Category Archives: Financial markets

The Brain Standard, Part Two, by Robert Gore

Three steps forward, two steps back; so humanity advances.

Part One

Ideas are the foundation of the brain standard, one of which is that only individuals have rights. This cuts through the collectivist dreck that passes for thought among most of the world’s so-called intellectuals. The variations of collectivism all disguise nothing more than brute force hiding behind propaganda. Their inevitable failures stem from their essential flaw: those that control the collective claim rights that negate those of the individual.

There are grounds for hope. From the ruins of impending collapse there will be some who reject collectivism and are committed to rebuilding on a foundation of individual rights. How they will protect those rights and whatever territories they stake out are what theoretical physicists sometimes call “engineering problems.” One advantage they’ll have, though, as the brain standard constituency—they’ll be smarter than their adversaries. Attention, imagination, and intelligence will be keenly focused on building from the ruins and protecting what they’ve built.

Here’s a thought experiment. Imagine someone invents a cheap, portable device that defends its bearer and his or her property from all violence from all sources, but has no offensive capability. The device is so cheap that virtually everyone can buy it, and charities are set up to donate it to those who can’t. The device is universally available and creates a world without violence.

How would such a world function? People would have to produce to survive, but absent mutual agreement no one would have an enforceable claim on anyone else’s production. There would be no coercive transfers of money or property. Disputes would be settled by negotiation and mediation. A body of civil law similar to English common law would develop. Surely such a society would figure out a way to deal with nonviolent crime.

The negation of violence would eliminate government’s nominal rationale: protecting citizens from violence. In the absence of government (and its violence), individuals and society as a whole would be free to advance as far as their capabilities will take them.

This extreme hypothetical offers a stark contrast with the absence of anything resembling freedom anywhere in the world today. Government and collectivism are top-down codependents based on violence and coercion. Their current manifestations are replaying the dreary and what should be the common knowledge lesson of history: they inevitably fail, often after a great deal of bloodshed.

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In the current jockeying among collectivist governments for the things over which they jockey, Russia’s and China’s are doing a better job than the U.S.’s. The former are the co-leaders of the Eurasian alliance and represent substantial politic and economic power. The latter is bankrupt, embroiled in yet another war it won’t win, and stands accused of sabotaging its most important European ally’s oil pipelines. At home, the U.S. government and its fellow travelers are in thrall to brain-dead ideologies that hasten the country’s disintegration.

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Allegorical Intermezzo, by James Howard Kunstler

We’ve reached some sort of climactic upheaval and life for most people is about to radically change. From James Howard Kunstler at kunstler.com:

” If, however, as Pareto suggested… a governing elite is inevitable, then we are certainly under the wrong elites. Whether a circulation of elites can be completed in time to save the world economic system from ruin and the majority from destitution and veritable slavery is a question of no little urgency.” — Michael Rectenwald

     Imagine that on an April evening in 1912, the captain of the RMS Titanic had announced a grand ball at which the male passengers were asked to wear their wives’ clothing and vice-versa…. That was approximately the condition of Western Civ verging on springtime in 2023: preoccupied with silliness while the iceberg awaits.

      But who would have thought the sinking of civilization would occur with such fantastic comic ornamentation? Men, in more ways than mere costuming, pretending to be women… incompetence honored, feted, even worshipped… intellect reduced to anti-thinking… anything of value thrown overboard in some weird post-modern potlatch ceremony of twisted moral righteousness…? But the hour is late, the party is near its end, and the iceberg is struck. The rest of the story will be you holding onto a few valuables, including your life, while the lifeboats get lowered.

     From here forward, things get pretty interesting. And from here on, nobody is really in charge. The vacuum of leadership we’ve been living in becomes impossible to ignore, and nature (it’s rumored) hates a vacuum. For the moment, circumstances are in charge, not personalities.

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The Federal Reserve’s Magic Trick: Big Tech, by Ron Paul

Virtually free money distorts companies and markets in all sorts of ways. From Ron Paul at ronpaulinstitute.org:

Now you see it … maybe soon you won’t.

Over the last year, the seeming ability of stock values of many technology companies to keep rising forever met resistance. This was true even for the major technology companies known collectively as “big tech.” During the last 12 months, Meta (parent company of Facebook, WhatsApp, and Instagram), Amazon, and Alphabet (parent company of Google and YouTube) suffered layoffs and big declines in stock prices.

These were the result of both bad decisions and changing market conditions. For example, the end of covid lockdowns obviously reduced demand for Amazon’s delivery services. Also, an increasing number of people are leaving Facebook and other Meta sites for newer social media sites. Many of those who use social media for political organization, education, or discussion are abandoning Facebook and YouTube for sites such as Rumble — sites that don’t deplatform individuals for sharing opinions and news that displeases “woke” bureaucrats and politicians.

