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Guest Post: Economic Punctuated Equilibrium
Submitted by Brian Rogers of Fator Securities
Economic Punctuated Equilibrium
“I have been studying the traits and dispositions of the "lower animals" (so called) and contrasting them with the traits and dispositions of man. I find the result humiliating to me.” - Mark Twain, Letters from the Earth
Talking Brazil
Happy Friday to one and all. First things first, I just finished a multi-city non-deal roadshow with Banco Fator’s head of equity research and strategy, Lika Takahashi. For those who aren’t familiar with Lika, you really should be. She has been one of if not the most pragmatic, conservative Brazil equity strategists in the market and typically destroys her competition with her price target on the Ibov. Investors we spoke to had 3 main questions for Lika: 1) what is our outlook for inflation in Brazil, 2) what is our outlook for growth in Brazil and 3) what is our take on the Brazilian central bank’s recent decision to cut rates by 50bps.
On inflation, I think central bank head Tombini has a problem. He said he expects global growth to decline and this downturn in GDP will attenuate inflationary pressures in Brazil. The problem I have with this view is that the Fed, BOE, ECB and BOJ won’t simply sit around and take a deflationary slowdown without a fight. They will print, obviously. This will produce monetary inflation and will help to keep commodity prices resiliently high. Tombini expects inflation to come down, I say good luck with that.
On growth, it’s possible that Brazil keeps the 3.4% or so growth next year based on the strength of their services labor market and government spending for the World Cup and other infrastructure projects. However, keep a close eye on China. For the first six months or so of the year there weren’t too many analysts overly concerned about dramatically slowing growth in China. However, the last few months have seen a bevy of “hard landing” articles about China. If China does hard land, say 6% growth, then Brazil will also slow dramatically.
On the central bank’s decision to cut rates only 2 days after Dilma went on TV and said that she wished rates would go down, I obviously feel that the days of central banking independence championed by Henrique Meirelles are dead.
All that being said, I should note here that I am actually quite bullish on Brazil. Why? Simply put, they have options. Despite my concerns about Tombini’s recent move, the central bank has a plethora of tools they can implement to help stabilize any major volatility. Government spending and general debt levels have been conservative recently and could be increased to offset bad times. And finally, Brazil has one of the best demographic profiles around with a huge population of young people and an increasing trend of poor people moving up the economic ladder.
It’s not that Brazil will avoid all problems, they won’t, it’s just that on a relative basis Brazil is much better positioned to deal with their problems than the vast majority of developed nations and nearly all of the emerging market countries.
Which brings me to the macro view.
Economic Punctuated Equilibrium
The late Harvard/NYU paleontologist Stephen Jay Gould and Niles Eldredge, who is the curator of the invertebrates department at the American Museum of Natural History, proposed a rather radical evolutionary theory in 1972 called punctuated equilibrium. The evolutionary thinking at the time was generally that species changed very slowly and gradually over time. Gould and Eldredge challenged this notion with punctuated equilibrium by arguing that rather than slow, gradual change, species remained stable for long periods of time and only changed during short, brief bursts of major change.
For example, an animal population could live for many generations without any noticeable change in genetic make-up. Then, due to the effects of an earthquake, volcano, climate change or some other major event, the population could be split into different groups with different geographies, food and water sources, climates, etc. As the populations react to the sudden change, they will go though rapid and noticeable adaptations to their new environment which will result in great change over a short period of time. However, after the major adjustment takes place, the population will stabilize again and largely remain the same until another great environmental change.
I’m obviously generalizing here and my apologies to the late Professor Gould and Professor Eldredge for the dumbed down explanation of their great theory, but I’m just an average equity research salesman and need to keep this simple.
When I think about the history of the financial and economic system of the US, I see many ways in which the theory of punctuated equilibrium is playing out. By and large, we have lived through long periods of general stasis punctuated by brief periods of radical change. Some of those periods of change can be identified as the creation of the Fed in 1913, the Bretton Woods Conference in 1944, the closing of the gold window in 1971 and the repeal of Glass-Steagall in 1999 via Gramm-Leach-Bliley. After every one of these major turning points, the market has had to make quick, radical adjustments. Following the adjustments, sometimes painful ones, the market would enter into relatively long periods of “stability.” But stability for whom? The 1% that controls the game.
