Revisiting "Coin in the Fuse Box" 

Doug Nolan

September 17 – Wall Street Journal (Greg Ip): “Can words take the place of actions? The Federal Reserve hopes so. On Wednesday it issued a policy statement promising to get inflation above 2%. In their accompanying projections, officials indicated that would mean keeping interest rates near zero at least until 2024 and until unemployment falls to 4%. ‘This very strong forward guidance, very powerful forward guidance that we have announced today will provide strong support for the economy,’ Chairman Jerome Powell told reporters. To drive the point home, he used the word ‘powerful’ 10 times in the press conference.”

Powell’s hammering home “powerful” had me recalling ECB President Jean-Claude Trichet’s “never precommit.” “The European Central Bank never pre-commits on interest rate moves.” “We are never precommitted as regards the future level or path of policy.” “We are never precommitted and we can increase rates whenever we judge appropriate to do that.”

Powell is struggling to reinforce flagging Federal Reserve credibility. Trichet was focused on establishing credibility for the unproven European Central Bank. Powell is directly signaling to the markets the Fed’s resolute commitment to maintain (for years to come) the most extreme monetary stimulus. Trichet was essentially signaling to market participants not to bet on a particular policy course. The FOMC is saying wager freely on an extended period of ultra-loose policies.

With zero rates and $120 billion monthly Treasury and MBS purchases, along with other measures, the Fed has completely succumbed to inflationism. In contrast, pre-Draghi ECB doctrine was founded on well-tested traditional central banking and sound money principles.

It’s as if the CBB has a weekly mandate to remind readers of the abnormality of so much that these days passes for normal. Why was Trichet so adamant against markets betting on the course of monetary policy? Because such activities would add an element of instability and risk compromising ECB credibility. It would increase leveraged speculation, in the process spurring an unstable monetary backdrop. Over time this would bolster asset price inflation and propagate Bubbles. And, importantly, speculative Bubble dynamics would pose increasing risks to system stability and monetary policy flexibility. Maintaining financial stability and central bank credibility were dependent on the central bank’s powerful commitment to sound money.

“Sound money” and “inflationism” are such critical fundamental concepts that are these days little more than archaic terminology from a bygone era. Over the years, rising securities prices evolved into the Federal Reserve’s primary mechanism for system stimulus and reflation. The Fed has reduced the cost of borrowing for leveraged speculation to about zero. It has committed to indefinitely injecting $120 billion monthly into highly speculative markets, while essentially promising to boost these purchases as necessary to support financial asset prices and marketplace liquidity. Importantly, the Fed continues to aggressively promote speculation and financial leveraging.

Bloomberg’s Mike Mckee: 

“…In terms of the balance sheet, are you concerned that your actions are more likely to produce asset price inflation than goods and services inflation? In other words, are you risking a bubble on Wall Street?

Chairman Powell: 

“Yeah, so of course we monitor financial conditions very carefully. These are not new questions. These were questions that were very much in the air a decade ago and more when the Fed first started doing QE. And I would say if you look at the long experience of… the ten-year, eight-month expansion, the longest in our recorded history, it included an awful lot of quantitative easing and low rates for seven years. And I would say it was notable for the lack of the emergence of some sort of a financial bubble, a housing bubble or some kind of a bubble - the popping of which could threaten the expansion. That didn’t happen. And frankly, it hasn’t really happened around the world since then. That doesn’t mean that it won’t happen, and so of course it’s something that we monitor carefully. After the financial crisis, we started a whole division of the Fed to focus on financial stability. We look at it through every perspective. The FOMC gets briefed on a quarterly basis. At the Board here we talk about it more or less on an ongoing basis. So, it is something we monitor. But I don’t know that the connection between asset purchases and financial stability is a particularly tight one. But again, we won’t be just assuming that. We’ll be checking carefully as we go. And by the way, the kinds of tools that we would use to address those sorts of things are not really monetary policy. It would be more tools that strengthen the financial system.”

What about the connection between asset purchases and market speculation? In the 1960s Alan Greenspan was said to have commented the Great Depression was a consequence of the Fed having repeatedly placed “Coins in the Fuse Box”.

There are contrasting points of view. According to Powell, we have experienced a period of over a decade of QE (new Fed policy doctrine) “notable for the lack of the emergence of some sort of a financial bubble.” “The connection between asset purchases and financial stability” is not “a particularly tight one.”

A counter argument holds that the Fed (along with the ECB, BOJ, PBOC, BOE and others) has for over a decade been inserting “Coins in the Fuse Box” to ensure the juice continues to flow freely into Credit, market and asset Bubbles. Excesses have been allowed to mount unchecked.

System correction and adjustment mechanisms have been impeded. Financial and economic structural impairment has run long and deep. In short, it’s a backdrop with parallels to that which culminated in the 1929 Crash and Great Depression.

It’s been a slippery slope, accordant with the history of inflationism. Powell now resorts to double-digit wielding of “powerful” as the Fed attempts to communicate the essence of its new inflation-spurring regime.

My own view holds Fed credibility has already been irreparably diminished. When it comes to the Federal Reserve’s commitment to tighten monetary policy in the event of an upside inflation surprise, credibility has been lost. There is minimal credibility that the Fed will respond to asset Bubble risks to financial stability.

The Fed’s stated strategy of employing macro-prudential policies as first line defense against financial excess is unconvincing. For now, these credibility voids have minimal impact. Markets see little inflation risk on the horizon, while speculative markets are more than fine with the Fed’s neglect of its financial stability mandate.

From day one, this new inflation framework lacks credibility. Markets don’t believe central banks have much control over some nebulous consumer price aggregate. There is little confidence that the Federal Reserve will miraculously orchestrate a price level just nicely above its 2% target.

So-called Fed “credibility” today rests on faith that the Fed (and global central bankers) will sustain elevated securities prices and market Bubbles. “Whatever it takes” central banking with open-ended balance sheets ensures abundant and uninterrupted marketplace liquidity. In this regard, a huge Coin was jammed in the Fuse Box in March and April.

I’m the first to admit the Fed and market nexus appears virtually miraculous. The Fed’s early and aggressive “insurance” stimulus spurred surging securities prices in the face of deep economic contraction and a spike in unemployment.

