Deutsche: "We Are Almost At The Point Beyond Which There Will Be No More Bubbles"

Whereas many Wall Street strategists enjoy simplifying their stream of consciousness when conveying their thoughts to their increasingly ADHD-afflicted audience, the same can not be said for Deutsche Bank's Aleksandar Kocic, who has a troubling habit of requiring a background and competency in grad level post-modernist literature as a prerequisite for his articles among the handful of readers who don't already speak exclusively in binary. Here is an example of Kocic's "unique" narrative style:

Volatility is a consequence of speed and speed is the result of fear. Acceleration of movement is a defensive maneuver, a tool of retreat -- high speed and high volatility represent sophistication of flight (flight to quality is an example of the speed event). However, absence of volatility is not necessarily synonymous with absence of fear. Volatility is low not only when things become predictable, but also if the distribution of risks causes paralysis, when the state of no change, regardless how uncomfortable it might be, becomes the least undesirable of all alternatives.

While a passage like that is far more likely to have been taken from a book by Lacan, Derrida, Deleuze and Guattari, Foucault or any other prominent POMO-ists, in this case it comes from Kocic' year end outlook which encapsulates many of the themes we have covered recently, most notably his recent take on the interplay between volatility and leverage, a topic which anyone who has read Minsky is quite familiar with, yet which Kocic decided to give it his unique post-modernist spin with the following "spiraling leverage" chart from one month ago...

... which he described as follows: "spiraling leverage cannot continue indefinitely. At some point, the bubble becomes too big and cannot be subsumed by a bigger bubble – the damage of its burst would become irreparable. Therefore, when that moment comes -- and we believe that moment is now – the market is facing a following dilemma."

  • Permanent state of exception: We continue to operate in a regulated environment. Leverage is limited, but care is taken not to overconfine the system so we avoid the Japanese scenario. While this appears as a prudent approach to reality, it implies giving up all the ideas of unlimited growth, something that made US economy look better than the rest of the world. Compared to what we have seen before, this means settling for much less than this country is used to aspiring. Although a reasonable proposition, it is emotionally a difficult choice that is and will remain subject to substantial political manipulation. It is unlikely that populist narrative will not continue to challenge this choice [ZH: hey, one can just blame the Russians, right?]
  • Flirting with high tail risk : Deregulation and deficit spending could result exactly due to abandoning the first path, as its direct challenge, under political pressure that American economy can restore its old status and resume its pace of the previous decades. This is a serious tail risk as it is playing against the backdrop of considerable overhang of the post-2008 one-side positioning. Central banks are massively short convexity in this scenario. Any inflationary maneuver, or anything that would be a bear steepener of the curve, could force disorderly unwind of the bond trade and reinforce the trend thus creating another crisis from which there could be no way out.
  • Forced deleveraging: An overly hawkish Fed forces rates higher and triggers a disorderly unwind of the bond trade, thus forcing the system to deleverage. This is the policy mistake.

The Deutsche Banker's conclusion was stark and certainly dramatic:

"The tension created by these three choices is in the center of both economic and political discourse. It will shape the market dynamics in the future, beyond the near term. Taper tantrum and the US presidential elections were the two most recent episodes that have highlighted the risk distribution opened by these choices. Policy mistake appears less likely at this point. The financial conditions are as loose as they have ever been. Fed hikes are only going to tone this down, but it is very difficult to see how they can create overly tight financial conditions and cause economic slowdown. Nevertheless, negative convexity of the central banks in the bear steepening or generally high rates scenarios are making risk of volatile deleveraging alive."

Of course, Kocic could (far simply) have said that it takes more and more debt to kick the can, and keep the world's biggest asset bubble ever created - with the explicit backing of central banks - from bursting. This is precisely what Bank of America's Barnaby Martin did in far less words one month ago:

"the irony in today's world is that central banks are maintaining loose monetary policies to generate inflation…in order to ease the pain of a debt "supercycle"…that itself was partly a result of too easy (and predictable) monetary policies in prior times."