He Who Controls the Game Wins
In my opinion, the problems we face today are not because we built a robust, transparent, fair system that is simply facing a few bumps in the road. Hardly. The problems we face today exist because the economic system has never been allowed to evolve into a system that is truly fair or just for all. Rather it is designed to ensure that the 1% who have always controlled things will maintain that control. It’s all very subtle, but make no mistake about it, crony-capitalism is the rule of the day.
And even when we did implement evolutionary changes that benefited all members of society (Glass-Steagall), the powers that be patiently waited until the moment was right to snatch that freedom away from the people and hand it back to the 1% (Gramm-Leach-Bliley).
The Fed controls the issuance of our currency and thus controls the price of money. The Fed also oversees our banks and thus plays a hugely vital role in how transparent (or not) our banking system is. Politicians control the legislative process and largely determine the judges that oversee the judicial process. These same politicians are controlled by large corporations and wealthy individuals due to the ridiculous way our campaign finance laws work and our lack of term limits. See the pattern?
Is a New Economic Punctuated Equilibrium Moment Upon Us?
Given the complete and utter disaster that awaits us once the curtain is finally drawn back in Europe, it’s important to consider whether or not the crisis we currently face is nothing but another downturn or is it in fact another game-changing, punctuated equilibrium moment? I firmly believe it is the latter. I’ll spare the audience the laundry list of challenges we face as a global economy - unsustainable debt loads, ghost cities, peak oil, climate change, over $700tr in notional derivative exposure, etc. - it’s a long list. In the final analysis, it’s hard to conclude anything other than the system we’ve known since 1971 is about to implode.
The powers that be know this and they are very afraid. Every piece of chewing gum they’ve tried to use to glue their global economic model back together again has failed. Humpty Dumpty has had a great fall but the cracking-up isn’t over yet. Indeed, we have arrived again at one of the great turning points in economic history. However, the current destination is the one that the 1% hate so much. This is the moment where some of the 1% lose their grasp on power and money and witness first-hand Schumpeter’s creative destruction.
Historically, these are the times when pitchforks are carried and torches lit. Think about how wealthy, powerful Brits felt when news of the original Tea Party made its way to London. Think about how a rich plantation owner in the South felt when news of Lee’s defeat at Gettysburg filtered down. Think about how a New York investment banker felt in 1933 when Glass-Steagall was passed. They were very likely afraid, very afraid. The edifice of their power and wealth was crumbling down around them.
Which brings me to Zuccotti Park.
Something Very Big Is Occupying Wall Street
Financial analyst and commentar Mike Krieger wrote a great piece yesterday where he discussed the Occupy Wall Street protestors and what’s happening in Lower Manhattan. One of the comments I particularly liked was Mike’s use of Mahatma Gandhi’s great quote to describe how the protestors are being viewed by the powers that be.
“First they ignore you, then they laugh at you, then they fight you, then you win.” - Mahatma Gandhi
The protestors downtown have moved past the ignore stage as the media blackout has given way to the sheer weight of the story. The strategy has now shifted to discrediting/laughing at/making fun of the protestors. The problem with this phase for the media will be the extremely difficult way it’s going to be to pigeon hole this crowd. They don’t represent the left or the right. They don’t represent the Dems or Repubs, business owners or labor unions, capitalists or socialists, rich or poor, black or white. They represent all of us.
All of the above groups are present and participating in these rallies. The protestors aren’t necessarily anti-capitalist or anti-corporation per se. They are anti the current system. The system that they have no influence over and yet controls their lives. The system that has seen average real wages remain flat for decades while inflation slowly exacts its insidious costs. The system that pushes forward fake politicians with movie star smiles, populist rhetoric and polished speaking styles, whose sole mission once elected is to maintain the status quo for the wealthy individuals and corporations that got them elected. The system that prints out of thin air and borrows from third world China and elsewhere trillions of dollars to bail out the wealthy while sending the bill the average taxpayer. The system that will produce, for the first time in the history of the United States of America, a current generation of young citizens who will be worse off than their parents were before them.
