The promise of something for nothing is always an enticing proposition. Who doesn’t want roses without thorns, rainbows without rain, and salvation without repentance? So, too, who doesn’t want a few extra basis points of yield above the 10-year Treasury note at no added risk?
Thus, smart fellows get after it; pursuing financial innovation with unyielding devotion. The underlying philosophy, as we understand it, is that if risk is spread thin enough it magically disappears. In other words, the solution to pollution is dilution.
With this objective, new financial products are fabricated into existence. The risk free reward of several extra basis points are then packaged up into debt instruments and sold off to pension funds and institutional investors. The search for yield demands it.
Yet as an economic expansion progresses, especially one that has been extended and distorted with the Fed’s cheap credit, these derived financial securities are polluted with more and more toxic waste. Spreading the risk ultimately pollutes the entire pool of liquidity. Continue reading
The decade long bull market run, aside from making everyone ridiculously rich, has opened up a new array of competencies. The proliferation of ETFs, for instance, has precipitated a heyday for the ETF Analyst. So, too, blind faith in data has prompted the rise of Psychic Quants…who see the future by modeling the past.
For the big financial outfits, optimizing systematic – preprogrammed – delta hedges is an essential aptitude of the 21st century. Our guess is that many of today’s high flyers will crash and burn during the next bear market. But what do we know?
As far as we can tell, the stock market, circa November 2019, is an absolute fantasy. The Dow Jones Industrial Average (DJIA), S&P 500, and Nasdaq have little connection to the underlying economy. Rain or shine, they go up.
Market watchers, eager to explain the fantasy, employ creative nomenclature as they attempt to classify the state of the stock market with discerning acumen. Is it a bubble? Is it a melt up? If it’s a melt up, what type and gradation is it? Continue reading
“We believe monetary policy is in a good place.” – Federal Reserve Chairman Jerome Powell, October 30, 2019.
The Sky is Falling
Ptolemy I Soter, in his history of the wars of Alexander the Great, related an episode from Alexander’s 334 BC compact with the Celts ‘who dwelt by the Ionian Gulf.’ According to Ptolemy’s account, which survives via quote by Arrian of Nicomedia some 450 years later, when Alexander asked the Celtic envoys what they feared most, they answered:
“We fear no man: there is but one thing that we fear, namely, that the sky should fall on us.”
Today, at the risk of being called Chicken Little, we tug on a thread that weaves back to the ancient Celts. Our message is grave: The sky is falling. Though the implications are still unclear.
The sky, for our purposes, is the debt based dollar reserve standard that’s been in place for the past 48 years. If you recall, on August 15, 1971, President Nixon “temporarily” suspended convertibility of the dollar into gold. The dollar became wholly the fiat money of the Treasury. Continue reading
The hillsides are always brown in the land of fruits and nuts come autumn. After baking away all summer long in the hot sun, the dense sage and chaparral covering the coastal hillsides and canyons are dry and toasty. Though, before conditions get better, they must first get worse.
High pressure systems form over the high-elevation deserts of the Great Basin, between the Sierra Nevada Mountains and the Rocky Mountains, each fall like clockwork. The pressure builds and forces the air to the south and west. The warm, dry winds of Santa Ana then race towards Southern California where they scorch the earth.
The winds howl from the east, across the inland deserts, where they funnel through the mountain passes and then blast across the LA Basin and out to the Pacific Ocean. As the winds conduit from high to low elevation they compress and rise in temperature at a rate of almost 30 degrees per mile of descent. What’s more, as the air’s temperature spikes upward, its relative humidity plunges downward below 10 percent. Continue reading