The Ego/Self-System Part I: A Historical Perspective

Article by Robert F. Steele, MA


The ego/self-system is a large, complicated and dynamic system, and examining it requires a series of articles in order to gain a wider understanding of its elements and dynamics. And, as the title implies, the ego cannot be separated from the self. They form a system, the exploration of which has been added to and changed by different disciplines over the past century, and recently, new information from neuroscience has brought about dramatic additions and changes to these old concepts. However, even though much uncertainty remains concerning consciousness, ego has been mapped out to some degree. I think it will be valuable to look closely at past and current positions to see if a working model of the ego can be assembled. Major questions will arise as the subject is explored. Is ego dangerous or helpful? Does it add to our lives, or is it a dangerous psychological prison? Is it a collective or individual system or both? How about free will and self-determination; are they real?

Perhaps, in the end, the biggest question will concern trying to find out who we actually are. The materials presented throughout this series are intended to be stimulative and provocative, to help readers go deeper within themselves. There is no intention to present an interpretation of Krishnamurti’s position regarding ego. What may be interesting, though, is to discover points of intersection, as well as departure, concerning the different perspectives presented.

Development of Ego as a Concept

The Freudian Ego

It was not until Sigmund Freud at the start of the twentieth century used the term “ego” that it became part of a dynamic self-system. Before his views reached print, probably most people throughout history did not question the self’s reality and probably also thought of it as homogenous. Freud, however, proposed a system composed of id, ego, and superego, where ego is the conscious and subconscious sense of self that works out a mediation between the id as a repository of primal urges, especially aggression and sexual demands, and the super-ego as a repository of cultural values and conscience. “The ego represents what we call reason and sanity, in contrast to the Id which contains the passions” (Freud, 1952, Major Works). This is a system always under a stability challenge from the interaction of the three elements’ different demands and, when in an unstable condition, becomes the fertile psychological ground for neurotic and psychotic illnesses. “Neurosis is the result of a conflict between the ego and the id, whereas psychosis is the analogous outcome of a similar disturbance in the relation between the ego and the external world” (Freud, 1973, Abstracts of the Standard Edition of the Complete Psychological Works of Sigmund Freud). Sexuality as the main driver of human impulses has been widely discredited and replaced by a much more complex view. However, Freud was truly revolutionary in seeing the self as composed of conflicting conscious and subconscious elements.

Freud’s daughter, Anna, added to his system via her book Ego and the Mechanisms of Defense, which proposed that there are specific and identifiable techniques used by the mind at both conscious and subconscious levels to protect self-regard. It is important to note that these techniques are essentially reality distortions.

Examples include denial, which is a refusal to see reality or projection where one’s faults are ascribed to others. There are many others, and they are fascinating, making Anna’s work worth reading. Later, George E. Vaillant expanded upon the topic of defense mechanisms in his 1977 work titled Adaptations to Life. This view takes the position that ego is inescapable and is absolutely necessary for the maintenance of mental health, even though it distorts reality. “The concept of the ego conveys the mind’s capacity to integrate inner and outer reality, to blend past and present, and to synthesize ideas with feelings” (Vaillant, 1993, p.7). Vaillant comments on the defense mechanisms to say: “Defense mechanisms are for the mind what the immune system is for the body. … If we do not unconsciously distort inner and outer reality, we are condemned to anxiety and depression.” (Vaillant, 1993, p. 11). Psychotherapy, when applied from this position, basically aims to strengthen and heal a suffering ego as if it were an ailing organ in the body and also implies that ego distortions are of no particular concern.

What we are going to do is to learn about ourselves – not according to the speaker, or to Freud, or to Jung, to some analyst or philosopher – but to learn actually what we are. If we learn about ourselves according to Freud we learn about Freud, not about ourselves. To learn about one self, all authority must come to an end, all authority – whether it be the authority of the church or of the local priest, or of the famous analyst, or of the greatest philosophers with their intellectual formulas, and so on. So the first thing that one has to realize when we become serious, demanding a total revolution within the structure of our own psyche, is that there is no authority of any kind.

That is very difficult, for there is not only the outward authority, which one can easily reject, but there is inward authority; the inward authority of one’s own experience, of one’s own accumulated knowledge.

