Tuesday, October 16, 2012

M.O.A.C. (Mother of All Crashes) Is Inevitable

While the pollyannas of the day run around desperately trying to escape reality, let's review the facts so everyone can reach their own conclusion on what happens next.

It's abundantly clear what I think:   I believe that 2008 was just a warning and therefore the true M.O.A.C. is now overdue.  Given that nothing has structurally changed since 2008, we are now on sudden death borrowed overtime.   

That said, I have been wrong so far, which offers the pollyannas among us an ongoing glimmer of hope however tenuous...

First, I will mostly skim over the subjective aspects of the impending MOAC debate e.g. sentiment and media propaganda, since I have been pounding away on those recently.  I showed that options volatility is at the same level of complacency as the all time high in 2007.  And just today, ZeroHedge indicated that equity allocations are at the same level as 2008, right before that crash.  I showed that Walmart was the leading stock prior to the Lehman collapse as it is now, and that the Dow Transports have been diverging from the Industrials for months indicating weakness in the real economy.  But of course, my main assertion is that the markets, media and public are literally stoned into complacency by monetary stimulus.  Granted my proof of sentiment is clearly anecdotal and based on data mining of Idiocratic TV listings such as: "I Didn't Know I was Pregnant", "Honey Boo Boo", "Long Island Medium", "Hoarders", "16 and Pregnant", "Hillbilly Handfishin'", "U.S. Presidential Election 2012" etc. etc.

I also fully admit that I come across as both arrogant and strident in my tone, largely  because I am sick and fucking tired of being talked down to by the media, politicians and policy-makers who assume that we are all a bunch of ignorant fools who can be lied to incessantly.  How many high ranking economists like Bernanke are going to chide us that we don't understand higher economics, even as he breaks every fundamental rule of commonsense and reality in his bid for financial alchemy ?

And that gets us to the hardcore immutable facts underlying the M.O.A.C. debate that will determine who is right in the end, the Central Bankers who break every fundamental rule of economics - or reality.  Or put it another way, was reality permanently suspended? If so, I never got the memo.

The Many Ways Central Banks Are Attempting To Circumvent Reality:

1) Attempting to use monetary policy as a long-term support for the economy.  Their implicit assumption is that manipulating the money supply is a proxy for sustainable innovation and production.  Clearly by the amount of ongoing and ever increasing liquidity applied over past decades, that's a false assumption.  Using economists' favourite analogy of a small island - if 10 people with different skills sets were on an island and the money supply was increased, all that would happen is that the price of everything would go up (the monetary unit would decrease in value), but production would stay the same.  Take a slightly more nuanced example where instead of giving everyone more money, there is a bank willing to lend and the amount available to lend suddenly doubled.  In that case, in line with the situation we face now, unless someone had a need to borrow to invest in their business, nothing would happen, even prices would likely stay the same.  That's the liquidity trap scenario we find ourselves in now.

2) Lowering interest rates and subsidizing debt: Apparently Central Bankers forgot the number one rule of economics which is that if the price is lower, people will demand (use) more

3) Subsidizing and encouraging consumption.  Related to (2), by subsidizing and encouraging debt, Central Bankers are subsidizing and encouraging consumption.  The problem is that they merely pulled demand forward in time, thereby ensuring that future demand growth is constrained by debt service 

4) They subsidized government deficits.  Along the same lines as (2) and (3), Central Bankers exhort governments to be more fiscally prudent, even as they are subsidizing fiscal profligacy

5) Discouraging Savings:  No wonder there is a dearth of retirement savings.  Central bankers reduced interest rates to zero and thereby eliminated the return on investment, discouraging people from saving - duh!

6) Moral Hazard: I went on about this recently.  Central Bankers have propped up speculators so many times now that the markets are oblivious to risk

7) Related to all of the above, Central Bankers have systematically financed asset bubbles by driving a disconnect between asset prices and underlying fundamentals.  They have subsidized speculation and rent seeking and in doing so, they have drawn resources away from the productive side of the economy all while increasing financial leverage and massively increasing systemic risk.

Other than the above, monetary policy works great.

Fifty Shades of Black and White
To conclude, I am sure there are many skeptics of this blog who believe that the most likely outcome is a nuanced "grey" area between the blithe oblivious stance of the general populace and my call for imminent MOAC.  My response is that clearly the blithely ignorant have been right for quite some time, whereas I have been wrong i.e. it's been a binary outcome.  Therefore, one must at least be somewhat cognizant of the other potential binary outcome wherein I am right, and they are wrong.  Otherwise, one is ignoring thousands of years of history wherein those who ignored obvious risk, paid the full retail price for it.