And no reason to fret the old dynamic whereby rising loan losses and resulting tighter bank lending standards usher in an economic down-cycle. Not these days – not with markets having evolved to become the primary source of finance throughout the economy.

With the Fed’s powerful market-based stimulus and attendant dramatic loosening of financial conditions ensuring a rapid “V” recovery, there’s no fear of the type of festering Credit problems that would have traditionally incited a problematic tightening of system Credit.

I have a few issues with this miracle. As noted above, this policy process promotes asset inflation, speculation and Bubbles, while forestalling important system correction and adjustment. In short, this strange financial and policy apparatus abrogates crucial facets of Capitalism.

Bloomberg this week featured an article, “Why Liquidity Is a Simple Idea But Hard to Nail Down.” The always inciteful Mohamed El-Erian penned an op-ed, “Are Stocks Losing Some Liquidity Momentum?”

In the latest weekly data, M2 “money” supply surged another $112 billion to a record $18.577 TN. M2 was up $3.069 TN in 28 weeks, or about 37% annualized. Not a mention of this data as the Fed agonizes over consumer price inflation slightly below target. Can marketplace liquidity be an issue when the system is in the throes of runaway M2 growth?

What is driving this historic monetary inflation? Clearly, Fed balance sheet growth is a primary factor. But I believe there’s another key factor: speculative leveraging.

The expansion of securities Credit creates new financial claims (“liquidity”) that circulate through the financial system and into the real economy.

September 18 – Reuters (Kate Duguid): “Investors are gearing up for the year's record-breaking pace of corporate bond issuance to continue in the coming week… The past week has seen roughly $42 billion of high-grade debt come to market in 39 deals… The breakneck pace of fresh issuance illustrates how the Fed's late March pledge to backstop credit markets and its policy of holding interest rates near zero have spurred borrowing… Companies had already issued $1.7 trillion in debt through the end of August…, compared with $944 billion in the same period last year.”

In the wake of the Fed’s March move to backstop corporate bonds, how much of this year’s record issuance has been purchased by speculators employing leverage? How much corporate Credit is these days being funneled into Wall Street structured finance (i.e. CDOs, CLOs and such), again incorporating leverage? How much leverage is being used to purchase shares in corporate bond ETFs? For that matter, how much new leverage is finding its way into mortgage securities – as the Fed backstops this key marketplace with $40 billion of monthly buying?

Finance evolves over time – and Federal Reserve policymaking has clearly had a profound impact on financial innovation and evolution. I argued the Fed, GSEs and Treasury momentously altered market risk perceptions for mortgage-related finance – the “Moneyness of Credit” – that was fundamental to mortgage finance Bubble inflation. A decade ago, I warned Bernanke’s move to use the securities markets for system reflation had unleashed the “Moneyness of Risk Assets” – the perception that Fed backing elevated stocks and corporate Credit to the status of perceived safe and liquid instruments.

Post-mortgage finance Bubble policy measures were instrumental in the enormous expansion of the ETF complex. It was no surprise then that ETF illiquidity was a key aspect of March’s market dislocation - or that the Fed would be compelled to provide a liquidity backstop for this illiquidity flash point.

The Fed’s move to bolster the markets and ETFs this past spring spurred a tsunami of ETF flows, especially into corporate Credit. Moreover, the Fed’s aggressive measures (“Coins”) in December 2018, September 2019 and March/April 2020 profoundly altered the perception of risk versus reward opportunity in trading options and other derivatives. In short, after creating an enticing market environment for using derivatives to speculate on the market’s upside, the Fed’s dramatic pandemic crisis response made buying call options a can’t lose proposition.

I suspect options trading over recent months has had a profound effect on market prices, trading dynamics and overall liquidity – and I suspect derivatives-related leverage has become a key source of monetary fuel throughout the system – financial and in the real economy.

My view is the disregard for speculative leverage and resulting liquidity effects is the most dangerous flaw in contemporary central bank doctrine. When the Greenspan Fed moved to accommodate – and then underpinned - market-based finance, he unleashed a process that saw leveraged speculation take an increasingly prominent role in system liquidity creation. The LTCM crisis in 1998 foreshadowed the collapse of speculative leverage and financial crisis in 2008.

And for over a decade now the Fed has been putting “Coins in the Fuse Box” – adopting increasingly extreme measures specifically to quash de-risking/deleveraging dynamics. And with each new act of desperation – 2018, 2019 and 2020 – the Fed only stoked greater excess and speculative leverage.

I see the entire inflation-targeting doctrine as little more than a sham. This is not about CPI and inflation expectations. The Fed is trying to convince the marketplace it retains the power to sustain market and speculative Bubbles. And why not a more constructive market response to Wednesday’s statement and Powell press conference? Because markets at this point recognize Bubbles will be sustained only through an ongoing massive expansion of the Fed’s balance sheet – and Powell was somewhat timid with balance sheet details.

Moreover, when the Fed Chairman downplays financial stability risks, he does sow some market doubt he fully appreciates the degree of underlying market fragility. Will he be ready with another immediate multi-Trillion stimulus package in the event of a non-pandemic, non-economic free-fall financial market dislocation? And this gets to the Core Issue: Fed reflationary measures at this point stoke massive late-cycle speculative excess and leverage. This significantly exacerbates market fragility, ensuring the next major de-risking/deleveraging episode will require even greater Fed liquidity injections (central bank Credit inflation) and market support.

It’s reasonable to ask, “Where does it all end?” – with an equally reasonable answer, “with market dislocation and a crash”. All those Coins in the Fuse Box in 1929 contributed directly to the house collapsing in flames.

For now, Fed policies worsen inequality and social tension.

The Fed is clearly cognizant of these issues. Powell hopes to get back to a 3.5% unemployment rate and strong job gains for blacks, Hispanics, other minorities, and the less fortunate more generally. But what a challenge it is to explain this new inflation-spurring regime in the context of how it will assist the common citizen.