That’s what I think the protestors are all about and I support it 100%. Occupy Wall Street is creating the next economic punctuated equilibrium moment and I say the sooner the better.
Have a great weekend.
Brian
* Fator Securities LLC, Member FINRA/SIPC, is a U.S. entity and a member of the Fator group of companies in Brazil. The comments below are from Brian Rogers, who is employed by Fator Securities (Brian’s opinions are his own and do not constitute the opinions of Fator Securities or the Fator group of companies).
Fator Securities LLC is not affiliated with Zero Hedge or any third party mentioned in this communication; nor is Fator Securities LLC responsible for content on third party websites referred to in this communication.
This material was not prepared by Fator Securities LLC. U.S. Persons seeking further information must contact Fator Securities LLC in New York at (646) 205-1160. This material shall not constitute an offer to sell or the solicitation of any offer to buy (may only be made at the time qualified participants are in receipt of the requisite documentation, e.g., confidential private offering memorandum describing the offering, related subscription agreement, etc.). Securities shall not be offered or sold in any jurisdiction in which such offer, solicitation or sale would be unlawful or until all applicable regulatory or legal requirements of such jurisdictions have been satisfied. This material is not intended for general public use or distribution and is intended for distribution only to appropriate investors. The opinions contained herein are based on personal judgments and estimates and are, therefore, subject to revision. Past performances are not indicative of future results.
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"Creative destruction" is just a fancy way of saying "nihilism". At this point, Glass-Steagall even if re-enacted and strengthened, won't do jack-shit to stop this. it's like opening your parachute 10 feet from the ground.
"There is no such thing as creative destruction."
Tell that to Shiva.
Keep your eyes on the Middle East. What will happen there in the next few days/weeks will change every equation. What is happening in the US and Europe is a sideshow.
Agree. But it's all going global. OWS is related to what's happening elsewhere since the first Greek riots in 5/2010 and the Arab Spring. All economies are suffering from the consequences of policies implemented over teh last 404 years.
OFFS
You'd better be wrong, or I'll come back and slap you.
I got enough on my plate.
Why, what's going down in the ME more than usual? Do you think Syria could explode? Saudi? Egypt again? Israel? Lybia counter revolution? Iran? Iraq? Bahrain again? All of the above? Or something else?
You forgot Yemen and Kuwait. Don't forget Turkey, tho thats borderline ME.
Pakistan. One drone attack too much and a Pakistani retaliation; then complete break of the "alliance"; then a pre-emptive move to "safeguard the nukes from extremists", followed by an ultimatum from Pakistan's friend and neighbour, China.
Counter-ultimatum from the Pentagon... and then the world discovers what half of all those derivative contracts was good for: China frontrunning its long awaited complete dumping of US treasuries. What China loses on the bonds, it doubles on the derivatives and PM's.
After that... who knows. Kiwi Pete will be happy that he can watch it from afar. (I love New Zealand!)
Derivatives that no one will pay.
It all boils down to guns and gasoline.
Fuckin' A right! Daniel 11:43-45
Nukes?
ATP of Denmark Snubs French, Italian Bonds for Collateral
By Radi Khasawneh and Nicholas Dunbar
http://www.bloomberg.com/news/2011-10-07...
Isn't Gould's theory basically Lysenkoism? He may be right about the outcomes, but it's not adaptation, it's near extinction and survival of a better adapted minority _that was already prepared_ for disequilibrium - a lesson for us.
Back to first year bio with you.
Bloomberg yesterday news story caught my eye. Ireland high-end housing market 70pc drop. i.e. 77million euro property in
central Dublin substantially discounted finally getting some viewings.
I have zero sympathy left for the folks that helped create this
insanity. And yes of course GS is needed, and many other
previous sound policies that actually worked as checks and
balances.
Poor choice of abbreviation in this crowd. Just sayin'
"They are anti the current system."
Well said.
What's sad is that these days are really extraordinary times and they are being squandered.
People now can have unbelievable wealth for the masses. And i'm not referring to hoarding Chinese-made junk, I'm talking about wealth of knowledge and actual freedom from necessities of the past.
