos of a failed state led to the rise of ISIS, a terror group even more brutal than Al Qaida, which now operates with impunity over large portions of Iraq and Syria. As ISIS fights Assad and the Kurds in Syria the civil war has resulted in largest refugee crisis in Europe since World War II with an estimated 4 million Syrians fleeing violence in their country and another 12 million in need humanitarian assistance. With no strategic buffer in the region and a shared enemy in ISIS, the US has controversially sought to strengthen diplomatic ties with Iran - an original member of Bush’s “axis of evil”. Whether you believe the Iraq war was just or not the point is that nobody predicted this extreme range of outcomes back in 2003. In similar fashion, global central banks are severely underestimating the unknown unknowns from their unprecedented policies today.

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tekhneek's picture

"The hour is 12 (midnight) 12:63 to be exact because Janet got drunk and forgot to turn off the heidelbergs again."

buzzsaw99's picture

bull fucking shit

Perimetr's picture

Caveat here . . .

In a fascist state, the banksters who have unlimited electronc funds at their disposal have the ability to buy unlimited amounts of stock, futures, etc.

In other words, it IS possible to rig the markets forever . . . within the fascist realm.

However, since the majority of industrial goods are now produced OUTSIDE the US/EU, those  producing the goods do not have to accept the electronic fascist currency in exchange for their goods.  (Same also goes for oil, although of course we are dealing with the Saudis)

Thus it IS possible for the system to end . . . but it has to be done from the outside of the fascist business model.

See why China and Russia are so threatening?

buzzsaw99's picture

maybe you've missed the torrent of "china devalues yuan" articles here on zh? maybe you missed this:

you think china wants an end to the current global eCONoME? fuck, they love it. all this other claptrap is purely for domestic consumption to keep the peons from rioting. zher's are like a broken record on this subject. ain't never. gonna. happen.

Consuelo's picture



So in terms of bluster vs. pride, how far do you think the Chinese will yield in the foreign policy arena to maintain continuity in the 'current global eCONoME'...?

Urshilikai's picture

What an amazing and insightful comment! It's like you didn't even read the article to respond with something of value.

NoWayJose's picture

How bad is it? I drove past one of the new retro McDonalds the other day - and the sign out front close to the road only had ONE arch -- they can't even afford two -- making the logo for McD's "the golden arch" instead of "the Golden Arches"

buzzsaw99's picture

this is apologist claptrap for the central banks.

This unofficial, but clearly observable policy has the unintended consequence of socializing risk for private gain and introduces deep ‘shadow’ risks in the global economy...

unintended my ass.

In similar fashion, global central banks are severely underestimating the unknown unknowns from their unprecedented policies today...

they aren't underestimating jack shit.

yogibear's picture

Only when the Fed has a currency crisis do markets normalize.

It's when the Fed loses it's grip.

Two Theives and a Liar's picture

So when interest rates go negative...will it be PAST midnight then?

Crocodile's picture

It never ends because it started at the beginning of mans history.  There is no end till you are dead.

gcjohns1971's picture

In a word,


That analysis applied to a world of gold-based currencies each describing a distinct economy, who depreciate to capture export markets from one another.

We don't have that.

We have pure fiat currencies based on debt in a global economy.

So China may desire a mercantilist policy, and devalue their currency to capture export markets...but it won't work for long because their import prices will soon skyrocket.  And if they borrow massive amounts on the imports, then eventually they'll have a collapse due to the distortions of their economy because of the borrowing (for imports) and money-printing (for devalued currency).

And Germany might desire a mercantilist they loan their customers the money to buy their products, and then create EURO's using the debts as collateral...and then when the purchasing nations cannot pay, Deutsche Bank will first warn, and then roll right over in default.

You can't get something for nothing.  I didn't say "SHOULDN'T" I said "CANNOT".

This is a point where economics touches physics...because the 'somethings' of the world are physical, and the Law of Conservation of Energy applies. 

You CANNOT use up all your resources, only change their form.

You CANNOT get something for nothing, only steal from one who produced the something.

And you CANNOT replace humans with tools, robotic or otherwise, for someone must make the tools, maintain them, and tell them what to manufacture...and when the machines are intelligent enough to do all that on their own they are intelligent enough to tell all the humans to take a hike and dispose of them.

Never One Roach's picture

ZH needs to get with the program ... everything is robust and wonderful; POTUS just said so again today between announcements of his importing another 100,000 refugees and his renigging on his promise to end the Afghanistan war.

Crocodile's picture

They were on a roll until they started speaking about 9/11 and IRAQ war, which is just a different angle of the same problems, the merging of government and corporations and the massive corruption and human carnage to follow.  The stupid Bible tells us about ALL these things and where the battle actually is, but what does the magic man in the cloud know besides everything?

Son of Captain Nemo's picture

Come on now!...

Let's not look so menacingly on that future collapse that is just around our corner.

I see many angry investors waking up to losing their fortunes and many poor people unable to get access to their bank account(s) and government paid holiday "welfare project" recipients being shut out completely...

And when that happens?...

I see the a bright future of the people that created the conditions being summarily rounded up and marched to the top of very tall buildings to be discharged permanently from the top of those buildings never to consume or spend our money ever again!  And the cities that made these atrocious errors in judgment being burned to the ground with the participants that enforced it kept it going inside those cities kinda like a macro version of the "Branch Davidians" in Waco only on a much larger scale!

Let's hope this happens because the alternatives they have planned for us if we don't get to them first are far worse indeed!!!


Goldilocks's picture

Mapping The Economic And Geopolitical Events To The Economic Collapse: Harley Schlanger (40:32)

Herdee's picture

Maybe the fuse will be lit next week when the Chinese take out a number of US warships in the South China Sea. -boom-boom- gold takes off

yogibear's picture

They really do all collapse. 


Rome was the strongest and it fell.

So will the US.

Consuelo's picture

And it will rewrite history in terms of what defines a 'collapse'.

enloe creek's picture

has anyone ever really thought what would life be like without any money? I mean can you see yourself competing for goods with the rest of your little world? whatever your imagined strengths and resources are, a long night is comming brother and you aint going to make it.

Beowulf55's picture

your a real upbeat person............if I hung out with you I might have to start drinking........

Clowns on Acid's picture

Youse guys just don't get it.

Yellen is going to print it, and Hildebeast is going to distribute it... WTF don't you feckin' unnerstand mofo?