Musings Report #18 5-4-13 The Great Disconnect
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The Great Disconnect
Longtime readers know my analytic perspective is based on what psychiatrist/author R.D. Laing called the politics of experience. We can summarize this by asking: what is "obvious" to those inside a system/milieu and what is "obvious" to those outside the system/milieu? Our experience of what is "obvious" says a lot about the unspoken/accepted cultural context: the subtle conditioning, the manufacture of "news" and consensus, what we perceive as "normal" relationships, work, goals, etc.
For example, we consider high levels of stress and related depression "normal," and pharmaceutical prescriptions as a "normal" response to high stress/depression (with the upper-class ideal being yoga, therapy and meds), rather than ask if our system is inherently deranging. Within this conventional milieu, the response is individual: see your doctor, take meds, go to yoga class, etc.; a systemic understanding that calls the entire Status Quo into question is suppressed to the point that this question never even arises.
The possibility that the financial/social system is inherently deranging is "obvious" to observers outside the system, but the idea is completely "not obvious" to those inside the conventional worldview.
That there is a great and growing disconnect between finance/monetary policy and the real economy is obvious to those outside the mainstream-media/state worldview. Within the Status Quo, the issuance of "free money" to the state and financiers is "obviously working," as the stock market is rising, real estate has once again entered bubble territory, and income taxes are rising.
The real economy of real people and real enterprises, on the other hand, is exhibiting signs of growing distress: 441,000 part-time jobs were (supposedly) created in April while 150,000 full-time jobs were lost, median household income continues declining, and the suicide rate of males in their 50s has leaped 48%. Are these statistics evidence of the "recovery" the Status Quo claims is underway? Do men in their peak earning years choose to end their lives in a economic boom? The "obvious" answer is no; suicide reflects financial despair and distress, not recovery and prosperity.
Is it a sign of a healthy economy that cash bidders (i.e. those with access to credit outside the mortgage market) can outbid conventional homebuyers?
Our friends who have been laid off and are seeking work report that the interview process has reached absurd levels: three grueling interviews are now standard practice for any position of responsibility, even those with no managerial duties. Applicants are grilled to reveal how much extra they are willing to give the prospective employer--how gung-ho they are to work late, go the extra mile, etc.
One friend reported that one prospective employer hired her boss for the position, i.e. he took a demotion to secure the job.
What is "obvious" is that labor across most sectors is in oversupply, and people in their peak earning years are having difficulty finding jobs. Young people are taking part-time/non-career building McJobs just to have some sort of income, or moving from one unpaid internship to another in the hopes of landing a job.
Despite the dramatic rise of stocks to new nominal highs, most households do not own enough stock or bonds to see any increase in usable wealth. The vast expansion of liquidity and non-bank credit has enabled the immensely wealthy to borrow money very cheaply and use this cash to buy rentier streams of income--utilities, dividend-paying stocks, T-Bills, and rental housing. The Federal Reserve policies have made it easier for a hedge fund to buy $100 million of rental homes for cash than for a business to expand production and payroll.
The monetary and fiscal policies that are inflating new asset bubbles do not create new enterprises or jobs; the money flows to the financier class which uses the free money to buy rentier assets, pushing these asset classes (stocks, bonds, housing) higher.
The wealth of the top 1% increases not because this class has created wealth for the economy and society, but because the Fed has given them unlimited access to free money with which to buy rentier assets that produce reliable income streams.
This great disconnect appears to be widening, with no constraints in sight. We can only look on with the same horror as one watches a slow-motion wreck--we know it will end badly, but we cannot know exactly when or how much collateral damage will occur. The great disconnect is not a stable dynamic, but the constituency that supports it is the wealthiest and most powerful in the land.
Market Musings
What is "obvious" to most participants is that the stock rally is fueled by central bank liquidity and quantitative easing, and since there is no limit in sight to these policies, there is also no limit to the stock market running higher. It is also "obvious" that betting against this trend is an excellent way to lose money, so the number of people shorting the market dwindles with each push higher.
Equally "obvious" is the incentive to borrow money via margin to invest in the rising market: the higher it goes, the more you can borrow, and the more you borrow and plow into the market, the more you make. It is a wonderful self-reinforcing feedback loop. Thus record-high margin debt is not a warning sign but evidence that the music is still playing, so keep on dancing.
That the disconnect between the real economy and the stock market is widening is obvious, but there doesn't seem to be any intrinsic reason why it can't continue widening. As a result, many analysts are calling for a brief retrace and then a new march to new highs. Others see a serious decline (10%+) this summer and a new high in Q4 2013 or Q1 2014.
In other words, what might be obvious to those outside the system--that all liquidity-driven bubbles end badly, usually when participants are convinced there is nothing to restrain the trend from going higher--is not at all obvious to participants and those cheering them on (the MSN, the Federal government and the Fed).
What I sense is a near-universal resignation of those attempting to call a top in the market, an acceptance that the trend is up for the foreseeable future and that trying to short this market (i.e. profit from a decline) is a fool's game.
The number of those willing to short the market, i.e. take the other side of the trade, has dwindled. Every sharp rally like last Friday's eliminates entire divisions of shorts, leaving the trade even more one-sided.
Yes, the market is manipulated and totally dependent on central bank QE, liquidity and outright buying of stocks and bonds. But the market is not as stable as presumed, and one-sided trades tend to capsize when everyone who feels safe being on one side of the boat least expect it.
Every trader wants to go short after it becomes obvious the trend has reversed. But since there are so few shorts left, the decline (should one ever be allowed to happen) might not be orderly enough for everyone to pile on board. More likely, the train will leave with few on board and the initial drop will leave everyone who was convinced the uptrend was permanent standing shell-shocked on the platform with margin calls in hand.
The best thing that happened to me this week
We cleaned our house and ordered some new (cheap) window blinds. Having guests arriving acts as a deadline of sorts to motivate procrastinators, and making progress in cleaning house is a welcome accomplishment, at least in our small-and-operating-two-businesses-here household.
From Left Field
"When Bill Clinton visited China in 1998, a female student named Ma Nan at Peking University stood up and denounced the appalling human rights condition in the US. She was supposed to file a question, but she sounded more like she was delivering a lecture. Later on, she married an American man, gave birth to a son, became the mother of an American, and departed China for good."
Bubbles everywhere: Too Much Asset Inflation: Doug Nolan (via U. Doran) Excellent summary of the Great Disconnect from an expert in credit.
"The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists." (Ernest Hemingway, The Next War)
Thanks for reading--
charles