Yahoo Finance's Brian Cheung: “So it seems like a lot of the new inflation framework is about shaping inflation expectations. But the average American who might be watching this might be confused as to why the Fed is overshooting inflation. So what’s your explanation to Main Street, to average people what the Fed is trying to do here? And what the outcome would be for those on Main Street?”

Powell: “That’s a very important question, and I actually spoke about that in my Jackson Hole remarks... It’s not intuitive to people.

It is intuitive that high inflation is a bad thing. It’s less intuitive that inflation can be too low. And the way I would explain it is that inflation that’s too low will mean that interest rates are lower. There’s an expectation of future inflation that’s built into every interest rate, right? And to the extent inflation gets lower and lower and lower, interest rates get lower and lower.

And then the Fed will have less room to cut rates to support the economy. And this isn’t some idle…, academic theory. This is what’s happening all over the world. If you look at many, many large jurisdictions around the world, you are seeing that phenomenon. So, we want inflation to be -- we want it to be 2%. And we want it to average 2%.

So, if inflation averages 2%, the public will expect that and that’ll be what's built into interest rates. And that’s all we want. So we’re not looking to have high inflation.

We just want inflation to average 2%. And that means that you know, in a downturn, these days what happens is inflation, as has happened now, it moves down well below 2%.

And that means, as we’ve said before, that we would like to see and we will conduct policies so that inflation moves for some time moderately above 2%. So, these won’t be large overshoots and they won’t be permanent. But to help anchor inflation expectations at 2%.

So yes, it’s a challenging concept for a lot of people, but nonetheless, the economic importance of it is large. And you know, those are the people we’re serving. And you know, we serve them best if we can actually achieve average 2% inflation we believe. And that’s why we changed our framework.

What a tangled web they’ve woven.

Year-over-year headline CPI inflation has averaged 1.7% over the past five years (1.9% during the past four). Year-over-year CPI was up 2.3% in February, before pandemic forces pushed it as low as 0.1% in May.

It was already back up to 1.3% in August. Is all the Hullabaloo really about consumer inflation fractionally below target? And will this be viewed as reasonable by the average American?

US banks signal mounting concern over real estate lending

Surge in so-called criticised loans driven by upheaval in property sector

Robert Armstrong in New York


Boarded-up windows in the Nicolett Mall shopping district in downtown Minneapolis © CRAIG LASSIG/EPA-EFE/Shutterstock


US banks are increasingly worried about being repaid on loans secured against commercial property, as offices, malls and hotels continue to stand empty.

The darkening outlook of banks is laid bare by disclosures on so-called criticised loans, which are flashing warning signals about a borrower’s ability to pay.

Among the 10 banks with the largest increases, criticised loans rose by 62 per cent in aggregate in the second quarter, but criticised commercial real estate loans rose by 144 per cent, to $26bn, according to an analysis by the Financial Times.

The banks with the largest total increases include JPMorgan Chase, Bank of America and Wells Fargo, three of the four largest banks in the US by assets. Criticised loans at those banks are now equivalent to 9, 13, and 25 per cent of tier one equity capital — the core measure of a bank’s financial strength — respectively, according to S&P Market Intelligence.

“People are looking pretty closely at criticised loans, particularly CRE loans. Because they’ve looked around the city and noticed it’s pretty empty,” said Brian Foran, regional bank analyst at Autonomous Research. 

A criticised loan is considered equivalent of debt rated CCC or lower by a credit agency.

The dollar value of criticised loans jumped 42 per cent across the US banking sector as a whole in the second quarter, according to data gathered by Morgan Stanley. US banks have added $111bn to their loan loss reserves since the beginning of the year, according to the Federal Reserve.

Bar chart of Per cent showing Change in US banks criticised loans, Q2 2020

Bar chart of Q1-Q2 2020, per cent showing Change in criticized commercial real estate loans


The financial consequences of shutting swaths of the US economy to deal with coronavirus are still just becoming clear, as many hotels remain empty, shopping mall traffic is subdued and office workers remain at home.

After many tenants skipped rent payments, some commercial landlords are struggling to make mortgage payments at a time when the future profitability of their properties is in doubt.

Bankers emphasise that falling into a high-risk category does not necessarily mean that a loan will go into default or even become delinquent — and that even in the case of default, banks can be made whole if the loan is collateralised by a valuable property.

“The banks are betting hard that they will be fine because the loan-to-value ratio is [say] 50 per cent,” said Mr Foran. “But the problem is, that was the loan-to-value from January.”

The largest increase in criticised loans was at Buffalo-based M&T Bank, where almost 40 per cent of its loans are in commercial real estate, with a concentration in New York City.

Criticised loans at M&T soared 156 per cent in the quarter and criticised CRE loans at the bank almost quadrupled, to $3.2bn. Criticised loans are now equivalent to 55 per cent of M&T’s tier one capital.

The case of M&T shows the challenges in comparing results from different banks, however. M&T made the decision to automatically downgrade the loans of any borrower who received payment forbearance during the crisis. “I don’t know of any other bank that did it that way,” one bank analyst said.


Another layer of complexity is added by recent adoption of the “current expected credit losses” accounting standard, under which banks must estimate losses for the whole life of a loan. This requires multi-factor economic modelling, rather than the simple monitoring of current loan performance. Different banks use different models.

“With judgment driving reserves, not trends in credit, you get these disconnects between reserves and criticised loans, and from bank to bank,” the bank analyst said. “Take a bank like M&T — they say they are being proactive, but from the outside, you really have no idea.”

Investors are not taking any chances. M&T shares have fallen 38 per cent since February, about 10 percentage points more than US bank indices.

MacroView: Newton, Physics And The Market Bubble 


Lance Roberts


Summary

Historically, all market crashes have been the result of things unrelated to valuation levels.

Issues such as liquidity, government actions, monetary policy mistakes, recessions, or inflationary spikes are the culprits that trigger the "reversion in sentiment."

The financial markets always adapt to the cause of the previous "fatal crash."

Unfortunately, that adaptation won't prevent the next one. 

I have previously discussed the importance of understanding how "physics" plays a crucial role in the stock market. As Sir Isaac Newton once discovered, "what goes up, must come down."

