Monday, September 19, 2022


This will do it...

"There is no political solution to our troubled evolution”

The central lesson of Nassim Taleb's Black Swan introductory, Fooled By Randomness, is that those who learn humility early on in markets go on to continued success. Those who have early success in markets, go on to ever larger bets leading to inevitable failure. It’s human nature to conflate all success as skill and all failure as personal inadequacy. Add in over a decade of central bank market bailouts and Taleb's theory is now getting tested on a biblical scale. 

So it is that this central bank experiment in moral hazard has trapped an entire society in an end of cycle super bubble. One in which liabilities remain at all time highs while assets are collapsing. For those of us who learned their lesson in prior asset bubbles this has been an exercise in humility, patience, and frugality. Which is now being rewarded in spades. The only solace in a time like this comes from knowing that bills will get paid independent of market vicissitudes.

No one can control history. Neither Democrats nor Republicans. All they can control is who gets hurt the most and the least. That is what passes for political ideology - the distribution of inevitable impacts of failed policy. 
Those in the heads down working class are easy prey for today’s con men. However among the educated, there is no excuse. We may not have control at the societal level, but we all have control at the individual level. Economic failure has been obvious since Springsteen first started writing about it 40 years ago. However this society has extreme survivor bias. This time around the list of survivors will be taken down to low single digits. A new low water mark that will be obvious to even the most truth challenged observer.

As I've pointed out several times, this housing bubble makes every other housing bubble i.e. 2008, 1980 seem minor by comparison. What saved many U.S. homeowners during the last housing bubble was the fact that only a relatively small subset of owners were using adjustable rate mortgages. In many countries there is no such thing as a 30 year fixed rate mortgage. ALL mortgages reset interest rates every few years. That type of system puts interest rate risk on the borrower. Whereas the U.S. system with long amortization periods puts interest rate risk on the lender. 

"Millions of people who borrowed cheaply to purchase homes during the pandemic boom face higher payments as loans reset"

"How exposed borrowers are to rising rates varies notably by country. In the US, for instance, most buyers rely on fixed-rate home loans for as long as 30 years. Adjustable-rate mortgages represented, on average, about 7% of conventional loans in the past five years. By contrast, other nations commonly have loans fixed for as little as a year"

The middle class is getting crushed at both ends now - higher inflation AND higher interest rates.

"The global economy may face a recession next year caused by an aggressive wave of policy tightening that could yet prove inadequate to temper inflation, the World Bank said in a new report"

Policy makers around the world are rolling back monetary and fiscal support at a degree of synchronization not seen in half a century

Investors expect central banks to raise global monetary policy rates to almost 4 per cent next year, double the average in 2021, just to keep core inflation at the 5 per cent level. Rates could go as high as 6 per cent if central banks look to wrangle inflation within their target bands"

There you have it, the World Bank is saying the best case scenario for investors is 4% interest rates AND 5% inflation

September 12th, 2022:

"We maintain a pro-risk stance"

September 18th, 2022

"FedEx CEO Raj Subramaniam did not spare investors from the doom and gloom. Asked on CNBC if a “worldwide recession” was ahead, he answered, “I think so; these numbers don’t portend very well. We are seeing volume decline in every segment around the world. So we just assume at this point that economic conditions are not going to be good.”

His company’s poor results are “a reflection of everybody else’s businesses,” he added on a particularly ominous note"

Who to believe?