– Krishnamurti

The Ego/Self-System Part I: A Historical Perspective

Ernest Becker

Freud’s views on ego became gospel and hold sway even today, especially in the sense of it being a perfectly legitimate and acceptable aspect of human life. But a major challenge to ego formulation came from psychiatrist Ernest Becker in the 1970s. He wrote a book titled The Denial of Death, which quickly became a hit among university psychology students. Becker decided that sexuality, as Freud’s driver for the ego system, was inadequate for explaining the intensity and persistence of the ego. He proposed that a fear of death boiled just below the surface of consciousness and threatened to erupt at any time, thus prompting the ego’s continuous attempts at denial and control via the use of defense mechanisms. “Becker concluded that human activity is driven largely by unconscious efforts to deny and transcend death,” according to Solomon, Greenberg and Pyszczynski in their book, The Worm at the Core , who go on to quote Becker: “We build character and culture,” Becker told Sam Keen, “in order to shield ourselves from the devastating awareness of our underlying helplessness and the terror of our inevitable death.” (2015, Amazon loc. 76). Next, Becker indicates that this psychological shield called self/ego has serious negative consequences. He agrees with Freud and Vaillant that the system distorts reality, but he then goes on to disagree with them by proposing that the system is basically a form of insanity.

“… everything that man does in his symbolic world is an attempt to deny and overcome his grotesque fate. He literally drives himself into a blind obliviousness with social games, psychological tricks, and personal preoccupations so far removed from the reality of his situation that they are forms of madness – agreed madness, shared madness, disguised and dignified madness, but madness all the same.” (Becker, 1973, p. 27).

Furthermore, this “madness” not only provokes individual problems but also gains great strength when ego combines to merge into group-shared belief systems that can inflict themselves not only upon other humans but also upon the world in general.

“If we had to offer the briefest explanation of all the evil that men have wreaked upon themselves and upon their world since the beginnings of time right up until tomorrow, it would be not in terms of man’s animal heredity, his instincts and his evolution: it would be simply in the toll that his pretense of sanity takes, as he tries to deny his true condition.” (Becker, 1973, p. 29).

Becker died at age 50 in 1974, and conventional psychiatry gave a sigh of relief and proceeded on its way. He did not live long enough for his ideas to be tested, which made it easier for them to be disregarded. However, a small but dedicated group of professional followers took up his cause and decided to put his propositions to the test in a series of sociological studies. The result was a book titled The Worm at the Core: On the Role of Death in Life by Solomon, Greenberg, and Pyszczynski. Their research supported Becker in test situations. “So after being reminded of death, we react generously to anyone or anything that reinforces our cherished beliefs, and reject anyone or anything that calls those beliefs into question.” (2015, Amazon loc. 314). Conversely, when reminded “… we react to criticizing and punishing those who oppose or violate our beliefs, and praising and regarding those who support or uphold our beliefs.” (2015, Amazon loc. 332).

This research supports an extension to the self/ego system in that the system now flows between individuals and outside groups in a complex way, depending on whether the individual is an insider or outsider of a group. For Freud, ego problems belonged to the individual, but for Becker, conflict expands from only being inter-psychic to also include intrapsychic conflict, and this new element is propelled by shared beliefs as an important part of the ego/self-system. “First, we human beings are driven to protect our self-esteem. Second, we humans strongly desire to assert the superiority of our own group over other groups.” (2015, Amazon loc. 91). The image of the self is created and sustained by a reciprocal flow of expressed beliefs between the individual and the membership group as a whole, or as a sustained disagreement struggle with outside groups.

The beliefs themselves are actually mental constructions forming the members’ sense of reality. Beliefs are composed of standards and values that, when boiled down, form descriptions of how the group and its members think things are; they are platforms for a system of valuation, judgment, hierarchy; they issue behavior that bestows varying amounts of self-esteem upon its members and scorn upon outsiders. Thus, group standards and values form the mold that shapes who we come to think we are. This forms the basis of emotional and cognitive psychological reactions which, in turn, produce behavior. I call this congruence, and it is the fit between the sense of inner and outer reality views. But, it is a fit that needs maintenance and defense. We seek to reinforce our attitudes and beliefs with the connections we make with the outer world, as well as the judgments we make concerning that outer world. As for behavior, belief dominated views are a basis for judging people and things; they form the basis of whom we seek out and whom we avoid. Thus, inner and outer reality views must remain reasonably consistent for both thoughts and emotions to provide a sense of security. The border between congruent sense-of-reality pieces must not only be logical but must also feel emotionally correct by bestowing a feeling of self-satisfaction and security within the group. Thus, the interlocking congruent beliefs of the individual and the group form an ego system that transcends the life of the individual as the beliefs are passed to new generations. (Solomon, Greenberg, Pyszczynski, 2015).

