The Matrix

Who could have possibly seen this coming? Almost three years we first detailed how America has become an entitlement nation where "work is punished." It appears President Obama is about to discover this first hand as his populist 'raise the minimum wage' strategy is showing yet another major unintended consequence. On the same day as New York acts to mandate a $15 minimum wage for fast food workers, Seattle's $15 minimum wage law - which is supposed to lift workers out of poverty and off public assistance - has hit a snag. As Fox News reports, evidence is surfacing that some workers are asking their bosses for fewer hours as their wages rise – in a bid to keep overall income down so they don’t lose public subsidies for things like food, child care and rent. So not only is work 'punished' it is now 'disinentivized by mandate' as part-time America toils amid ever-rising costs of living.

“Until they become conscious, they will never rebel, and until after they have rebelled, they cannot become conscious.” - George Orwell

It’s a shell game intended to keep us focused on and distracted by all of the politically expedient things that are being said - about militarized police, surveillance, and government corruption - while the government continues to frogmarch us down the road toward outright tyranny.

When governments find themselves in financial trouble because of the stupid decisions that they’ve made, their first response is to award themselves even more power to make even stupider decisions. And among the stupidest decisions that any government can make is imposing capital controls… something that Argentina has in abundance.  Capital controls are like the Matrix; you can’t really explain what they are. You have to show people. Argentina does not disappoint.

There are no free financial markets in America, or for that matter anywhere in the Western word, and few, if any, free markets of any other kind. The financial markets are rigged by the big banks, the Federal Reserve, and the Treasury in the interests of the profits of the few big banks and the dollar’s exchange value, which is the basis of US power. It is just as amazing that Americans and Europeans are so trapped in The Matrix that they have no inkling that their future has been destroyed.

We are what we think more so than what we eat.

Many activists are clamoring for a higher minimum wage. That's an admirable goal, but is that where the worst problem is? Even at the abysmally low wages of the present moment, we still have 938,000 people being turned away from McDonald's because there aren't enough McJobs. The real problem is the lack of meaningful work. In a world of machines and social alienation, meaningful work is as scarce as water in the drought-stricken California Central Valley.

"...choosing to raise your children to be independent thinkers who don’t automatically want to control others by force, can sometimes lead to tension with family and friends, especially older ones. I find most of them to be just innocent victims who happily reside within the matrix, merely repeating thoughts they were subliminally conditioned to believe."

The average American spends more than 10 hours a day using an electronic device... and most of that activity is not even interactive. The vast majority of the time we are just passively absorbing content that someone else has created. Instead of humans being forcefully connected to “the Matrix”, we are all willingly connecting ourselves to it, as the system that defines our reality for us gains greater and greater hold over everything.

"The second quarter is going to be devastating for the service companies," warns Conway Mackenzie - the largest U.S. restructuring firm - adding that, despite slashing thousands of jobs, delaying (or scrapping) billions in capex amid the prolonged rout in oil prices, "there are certainly companies that are going to die." As Bloomberg reports, oil drillers will begin collapsing under the weight of lower crude prices during the second quarter and energy explorers who employ them will shortly follow with oilfield-service providers are facing a "double-whammy." As we noted here, there are more than a few candidates for this 'death' list as it appears increasingly clear that what was considered an "unambiguously good" narrative for the nation is anything but...

Over a month ago we presented a ranking of "America's most levered energy companies." Since then they have all, without exception gotten clobbered, not only in their publicly traded stock but also their debt. Today, long after the liquidation whirlwind has left junk bond owners dazed and confused, Goldman catches up, and lays out a matrix of shale companies sorted not only by leveraged (they see 2.5x as the cutoff; we used 4.0x) but also by shale asset quality. From there, it also lays out the various opportunities, if any, available to the management teams in the resultant 4 quadrants. Readers will be most interested in the "restructuring/bankruptcy" option, most applicable for Group 4, because these are the names which,  all else equal, will file for bankruptcy first.

The current premise is that global equities markets will rise regardless of economic fundamentals. Money must flow into equities [perceived as the only asset class capable of producing “acceptable” returns] because the alternatives offer virtually no return…with interest rates pinned near zero in most western economies. Just buy any equity [akin to dart throwing] and a “greater fool than you” will buy after your purchase, at a higher price, ad infinitum... thus ever increasing the asset’s value This is such an obviously flawed argument on so many levels... albeit, like almost any strategy, is surprisingly effective from time to time.

Make no mistake: the Internet of Things is just Big Brother in a more appealing disguise. Even so, we're not suggesting we all become Luddites. However, we need to be aware of how quickly a helpful device that makes our lives easier can become a harmful weapon that enslaves us.

Einstein advised “We cannot solve our problems with the same level of thinking that created them”. Yet that’s mostly what I see happening today on many levels.

We will readily admit that one cannot know with certainty whether the bubble in risk assets will become bigger. However, it seems to us that avoiding a big drawdown may actually be more important than gunning for whatever gains remain. We don’t think it is a good idea to simply “take the blue pill” and rely on the idea that the effects of the money illusion will last a lot longer. It is possible, but it becomes less and less likely the higher asset prices go and the more money supply growth slows down. If no-one can say when, then the “blue pill” strategy has a major weakness. It means that things could just as easily go haywire next week as next year.

Hugh Hendry's Eclectica Fund has had a great Q4 (up 3.3%, 4.0%, and 5.0% in the last 3 months) despite portfolio risk being quadruple his 'old normal'. How did he achieve this? He begins... "There are times when an investor has no choice but to behave as though he believes in things that don't necessarily exist. For us, that means being willing to be long risk assets in the full knowledge of two things: that those assets may have no qualitative support; and second, that this is all going to end painfully. The good news is that mankind clearly has the ability to suspend rational judgment long and often... He who hangs on to truth has lost. The economic truth of today no longer offers me much solace; I am taking the blue pills now."