Stocks and Precious Metals Charts - Ship of Fools - Lingering at Another Minsky Moment

 

“The disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least to neglect, persons of poor and mean condition is the great and most universal cause of the corruption of our moral sentiments.”

Adam Smith

"I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis.  Concepts including 'rational expectations,' 'market discipline,' and the 'efficient markets hypothesis' led economists to argue that speculation would stabilize prices, that sellers would act to protect their reputations, that caveat emptor could be relied on, and that widespread fraud therefore could not occur.  Not all economists believed this – but most did.

Thus the study of financial fraud received little attention.   Practically no research institutes exist; collaboration between economists and criminologists is rare; in the leading departments there are few specialists and very few students.  Economists have soft-pedaled the role of fraud in every crisis they examined, including the Savings & Loan debacle, the Russian transition, the Asian meltdown and the dot.com bubble.

They continue to do so now.  At a conference sponsored by the Levy Economics Institute in New York on April 17, the closest a former Under Secretary of the Treasury, Peter Fisher, got to this question was to use the word 'naughtiness.'  This was on the day that the SEC charged Goldman Sachs with fraud."

James K. Galbraith, Why the 'Experts' Failed to See How Financial Fraud Collapsed the Economy, May 16, 2010

"There is a kind of chronic complacency that has been rotting American liberalism for years, a hubris that tells Democrats they need do nothing different, they need deliver nothing really to anyone – except their friends on the Google jet and those nice people at Goldman.

The rest of us are treated as though we have nowhere else to go and no role to play except to vote enthusiastically on the grounds that these Democrats are the 'last thing standing' between us and the end of the world.   It is a liberalism of the rich, it has failed the middle class, and now it has failed on its own terms of electability.   Enough with these comfortable Democrats and their cozy Washington system.  Enough with Clintonism and its prideful air of professional-class virtue.

I think what we need in order to restore some kind of sense of fairness is not the final triumph of markets over the body and soul of humanity, but something that confronts markets, and that refuses to think of itself as a brand."

Thomas Frank, 2016

 

Stocks managed to shake off some early gloom and rallied in the afternoon.

The Dollar chopped sideways, finishing largely unchanged.

Gold and silver rallied sharply.

The VIX fell slightly.

Earnings continue rolling in, for what they are worth.

Did I mention that there will be a stock option expiration on Friday.

Have a pleasant evening. 

Stocks and Precious Metals Charts - Who Could See It Coming? - Dead Reckoning the Minsky Moment

"In particular, 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."

Hyman Minsky, The Financial Instability Hypothesis


"Twenty-five years ago, when most economists were extolling the virtues of financial deregulation and innovation, a maverick named Hyman P. Minsky maintained a more negative view of Wall Street; in fact, he noted that bankers, traders, and other financiers periodically played the role of arsonists, setting the entire economy ablaze. Wall Street encouraged businesses and individuals to take on too much risk, he believed, generating ruinous boom-and-bust cycles. The only way to break this pattern was for the government to step in and regulate the moneymen.

Many of Minsky’s colleagues regarded his 'financial-instability hypothesis,' which he first developed in the nineteen-sixties, as radical, if not crackpot. Today, with the subprime crisis seemingly on the verge of metamorphosing into a recession, references to it have become commonplace on financial web sites and in the reports of Wall Street analysts. Minsky’s hypothesis is well worth revisiting."

John Cassidy, The Minsky Moment, The New Yorker, 4 February 2008.


"The period of financial distress is a gradual decline after the peak of a speculative bubble that precedes the final and massive panic and crash, driven by the insiders having exited but the sucker outsiders hanging on hoping for a revival, but finally giving up in the final collapse."

Charles Kindelberger, Manias, Panics, and Crashes: A History of Financial Crises


"The sense of responsibility in the financial community for the community as a whole is not small.  It is nearly nil.  Perhaps this is inherent.  In a community where the primary concern is making money, one of the necessary rules is to live and let live.  To speak out against madness may be to ruin those who have succumbed to it.  So the wise in Wall Street [and in the professional and credentialed class] are nearly always silent."

