Saturday, August 27, 2016

Manias, Panics, And Mass Delusions

aka. Trapped Capital...

Do you know why the oil industry lies all the time? Because they have to, they need marginal capital to continue flowing to the oil market or else their ponzi scheme collapses...

U.S. oil in storage:
Combined oil and gas inventories reached record levels this week (not shown)...

Which leads us to another excerpt from the forthcoming "book", which is just awaiting final collapse, and final spell-checking. I keep telling myself that one day my life won't consist of explaining that the impossible is not possible...

The Financial Cycle Versus The Economic Cycle
Economists are blissfully oblivious to the financial cycle which happens to lead the economic cycle. Economists focus almost solely on the long-leading statistics that measure the health of the economy, while almost universally ignoring financial risk and speculative appetite. No surprise, the vast majority of economists never predict recessions before they occur, because in accordance with cyclical Economic policy, most economic indicators are strongest at the very end of the cycle during the “inflationary” phase of expansion.

Despite this widespread myopia, a few cogent observers have bridged this arbitrary Chinese wall between the financial cycle and the economic cycle, most notably Hyman Minsky who had a few things to say about the role of risk appetite in generating cyclical risk for the economy:

"the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy is a deviation amplifying system"

Beginning on page 6, Minsky defines the various stages of speculation: hedge, speculative, and Ponzi. After which he delves into his key observations…

“The first theorem of the financial instability hypothesis is that the economy has financing regimes under which it is stable, and financing regimes in which it is unstable. The second theorem of the financial instability hypothesis is that over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system…over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance.”

All of which is the long way of saying that the financial cycle LEADS the economic cycle, with a strong feedback loop between the two cycles. At the early point of a recovery, risk assets reflate under the expectation of future increased profit, despite prevailing weak economic conditions. This early stage risk-seeking combined with Monetary and Fiscal policy feedback into the economy via investment. However, at the end of the financial cycle, risk aversion spreads as investors anticipate the falloff in economic activity. This risk aversion feeds back into the economy via a tightening of financial conditions. Policymakers can distort this process by incentivizing late stage risk-taking, but over thousands of years they have yet to find a way to forestall the inevitable economic contraction.

Normal Financial / Economic Cycle relationship:

Cycles with Monetary Distortion aka. “Quantitative Easing”
QE has the effect of lengthening the financial cycle such that instead of predicting recessions, financial assets decline INTO recessions:

Global stocks ex-U.S. with Global GDP growth rate:

Policy-makers are doing everything possible to keep gamblers in the casino despite overwhelming risk:

S&P with Earnings yield. The S&P can be said to be in late stage "Ponzi mode", as the return on forward investment imputed by corporate profit, continues to decline as price rises...

Japan Nikkei...
Japan is the only country in the world that has played this game before. Shockingly it didn't work:

European stocks overlaid with Japan Nikkei
With Global Stimulus (red line):