Andy Kessler, via the Wall Street Journal, recently discussed a similar point with respect to the momentum in stock prices. To wit:

"Does this sound familiar: Smart guy owns stock in March at $200, sells it in June at around $600, but then buys it back in July and August for between $900 and $1,000. By September it's back at $200. Ouch. Tesla this year? Yahoo in 2000? Nope. That was Sir Isaac Newton getting pulled into the great momentum trade of the South Sea Co., which cratered 300 years ago this month. He lost the equivalent of more than $3 million today. Newton, whose second law of motion is about the momentum of a body equaling the force acting on it, didn't know that works for stocks too."

To understand what happened to the South Sea Corporation, you need a bit of history.

The South Sea History

In 1720, in return for a loan of £7 million to finance the war against France, the House of Lords passed the South Sea Bill, which allowed the South Sea Company a monopoly in trade with South America.

England was already a financial disaster and was struggling to finance its war with France. As debts mounted, England needed a solution to stay afloat. The scheme was that in exchange for exclusive trading rights, the South Sea Company would underwrite the English National Debt. At that time, the debt stood at £30 million and carried a 5% interest coupon from the government. The South Sea company converted the government debt into its own shares. It would collect the interest from the government and then pass it on to its shareholders.

Interesting Absurdities

At the time, England was in the midst of rampant market speculation. As soon as the South Sea Company concluded its deal with Parliament, the shares surged to more than 10 times their value. As South Sea Company shares bubbled up to incredible new heights, numerous other joint-stock companies IPO'd to take advantage of the booming investor demand for speculative investments.

Many of these new companies made outrageous, and often fraudulent, claims about their business ventures for the purpose of raising capital and boosting share prices. Here are some examples of these companies' business proposals (History House, 1997):

  • Supplying the town of Deal with fresh water.
  • Trading in hair.
  • Assuring of seamen's wages.
  • Importing pitch and tar, and other naval stores, from North Britain and America.
  • Insuring of horses.
  • Improving the art of making soap.
  • Improving gardens.
  • The insuring and increasing children's fortunes.
  • A wheel for perpetual motion.
  • Importing walnut-trees from Virginia.
  • The making of rape-oil.
  • Paying pensions to widows and others, at a small discount.
  • Making iron with pit coal.
  • Transmutation of quicksilver into a malleable fine metal.
  • For carrying on an undertaking of great advantage; but nobody to know what it is.


A Speculative Mania

However, in the midst of the "mania," things like valuation, revenue, or even viable business models didn't matter. It was the "Fear Of Missing Out," which sucked investors into the fray without regard for the underlying risk.

Though South Sea Company shares were skyrocketing, the company's profitability was mediocre at best, despite abundant promises of future growth by company directors.

The eventual selloff in company shares was exacerbated by a previous plan of lending investors money to buy its shares. This "margin loan" meant that many shareholders had to sell their shares to cover the plan's first installment of payments.

As South Sea Company and other "bubble" company share prices imploded, speculators who had purchased shares on credit went bankrupt. The popping of the South Sea Bubble then resulted in a contagion that spread across Europe.

Newton's Folly

Sir Isaac Newton, the brilliant mathematician, was an early investor in South Sea Corporation. Newton quickly made a lot of money and recognized the early stages of a speculative mania. Knowing that it would eventually end badly, he liquidated his stake at a large profit.

However, after he exited, South Sea stock experienced one of the most legendary rises in history. As the bubble kept inflating, Newton allowed his emotions to overtake his previous logic and he jumped back into the shares. Unfortunately, it was near the peak.

It is noteworthy that once Newton decided to go back into South Sea stock, he moved essentially all his financial assets into it. In general, Newton was intimately familiar with commodities and finance. As Master of the Mint, his post required him to make many decisions that depended on market prices and conditions.

The story of Newton's losses in the South Sea Bubble has become one of the most famous in popular finance literature. While surveying his losses, Newton allegedly said that he could "calculate the motions of the heavenly bodies, but not the madness of people."

History Never Repeats, But It Rhymes

Throughout financial history, markets have evolved from one speculative "bubble," to bust, to the next with each one being believed "it was different this time."

The slides below are from a presentation I made to a large mutual fund company.


Some common denominators between all previous bubbles and now.


The table below shows a listing of assets classes that have experienced bubbles throughout history, with the ones related to the current environment highlighted in yellow.


It is not hard to see the similarities between today and the previous market bubbles in history. Investors are currently chasing "new technology" stocks from Zoom (NASDAQ:ZM) to Tesla (NASDAQ:TSLA), piling into speculative call options, and piling into leverage. What could possibly go wrong?

Oh, by the way, the slides above are from a 2008 presentation just one month before the Lehman crisis.

The point here is that speculative cycles are always the same.

The Speculative Cycle

Charles Kindleberger suggested that speculative manias typically commence with a "displacement" which excites speculative interest. The displacement may come from either an entirely new object of investment (IPO) or from increased profitability of established investments.

The speculation is then reinforced by a "positive feedback" loop from rising prices, which ultimately induces "inexperienced investors" to enter the market. As the positive feedback loop continues, and the "euphoria" increases, retail investors then begin to "leverage" their risk in the market as "rationality" weakens.

The full cycle is shown below:

During the course of the mania, speculation becomes more diffused and spreads to different asset classes. New companies are floated to take advantage of the euphoria, and investors leverage their gains using derivatives, stock loans, and leveraged instruments.

As the mania leads to complacency, fraud and manipulation enter the marketplace. Eventually, the market crashes and speculators are wiped out. The government and regulators react by passing new laws and legislations to ensure the previous events never happen again.