* * *

In any case, fast forward one month later when Kocic picks up where he left off on his favorite "spiraling leverage" diagram, and decides to once again paraphrase Minsky's conclusion that "stability is destabilizing" using just a few hundred extra words than is necessary, although since he does so in a "cool", Pomoist way, here is the paraphrase:

Persistent low volatility is like a sirens’ song. Low uncertainty engenders high leverage which leads to compression of risk premia and further buildup of risk, which, in the long run, destabilizes the system causing ultimately volatile deleveraging. This is generally harmful for the economy and requires stimulus injection in order to create an economic turnaround leading to subsequent decline in volatility and gradual releveraging as the system recovers. When described in terms of leverage and volatility, economic trajectories exhibit quasi-periodic pattern. These dynamic are shown in the Figure as trajectories in the vol-leverage plain across several “cycles”.


Starting with the internet bubble in 1999, we reach the 2001 recession and subsequent recovery on the back of the real estate boom (2003-2007). The figure suggests that after each volatile deleveraging (e.g. 2000 and 2007), subsequent sweep leads to a bigger bubble. After each sweep, amplitudes grow bigger and the damage more substantial, requiring a heavier hand in terms of policy response as crises they create become deeper and recoveries longer and more difficult.

Kocic then reuses the same chart he showed back in November to indicate the four distinct endgames should the leverage cycle be pushed into one of four final states of "instability."

Where the narrative differs from last month, however, is in the slight but perceptible shift to Kocic' conclusion: he now appears resigned that the current twist of the vol spiral is also the last one, beyond which the current financial and monetary system will no longer exist, something his just as gloomy colleague Jim Reid concluded not too long ago and which we described in "This Is Where The Next Financial Crisis Will Come From."

Here is Kocic explaining why we may be approaching the end of financial history (at least as we know it):

It is clear that the spiraling trajectory cannot continue indefinitely; it has to stop at some point beyond which there will be no more bubbles. In many ways, it looks like the post-2008 represents the last lapse. A new game has to be reinvented for the old future to materialize, or a different paradigm altogether has to take over.

As to what happens next, after the two sweeps of the spiral, both of which culminated with crashes, Kocic reverts back to his forecasting self and writes that "we arrived at the juncture point (2017) from which four possible trajectories emerge, none of them are looking very attractive at this point." For those who may have forgotten the November report, here they are again:

  • Throughout the post-crisis period, policy response has been designed around an attempt to avoid the lower left corner of low volatility and low leverage. It is safe to say that we have been able to stay clear of this outcome.
  • At this point, with regulated financial sector and restricted leverage, we have found what appears to be a “reasonable” base case trajectory – a middle ground between Japanese style liquidity trap and repeat of the same mistake of the previous lapse -- with regulated markets, lower leverage, and subaverage growth (a.k.a. Permanent state of exception).
  • Alternatives represent risk scenarios and correspond to volatile outcomes. The lower right corner is the policy mistake territory of forced deleveraging (without inflation) triggered possibly by overly aggressive Fed.
  • The most acute risk is associated with the path leading to the upper right corner where possible deregulation and reckless fiscal spending could trigger rise in inflation leading to stagflationary outcome with potential currency decline and forced unwind of the bond trade. Both of these trajectories represent high risk alternatives to be avoided.

Unfortunately, as recent social events have demonstrated, the current "reasonable base case" of a "permanent state of exception" is becoming increasingly improbable because the forced surreal financial relationships are starting to tear apart the social fabric itself. Not only that, but the fact that the "stability" has only been bought thanks to some $15 trillion in central bank liquidity is lost on only the biggest fools, and socialists, pardon - MMTers - in finance. Here again is Kocic:

As much as the base case trajectory appears as “reasonable” and a worry-free choice, its biggest problem is its legitimation. Easy money provided by central banks to restore growth was easy for capital, but not for labor. Policy response to crisis added further to inequality by blowing up the financial sector and inviting speculative rather than productive investment. The Keynesian bond which ties profits of the rich to the wages of the poor seems to have been severed, cutting the fate of the elites loose from that of the masses and the well-being of the economy. 

