Monday, September 23, 2013

No Excuses This Time

I interrupt this blog post to announce that the end of the world has arrived (no, not because of Facebook going parabolic - well that too). "Dr. Doom" (Nouriel Roubini), after being bearish for four years straight, has now decided he is "optimistic on stocks". Apparently, money printing only becomes a good idea after it's been used for four years straight. Who knew?

And I'll take that name thanks, you're not Dr. Doom anymore 
(I know, I'm not a Doctor - I'll be Mr. Doom then)

Where Was I...
I still read articles all the time, written by otherwise seemingly intelligent people, telling us that while we may be in "uncharted territory", no one knows for certain how all of this will turn out. Inflation? Deflation? Reflation? Stagflation? Masturbation?...Unfortunately, this isn't a fucking mystery novel. We've seen this movie twice before and even the most ardent Kardashian watcher has no excuse this time around. Contrary to prevailing popular belief, money printing is not the secret to effortless wealth...

Deja Vu - Do That To Me One More Time
Way back in May of 2007 when everyone knew there was a housing bubble yet most people were still pretending they didn't know how it would end, I wrote (below) there was an obvious reason for why risk was being totally ignored. And of course we know how all of that turned out. Right now, we are in the exact same situation. Always at or near the top of a bubble everyone forgets all of the underlying risk factors that have been accumulating in the background and starts rationalizing why "all of this" can go on indefinitely. The reason of course is greed. Wall Street and speculators thrive on greed and therefore constantly need to rationalize away risk, especially when the big year end bonus is in sight. The last people we can expect will see another collapse coming is Wall Street, because they live by the adage that "the end of the world only comes once, and you can't make any money off of it". Meanwhile, their annual bonus incentive gives them overriding motivation to ignore risk and focus on return, especially considering they manage other people's money. So at this late juncture, given all of the attendant facts and circumstances, I would suggest that the only debate is when this entire shit show collapses, not if. Anyone still willfully ignoring the debate around "if" it collapses, is someone with their head shoved completely up their own ass...

"8) Complacency and Mass Delusion ("How did we not see this coming...?"): There is an extremely dangerous belief among the financial community that the more people know about a particular problem ahead of time, the less effect there will be on the market when the problem/crisis actual occurs. This belief derives from the Efficient Market Hypothesis which in its strictest form states that all information is already priced into the market. Unfortunately, in reality there are two major issues preventing the real-world realization of Efficient Markets: 1) Greed and 2) Fear. The major side effect of greed is that it leads to a biased form of judgement known as "wishful thinking" - or on Wall Street they refer to it as "Talking your own book". Conversely, extreme fear leads to negative extrapolation, which is another mental bias limiting one's willingness to accept risk. Looking back at past market manias that rose vertically and then collapsed vertically (Nasdaq, Nikkei, Nifty Fifty, 192os etc.), we see that these were not driven by a radical change in the underlying fundamentals, instead these were driven by the sheer power of the prevailing mass psychology - greed or fear. This untimely decoupling of rational pricing from fundamentals inevitably has catastrophic consequences. In other words, most people either load up on risk and/or sell risk at exactly the wrong possible moments. Right now we find ourselves precisely in one of these historically critical, greed-fogged moments, where the prevailing major risks are in fact NOT discounted in the market and where virtually every piece of bad news is quickly rationalized away. Therefore, the market will soon be in the relatively rare and yet uniquely devastating position of following the fundamentals lower, rather than leading the fundamentals lower. As I have also made clear, the ensuing unwinding of exotic derivatives and leveraged positions will cause a relentless bear market and economic collapse, the severity and duration of which will catch almost everyone by surprise."

Here is another explanation for why all of this risk gets ignored