The magician in this scenario — the Federal Reserve — played a major role in big (and medium and small) tech’s rise and fall. Technology writer David Streitfeld, writing in the New York Times, recently examined how the Fed’s 2008 market meltdown related policy of near zero interest rates led many investors to throw money at tech companies. In many cases, these investors would not have bought tech companies stock had the Fed not distorted the signals sent by interest rates, which are the price of money. The historic expansion of the Fed balance sheet thanks to “quantitative easing” also helped create a tech bubble. Now that the Fed is raising interest rates (although still keeping them well below what they would likely be in a free market), the tech bubble is being popped as investors are able to get a more realistic view of tech companies’ value. This is causing a painful but necessary correction.

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What If the Whole Point Is to End “The Fed Put”? By Charles Hugh Smith

Alan Greenspan initiated the “Fed Put” back in 1987 when the stock market crashed. Now, Jerome Powell may be the buy who ends it. From Charles Hugh Smith at oftwominds.com:

Choose one, and only one: a stock market that inflates and pops in an endless series of ever-more destructive bubbles, or a real economy that is no longer in thrall to the engines of wealth inequality and speculative frenzy.

“The Fed Put”–the implicit Federal Reserve policy of bailing out the stock market as soon as it swoons by unleashing a flood of monetary stimulus–is now accepted as a guarantee not unlike financial gravity. Regardless of the bleatings of Fed officials, “everyone knows” the Fed will quickly “pivot” should the market swoon, slashing interest rates and ramping up liquidity via Quantitative Easing (QE).

Recall the definition of excess liquidity: the difference between real money growth and economic growth. The Fed juices excess liquidity not to further expansion in the real economy but to force-feed new money into the stock market and other risk assets.

The only possible result of “The Fed Put” is a credit/asset bubble, which is why we’re currently experiencing the third such monumental speculative bubble in 23 years.

“The Fed Put” is the logical endpoint of neoliberalism, which places “markets” (and thus finance) at the core of the real economy. The neoliberal fantasy is that “markets” solve all problems via the magic of “the invisible hand” and so everything becomes subservient to the gyrations of “markets.”

The second part of the fantasy is that “markets” are self-regulating, meaning there’s no need for a moral order or government regulations; the magic of markets includes a godlike ability to restrict its own motivations, i.e. greed and exploitation to maximize gains by any means available.

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Vanguard CEO Abandons ESG Investing Alliance: “Not In The Game Of Politics”, by Tyler Durden

Trendy investment strategies don’t generally produce better than average returns. From Tyler Durden at zerohedge.com:

Environmental, social, and governance (ESG) has been a hotly debated topic over the last few years.

The seemingly unquestioned march towards corporate utopia has met with resistance among those who oppose the idea that government oligarchs should dictate the affairs of private business firms. The long-term effects of the ESG movement are largely ignored by the mainstream.

As Tom Czitron previously commented, ESG is largely justified on the basis that corporations and financial institutions should be socially responsible. They should work obsessively to address the perceived menaces of climate change, racism, sexism, and a host of subjects. Our benevolent political and economic elite define what is virtuous and what is not for a grateful public.

But, as of late, there are some naysayers that dare to stand up to the socialism-by-stealth promoters with Tim Buckley, chief executive at Vanguard, perhaps the biggest name yet to buck the ESG orthodoxy.

“Our research indicates that ESG investing does not have any advantage over broad-based investing,” Mr. Buckley said in a recent interview with the Financial Times.

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Highlights From Warren Buffett’s 2022 Letter, by Tyler Durden

Like or hate Warren Buffet, he’s a pretty fair investor from whom a thing or two can probably be learned. From Tyler Durden at zerohedge.com:

Many were wondering if Warren Buffett would address his recent unwind of Berkshire’s $4+ billion stake in Taiwan Semi – a brand new position that had catapulted into the investing conglomerate’s Top 10 holdings as of Sept 30 ’22 only to see it slashed by 86% just one quarter later…

… and this morning, when Buffett filed the latest Berkshire annual letter, they got the answer: an unequivocal no.

So what did Buffett talk about in his latest and – at just barely 9 pages – shortest ever letter since Berkshire launched the practice of recapping his investment principles, activities and results some 46 years ago in 1977? Nothing that he hasn’t addressed on countless previous occasions. Below we summarize some of the key highlights.

First, here is a snapshot of Berkshire Q4 financials:

Q4 profit fell, reflecting lower gains from investments and foreign currency exchange losses as the U.S. dollar lost value. Quarterly net income fell 54% to $18.16 billion, or $12,412 per Class A share, from $39.65 billion, or $26,690 per share, a year earlier.

Of course, as is well-known, Buffett despises GAAP earnings  and instead urges investors to look at operating earnings instead which strip away the quarterly fluctuations of the conglomerate’s public stock investments (i.e. unrealized gains/losses).

The GAAP earnings are 100% misleading when viewed quarterly or even annually. Capital gains, to be sure, have been hugely important to Berkshire over past decades, and we expect them to be meaningfully positive in future decades. But their quarter-by-quarter gyrations, regularly and mindlessly headlined by media, totally misinform investors.

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The US Housing Recession Is The Canary In The Coal Mine, by Dhaval Joshi

The canary is gasping. From Dhaval Joshi at BCA Research via zerohedge.com:

Quietly and off most people’s radar screens, US residential fixed investment (home building) has slumped by 20 percent in the past year – a rate of decline that puts it on a par with the major housing recessions of 1990, 1980, 1973, 1965, and 1951.