Confused? You can thank Bernanke and Yellen for president Trump. Anyway, Kocic continues:

 With subaverage growth and highly skewed wealth distribution, the economy is converging towards what for a growing majority increasingly resembles a zero sum game. To the vast majority, that is saying that the best days are behind us. This is the most difficult aspect of the base case scenario: There has been no political system in modern history -- inclusive, exclusive, democratic or oppressive, all the same – that has promised anything but better future to its constituents. For any ideology the gradient between the present and the future has always had to be positive. It is difficult, if not impossible, to conceptualize any political narrative capable of making the reverse acceptable. And in a context where economic growth is a universal metric of progress, problems  with the base case become even more acute. The legitimation of the base case will continue to define the populist narrative as a voice of change. Politics will be shaped along the lines of looking to disrupt the status quo with quick short-term fixes, which could emerge as outright triggers of stagflationary trajectory.

Well, considering that years and decades of endless political lies that "the future is brighter" is the reason why the world finds itself on the edge of a social, political and financial catastrophe, and which has made a handful of people richer than their wildest dreams while pushing the vast majority of the population into considering that socialism - and even communism - may be a wise alternative to capitalism, perhaps it is not so bad that for once the truth will be told and someone will have the temerity to admit that no, the future will not be better, especially when one admits that after the next crash - and the wars that follows - the future, or as it will be known then, the present, will be the worst since the world wars.

And finally, for those who lament the disruptions to the status quo by populist elements promising "short-term fixes", well just look where said status quo got you: a world where the markets have to close their eyes and pretend they can exist forever in the artificial, central-bank created "permanent state of exception."

Which, thankfully, is impossible.


Sudden Debt knukles Mon, 12/11/2017 - 18:39 Permalink

No more bubbles because the central banks will own all stocks and all companies linked to it.Once they own most companies, they can create the 6 super companies that will control 90% of the economy and that will give them the final power of politics, economics, employment, housing and agriculture.Then they can openly become the leaders of the world.

In reply to by knukles

SDShack CJgipper Mon, 12/11/2017 - 16:51 Permalink

It's not just the dollar, it is a perpetual race to the bottom for all. This has happened because the entire world financial plan is now just one giant Ponzi. Through decades of mis-asset allocation (ie wealth redistribution from the productive world middle class to the non-productive elites), real world wealth creation has turned negative. The consequence is ever expanding debt required to feed the Ponzi to stave off collapse. But the bottom line is there has never been a solution to a Ponzi other then collapse.

In reply to by CJgipper

Putrid_Scum SDShack Tue, 12/12/2017 - 02:19 Permalink

The Reset is gathering pace across the entire Earth.

Those that know what’s going on are smart enough to keep their mouth shut in public. Anyone who knows can’t benefit from from telling it as it is.

Most guys are relocating or preparing too. Final preps I guess, the Future is grim indeed, even if you do make it. Good Luck


In reply to by SDShack

Parrotile Mon, 12/11/2017 - 16:35 Permalink

"It's different this time".Heard this before, haven't we. Seen the consequences too.Seems "everyone" in positions of power have really short memories. I wonder why? . . . . . . .

CRM114 Thought Processor Mon, 12/11/2017 - 21:41 Permalink

The financial crash happens in the same way. What happens after that will most assuredly not be the same. The last depressions happened mostly due to wars people thought were worth fighting, and at a time when people were a lot more resilient, with the 1929 great depression happening with a world population under a quarter of what it is now. 70% were rural then, 70% are urban now. Riots and collapse are coming this time, big time.

In reply to by Thought Processor

gdiamond22 Mon, 12/11/2017 - 16:37 Permalink

Sounds like Irving Fisher in 1929.... "Sept. 5, 1929; “Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher"

CrabbyR Mon, 12/11/2017 - 16:40 Permalink

the only easy way out (not that it is pulling teeth) is to stop issuing new debt and keep rates low... the bad side to this is that we get to keep the parasitic central banks

adr Mon, 12/11/2017 - 16:52 Permalink

Do you really think Amazon is the cause for the decimation at retail?Are stores needing 40% off sales two weeks before Christmas to move inventory a symptom of an all time high economy?Is it healthy for people to gamble their entire net worth on an artificial construct they know nothing about just because it has been skyrocketing in value?Oustide a few select sectors, jobs pay nothing so it is better to sit on your ass and collect welfare. In fact if you spend your welfare on crypto bullshit and daytrade on your Obamaphone you could have made more than working 100 lifetimes.This is supposed to be normal?