Any conclusion or hypothesis – Individualism or Collectivism, Capitalism or Socialism, or Communism, Reincarnation, etc. – is a belief. By accepting a belief, you exclude all other forms of thinking. Belief in God does not mean understanding God. A mind tethered to a belief, hypothesis or conclusion – whether based on its own experience or the experience of others – cannot go far; it is not free but conditioned. Therefore, belief is a hindrance to understanding.

– Krishnamurti

Becker’s self/ego system is a defense against uncertain and uncontrollable aspects of life, with death being the ultimate unsolvable problem confronting our deep and ancient DNA’s imperative for survival. This is the ultimate conundrum for all of humanity. In this sense then, Becker goes far beyond the sexual, cultural conflicts presented by Freud. He has come upon a core problem common to all, and the ancient solution has brought about the ubiquitous invention of self and ego in all of its endless variations of belief. He then goes on to say that beliefs put group/individual assemblies into conflict when biological survival is equated with group-belief survival. Life and death situations, when the ego is added into the survival equation, expand from fear laden concerns about physical survival to include fear laden concerns about psychological survival. The two have the same fear basis. Ego then is, in its whole, a defense system against memory held fear that uses psychological defense mechanisms to defend core beliefs, behaviors and lifestyles. So, it is implied that if one wants to surrender core beliefs, one must enter a no man’s land where one is unsure of inner and outer reality and there is a sense of the possibility of being overwhelmed by one’s fears.

“When people lose confidence in their core beliefs, they become literally ‘dis-illusioned’ because they lack a fundamental blueprint of reality. Without such a map, there is no basis for determining what behaviors are appropriate or desirable, leaving no way to plot a course to self-esteem” (Solomon, et. al., 2015, p. 914).

The supposition here is that the blueprint of reality is an illusion and its loss can bring about a psychological collapse. Becker’s views seem to bring psychology much closer to Krishnamurti’s definition of ego. I have never found a reference indicating Becker read Krishnamurti, but he certainly presents the ego/self as something much more ubiquitous and comprehensively dangerous than the Freudian view, which is in alignment with Krishnamurti’s position that the ego/self is a universal human invention prompted by and maintained by fear, which blinds us to our true condition and the solutions to the problems generated by the ego/self-system across the globe.

Meditation really is a complete emptying of the mind. Then there is only the functioning of the body; there is only the activity of the organism and nothing else; then thought functions without identification as the ‘me’ and the not-me. Thought is mechanical, as is the organism. What creates conflict is thought identifying itself with one of its parts which becomes the ‘me’, the self and the various divisions in that self. There is no need for the self at any time. There is nothing but the body and freedom of the mind can happen only when thought is not breeding the ‘me’. There is no self to understand but only the thought that creates the self.

– Krishnamurti

When a group forms beliefs, these beliefs can set the group against outsiders holding differing views and beliefs. And tolerance between groups, like beauty, is only skin deep, because if a group’s beliefs are at odds with another group’s core beliefs, then the very existence of the outsider threatens to unmask the unreality of those beliefs that keep uncertainty and fear at bay. If there is enough physical and psychological security to go around, tolerance might be temporarily sustainable. It always helps, too, if the believer can maintain a smug sense of superiority over outsiders and see them as simply misguided. But that, of course, can motivate a group’s conversion efforts. Rather than killing them, let’s just kill their beliefs; once again, we will be safe and our victory proves we are right, and in that righteousness strengthens our beliefs. I am not just referring only to religious beliefs here, but also political, lifestyle and economic beliefs, among others. The outer threat is the communist or capitalist or socialist, the liberal or the conservative, and anyone who does not want to acquiesce to the in-group’s beliefs. A sense of superiority allows for the domination, exploitation or destruction of others, or the destruction of Nature, and so forth.

Congruence then does not just imply a form-fit connection with those with whom I agree and share a lifestyle, but it can be also a fit with those I disagree with. An adversarial fit creates a mutual relationship of fear, distrust, loathing and disregard, and, in so doing, defines and identifies both sides. Both puzzle pieces in this case need each other as a way of locating fears and uncertainties in an identifiable outer location. By locating the threat, there is something to work with, to attempt to change or destroy in order to make things right. Having someone outside to blame is so much better than vague feelings of inner insecurity and that gnawing sense of vaporous uncertainty haunting every day from within, saying maybe something is wrong with us. If the threat is outside, there is an opportunity for change without challenging the sense of who we are. But, if inside, that is as a much bigger dilemma that threatens to strip away identity’s psychological comforts. Furthermore, locating the threat as outside can be enjoyed by both sides of the conflict’s congruent fit. This is a relationship formed by the same defense mechanisms used at the individual level. In an odd but real sense, an individual or group’s adversaries are also an intimate and desired part of the ego’s need for invidious comparisons, as well as a need for drama and struggle as a preoccupation.

