Wednesday, December 18, 2019

Rich Man's Panic Attack

History will say that this past decade did to capital what prior decades did to the middle class - lured it in and obliterated it...

Way back in 2003, I lost faith in Ponzi capitalism. The Fed had lowered interest rates to 1.5% and was encouraging people to use adjustable rate mortgages, zero down payments, and other gimmicks to increase leverage. Policy-makers were pulling forward consumption from the future to boost GDP today. Of course a lot of people, still reeling from the Dotcom bust and recession, took the Fed up on the offer. So began the housing bubble.

Cheap money is an aphrodisiac, it can be irresistible. Worse yet is when the neighbours are all borrowing and spending, which leads to fear of missing out. Why don't we have a home equity line of credit ATM? Unfortunately, central banks had no exit strategy for all of that borrowed money. Starting in 2004, Greenspan raised rates 17 times in a row, obliterating anyone who took them up on the offer. It wasn't just Greenspan of course who had recommended ARMs, realtors were using adjustable rate mortgages with "teaser rates" to get homeowners to splurge on a larger home under the belief that their incomes would outgrow the inevitable interest rate "reset". Of course that isn't what happened. 

So it was with the economy, so it is now with investing. The seduction of cheap money, the "fear of missing out", and no exit strategy provided by central banks from their mega bubble. Sound familiar? Central banks have succeeded in creating an aura of invincibility that has convinced the masses to believe in an indefinite asset bubble. And an endless economic expansion. Retirement "planners" have done their part in convincing people that if they don't buy into the mega bubble they will never retire. Low interest rates did the rest. Forced people to believe in delusion.

In other words, deflation emanating from 2008 and the de facto failure of globalization, collapsed the cost of capital and forced investors further into risk. We stopped pretending a long time ago that the rest of the world will ever have our standard of living. Now we're just worried whether WE will have our standard of living. 

Just as the middle class got obliterated in the last bubble, the vast majority of capital will get obliterated in this one. For much the same reason - a tsunami of deflationary poverty capital lowered real rates of return to nothing. The only return now is the zero sum Ponzi return from chasing asset bubbles. A game in which the vast majority always lose. Left holding the bag again at the end. Many right wing pundits blame central banks for sponsoring this delusion; however, central banks were just trying to keep the almighty capitalist system duct taped together after 2008. Because when the system itself explodes, people will begin to question whether or not the model really worked in the first place. At which point they will finally demand to rebalance the economy back towards the worker. If this society had a cumulative IQ of five, that would have already happened by now. But American mythology isn't going to die easy, it wants to explode. 

We've reached a point now wherein investor sentiment no longer correlates to the economy. Central banks are managing asset rotations, that are wholly detached from economic reality.

Case in point, the Fed ALWAYS steepens the yield curve at the end of the cycle. That doesn't mean the coast is clear:


Pavlovian response to cheap capital made it inevitable that recession would be widely viewed as a buying opportunity.

"When the Fed hits the gas, buy bank stocks with both hands"
"I've heard that before, but I can't remember when"

Step 1 see it coming.

Get that step wrong, go back to CNBC.