John Kenneth Galbraith, The Great Crash of 1929


"People who lost jobs — and those are in the millions in 2008, 2009, and 2010 — have now gotten jobs, that’s true, but the jobs they’ve gotten have lower wages, have less security and fewer benefits than the ones they lost, which means they can’t spend money like we might have hoped they would if they had got the kinds of jobs they lost, but they didn’t...

The big tax cut last December, 2017, gave an awful lot of money to the richest Americans and to big corporations.  They had no incentive to plow that into their businesses, because Americans can’t buy any more than they already do.  They’re up to their necks in debt and all the rest.

So what they did was to take the money they saved from taxes and speculate in the stock market, driving up the shares and so forth.  Naive people thought that was a sign of economic health.  It wasn’t.  It was money bidding up the price of stock until the underlying economy was so far out of whack with the stock market that now everybody realizes that and there’s a rush to get out and boom, the thing goes down."

Richard Wolff, The Next Economic Crisis Is Coming

Bubbles most often resolve their imbalances irresponsibly and jarringly, with a correction that is sharp and destructive.  It is often triggered by some seemingly trivial event, especially if its predatory mispricing of risk has been allowed to fester for an extended period of time..  How can this be?

Credit cycles explain bubbles in modern finance, but the elite protect themselves and their banks from the effects. Hence, only the middle and working class loses. And this has been the case for many years now. Hence the growing unrest abroad, and the decisions by the electorate at home that seem to puzzle and provoke the very comfortable 'credentialed' class.

The reason for this is quite easy to understand. Those who benefit the most from the bubble both actively and passively help sustain it.   They are reluctant to surrender any potion of their enormous advantage and personal gains, even if it might be better for them in the long term.

They do not consider the damage that may be done to the underlying social fabric that supports and protects their wealth.  Contrary to all of the familiar assumptions, they are not acting rationally or prudently, even for themselves.  Their focus is short term and short-sighted.  They are drunk on their own success.

The interpreters and creators of the prevailing narrative are themselves beneficiaries of the bubble economy, and will go to great lengths to misdirect the public discussion from any root causes, and often from its very existence.  They will distract the public with inflammatory issues, economic fear,  stage-managed spectacles, and manufactured complexity.   And finally, in the extremes of their shamelessness, they will seek to blame the victims for their lack of sophistication and the government for its efforts to restrain their predatory frauds.

This enables the cycle of boom and bust to repeat and worsen beyond all reasonable expectations.

The lesson from history is that a system based on the ascendant greed of powerful insiders is rarely rational and self-correcting, and is often spectacularly self-destructive.  And those with the most power, in their wonderful self-delusion, simply do not care until it is too late.  They are blinded by the moment, in their competition with each other, and the insatiable nature of greed itself.  'Enough' is not in their reckoning.

To this end governments are fashioned, and people organize themselves from the damage that can be done to society as a whole by a few.   Unfortunately people forget, and it seems that at least once every generation or so the madness slips loose its restraints, and this sad lesson from history repeats.

And so once again the world must face its rendezvous with destiny.

The box scores for today's market action are shown in the graphs below.

Apparently rough weather is heading towards the east coast. The local grocery store was a nuthouse even in the early afternoon. I am making some chicken soup for myself and Dolly. Even if I could coax her out of her fuzzy blanket and pillows, Dolly would offer limited assistance.  She is clearly just in it for the chicken.

Have a pleasant evening.

Caught in the Aftermath of a Minsky Moment by a Credibility Trap

"I think this is where the academics are kind of clashing with the practitioners. I think on paper negative rates make a lot of sense if you're running academic models, but in reality they make no sense.  Having seven or eight trillion dollars of debt trading at negative rates, having thirty year JGB's trading at fifty basis points is absolutely ludicrous. This experiment that's going on we all know will end poorly at some point in time, I just don't know when that time is...

I think that one of the fears that they have is a run on cash. If they told you and I that they're going to tax your deposits by a hundred basis points, well it's better to put it in a safe or under your mattress. And that's why you see a resurgence in gold. The more they move to negative rates, the more gold is gonna take off because there's no carrying cost."