The Ego/Self-System Part I: A Historical Perspective


Krishnamurti began his independent speaking career in the late 1920s during Freud’s ascendency, and from the onset, he took a singular and radical position concerning the nature of the self, the condition of the world and possible remedies for problems in the human world. He said, “You are the world and the world is you,” and that “you” was the source of a great deal of suffering for both individuals and for humanity in general. He rejected the popular position that the application of new outward social and political ideas would solve those problems, including psychotherapy. For many decades, Krishnamurti was a voice in the wilderness who gathered a few ardent followers, while the rest of the world went about fighting an economic depression and a world war. After the victory, optimism flew skyward and the United States was at its zenith. The mood was that the U.S. had all the answers and that our formula for democratic capitalism made us superior. It was a buoyant, iconoclastic and patriotic time and, being American, it was also the time of the “rugged individualist” and “the self-made man” who could solve any problem. Krishnamurti’s position, which he adhered to without waver, was fundamentally different. His view was that the self made us somehow universal and that we were all responsible for many intransigent human problems because they stemmed from that self. As such, the only possible answer had to lie within. Logically, then, the only possible solution and starting place was a journey.

So this is the first thing to realize: that it is absolutely essential to know yourself, otherwise you have no basis for thought at all. You may be very erudite and have a big position, but that is all nonsense as long as you do not know yourself, because you will be walking in darkness.

To understand yourself there must be an awareness, a watchfulness, a state of observation in which there is not a trace of condemnation or justification; and to be in that state of observation without judging is an extraordinarily arduous task, because the weight of tradition is against you; your mind has been trained for centuries to judge, to condemn, to justify, to evaluate, to accept or deny. Don’t say “How am I to get rid of this conditioning?”, but see the truth that if you want to understand yourself, which is obviously of the highest importance, you must observe the operation of your own mind without any condemnation or comparison.

– Krishnamurti

It would not be until the 1960s that cracks in the American Dream would start to appear. The Vietnam War, industrial pollution, racism and the male domination of women gained attention, along with Becker and a book called The Limits to Growth, a study by scientists that suggested a civilization based on growth was inherently unstable and unsustainable. It was the beginning of doubt concerning the nature of the world that we had so recently assembled. It was also a time of greatly expanded attendance at Krishnamurti’s talks. I was one of the persons there, and it might be hard for younger people to imagine the impact of this man’s words when he proposed that there was a fundamental problem in the operation of human consciousness. After all, my generation had grown up being told our nation had all the answers and all we had to do was to give ourselves to this national belief and lifestyle system. Join up, become educated to serve capitalism, or join the military and save democracy in Vietnam. What a relief to finally hear someone say that what we were offered as answers were not answers at all, that beliefs were dangerous and part of the problem and that inner freedom was essential both for looking at the problems as well seeking answers. The proposed answers from the various belief centered organizations were actually growing problems in disguise, offered by glib promoters of belief and manipulators of public opinion.

Now, decades after Krishnamurti’s death in 1986, humanity is even more deeply fractured and mired in problems. Our world population has doubled, and there are some, especially scientists, saying we are perched on a precipice, as we face a deteriorating global environment and increasing economic, political and social instability. The answers proposed and initiated after the Second World War are increasingly spawning dangerous problems. Krishnamurti’s proposal still remains. Is the core of the problem with us, each of us, and is the only hope to a solution to undertake a journey within to carefully examine this strange phenomenon called self and ego?

In the next section, we will investigate what the very new science of the brain has to say concerning whether the self is a real physical location in the brain or not, and how the brain creates its reality. Evidence may have been gathered from this research that can shed light on the nature of self and if it is truly as dangerous as Krishnamurti proposed.

Robert is a retired mental health counselor and lifetime student of Krishnamurti.

A bull market in bluff: why guff and baloney are on the rise

Even if they avoid the jargon trap, innovators and leaders find the temptation to talk crap strong

Andrew Hill

It is nigh impossible trying to stem the tide of guff swamping business © Getty

Bullshit is having a moment. From obfuscating jargon to the careless perpetration of untruths and exaggerations, the BS quotient seems to be rising.

Such is our expectation of being bullshitted that books now declare they are free from taint on their covers. David Rowan’s Non-Bullshit Innovation and Chris Hirst’s No Bullsh*t Leadership (some publishers are coyer than others about the B-word) are both out this month, and at least two new “no bullshit” guides will join the groaning self-help shelves this year.