The Latest Mania

Let's go back to Andy for a moment:

"When bull markets get going, investors come out of the woodwork to pile in. These momentum investors - I call them momos - figure if a stock is going up, it will keep going up. But usually, there is some source of hot air inflating stocks: either a structural anomaly that fools investors into thinking ever-rising stock prices are real or a source of capital that buys, buys, buys-proverbial 'dumb money.' Think of it as a giant fireplace bellows, an accordion-like contraption that pumps in fresh oxygen to keep flames growing." - Andy Kessler

We have seen these manias repeat throughout history:

  • In 1929 you could buy stocks with as little as a 5% down payment.
  • The 1960s and '70s had the Nifty Fifty bubble.
  • In 1987 it was a rising dollar, portfolio insurance, and major investments by the Japanese into U.S. real estate.
  • In 2000, it was the new paradigm of the internet and the influx of new online trading firms like E*Trade creating liquidity issues in Nasdaq stocks. Additionally, record numbers of companies were being brought public by Wall Street to fill investor demand.
  • In 2008, subprime mortgages, low interest rates, and lax lending policies, combined with a litany of derivative products inflated massive bubbles in debt instruments.

In 2020?

What about today? 

Look back at the chart of the South Sea Company above. 

Now, the one below.


See any similarities?

Yes, that's Tesla

However, you can't solely blame the Federal Reserve as noted by Andy:

"Most simply blame the Federal Reserve-especially today, with its zero-interest-rate policy-for pumping the hot air that gets the momos going. Fair enough, but that's only part of the story. Long market runs have always allured investors who figure they're smart to jump in, even if it's late.

Everyone forgets the adage, 'Don't mistake brains for a bull market.'"

This Time Is Different

As stated, while no two financial manias are ever alike, the end results are always the same.

Are there any similarities in today's market? You decide.

"From SPACs, or special purpose acquisition companies, which are modern-day blind pools that often don't end well. Today's momos also chase stock splits, which mean nothing for a company's actual value. Same for a new listing in indexes like the S&P 500. Isaac Newton could explain the math." - Andy Kessler

You get the idea. But one of the tell-tale indications is the speculative chase of "zombie" companies which are only still alive primarily due to the Federal Reserve's interventions.


Fixing The Cause Of The Crash

Historically, all market crashes have been the result of things unrelated to valuation levels. Issues such as liquidity, government actions, monetary policy mistakes, recessions, or inflationary spikes are the culprits that trigger the "reversion in sentiment."

Importantly, the "bubbles" and "busts" are never the same.

I previously quoted Bob Bronson on this point:

"It can be most reasonably assumed that markets are efficient enough that every bubble is significantly different than the previous one. A new bubble will always be different from the previous one(s). Such is since investors will only bid prices to extreme overvaluation levels if they are sure it is not repeating what led to the previous bubbles. Comparing the current extreme overvaluation to the dotcom is intellectually silly.

I would argue that when comparisons to previous bubbles become most popular, it's a reliable timing marker of the top in a current bubble. As an analogy, no matter how thoroughly a fatal car crash is studied, there will still be other fatal car crashes. Such is true even if we avoid all previous accident-causing mistakes."

Comparing the current market to any previous period in the market is rather pointless. The current market is not like 1995, 1999, or 2007? Valuations, economics, drivers, etc. are all different from cycle to the next.

Most importantly, however, the financial markets always adapt to the cause of the previous "fatal crash."

Unfortunately, that adaptation won't prevent the next one.

Yes, this time is different.


"Like all bubbles, it ends when the money runs out." - Andy Kessler

What the Loss of Ruth Bader Ginsburg Means for the Supreme Court

If President Trump gets to appoint a new Justice to the Court, the conservative takeover will last for a generation

By DAVID S. COHEN 

WASHINGTON, DC - AUGUST 30: Supreme Court Justice Ruth Bader Ginsburg, celebrating her 20th anniversary on the bench, is photographed in the West conference room at the U.S. Supreme Court in Washington, D.C., on Friday, August 30, 2013. (Photo by Nikki Kahn/The Washington Post via Getty Images)


This is hard. The country lost one of its all-time greats tonight. A woman who dedicated almost every second of her professional life to making this country better, more just, more equal. 

She worked until the very end. And on her death bed, she dictated to her granddaughter the following: “My most fervent wish is that I will not be replaced until a new president is installed.”

Why would she say this as her dying wish? 

Because she knew exactly what a Trump replacement Justice would mean — a conservative majority on the Supreme Court for decades; a rollback of women’s rights; the end of nationwide legal abortion; turning back the clock to the pre-civil rights era in anti-discrimination law; open season on election interference and voter suppression. 

The list could go on and on, but it boils down to one basic thing — a new Trump appointee would mean the Court will likely destroy everything Ruth Bader Ginsburg worked for in her lifetime.

Let’s start with the obvious — abortion. Earlier this summer, the Supreme Court voted to strike down a Louisiana abortion restriction by a vote of 5-4. But five Justices, including Chief Justice Roberts who had joined the Court’s four liberals (including Justice Ginsburg) in striking down the law, expressed serious doubts about protecting abortion in future cases. Both of President Trump’s appointments to the Court — Bret Kavanaugh and Neil Gorsuch — voted to uphold the law.

The Republicans have been salivating over replacing Ginsburg for just this reason — with a new Trump Justice who would presumably oppose abortion rights, there would be six votes against abortion on the Supreme Court. This would give wiggle room for one of those Justices, possibly Chief Justice Roberts, to defect on the ultimate issue of the fate of Roe v. Wade. 

It’s hard to imagine any other defections though — Justices Thomas and Alito are surefire votes against Roe. And in this summer’s case, Justice Gorsuch cast serious doubt on any abortion protective rulings, as did Justice Kavanaugh, despite what Senator Susan Collins says he told her during his confirmation hearings.

In other words, with a sixth conservative Justice on the Supreme Court, overturning Roe isn’t as certain as the sun rising in the east in the morning … but it’s pretty damn close.

Beyond abortion, a new Trump appointee would be devastating for civil rights. There would be a sixth vote for religious and moral exemptions from general laws, including anti-discrimination laws. There would be a sixth vote against protecting LGBT people under the Constitution. There would be a sixth vote against affirmative action. 

There would be a sixth vote for saying that sex discrimination under the Constitution isn’t protected because the authors of the Fourteenth Amendment were only thinking about race. These rulings would have vast impact for women, people of color, LGBT folks, people with disabilities, the elderly, the indigent, veterans, and more. And the impact would be in almost every walk of life — employment, housing, education, government services, just to name a few.

