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Musings Report #27 7-2-16 If We Can't Be Honest, No Solution Is Possible
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If We Can't Be Honest, No Solution Is Possible
I often invoke the term scale-invariant, which refers to a dynamic that functions equally well on the micro-level as it does on the macro-level. (The scientific definition is: "scale invariance is a feature of objects or laws that do not change if scales of length, energy, or other variables, are multiplied by a common factor.")
Accounting is scale-invariant. If a household has fewer assets than liabilities, it is insolvent. If a $10 billion company has fewer assets than liabilities, it is insolvent.
Human emotions also have scale-invariant features, as we all share the same wetware / genetic heritage / naturally selected default settings and capabilities.
The notion that the ideal solution to a problem is to hide it by ignoring it and refusing to discuss it is scale-invariant. "The elephant in the room" in a marriage is a problem that one or both partners fear might blow up the relationship, and neither is willing to take that risk.
In a corporation (for example, in Nokia before it collapsed), mid-level managers hide problems for fear of being fired or demoted.
In national governments and central banks, major financial/ economic problems are glossed over with soothing public relations and rigged statistics.
We all know this "solution" (hiding a problem and refusing to acknowledge it directly) eventually blows up the relationship, the corporation or the national economy.
Dishonesty wasn't really a solution, it was simply easier: directly acknowledging a serious problem is difficult for many reasons. Nobody likes to acknowledge failure and/or powerlessness, and nobody likes to sacrifice or ask others to sacrifice.
So we ignore the problem, gloss it over, mask it, and refuse to honestly confront the unwelcome realities.
Kyle Bass has consistently maintained that China's ballooning debt has reached the point that the government, despite its claims to the contrary, can no longer control the inevitable implosion of China's $3 trillion in corporate debt and trillions in other private-sector debt.
In comparing the asset-liability mismatch that triggered the collapse of the U.S. housing bubble in 2008 with China's current mismatch, Bass said:
"...our asset-liability mismatches were two and a half percent of our system, and you know what they did. So China's excesses (at 10% of their system) are already, they're already so far ahead of the world's excesses in prior crises that we're facing the largest macro imbalance in world history. And to this day, I can't figure out why people don't see it for what it is."
If we can't be honest, no solution is possible.
Many of us declared the official response to the Global Financial Meltdown of 2008-09 nothing but smoke and mirrors and extend and pretend.
Interestingly, after seven years of weak growth and rising wealth/income inequality, the mainstream media is finally discussing the reality that the official "fixes" of quantitative easing (QE) and zero-interest rate policy (ZIRP) have not been solutions at all: they've only exacerbated imbalances and inequalities that have grown in size and severity.
Putting off the day of reckoning is not a real solution. Solutions require honesty, and currently that honesty is too painful to bear.
So instead of getting an opportunity to think through a long-term solution, we'll get another meltdown (this time in China) and the authorities will choose politically expedient "extend and pretend" fixes that only make the underlying imbalances and instabilities worse.
Denial is not a solution, and neither is acting like the problem doesn't exist. But this is our short-term default setting in all scales of human life.
There is a high price to be paid for not solving problems, just as there is a great dividend for those few who have learned to tackle problems head-on in a brutally honest fashion.
Summary of the Blog This Past Week
Brexit and the Crisis of Capitalism 7/1/16
Brexit, the E.U. and the "Special Relationship" of the U.S./U.K. 6/30/16
Brexit, a Step in the Right Direction: The Optimistic View 6/29/16
Brexit Is What Happens When the Pie Is Shrinking 6/28/16
Understanding Brexit: The Powerless Press Their Thumb in the Eye of the Power Elite 6/27/16
Best Thing That Happened To Me This Week
Family visit (niece from Hawaii) and a BBQ at home with a little wine tasting.
Market Musings: Mind the Open Gaps
A few weeks ago I posted this chart of the S&P 500, when the SPX was around 2,100 and the mood was euphoric, showing open gaps below at 2,078 and 2,052. I suggested these gaps would get filled despite the euphoria.
Lo and behold, the SPX plummeted under 2,000 in the wake of Brexit, filling those gaps. That decline left an open gap around 2,100 that I expected to get filled on a rebound, and I traded accordingly.
The post-Brexit rally has retraced the entire drop and is back above 2,100, having neatly filled the open gap. But this manic rally has opened two new gaps below at 2,040 and 2,005.
Once again, the mood is euphoric, and once again I expect these gasp to get filled sooner rather than later. To fill these gaps, SPX would have to re-test 2,000. After that, one more more rally to a new record high above 2,134 wouldn't surprise me in the least.
From Left Field
When You Dial 911 and Wall Street Answers (via Joel M.)
I walked from Liverpool to London. Brexit was no surprise
Business Leaders Have Abandoned the Middle Class -- even the Harvard Business Review is admitting the truth...
Oil Is Still Heading to $10 a Barrel (via U. Doran)
Why the sharing economy could be the internet’s most divisive revolution yet -- disaster or boon, it will continue...
DIVIDED AMERICA: Constructing our own intellectual ghettos
Making A Killing -- a tragic story of stupid escalation and murder...
Culinary Deserts, Gastronomic Oases: A Classification of US Cities
Architects See Potential in China’s Countryside -- a Chinese pattern language...
The Observatory of Economic Complexity -- charts galore, weird interface...
A Publisher in Exile Gets the Big Scoops on China’s Elite (via Maoxian)
Yochai Benkler on How Cooperation Triumphs over Self-Interest (1:17 hours)(via Lew G.)
"If you're not making mistakes, then you're not doing anything. I'm positive that a doer makes mistakes." John Wooden
Thanks for reading--
charles |
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