Academia has also been having its say. Philosopher Harry Frankfurt’s famous 1986 essay “On Bullshit”, reprinted to bestselling effect in 2005, was an early example of academic interest in the phenomenon.

The most recent is a discussion paper from the Institute of Labor Economics with the irresistible title “Bullshitters. Who Are They and What Do We Know about Their Lives?”

John Jerrim, Phil Parker and Nikki Shure mined a 2012 survey of English-speaking 15-year-olds conducted as part of the OECD’s Programme for International Student Assessment (Pisa) to build one of the few empirical studies of bullshit.

The Pisa programme asked students how familiar they were with a list of 16 mathematical concepts. Three of them were fake, laying a perfect trap for bluff-prone youngsters.

By marrying these results with answers about the 15-year-olds’ self-belief, popularity, perseverance, and so on, the academics concluded the most likely bullshitters were Canadian and US teenagers from advantaged backgrounds. The people most likely to give you a straight answer, were, by some margin, young Scots.

The researchers’ “bullshit scale” now joins the annals of bullshit research, alongside the “bullshit receptivity scale” conceived for a 2015 paper that explored people’s likelihood to believe “pseudo-profound” BS. If you’re a sucker for the supernatural, you are more likely to be receptive, that paper concludes, unsurprisingly enough.

When a bullshitting, cavalier American can rise to become leader of the free world, and social media spreads wilful distortions far and wide, such findings, once classified as academic ephemera, start to take on geopolitical importance.

Yet they only go so far in identifying why business leaders and innovators are particularly prone to bullshit and bullshitting.

Jargon is just the start. David Rowan, founding editor of Wired UK, correctly identifies “innovation theatre — a box-ticking, public-relations-led, self-reassuring alternative to radical changes in mindset and culture” as the opposite of non-bullshit innovation. His book opens at a convention of “innovation professionals”, amid talk of “transactionalisation”, “abstractification” and “self-healing swarm behaviour” that would shatter the bullshit receptivity scale.

Chris Hirst, an executive at Havas, the marketing group, advises leaders to resist dressing up what they find at their organisations in “flowery language and management speak”. (It may be worth noting that, even three decades ago, Prof Frankfurt found the ad industry “replete with instances of bullshit so unmitigated that they can serve among the most indisputable and classic paradigms of the concept” — a slight Mr Hirst rejects.)

In a valedictory article in 2017, my former colleague Lucy Kellaway lamented that her two decades trying to stem the tide of guff swamping business had come to naught. Lampooning an entrepreneur’s hype-draped blog post, she wrote that “business bullshit has got a million per cent more bullshitty, and I’ve stopped predicting a correction in the marketplace”.

Even if they avoid the guff trap, though, innovators and leaders will find the temptation to bullshit strong. “Storytelling” is one of the vital attributes of a good entrepreneur, according to Mr Rowan. That can lead, via bluff, to white lies, and even fraud. BS is also encroaching on corporate boardrooms, he says, because there are not enough genuine innovators to satisfy directors’ panicky demands for ideas to see off disruptive start-ups.

A more basic reason why bullshit is so hard to beat, though, is its central paradox. Bullshitting can require reckless self-confidence and a lack of self-awareness. But it is also the chosen tool of leaders who are all too aware of their deficiencies, and exploit their position to get away with bluffing.

Far from using the licence of high office to ask for explanations, as they should do, such leaders feel forced to take a view, however poorly supported by evidence or facts. They “fear saying ‘I don’t know’ or ‘I don’t understand’”, explains Mr Hirst. And in that, they are, unfortunately, little different from a teenager winging it when faced with a tricky-sounding maths problem.

Why Capitalism Needs Populism

Globalization, digital technologies, and other factors have allowed competitive US corporations to achieve market dominance. If the past is any guide, it is only right that these "superstar" firms should now be challenged by grassroots political movements protesting against an unholy alliance of private-sector and government elites.

Raghuram G. Rajan


CHICAGO – Big Business is under attack in the United States. Amazon canceled its planned new headquarters in the New York City borough of Queens in the face of strong local opposition. Lindsey Graham, a Republican US senator for South Carolina, has raised concerns about Facebook’s uncontested market position, while his Democratic Senate colleague, Elizabeth Warren of Massachusetts, has called for the company to be broken up. Warren has also introduced legislation that would reserve 40% of corporate board seats for workers.

Such proposals may seem out of place in the land of free-market capitalism, but the current debate is exactly what America needs. Throughout the country’s history, it has been capitalism’s critics who ensured its proper functioning, by fighting against the concentration of economic power and the political influence it confers. When a few corporations dominate an economy, they inevitably team up with the instruments of state control, producing an unholy alliance of private- and public-sector elites.