To be clear, none of these are as certain as Trump tweeting white supremacist memes. It’s possible that the two conservatives who joined the four liberals this summer to protect LGBT people under anti-discrimination law would continue to further LGBT rights, even with a new Trump appointee. But, it’s really hard to see that with a sixth conservative on the Court. 

It’s much more likely that a six-Justice conservative majority would either stick together on a reliable basis or have just one defector, providing a consistent conservative majority in almost every case.

And there’s more! Healthcare is also at stake. The Chief Justice has twice provided the fifth vote to uphold Obamacare at the Supreme Court. But the law’s fate is once again before the Court, with oral argument on a new challenge scheduled for November 10. 

If that case is heard with just eight Justices, the Chief joining the remaining three liberals would result in the law being struck down, because it would affirm the lower court ruling (which found the law unconstitutional). Or, the case will be re-scheduled and re-heard when there is the new Trump Justice, which would once again give the conservatives a likely majority to strike the law down, a conservative dream for years.

For those who remember the election of 2000, with the Supreme Court having to intervene in the notorious Bush v. Gore ruling, a new Trump Justice could tilt the Court in Trump’s favor come election season. With all the doubt the President is casting on the election already, barring a Biden landslide, many people think the outcome of the election could be determined by the Supreme Court.

When Ginsburg was on the Court, there was hope that Chief Justice Roberts would rise above partisanship and vote with the four liberals to protect the integrity of the election and thwart any Trump election shenanigans. 

But, if Ginsburg is replaced by a Trump conservative by the time election cases make their way to the Court, the Court would almost certainly rule in Trump’s favor, whatever the claims. Justices Thomas and Alito almost always tow the Republican party line, and three other Justices would owe their spot on the Court to Trump. 

It’s hard to imagine five votes for Trump wouldn’t be a foregone conclusion.

There are so many more issues at stake here — the environment, economic regulation, criminal justice protections, the death penalty. Basically every issue in American life eventually winds up before the Supreme Court. Make no mistake, before tonight, we had one of the most conservative Courts ever in this country’s history. But even with this ultra-conservative Court, there were still big liberal surprises this past year.

After Friday night, though, if President Trump gets to appoint a new Justice to the Court, liberal surprises will be another victim of the doom that is 2020. And given the age of the conservatives on the Court, it will be decades before liberals have hope to get any more surprises, let alone ever control the Court again.

Not all hope is lost though. As I’m writing this, Senators Murkowski and Collins have indicated they would not vote to confirm a Trump nominee unless he wins re-election. And Senator Grassley has previously indicated that he wouldn’t either. On the other hand, Senate Leader Mitch McConnell has put out a statement vowing to have a floor vote for a new Trump Justice.

So Justice Ginsburg’s dying wish is now in the hands of the small number of remaining Senate Republican “moderates.” If four of them join the 47 Democrats in opposing a Trump nominee, Justice Ginsburg will get her dying wish. If not, almost everything she worked for in her career is sure to be swept away in the coming years.

The Coming Global Technology Fracture

Today's international trade regime was not designed for a world of data, software, and artificial intelligence. Already under severe pressure from China’s rise and the backlash against hyper-globalization, it is utterly inadequate to face the three main challenges these new technologies pose.

Dani Rodrik

rodrik176_ANDREW HARNIKPOOLAFP via Getty Images_pompeoUShuawei


CAMBRIDGE – The international trade regime we now have, expressed in the rules of the World Trade Organization and other agreements, is not of this world. It was designed for a world of cars, steel, and textiles, not one of data, software, and artificial intelligence. Already under severe pressure from China’s rise and the backlash against hyper-globalization, it is utterly inadequate to face the three main challenges these new technologies pose.

First, there is geopolitics and national security. Digital technologies allow foreign powers to hack industrial networks, conduct cyber-espionage, and manipulate social media. Russia has been accused of interfering in elections in the United States and other Western countries through fake news sites and the manipulation of social media. The US government has cracked down on the Chinese giant Huawei because of fears that the company’s links to the Chinese government make its telecoms equipment a security threat.

Second, there are concerns about individual privacy. Internet platforms are able to collect huge amounts of data on what people do online and off, and some countries have stricter rules than others to regulate what they can do with it. The European Union, for example, has enacted fines for companies that fail to protect the EU residents’ data.

Third, there is economics. New technologies give a competitive edge to large companies that can accumulate enormous global market power. Economies of scale and scope and network effects produce winner-take-all outcomes, and mercantilist policies and other government practices can result in some firms having what looks like an unfair advantage. For example, state surveillance has allowed Chinese firms to accumulate huge amounts of data, which in turn has enabled them to corner the global facial recognition market.

A common response to these challenges is to call for greater international coordination and global rules. Transnational regulatory cooperation and anti-trust policies could produce new standards and enforcement mechanisms. Even where a truly global approach is not possible – because authoritarian and democratic countries have deep disagreements about privacy, for example – it is still possible for democracies to cooperate among themselves and develop joint rules.

The benefits of common rules are clear. In their absence, practices such as data localization, local cloud requirements, and discrimination in favor of national champions create economic inefficiencies insofar as they segment national markets. They reduce the gains from trade and prevent companies from reaping the benefits of scale. And governments face the constant threat that their regulations will be undermined by companies operating from jurisdictions with laxer rules.

But in a world where countries have different preferences, global rules – even when they are feasible – are inefficient in a broader sense. Any global order must balance the gains from trade (maximized when regulations are harmonized) against the gains from regulatory diversity (maximized when each national government is entirely free to do what it wants). If hyper-globalization has already proved brittle, it is in part because policymakers prioritized the gains from trade over the benefits of regulatory diversity. This mistake should not be repeated with new technologies.

In fact, the principles that should guide our thinking on new technologies are no different from those for traditional domains. Countries may devise their own regulatory standards and define their own national security requirements. They may do what is required to defend these standards and their national security, including through trade and investment restrictions. But they have no right to internationalize their standards and try to impose their regulations on other countries.

Consider how these principles would apply to Huawei. The US government has prevented Huawei from acquiring American companies, restricted its operations in the US, launched legal proceedings against its senior management, pressured foreign governments not to work with it, and, most recently, banned US companies from selling chips to Huawei’s supply chain anywhere in the world.