A simple laptop and internet access eliminates so much of what we used to spend money on. From books to newspapers to radios/stereos to games, etc. etc.
We live in times where no one should suffer.
Instead we have a select few hoarding all the wealth.
Instead of living in great times, we live on the verge of a global revolution.
We lack real leadership. We lack any vision of a better world.
Well said.
The lack of a vision is the real problem. The problem with global caoitalism is that there is a real lack of ideas to replace it, since Communism has been discredited, and the generation that overthrew it 20 years ago is now running the capitalist system.
Much like in Syria, the existing regime cannot be overthrown because nothing is in place to replace it.
Think about how a rich plantation owner in the South felt when news of Lee’s defeat at Gettysburg filtered down.
//////////////////////////////////////////////////////////////////////
Crony capitalism from the start in the US.
"Given the complete and utter disaster that awaits us once the curtain is finally drawn back in Europe"
Fuck off, yanks. You are in much worse position, so stop pretending things are somehow worse in Europe. USA is a DEAD MAN WALKING! There will be no such country by 2020. You are USSA now.
Wow, and this from a Euroist. The entire playing field is changing, but -- from where I'm standing, 'Europe' is in no glittery-sparkley position over the United States of America. Europe reminds me of a station-wagon filled with arguing, bickering tweens coming back from the mall -- with the driver turned around trying to straighten things out, not noticing the station wagon about to drive off of a cliff.
Worse? No.
I'm headed up to the protests to spend the day soon. Wearing a dark suit and tie to make the point that this isn't Hippies Redux.
Going as a MIB?
This might have actually been feared, 'back-in-the-day', before the MIB meme was hijacked by .. 'the Agency', and was re-issued as a couple of comedy movies -- a rather successful dis-information tactic, a la 'Philadelphia Experiment' (secret government coverup, to Hollywood movie and discreditation).
Good for you. Balance OWS out, show us some clear thinkers there. Green.
A few years ago I did some reading to try and inform myself on the intelligent design versus darwinian evolution debate. One idea that really popped out was that punctuated equilibrium was really just a repackaging of Cuviers catastrophism with Darwinian logo.The fossil record is more supportive of Cuvier than Darwin. Maybe the author should have looked a little further back for his anthropolical metaphor.
Cuvier and Darwin are not at odds with each other; catastrophe is one of many flavors of natural selection.
regarding the primary driver of speciation and change they are at odds.
Occupy Wall Street? Hell, Occupy the Federal Reserve!
“First they ignore you, then they laugh at you, then they fight you, then you win.” - Mahatma Gandhi
Sounds like you're talking about the Tea Party. If you think this applies to OWS'ers you are sadly mistaken. First off the media black out you describe never happened. The first day of OWS was on the weekend. Not quite a work day for most including the media. The second dday was when the cops got overlyaggressive with the protestors. That was all over the news.
If the powers of the media are against the OWS, and the Tea Party march on DC is any indication, they will immediately start to discredit the movement with lies (racists, bigots etc...). The media will repeat the lies so often that the un-informed masses believe it to be true (Joseph Goebbels tactics). Then political hack talk show hosts will play to the mis-information like it was true and the masses will laugh and agree.
This media and their political friends in DC are NOT against this movement. For the politicians to be scared (and thus the media) the march and sit-in needs to occur in DC during the workweek. May I suggest camping out in front of the Treasury, Federal Reserve, or the Capitol for starters. Then take it to K Street and let all those lobbyists know that "We The People" are sick and tired of being fleeced by special interest groups.
Joseph Stalin once described the masses as useful idots. They weren't really idoits in the classic sense but they were un-suspecting pawns of people who just wanted power.
Be careful.
The very idea of government is founded upon the social contract. When your government ceases to act in your interest, then cease to offer your consent to be governed.
*Double post*
It is kind of amazing OSW took so long to happen, and I'm all for it, but I'm a gettin' old.
http://www.youtube.com/watch?v=_JlLirV0rcI&feature=related
You are all for the movement being hijacked (Soros, Moveon, Obama, et al), and for the blind to continue to think they are effecting any change they desire?
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