This is what has happened in Russia, which is democratic and capitalist in name only. By maintaining complete control over commodity extraction and banking, an oligarchy beholden to the Kremlin has ruled out the possibility of meaningful economic and political competition. In fact, Russia is the apotheosis of the problem that US President Dwight D. Eisenhower described in his 1961 farewell address, when he admonished Americans to “guard against the acquisition of unwarranted influence” by the “military-industrial complex” and the “potential for the disastrous rise of misplaced power.”

With many US industries already dominated by a few “superstar” firms, we should be glad that “democratic socialist” activists and populist protesters are heeding Eisenhower’s warning. But, unlike in Russia, where the oligarchs owe their wealth to the capture of state assets in the 1990s, America’s superstar firms have gotten to where they are because they are more productive. This means that regulatory efforts have to be more nuanced – more scalpel than sledgehammer.

Specifically, in an era of global supply chains, US corporations have benefited from enormous economies of scale, network effects, and the use of real-time data to improve performance and efficiency at all stages of the production process. A company like Amazon learns from its data constantly to minimize delivery times and improve the quality of its services. Confident of its superiority relative to the competition, the firm needs few favors from the government – one reason why Amazon founder Jeff Bezos can back The Washington Post, which is often critical of the US administration.

But just because superstar firms are super-efficient today does not mean they will stay that way, particularly in the absence of meaningful competition. Incumbents will always be tempted to sustain their positions through anti-competitive means. By supporting legislation such as the 1984 Computer Fraud and Abuse Act and the 1998 Digital Millennium Copyright Act, the leading Internet firms have ensured that competitors cannot plug into their platforms to benefit from user-generated network effects. Similarly, after the 2009 financial crisis, the big banks accepted the inevitability of increased regulations, and then lobbied for rules that just so happened to raise compliance costs, thereby disadvantaging smaller competitors. And now that the Trump administration has become trigger-happy with import tariffs, well-connected firms can influence who gets protection and who bears the costs.

More generally, the more that government-defined intellectual-property rights, regulations, and tariffs – rather than productivity – bolster a corporation’s profits, the more dependent it becomes on government benevolence. The only guarantee of corporate efficiency and independence tomorrow is competition today.

The pressure on the government to keep capitalism competitive, and impede its natural drift toward domination by a dependent few, typically comes from ordinary people, organizing democratically in their communities. Not possessing the influence of the elite, they often want more competition and open access. In the US, the late-nineteenth-century Populist movement and the early-twentieth-century Progressive movement were reactions to monopolization in critical industries such as railroads and banking. These grassroots mobilizations led to regulations like the 1890 Sherman Antitrust Act, the 1933 Glass-Steagall Act (albeit less directly), and measures to improve access to education, health, credit, and business opportunities. By supporting competition, these movements not only kept capitalism vibrant, but also averted the risk of corporatist authoritarianism.

Today, as the best jobs drift to superstar firms that recruit primarily from a few prestigious universities, as small and medium-size companies find the path to growth strewn with impediments laid by dominant firms, and as economic activity abandons small towns and semi-rural communities for megacities, populism is emerging again. Politicians are scrambling to respond, but there is no guarantee that their proposals will move us in the right direction. As the 1930s made clear, there can be much darker alternatives to the status quo. If voters in decaying French villages and small-town America succumb to despair and lose hope in the market economy, they will be vulnerable to the siren song of ethnic nationalism or full-bore socialism, either of which would destroy the delicate balance between markets and the state. That will put an end to both prosperity and democracy.

The right response is not revolution, but rebalancing. Capitalism needs top-down reforms, such as updated antitrust regulation, to ensure that industries remain efficient and open to entry, and are not monopolized. But it also needs bottom-up policies to help economically devastated communities create new opportunities and maintain their members’ trust in the market economy. Populist criticism must be heeded, even if the radical proposals of populist leaders are not followed slavishly. This is essential to preserving both vibrant markets and democracy.

Raghuram G. Rajan, Governor of the Reserve Bank of India from 2013 to 2016, is Professor of Finance at the University of Chicago Booth School of Business and the author, most recently, of The Third Pillar: How Markets and the State Leave the Community Behind.

Chinese Real Estate Has Eaten the Asian Junk-Bond Market

Nearly all Asian high-yield debt issued in the first quarter came from Chinese property companies

By Mike Bird

Asia’s high-yield-bond market is being overwhelmed by Chinese real-estate companies, leaving it increasingly dependent on the questionable health of a single sector.

