Saturday, May 18, 2013

Born In The Bubble

The basis of Elliot Wave Theory is that social mood drives markets, therefore all other economic factors are second derivative. Meaning that when social mood reaches its maximum limits (manic or depressive), then the markets and economy will follow. The tangible manifestation of social mood therefore is in the stock market, which is the ultimate barometer of social optimism and pessimism. The wave counts that EWT uses to track the markets are intended to track the expansion, contraction and exhaustion of social mood.

That's all well and good, however, Central Banks and HFT bots didn't get the memo...

In a world where market volumes are half what they were five years ago, where 70% of remaining volume is computerized, and where the marginal dollar of buying power is supplied by central banks, then it should come as no surprise that social mood is no longer dictating the markets.

All of the various EW sites I follow, have been stymied again and again as to why this rally has not already ended. The "hot hand" I mentioned recently, who had been right all year until recently has been wrong twice in a row, and now his charts are in no man's land. We just reached his intermediate target (1666) a month ahead of time, a mere four days after he posted those charts. Or to put it in his words: 

"...So, please remember, we are dealing with non-linear markets, and all I do is try to set a road map to guide you along the way."

To paraphrase: No one knows what the hell is going on anymore...

More importantly, given that Central Banks and HFT bots are now clearly running the show, then the tail is now wagging the dog. Market volatility has been unnaturally suppressed, which is sending false signals back to the economy and market participants. Which is another way of saying that everyone is taking way too much risk - across all dimensions of the economy - under the false assumption that the economy is more stable than it really is. Volatility, has been in a positive feedback loop such that the dampened actual market volatility has lowered options implied volatility and thereby encouraged risk taking. This has occurred across all risk asset classes, as ZH reported last week, CDS (credit default swap) premiums are at their lowest levels ever, indicating that hedging is now futile for anyone who manages money and wants to keep their job. Unfortunately, volatility is mean reverting, so the longer it stays artificially compressed, the bigger and more explosive will be the panic when it unwinds to the upside, as market participants realize they are under-protected and over-leveraged.

This false sense of stability has of course permeated broader society as well. Instead of focusing on economic issues, the Idiocracy is more than content to worry about the latest American Idol winner and whether or not Chaz Bono just lost 65 pounds. And I'm not sure why the bacon restaurant is closing - seemed like a good idea at the time...

On the geopolitical front, things are heating up again all over, but oblivious policy-makers at the behest of Faux Newstards, are still obsessing over what went wrong at the Benghazi embassy in Libya last year. 

Here is what went wrong - the U.S. has military bases in 145+ countries and is spread far too thin and therefore can no longer protect all of the "assets" in its sprawling empire. So of course, this political discussion is merely theater of the absurd as the morons of the day search for proximate reasons for the embassy being breached, all the while ignoring the bigger picture, that any embassy can be breached at this juncture.

In the bubble, wanting and getting 'more', is the only objective...
The worse part of this unnatural fantasy that we live in, is that it has spawned a generation of empty shirts who dominate positions of power and media and who are incapable of comprehending the underlying source of problems, much less tackling these issues at the root cause. Incapable intellectually and morally but worst of all lacking the courage to do see things as they really are. These people were born in the bubble and therefore have come to believe that all of *this* is normal. They never stop to contemplate the basic fact that for example, the U.S. comprises 5% of the world's population and yet uses 25% of world resources on an ongoing basis;  worse yet, borrowing a significant portion of its annual GDP, to do so. Same for most of the other developed nations - living in a consumption-oriented fantasy world based on borrowing from Third World nations. Most people don't even stop to consider these untenable assumptions the globalized economy is based upon - because that might mean an end to a cherished way of life in which having more is everything. Ponzi World was only ever about wanting and getting more, and of course everyone who bought in to that game, became an undifferentiated corporate widget. End of story. (Speaking as an undifferentiated widget myself, of course).

So the real question on the table, is what happens when this all melts down at the same time and we find out we are led by a bunch of fucking man boys who can't manage their way out of a paper bag?

Then, according to the law of unintended consequences, 'volatility' will be back with a vengeance across all dimensions at the same time, at which point things will get mighty interesting.