Thought Processor aliens is here Mon, 12/11/2017 - 17:13 Permalink

 Maybe bubbles are just a fact of life and evidence of a system that requires the ability to 'right' itself.  It goes both ways really, as in 2008 when the system was prevented from going down because certain entities were too big to fail, it did nothing but both prolong and compound something that was way out of balance to begin with.  It was nothing but evidence that the system itself had been corrupted to such an extent that they could not allow it to correct itself in a healthy manner.   And here we are wondering why things are so fucked up.   

In reply to by aliens is here

inhibi Thought Processor Mon, 12/11/2017 - 18:13 Permalink

No. In modern day US, bubbles are entirely fabricated, or if not entirely fabricated, recognized (usually very early on), altered, guided, and eventually capitalized on.Look at the housing bubble: Greenspan had TONS of indicators that keeping low interest rates was creating a massive asset price spike. However, AIG, the TBTF crowd, the lenders, the REITs, the steel & concrete industry, etc were raking in millions and therefore, either talked Greenspan into keeping them low or like Kocic writes, keeping them low was the easy path for all of them.Then when it burst, all of the fault was placed on the taxpayers while the rich went on a buying frenzy the likes of which America hadn't seen since the 20's. I wouldnt be too far off to say that the large companies doubled/tripled in size in the decade following the crash while the smaller players either got bought by vulture PE or consolidated into the larger camps - along with massive layoffs, wage cuts, the whole "efficiency" mantra that is now at the core of all American business - usually under the guise of being lean, but in actuality, cutting costs so the C-suite can increase their pay. And people wonder why Millenials are for socialism. Before Clinton, avg CEO pay was 20-50x average employee. Now its 1000x if not more, if you count the travel fare, free cars, stock, etc.America is now basically run by 20 or so odd companies. These companies are basically run by about a 100 individuals, that sit on multiple boards, have large holdings in this and that - the 'untouchables'. These guys have 0 competition, and they know it. The whole system revolves around their feifdoms, the corps. Patent portfolios allowed them to corner their own markets with ease, the legal system allowed them to bully competition out of the marketplace, and lobbying allowed for regulatory capture. All of this made America the hollow husk that it is today - namely, a handful of people completely out of touch with reality, shaping the economic future of this country. 

In reply to by Thought Processor

creeko Mon, 12/11/2017 - 17:10 Permalink

I'm thinking about a new lease on this great bicycle I saw at a store the other day.  96 months, only $7 per month.  With what I save here, I can afford to crowd-share a few extra pairs of socks per week.  efffin' good times, I say.

Paracelsus Mon, 12/11/2017 - 17:20 Permalink

   War.....The elites get to clamp down on dissent.This article reeks of hypocrisy since DB has offset risk by purchasing CDS protectionfrom here to the moon and back. What happened to keeping reserves on hand (gold)in order to have physical just in case of emergency?Iceland refused to socialize the debts of its private banks (twice).Ireland has absorbed the bad debts for perpituity. The young have emigrated abroad, not thefirst time in history.Let's see... Greece fixed? Spain? Portugal? They both owe Italy bigtime.The Italian banks will fold if the Spanish and Portugese debt goes south.Puerto Rico? In pretty bad shape before the hurricane. Okay,so rebuild it and it gets thrashed again in a year or two. From what I have read the PR economic system is about as corruptas they come. So what do they produce that we desperately need?These vulture hedge funds that are holding up settlement by insisting on 100% repayment        (Argentina),and now Puerto Rico.... The aim is to pressure the US Gov't to back the bonds andthat is shifting the risk to the taxpayer (ask yourself if the taxpayer would have received adividend check!). Speaker Paul Ryan is heavily into supporting a US bailout.If the Puerto Rican bonds default, more than one US pension funds will be hurting.  Now, in the late '90's when LTCM went bust none of the banks were eager to bail out a hedgefund that had made a wrong way bet (highly leveraged,non-hedged bet on Russia bonds,just before the Russian default). The Treasury guys had to strongarm all the major's into a room and post a guard with orders to shoot to kill. When it's THEIR money at risk things aredifferent. One last detail, Germany sold alot of arms (Diesel Subs) to Greece. Ask yourself who wants to attack Greece? F-16's and such require expensive oil filters that they don't have on the shelfat K-Mart. All this stuff is rusting and does not contribute to social progress at this point intime.The Greek people cannot get medical supplies or basic health care. They are going to blamethe bankers. Nigel Farage has been going on about this for years. (Practically the only one).   PS: legend has it that LTCM was short about 400 tons of rehypothecated Italian gold when they almost collapsed. Interesting fun facts. You never need physical until you really, really need it....