Nearly all Asian high-yield debt issued in the first quarter came from Chinese property companies, according to ratings company Moody’s. Their bonds now represent 48% of the ICE Bank of America Merrill Lynch Asian Dollar High Yield Index, which tracks securities worth $162 billion—outweighing every other sector by miles.

This isn’t your grandfather’s Asian high-yield credit market, or even your older brother’s. As recently as 2010, Chinese real estate made up an almost-negligible 7% slice of the index.

So when fund managers say they like Asian high yield, they’re effectively now saying they like Chinese property developers. Nothing else in the index is anywhere near large enough to act as a counterweight.

The vacant apartments of tomorrow. Photo: thomas peter/Reuters

The rapid expansion of Chinese property debt tells the story of a sector that has been incredibly profitable, but has become highly leveraged and in many ways dysfunctional.

At China Evergrande Group ,a developer that alone accounts for more than 11% of the bond index, total debt amounted to more than twice equity at the end of 2018. In general, China’s property developers make riskier investments than in the past, and the quality of their debt has declined, according to Moody’s.

Demand is also speculative. Chinese property purchases have come to be dominated by families buying second and third homes that they often leave empty, according to research by China’s Southwestern University of Finance and Economics. The national vacancy rate now sits at 21.4%, up 3 percentage points since 2011 and around double the international average. That’s in a country where house prices, relative to average income, are higher than in New York or London, according to Citi analysts.

Investors would be wise to take a close look at their exposure to Asian high-yield debt. Index-tracking bond funds may have changed markedly in recent years and bear a fresh inspection.

Just Sell This Bounce

by: David H. Lerner
- I went out on a limb calling this bounce, and I am going out on a limb again calling this a temporary bounce.

- Special mention to Tesla, up almost 16. I am confident and excited that now TSLA has put in a bottom.

- I want you to take profits starting tomorrow morning, especially if the futures are up strong. I want you to take 30% to 50% of the gains from this past Thursday.

I Went Out on a Limb Calling this Bounce, and I am Going Out on a Limb Again Calling This a Temporary Bounce
It's gratifying to have called this rally and see it come on so strong. I was a little early, it started last Thursday and got stopped in its tracks. With this crazy FTC and DOJ declaring war on America's Tech crown jewels, the market had to discount the idea that the USA can cannibalize its own progeny all because of politics.
One of our loyal readers asked me that, "now that the Fed has come out with language supportive of lowering interest rates to support the market, would that justify a longer rally?" He did find it quizzical that Powell made no mention of actually lowering rates so he wanted my take. I have to be honest, I was a bit surprised that he made this connection. I was actually working for a client on my real vocation and turned down the babble of market chatter. I took a listen and, sure enough, the commentators are making that connection. I am not a dyed in the wool, 100% chartist, but when the charts are talking loud enough, they should be heeded. The rally's cause to me was broadcasted in the charts a week ago. We were plainly way oversold and it was only natural that we had a bounce. I was not expecting such a strong bounce, but if you take into account that this little rally was building for a few days, it does make sense somewhat. We may see more of a rally for Wednesday, and even going into Thursday. As I said earlier, this is a countercyclical bounce and we are very likely to retreat again to continue exploring true support at a lower level. Yesterday, the all-important level on the S&P 2,750 did not hold, we got down to 2,730. So this is what I suggest, you speculators (my definition) where you are expected to develop a position over weeks or months, and of course, you fast money traders, I'm going to want you to sell harder than usual. There were some fantastic winners on the list this morning, The Trade Desk (NASDAQ:TTD) was up 25 points, Arista Networks (NYSE:ANET) up 13, MongoDB (NASDAQ:MDB) up almost 7, Intuitive Surgical (NASDAQ:ISRG) up 16, Illlumina (NASDAQ:ILMN) up 10, yes, there were others that were not so great. Special mention to Tesla (NASDAQ:TSLA), up almost 16. I am confident and excited that now TSLA has put in a bottom. Can it give up these gains, yes? Will we see $280 to $320 before we see $130-$150? I say yes. Fast traders and speculators should start setting up a long trade in TSLA that should give nice returns going into the latter half of the summer.
Take Profits
I digress, I want you to take profits starting tomorrow morning, especially if the futures are up strong.
I want you to take 30% to 50% of the gains from this past Thursday. Look to hold onto 25% of these recent positions. I think the top end of this rally could be 2,830. Do you remember this number? When we were in the high 2,800s, I said support should start at 2,830-2,820 with a really important level around 2,810 and a hard base at 2,800. Now an important rule is; "past support becomes resistance". This all sounds nonsensical, but I covered this a few weeks ago and I don't want to bore my old readers. I will get to the underpinning of this rule, I will cover this in my longer Sunday piece. If this doesn't sound like my usual pattern, it's not, I never like taking huge profits on a speculation, fast money traders do this out of habit. Perhaps this suggestion underlines my certainty that this bounce does NOT have legs. Sadly, I don't think 2,700 holds when we start declining again.