Kyle Bass, Hayman Capital

This comment [quoted below] about a recent column by Paul Krugman is written by someone I consider to be an ethical and intelligent mainstream economist. It was so simply and eloquently put that I am using it here on my site.  It expresses almost perfectly why there is a broad movement growing in the US that rejects all the  establishment candidates from both parties

And it goes without saying that the words I put in front of it are completely my own, and most likely go far beyond what this person said so well.  We have disagreed on some things at times, but I hope in an amicable way.  This is how knowledge is created from the raw material of data.

What I find to be highly significant right now is how badly the status quo is assessing and reacting to this current political situation.  There is an unmistakable desire for honesty, transparency, and reform in this country, especially among the young.  But those who view themselves as the powerful, the thought leaders, seem to be retreating into a comfortable story that they tell each other.   It is a story about how good things really are, if only the stupid and naive public could be made to understand it. Few may actually believe it in their hearts, but it is a story that serves their cause: it is expedient.

I don't wish to single Mr. Krugman out, not at all, because he is hardly the worst among mainstream commentators and economists.  He is merely symptomatic of these times, more a follower and participant than an original thinker or leader. Like his peers, he has seen others doing it, and it has worked for them.  As Louis Brandeis once said, the government teaches by example.   

What the privileged fail to realize is that by continuing to push forward with their winning strategy, because nothing powerful enough has risen up yet to stop them, will at some point shake the American republic to its foundations.

Since our current system of finance and money is so heavily reliant on confidence in its integrity, I fear that this break in trust, that is already showing signs of advanced development, will lead to a serious tear in the social and economic fabric.  This is certainly something that we have seen before in this country, but thankfully not for many, many years.

Some people will view this gathering storm as an opportunity to gain more power for themselves and their friends, and will attempt to use it as such.  And some ruthlessly so I am sure.  And that is dangerous. It is unfortunate that real change that can provide a more constructive alternative is not happening, because the very serious people, what Larry Siummers categorized as insiders, keep rationalizing the status quo to themselves, and deny anything that suggests that the prevailing system has failed, that they may have failed in anything.  I have called this the credibility trap.

If the fortunate few decide to continue to push down this rising trend towards reform and justice, eventually resorting to force as confidence and willing compliance continues to decline, then history suggests that the Pandora's box that they will open will carry many of them, and far too many innocents, to a place where they would not wish to go.

We do not have 'capitalism;'  what we have is plunder.   We have a corrupt system of kleptocracy ruled over by the big money power of a relative few individuals and organizations, what FDR called 'organized money'.  And a system based on the primacy of selfishness, power,, unbridled greed and a free hand to cheat and deceive and manipulate will serve to create a kind of hell on earth.

I think it is time for all of us to take a deep breath and seriously consider where our passions are taking us, and what this spirit of contentiousness and willfulness is causing us to say and do. The ultimate irony is when we become that which we hate.  I would wish all of us to step back and see what we may become before this goes too far.

Saturday, April 16, 2016 at 05:32 AM (in reaction to the two recent PK columns on Sanders):

"Paul Krugman has decided that if there is any way to destroy a decent, humble, caring, thoughtful candidate for president, a candidate who offers the possibility of actual change in domestic and foreign policies that have created so many problems for so many people for so long, if there is any way, any word that can be used, to destroy that candidate then destruction there will be.

What Krugman has done however is show me what wild intolerance, what authoritarian political thinking in an American context amounts to, and the attempts by Krugman at destruction of a decent person and candidate will with me turn me completely away from the desired effect.

Were I a student of Paul Krugman, I would smile and nod as if in agreement and very quietly go in the opposite direction. After all, I fortunately learned early on which teachers always had to be agreed with.

I have no idea where this disdain for a truly decent person and candidate comes from, obviously not from the person, nor do I care about the psychology on where the disdain comes from. Krugman is being as fierce as can be, harsh as can be. I record the fierceness and harshness, know such an anti-intellectual posture can never be for me and move away.

"As you know, I’m only saying these things because I’m a corporate whore and want a job with Hillary.

Related: Paul Krugman, Why I Haven't Felt the Bern


Jesse in reply:

Paul, you will obtain no objection to that self-confession from me, although it is purposely and dramatically overstated so as to discredit it.   No, you are caught by an idea, to a particular economic arrangement that seems to be failing most people, and to what history is likely to see as a systematic and continuing abuse of power.