Housing recessions matter because they are the ‘canary in the coal mine’ for economy-wide recessions. Not all economic recessions follow housing recessions1, but most housing recessions presage economic recessions.

US Housing Recessions Are The ‘Canary In The Coal Mine’

Housing recessions are the canary in the coal mine for interest rate induced economic recessions. This is because, just as the canary is hyper-sensitive to toxic gases, housing investment is hyper-sensitive to interest rates.

Higher interest rates transfer more income from borrowers to lenders, making it more costly to service existing debt and take on new debt. This suffocates the most indebted parts of the economy – homeowners, homebuilders, and housing investment – before it suffocates the broader economy. So, just as the canary keels over before the coal miner, housing investment keels over before the broader economy.

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Fear and Greed with a Roll of the Dice, by MN Gordon

There are still way too many people who want to buy when everyone else is buying, and nothing approaching the capitulation and loathing that characterize the true bottom of bear markets. From MN Gordon at economicprism.com:

Bear markets take time.  They also provide countless occasions to lose money.  With each bounce comes an opportunity for investors to buy higher so they can later sell lower.

Major U.S. stock market indexes hit what is likely an interim bottom in the fall of 2022.  Since then, they’ve bounced with incredible vitality.  The bounce has brought new confidence to investors at what may end up being the worst possible time.

Many smart people have misconstrued the bear market rally – a sucker’s rally – as the origins of a new bull market.  After January’s stellar performance to start the New Year, calls of a bull market have come far and wide.

Maybe these bull market calls are right.  Maybe the stock market’s selloff this week was merely a consolidation period.  And the major stock market indexes will soon charge past their all-time highs from over a year ago.  We’re not so sure.

Billionaire investor Jeremy Grantham, and co-founder of the Boston-based money manager GMO, recently provided a well-reasoned assessment of where the stock market, as measured by the S&P 500, is headed.  In his 2023 outlook letter, After a Timeout, Back to the Meat Grinder!, which was published on January 24, Grantham noted:

“While the most extreme froth has been wiped off the market, valuations are still nowhere near their long-term averages.  My calculations of trendline value of the S&P 500, adjusted upwards for trendline growth and for expected inflation, is about 3,200 by the end of 2023.  I believe it is likely (3 to 1) to reach that trend and spend at least some time below it this year or next.”

As of Thursday’s close, the S&P 500 was at about 4,012.  Thus, to hit 3,200, the S&P 500 would have to fall 20 percent.  What to make of it?

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The CDS Market Reveals How To Profit From the Coming Collapse of Fiat Currency, by Nick Giambruno

Bitcoin is a call on a generalized currency collapse. From Nick Giambruno at internationalman.com:

Profit from Collapse

As told in the movie The Big Short, a group of hedge fund managers who saw the housing crash coming used Credit Default Swaps (CDS) to make a fortune.

These exotic financial instruments conveyed information crucial to seeing the 2008 financial crisis in advance. That knowledge allowed astute speculators to get positioned for massive profits as the crisis unfolded.

In the coming crisis—which has already started—I expect CDS will again play a key role in telegraphing important information shrewd speculators can use to their advantage.

A CDS is a contract between two parties. Think of it like an insurance policy against a borrower—typically a large company or a government—defaulting. One party underwrites the insurance policy, and another buys it. If the borrower defaults, the CDS issuer pays out the CDS buyer.

CDS trade in the open market and reflect investor expectations of the default probability of a particular borrower. The more likely the underlying entity is to default, the more expensive the insurance (CDS) will cost.

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The New Normal: Death Spirals and Speculative Frenzies, by Charles Hugh Smith

The death spirals generally follow the speculative frenzies, although timing the spirals is problematic. From Charles Hugh Smith at oftwominds.com:

There is an element of inevitability in play, but it isn’t about central bank bailouts, it’s about Death Spirals and the collapse of unsustainable systems.

The vapid discussions about “soft” or “hard” landings for the economy are akin to asking if the Titanic’s encounter with the iceberg was “soft” or “hard:” either way, the ship was doomed, just as the global economy is doomed by The New Normal of Death Spirals and Speculative Frenzies.

Death Spirals are the inevitable result of entrenched interests clinging on to the status quo and thwarting any adaptation or evolution that might threaten or diminish their share of the swag–and that includes any real change because any consequential modification has the potential to upset the gravey train.

The status quo “solution” is to borrow and blow whatever sums are needed to satisfy every entrenched interest. Filling the federal slop-trough for all the hogs now requires borrowing a staggering $1.4 trillion every year, and billions more in municipal, county and state bonds (borrowing money via selling bonds) on the local level.

This borrow and blow strategy avoids any uncomfortable discipline and difficult trade-offs: everybody gets everything they demand.

This strategy looks “unsinkable” until the iceberg looms dead ahead. History suggests that fiscal and political discipline is eventually imposed by the real world in one fashion or another when diminishing returns enter a Death Spiral.

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