Calling BS on the DOJ and FTC. Unicorns Will Become a Fairy Tale Once Again

Now I want to pick up on this DOJ and FTC nonsense, this is a Potemkin village of phoneyness.

I challenge anyone to give me a real coherent argument that there is a monopolistic practice that can only be remedied by breaking up Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN) and Alphabet (GOOGL/GOOG). At most, there will be some fines, even in the billions, which any of these companies can fund that out of their couch cushions.

What this will do and have tremendous influence in the stock market is via IPO. The fact that none of these companies and I suspect none of the next level companies like an Adobe (NASDAQ:ADBE) or a Salesforce (NYSE:CRM) will be able to buy a Unicorn or even take a major percentage of an investment round of one, ever again. So let's face it, the VC bubble is going to burst long and strong. First, the fiasco of Lyft (NASDAQ:LYFT)/Uber (NYSE:UBER), now SoftBank (OTCPK:SFTBY) (OTCPK:SFTBF) is having trouble raising the next $100 billion Vision fund. Now with this government mandated buyers strike, startups will HAVE to take the IPO route. The stock market is our concern and focus, obviously, for the VC world, we are about to see a cataclysmic adjustment. Profits and cash flow now matter most or it should soon. I suspect that more, and even promising startups will die on the vine. The WeWorks of the world will have to change or die. It might actually work out for the small investor if they understand technology. So for us, this will work out fine, not so much for the VC and startup world. I will bring the popcorn and watch how WeWork (VWORK) goes the way of the Hindenburg on IPO.
Aside from the charts, why are we selling off?
Let's start with the chart below and my crude markings and then talk fundamentals. I drew this chart May 2, way before the sell-off and the bounce. Look on the left side. Again, apologies to my loyal long-time readers for the rehash. When I refer to congestion it was all that up and down motion on the left side of the December drop. I drew the right side predicting our current volatility, based on experience, and just how charting predicts behavior. Just simply look at this chart; we mapped out a clear double top, which is "Snake Eyes" to a chartist. You noticed that I felt compelled to share this chart once that second top clearly rolled over (another bad sign) and had that bounce at 2810. Today, a newer chart would be showing that we broke that 2,810, and major support at 2,800. Just scan your eyes across this chart and look how prominently the chart shows failure and support at the 2,800 level. Earlier in this article, I said this bounce should fail around 2,810 to 2,830. Doesn't that make more sense now?
Okay, now for the fundamentals
The market is selling off because conditions have changed:
  • The Chinese are not interested in making a deal in 2019. They want to wait right up to Election Day. This gives them the ultimate advantage. Right now they are trying to manage Trump so that he doesn't go crazy and ban all imports from China or install nuclear weapons in Taiwan. Basically, no one knows what Trump is capable of and that is just the way he likes it.
  • The economic numbers are slowing down. Everyone expected the economy to slow in the first half, but now we are seeing the slowdown and market prices need to adjust
  • The 10-year is collapsing. Call it what you want, but this points to a failure at the Fed. The stock market would rather see the Fed drain liquidity from the economy but be in control than to get loose and NOT be in control.
  • My corollary to the above thesis is that it would be an unmitigated disaster for the Fed to lower rates right now. Powell can jaw-bone all he likes and the market can throw the biggest tantrum, but the moment he lowers rates because of the market bitching is the day I tell you to sell all your speculation plays and go to 100% cash.
  • I don't want to get political, but the Mexico Tariff scares the crap out of the markets. It didn't expect that coming at all, it makes no economic sense, and there is no visibility whether Trump extends the tariff war to other partners.
  • The economy needs infrastructure and Trump threw Chuck and Nancy out of the Oval Office.
I'm Still a Bull, I Promise!
I am hardly a bear. China will fade into the background later in the summer, and the economy will stop sputtering and firm up. Profits, especially in tech, will prove to be as reliable as ever.
Merger activity will pick up and I could see a rally taking us to new highs late summer, early fall. Until then, speculation and trading will generate tremendous alpha if we remain nimble. So take strong profits this morning. Not 100% but 30%-50%, and if the rally goes another 24 hours, tail out those profits accordingly. Be brave, this is a speculator's paradise. An individual investor picking individual stocks is once again the winner. I will take this up on Sunday as well.
Happy Trading!