This is not capitalism; this is mere plunder by a powerful few. We are caught in the aftermath of a 'Minsky Moment' by a credibility trap, and it has been going on for far too long.

In your defense, there is a lot of this sort of creative rationalization of a rotten system going around these days. It is fashionable.   And that is a big part of the problem.

Which Way Out of the Minsky Moment?

If we are indeed in a Minsky Moment, which we think we are, then monetary inflation by the Fed and government invervention without reform will most likely increase the probability of a protracted stagflationary repression in the United States, and possibly lead to civil unrest and an exogenous reform of the system. An abandonment of the system as it is with a turn to fascism has been the historic choice of Wall Street. The political lobbying against systemic reform by the Bankers and their sycophants will be intense and as persuasive to the many as most appeals to fear. However, their reckless advice leads to a trip to the brink of the abyss.

The Minsky Moment
by John Cassidy
February 4, 2008
The New Yorker

Twenty-five years ago, when most economists were extolling the virtues of financial deregulation and innovation, a maverick named Hyman P. Minsky maintained a more negative view of Wall Street; in fact, he noted that bankers, traders, and other financiers periodically played the role of arsonists, setting the entire economy ablaze. Wall Street encouraged businesses and individuals to take on too much risk, he believed, generating ruinous boom-and-bust cycles. The only way to break this pattern was for the government to step in and regulate the moneymen.

Many of Minsky’s colleagues regarded his financial-instability hypothesis, which he first developed in the nineteen-sixties, as radical, if not crackpot. Today, with the subprime crisis seemingly on the verge of metamorphosing into a recession, references to it have become commonplace on financial Web sites and in the reports of Wall Street analysts. Minsky’s hypothesis is well worth revisiting. In trying to revive the economy, President Bush and the House have already agreed on the outlines of a “stimulus package,” but the first stage in curing any malady is making a correct diagnosis.

Minsky, who died in 1996, at the age of seventy-seven, earned a Ph.D. from Harvard and taught at Brown, Berkeley, and Washington University. He didn’t have anything against financial institutions—for many years, he served as a director of the Mark Twain Bank, in St. Louis—but he knew more about how they worked than most deskbound economists. There are basically five stages in Minsky’s model of the credit cycle: displacement, boom, euphoria, profit taking, and panic. A displacement occurs when investors get excited about something—an invention, such as the Internet, or a war, or an abrupt change of economic policy. The current cycle began in 2003, with the Fed chief Alan Greenspan’s decision to reduce short-term interest rates to one per cent, and an unexpected influx of foreign money, particularly Chinese money, into U.S. Treasury bonds. With the cost of borrowing—mortgage rates, in particular—at historic lows, a speculative real-estate boom quickly developed that was much bigger, in terms of over-all valuation, than the previous bubble in technology stocks.

As a boom leads to euphoria, Minsky said, banks and other commercial lenders extend credit to ever more dubious borrowers, often creating new financial instruments to do the job. During the nineteen-eighties, junk bonds played that role. More recently, it was the securitization of mortgages, which enabled banks to provide home loans without worrying if they would ever be repaid. (Investors who bought the newfangled securities would be left to deal with any defaults.) Then, at the top of the market (in this case, mid-2006), some smart traders start to cash in their profits.

The onset of panic is usually heralded by a dramatic effect: in July, two Bear Stearns hedge funds that had invested heavily in mortgage securities collapsed. Six months and four interest-rate cuts later, Ben Bernanke and his colleagues at the Fed are struggling to contain the bust. Despite last week’s rebound, the outlook remains grim. According to Dean Baker, the co-director of the Center for Economic and Policy Research, average house prices are falling nationwide at an annual rate of more than ten per cent, something not seen since before the Second World War. This means that American households are getting poorer at a rate of more than two trillion dollars a year.