There is little evidence that Huawei has engaged in spying on behalf of the Chinese government. But that does not mean that it will not do so in the future. Western technical experts who have examined Huawei’s code have been unable to rule out the possibility. The opacity of corporate practices in China could well obscure Huawei’s links to the Chinese government.1

Under these circumstances, there is a plausible national security argument for the US – or any other country – to restrict Huawei’s operations within its own borders. Other countries, including China, are not in a position to second-guess this decision.

The export ban on US companies, however, is harder to justify on national security grounds than the ban on Huawei’s US-based operations. If Huawei’s operations in third countries pose a security risk to those countries, their governments are in the best position to assess the risks and decide whether a shutdown is appropriate.

Moreover, the US ban confronts other countries with severe economic repercussions. It creates significant adverse effects for national telecoms companies like BT, Deutsche Telekom, Swisscom, and others in no fewer than 170 countries that rely on Huawei’s kits and hardware. Perhaps worst hit are poor countries in Africa that are overwhelmingly dependent on the company’s cheaper equipment.

In short, the US is free to close its market to Huawei. But US efforts to internationalize its domestic crackdown lack legitimacy.

The Huawei case is a harbinger of a world in which national security, privacy, and economics will interact in complicated ways. Global governance and multilateralism will often fail, for both good and bad reasons.

The best we can expect is a regulatory patchwork, based on clear ground rules that help empower countries to pursue their core national interests without exporting their problems to others. Either we design this patchwork ourselves, or we will end up, willy-nilly, with a messy, less efficient, and more dangerous version.


Dani Rodrik, Professor of International Political Economy at Harvard University’s John F. Kennedy School of Government, is the author of Straight Talk on Trade: Ideas for a Sane World Economy.

Eternal Brexit

By: George Friedman



In 2016, the British government called for a referendum on whether the United Kingdom should remain a member of the European Union. The British people voted to leave. Since then, there has been a struggle in Britain to reverse the decision and a struggle between Britain and the EU on the terms of the departure.

It’s now 2020, and the process still isn’t finished. Given that the EU is based merely on a treaty – not a federation – sovereignty is a matter for individual states, not the “government” in Brussels. Treaties are arrangements between nations, not a merger of nations, and therefore are reversible.

Since we are about to see a new and presumably final round of negotiations on the divorce, with the EU now calling for a rapid resolution, even as the Irish question is now the blocker, the real issue is how this matter has dragged on so long. To anyone who has been divorced or seen one, it makes sense: Divorces are almost always filled with rage, recrimination, desires to inflict pain and sometimes the desire that the old affection be resurrected.

The children are made pawns. Friends must choose sides. The difference, of course, is that Britain’s relationship to the EU is simply a matter of national interest and not the result of a love affair. Britain and the EU lived together when they had to, but they never married. And so the lawyers continue to meet as each side creates more barriers to an amiable disengagement.

The first barrier to the separation was within Britain. The technocratic classes and the financial community took it for granted that Brexit would be rejected by the voters. When it wasn’t, they had two choices: face the fact that they had misunderstood their country, or label the vote flawed and the result of ignorance on the part of those who voted for withdrawal.

Naturally they chose the latter, a decision that is primarily responsible for Brexit’s delay. If the ignorant voted for Brexit, all they needed was a little education in the error of their ways, or so the thinking went. The best strategy, then, was to delay Brexit and persuade the country that Brexit would be catastrophic so that the government could reverse the vote.

The problem was that the technocracy and the financial community were confusing their interests with those of the country as a whole. Free trade had benefitted many, but it had also left the industrial classes struggling as low-wage countries had access to the British market. The result was a near depression in the industrial heartland of Britain.

As in other countries, those who benefitted from free trade were either indifferent or mostly ignorant of the price others were paying. They never imagined they would lose the referendum, but then they didn’t know how many unemployed industrial workers there were.

A second barrier concerned national sovereignty, particularly on immigration. The enlightened elite felt a moral obligation to help immigrants. They were in lockstep with the elite of the European continent on this. Of course, the immigrants would not be living with the elites in their neighborhoods.

Immigrants live in low-cost housing, the same kind that the industrial class has lived in since its decline. The idea that immigration could not be blocked under EU rules meant not only a loss of national sovereignty but a burden to be uniquely carried by those who have lost the most.

The irony was that, historically, the political factions that championed the interests of the industrial working class and were hostile to the financial elite found themselves with the opposite stance: The industrial working class was now perceived as reactionary and racist, while the financial and technocratic elite was seen as enlightened.

If opposition to Brexit was enlightened, then the vote could be reversed once the rest of the country understood as much. Hence the strategy to reverse the vote and reaffirm British commitment to the EU. This continued until the election of Boris Johnson settled the question.

The EU, meanwhile, did what it could to make Brexit unpalatable with a two-pronged approach. The first was to make it appear that Brexit would be financially catastrophic for Britain and relatively inconsequential to the EU. The second prong was to make the negotiations as difficult as possible, setting terms as onerous as possible and difficult for Britain to accept.

The irony was that if Brexit was of so little concern to the EU as it portrayed, then the seemingly inflexible stance it took made no sense. In truth, losing free access to the second-largest economy in Europe was enormously important, and bargaining positions notwithstanding, some accommodation was essential.

The driving force in this strategy was an implicit alliance between anti-Brexit Britons and the EU. Both badly wanted to keep Britain in the EU, and the actions of each were meant to help the other. A rigid negotiating position by Brussels made a manageable Brexit seem impossible, and might strengthen the hand of anti-Brexit British. At the same time, the constant maneuvers to reverse Brexit strengthened Brussels’ hand since they were dealing with what might be a declining faction in Britain. Together, these two factions might break the back of Brexit.

The strategy failed, of course, because neither faction could recognize or concern itself with the price the British industrial class was paying. Both expected this class to weaken, but in fact, the faction remained intact and even attracted others. The lower class movements, labeled right wing by the elite, became more powerful and more extreme. The British problem became the European problem, same as it ever was.