inhibi Paracelsus Mon, 12/11/2017 - 18:43 Permalink

I agree. I guess the real question really is, what will trigger the collapse?By any metric, one would have already assumed that the student debt fiasco is reaching a boiling point, but then again, we live in a globalized world where one country can make up for the lack of another, as in how the Chinese realstate investors took up the slack in housing interest in the US, Canada, Australia and elsewhere.However the collapse will manifest, it will be very large and very global. They fixed nothing with QE, just merely painted over the problems. They got BTC to go up, housing to go up, and the stock market to go up. They are so far up now the financial system and reality (labor and goods) are so far rmeoved from eachother as to be on entirely different planes, only tangentially coming together in the form of financial metrics, easily modified, easily manipulated, and essentially, increasingly less interesting as the speculative becomes much more enticing than the actual doing.And there you have it in microcosm, the current US - a completely speculative market revolving a service based economy where everything productive is shipped elsewhere (we aint got time fo that shit).What's even more depressing is that American's have never worked longer hours in their entire history - at a time of apparent technological prowess nonetheless.

In reply to by Paracelsus

vladiki inhibi Mon, 12/11/2017 - 23:45 Permalink

Chinese 'investors' didn't "take up the slack in housing interest" in Aus and Canada.  To (a) export capital and (b) take a punt on capital gain, they deliberately exploited a preexsting shortage due to population growth ahead of housing development..  And the Aus and Canadian govts let them!   Unbelievable, Feckless.  They don't buy where the slack is greater but where the potential to exploit shortage is greater.  Local would-be buyers hate them.  Some older sellers love them since they've pushed up prices dramatically. Many of the houses they buy are unoccupied because they've been bought as trading counters, not homes. The whole sequence has been socially and financially toxic for thse 2 countries - and perhaps more so for New Zealand.  There have already been moves to restrict/cease this trade.  Long overdue. 

In reply to by inhibi

Librarian Mon, 12/11/2017 - 17:21 Permalink

I'm fairly confident that Anthony van Diemen, the Governor General of the Dutch East Indian Company in 1639 also glibly announced that Tulipmania was the last bubble in history.Shareholders don't really want the entire truth.  If people really wanted the Truth, nobody would buy hotdogs.

HRH of Aquitaine 2.0 Mon, 12/11/2017 - 19:20 Permalink

I agree about this asshats writing style. I had to read three of Foucaults books. Painful. I can't stand that POMO shit.

This end of bubbles crap reminds me of the Marxists and their obsession with the end of history nonsense. Ridiculous.

bruceme HRH of Aquitaine 2.0 Mon, 12/11/2017 - 19:34 Permalink

That is absolute best comment here.  This is just crazy how all of the Wall Street analysts keep guessing and keep getting market direction wrong. The group at Shep Wave have been dead on in the markets as far as I can tell.  I use them for short term trading in stawks, gold and oil. I go with the ones who have an actual record and have been in the business for a while. 

In reply to by HRH of Aquitaine 2.0

CNONC HRH of Aquitaine 2.0 Mon, 12/11/2017 - 23:06 Permalink

I tend to write in a similar fashion.  Brevity and concision have their place, and suit most topics, but the English language is capable of extraordinary precision.  If I have something important to convey, (or at least I may think it important) I want to reduce the opportunity for misunderstanding, and that often requires more complex sentence structures than are typical, or uncommon synonyms for common words in order to avoid unrelated associative meanings being introduced where they don't belong or may confuse. If you wish to be assailed by verbosity without a point, may I suggest Albert Camus.  "The Plague" is an especially appalling example. 

In reply to by HRH of Aquitaine 2.0

MusicIsYou Mon, 12/11/2017 - 20:16 Permalink

Then what Kocic is saying is that the mega rich are running from the predator of predators otherwise why would speed be so important to them. Note: God just lays around.

CRM114 Mon, 12/11/2017 - 21:05 Permalink

The thing about bubbles is that not only can you not see in from the outside, but you can't see out from the inside. To me, that graph looks more like the entire global finance industry disappearing up its own fundamental orifice.