It’s hard to say exactly how falling house prices will affect the economy, but recent computer simulations carried out by Frederic Mishkin, a governor at the Fed, suggest that, for every dollar the typical American family’s housing wealth drops in a year, that family may cut its spending by up to seven cents. Nationwide, that adds up to roughly a hundred and fifty-five billion dollars, which is bigger than President Bush’s stimulus package. And it doesn’t take into account plunging stock prices, collapsing confidence, and the belated imposition of tighter lending practices—all of which will further restrict economic activity.

In an election year, politicians can’t be expected to acknowledge their powerlessness. Nonetheless, it was disheartening to see the Republicans exploiting the current crisis to try to make the President’s tax cuts permanent, and the Democrats attempting to pin the economic downturn on the White House. For once, Bush is not to blame. His tax cuts were irresponsible and callously regressive, but they didn’t play a significant role in the housing bubble.

If anybody is at fault it is Greenspan, who kept interest rates too low for too long and ignored warnings, some from his own colleagues, about what was happening in the mortgage market. But he wasn’t the only one. Between 2003 and 2007, most Americans didn’t want to hear about the downside of funds that invest in mortgage-backed securities, or of mortgages that allow lenders to make monthly payments so low that their loan balances sometimes increase. They were busy wondering how much their neighbors had made selling their apartment, scouting real-estate Web sites and going to open houses, and calling up Washington Mutual or Countrywide to see if they could get another home-equity loan. That’s the nature of speculative manias: eventually, they draw in almost all of us.

You might think that the best solution is to prevent manias from developing at all, but that requires vigilance. Since the nineteen-eighties, Congress and the executive branch have been conspiring to weaken federal supervision of Wall Street. Perhaps the most fateful step came when, during the Clinton Administration, Greenspan and Robert Rubin, then the Treasury Secretary, championed the abolition of the Glass-Steagall Act of 1933, which was meant to prevent a recurrence of the rampant speculation that preceded the Depression.

The greatest need is for intellectual reappraisal, and a good place to begin is with a statement from a paper co-authored by Minsky that “apt intervention and institutional structures are necessary for market economies to be successful.” Rather than waging old debates about tax cuts versus spending increases, policymakers ought to be discussing how to reform the financial system so that it serves the rest of the economy, instead of feeding off it and destabilizing it. Among the problems at hand: how to restructure Wall Street remuneration packages that encourage excessive risk-taking; restrict irresponsible lending without shutting out creditworthy borrowers; help victims of predatory practices without bailing out irresponsible lenders; and hold ratings agencies accountable for their assessments. These are complex issues, with few easy solutions, but that’s what makes them interesting. As Minsky believed, “Economies evolve, and so, too, must economic policy.” ♦


In Time of Tumult,Obscure Economist Gains Currency
Mr. Minsky Long Argued Markets Were Crisis Prone;
His 'Moment' Has Arrived
By JUSTIN LAHART
August 18, 2007

At its core, the Minsky view was straightforward: When times are good, investors take on risk; the longer times stay good, the more risk they take on, until they've taken on too much. Eventually, they reach a point where the cash generated by their assets no longer is sufficient to pay off the mountains of debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. "This is likely to lead to a collapse of asset values," Mr. Minsky wrote.

When investors are forced to sell even their less-speculative positions to make good on their loans, markets spiral lower and create a severe demand for cash [that can force central bankers to lend a hand]. At that point, the Minsky moment has arrived.

The worst of all worlds would be a stagflationary depression in which unemployment was high, wages were stagnant for the majority, and the price of essentials spiraled higher despite slack aggregate demand.

The Financial Instability Hypothesis by Hyman Minsky May 1992

An increasing complexity of the financial structure, in connection with a greater involvement of governments as refinancing agents for financial institutions as well as ordinary business firms (both of which are marked characteristics of the modern world), may make the system behave differently than in earlier eras. In particular, the much greater participation of national governments in assuring that finance does not degenerate as in the 1929-1933 period means that the down side vulnerability of aggregate profit flows has been much diminished. However, the same interventions may well induce a greater degree of upside (i.e. inflationary) bias to the economy.

It is our view that the only sustainable exit from this boom-bust cycle will be a systemic reform of the banking system so that it once again serves the real economy, and a return to the growth of real wages and a more equitable distribution of wealth in the country to foster aggregate savings and sustainable consumption.