We are now entering what seems to be the final phase. Brussels appears to be bitter at how long the process has taken, and the chief EU negotiator, who had been threatening and unrelenting in his negotiating strategy, appears to have been removed from his position. In other words, the EU is no longer the issue. Once Britain had decided to leave, there was nothing the EU could do except delay.

The issue now is the historical British issue: Ireland. Ireland is in the EU and will stay. It wants free trade with Northern Ireland. Northern Ireland is part of the U.K. and therefore will leave the EU. The EU cannot permit free trade between an EU member and a part of Britain since that will turn into free trade with England, which is not nearly as much a problem for Ireland or Britain as it is for the EU. The EU is balking, and Britain is leaving. That may reignite the political conflict in Northern Ireland.

Marriages are wonderful things. Divorces are agonizing things for all involved. This is particularly relevant when the couple has merged as completely as a good marriage requires. The lesson for nations is that all alliances end in divorce. And the more focused and limited, the less agonizing the inevitable is. In a marriage, all are one, or should be.

In a political arrangement that is never the case. It’s nothing more than nations pursuing their national interest. Until death do us part does not apply to nation-states.

No gloves, no masks: Venezuela’s exposed health workers

Medics are dying in large numbers from Covid-19 as they work with minimal protective equipment

Vanessa Silva in Caracas and Gideon Long in Bogotá


A cancer patient at the Luis Razetti Oncology hospital in Caracas. The hospital stopped admitting new cancer patients at the start of the lockdown in March to curb the spread of coronavirus © AP



José Manuel Olivares begins his press conference with a roll call, reading the names of the Venezuelan health workers who have died from coronavirus. It takes him a while. There are 115 people on his fast-expanding list.

The dead include nurses from the western state of Zulia and from Delta Amacuro at the mouth of the Orinoco river; doctors from the coastal state of Vargas and from Apure, in the southern jungle; biomedics, radiologists and pulmonologists; a gastroenterologist from the eastern state of Monagas, drafted in to help his colleagues.

“These are doctors who will never again make a diagnosis, nurses who will never again administer medicine,” said Dr Olivares, a member of congress who is in Bogotá having fled Venezuela in 2018. “They are Venezuelans who are no longer with us and [President] Nicolás Maduro is to blame for that, having destroyed the health system.”

According to the Pan American Health Organization, in Latin America alone, 570,000 medics have contracted Covid-19 and 2,500 have died. “They are working under more stressful conditions than any of us could imagine,” Carissa Etienne, Paho’s director, told reporters recently.

But while medics in most countries can count on at least basic personal protective equipment, doctors and nurses in Venezuela often work with the bare minimum. 

Mauro Zambrano, a health worker and union leader, says that of the 16 hospitals he monitors in Caracas, nine have no masks or gloves and seven no clean water. Most have no bleach and none has disinfectant or soap.

A doctor at a hospital in the west of Caracas, speaking to the Financial Times on condition of anonymity, said his clinic has had to improvise throughout the pandemic. “Everyone has to bring their own gel and protective equipment,” he said.


Protective gloves dry in the sun at a hospital in Caracas © Bloomberg


Medical staff have also been persecuted.

In April, Andrea Sayago, a bioanalyst in the state of Trujillo, carried out tests on the first patient diagnosed with Covid-19 at her hospital. She alerted colleagues via WhatsApp. The next day, according to her lawyers, hospital directors pressured her to resign, saying her message amounted to “terrorism”.

She quit, only to be arrested by Venezuela’s intelligence service, the Sebin. Her lawyers say they held her for two days. Five months later, she is still under house arrest. She told the FT via WhatsApp that she could not comment on her case because it was before the courts.

“In Venezuela today, you can’t even share a private message criticising the Maduro government via WhatsApp without fear of being prosecuted,” said José Miguel Vivanco, director of Human Rights Watch Americas.


City crew disinfect a wall with a mural of former president Hugo Chávez in the Petare neighbourhood of Caracas © Bloomberg


The Maduro government says the pandemic is under control.

It has registered 52,000 cases in a country of 29m people, and a barely credible death toll of 420. That is 14 deaths per million people, far lower than in any other big Latin American nation. In Colombia the figure is 404 per million, in Brazil 586 and in Peru 890.

The regime says it has carried out 1.8m tests for Covid-19. What it fails to say is that almost all are rapid tests, not the more reliable molecular (PCR) tests that most countries use for their official figures. Only two laboratories in Venezuela are authorised to process PCR tests. Colombia has 81. Chile and Argentina have more than 100 each.

“In order to manipulate the figures, the regime has centralised PCR testing, and that’s the only test that’s worth considering for serious diagnosis,” said Ricardo Alfonzo, a surgeon in Caracas. “The rapid test is no good for diagnosis, it’s only useful for patient follow-up.”

Dr Alfonzo, who treats cancer patients, recalled the situation in his hospital as cases started to rise. “There were no beds, either in intensive care or on ordinary wards,” he said. “They were treating people in chairs.”

He himself was infected with the virus and spent 10 days in hospital. “My PCR test result came back yesterday,” said the robust 69-year-old. “It took three weeks! I’ve already recovered!”

Tackling the pandemic in these conditions has taken its toll.

“I feel drained, physically, mentally and emotionally,” said Karina Suárez, a 28-year-old doctor in the western state of Táchira. “I’ve watched three of my patients die without being able to do anything.”

No one knows how many people have died from coronavirus in Venezuela, and no one will. Mr Olivares said he had logged nearly 800 deaths — twice the official figure, but he said the true number could easily be two or three times higher.

Six senior government figures have had Covid-19, suggesting that at least among the Socialist party elite it is widespread. One, Caracas governor Darío Vivas, died of it.

But as in so many other areas of life in Venezuela, reliable data are scarce. The government did not respond to the FT’s requests for information.

As the pandemic continues to reap its toll, heartbreaking stories are told of relatives and friends who have died and who might have been saved had the health system been in better shape.

Dr Suárez recalled a case where she was treating a patient on one floor while a ventilator was available on another. The hospital lift was broken. She was unable to bring the ventilator downstairs or take the bed-bound patient upstairs.

“We just had to stay with him while he died,” she said. “These are the things that get to you.”