Thursday, November 14, 2013

The Age of Hazardous Immorality Will End "Abruptly"

Torn By the Promise of the Joker and the Fool

Sadly, the flash crash casino doesn't warn its customers when they are about to be wiped out, or that the house always wins; nevertheless the stoned masses are double down at the same roulette wheel that robbed them the last two times. It had to be this way...

Moral Hazard:

This infantile society is intimately familiar with the concept of Moral Hazard, yet willfully has chosen to disregard that lesson, as it has every other aspect of commonsense. There are many reasons why Faux News and the infotainment Matrix were fabricated, but a high tolerance for reality is not one of them.

OPM: Other People's Money
We know why Wall Street ignores risk, because as a "culture" it is singularly corrupt and greed-obsessed. On top of that there is the end-of-year bonus, creating the distorted incentive to inflate current year returns as much as possible regardless of long-term risk. It's moral hazard writ large. Heads their risky bets pay off garnering a fat bonus. Tails, everything blows up again and they walk away leaving everyone else holding the bag. Wall Street consists of the greediest people on the face of the earth doing exactly what they have been incentivized to do (yes, again).

Faith in the Delusional Bernanke "Put" is Total
Index Options Put/Call Ratio (50 DMA)
Wall Street's option-based hedging is the lowest in the life of the data (10 years)
Notice back in 2007 the ratio was high due to concerns over subprime, however it declined during the Lehman melt-down as hedges were monetized. If there hadn't been hedging back then, the collapse would have been a lot worse, because hedging de facto forces capital back into the markets when hedges are monetized i.e. it cushions the decline. Prior to the meltdown those index put options were worth pennies on the dollar, but at the market bottom they were worth several thousand percent more. However, just today, we learned that Soros jettisoned a big chunk of his index hedge at recent market highs. Belief in the Bernanke "put" has led to extreme moral hazard and total lack of hedging. People forget that the Bernanke "put" failed to prevent the 2008 debacle. But as long as other people's money is at risk, then plausible deniability is all that's needed to reach for the fat year-end bonus now 6 weeks away...

Double or Dog Food: Life in the Retirement Casino
Broader society's sad gambling addiction is a slightly different story. It's still moral hazard, but from a considerably less lucrative angle. Having been shellacked by tech stocks, a housing crash, and then the 2008 meltdown, ageing Baby Boomers are desperate to make up for lost time. Thanks to the rise of the 401k (self directed retirement plan), saving for retirement has become a daily dice roll in the world's largest casino. Retirement advisors, now having finally recovered from 2008, are once again telling their clients to pile back into stocks, because we know how well it worked the last two times. Of course, this is the third boom-bust cycle in just over a decade. Each boom/bust has been inflated by and then subsequently "rescued" by Central Bank monetary policy. However, each resuscitation attempt has required yet more and more Fed dopium - now wholly dependent upon ongoing inflation of the money supply. Again, it's moral hazard fully at work. The masses at large didn't learn their lesson the first two times, so here we go again. Modern (macro) economic theory for some reason, outright ignores the fundamental economic lesson of moral hazard, by postulating that through a combination of fiscal and monetary manipulation, recessions can be avoided almost entirely. Therefore, in the process of trying to save the economy from the adversity of unemployment, these policies inadvertently end up saving speculators from the very same risks that fueled the bubble in the first place. Meanwhile, the other basic economic lesson that has been assiduously ignored, is the fact that lowering the cost of debt will only subsidize and encourage a lot more debt. Basic supply and demand. Yet as fun as this economic experiment has been, unfortunately each iteration of boom and bust, has inflicted yet more damage to the real economy, since monetary policy is at best a temporary stop-gap until the real economy recovers. When the buffoons in leadership are given an excuse to do nothing, they do nothing. And monetary policy is the ultimate excuse to do nothing.

Ponzi Scheme:
"a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation"

Technically, globalization is not a Ponzi scheme, because it's not "fraudulent", it's merely highly immoral. It's not fraudulent because everyone implicitly knows it's a ponzi scheme. Everyone knows that billionaires get paid with the profits they make from exploiting Third World wage slaves. Everyone knows that the Third World wage slaves work in ludicrous conditions and will very likely never achieve middle class status much less ever become well-off. And worse yet, everyone knows that if the wage slaves don't keep paying into the scheme via the recurring trade deficit, then this entire immoral scheme will collapse, post haste.

Taking the ponzi definition a step further, any "operation" that pays out its core capital as income is a ponzi scheme. Because without capital maintenance, an organization's ability to continue recurring operations will eventually be impaired. Therefore, liquidating jobs and industries to boost short-term profits is a ponzi scheme. It will work for a while and then fail catastrophically. Again, everyone knows about outsourcing so technically it's not fraudulent, it's merely highly immoral.

Ponzi Schemes Always Fail. Violently and Suddenly
No surprise, when everyone realizes that the music has stopped and there are no chairs left, then it will be game over man. When this all ends it will be sudden and fucking brutal. At that point, the term "counter-party risk" will take on all new meaning as the "reach for yield" dissolves into the "reach for worthless IOUs".

The Bernanke "Put" is a Wall Street Delusion
These phony low volatility markets, elevated on meager volume, have sucked in trillions of combined Federal Reserve and private money slowly but surely over the past five years. Now, with combined $19 trillion in U.S. stock market value and north of $200 trillion in combined global assets, the Fed thinks it can control an asset stampede using a mere $85 billion a month? That amount of flow isn't even half of one percent of current U.S. stock market value. It's like jumping out of a 10 story window and using a blanket to break the fall.

When the algos go full Skynet in the midst of a high volume panic, the underwear will be mighty stained, to say the least. The age of immoral hazard is ending as appropriate, with the mother of all bets on the indefinite status quo.

It had to be this way - moral hazard assured it.