Blog Archive
Why you have been wrong about fiscal and monetary stimulus your whole life
Do you know how an old lawn mower with a gas engine worked? Or a water scooter? Or a dirt bike with a kick start?
They all have to use some kind of external force, be it a hand crank, a pull on a string, or an electrical start engine, to get the actual gas engine from stand still to running at a certain threshold rpm (revolutions per minute).
Once the gas engine is turning at the right speed, the controlled and timed gas explosions can move pistons in just the right way to rotate a shaft round its axis, which makes whatever we want spinning spin, e.g., the driving wheels of a car. Talking of cars and threshold rpm; isn't it weird that the number of people fitting in a car is just right for pushing a car with a dead battery in a speed that just about reaches that magical limit where the ICE engine can take over?
So, what do start engines and kick starts have to do with stimulus? It's quite straightforward: if you have to keep kicking, or pushing then it's not stimulus; then it's just temporary life support. Maybe you're out of gas, or the engine is broken. In any case, you won't get the motor running, it'll just be you working up a sweat spending more energy than you get out of the effort.
That's exactly how it is with economies and economics. If you can't remove the stimulus, such as ultra-low interest rates and fiscal deficits without getting a significant slowdown, then what you did was never stimulus -- it was just the equivalent of pushing a dead car a few hundred meters extra.
A stimulus the way Keynes talked about it, was a temporary effort that removed whatever was artificially blocking the real economic potential. Printing a trillion dollars a year while running a trillion dollar budget deficit, accompanied by zero interest rates year after year after year... does not qualify as stimulus. That's using the defribillator on a corpse, with high enough voltage to make the body jerk around like president Trump's assessments of what constitutes respectively good and bad monetary and fiscal stimulus depending on who's pulling the strings. Hint: anything the Donald does is good policy. Anybody else doing the same thing: stoopid.
OK, maybe you had this right all along. I think you did, I just about exclusively have thoughful readers.
Unfortunately this will never be read by the ones who really need it -- the slimy arms of the vampire squid: the Kurodas, Ingveses, Draghis, Bernankes, Yellens and Powells of the world. Well, we'll see about Powell... Who knows, he could be a Volcker in disguise.
Summary: stocks tumble as investors update their models of policy rates, inflation, buybacks, bond yields, DCF models, refinancing hurdles, italian banks, Emerging Markets worries and trade wars
Thought of the day: how nimble and smart they are, investors!
What the pros are saying
WSJ, CNBC, Reuters and other news outlets have explained in detail the last two days why the stock market is crashing:
-Investors realized inflation is gaining momentum, and that the US Fed and other central banks will have to counter with rate hikes. Higher policy rates and less QE (money printing) feed into higher market yields for bonds, which in turn acts as both an alternative investment in a TINA* world, and a higher discount rate in investors' Discounted Cash Flow models. The latter is particularly important for tech stocks that are expected to make most of their profits far into the future (if ever).
Not least investors took just 24 hours to realize that with inflation looming and interest rates rising into the low single digit space (the horror!) will become more difficult to finance the outlandish projects that warrant current double digit P/S valuations, as well to re-finance the already hugnormous piles of debt lingering from past stock repurchase programs -- not to mention future stock buybacks that might very well have to be cancelled.
Can you imagine a world where corporate investment budgets shrink from year to year, and where dividends and stock purchases have to be financed with free cash flow stemming from profits rather than free bank money?
Finally, many models were swiftly updated with new currency prices and trade tariffs, as well as the endgame result of recursive doom-loops (government-bank insolvency and runaway financing rates), triggered by recent Italian bank bankruptcy jitters.
- TINA = There Is No Alternative To Stocks
TINHIW
That Is Not How It Works!
No, no, no! No!
That's emphatically not what happened this week. That's not how the market works. There are hardly any investors left that take time off their days to think about thing s like that, and certainly not in that manner.
There are but a few fundamentally inclined outfits that do meet once a week to discuss similar things. However, A) they have not had their meetings yet this week, and B) they are quite few compared to passive funds, momentum investors, CTAs, daytraders, index huggers etc.
Ask yourself: Do you know anybody who claims they sold for the reasons listed above? That they updated their models and sold due to inflation gaining steam and all or any of the variables and repurcussions? I didn't think so. There probably are quite a few talking about why the market sold of, why others sold, whether it's thoughtful and smart of others to sell for those reasons, but just about nobody went through the calculations above and concluded it was time to sell this week. Nope.
The butterfly effect
If you stretch conditions far enough, e.g., with debt upon debt, derivatives upon derivatives, ever higher valuations on ever higher adjusted, manipulated numbers, based on unsustainably low costs for debt and wages, and resulting unsustainably, historically perverse margins...; then any little flap of the wing can set off an avalanche.
Do you know anybody
who claims they sold for above reasons
I'm not saying the last few days is an avalanche, an earthquake, a tsunami, the beginning of the big one. I mean, the small correction, which isn't even a correction, let alone a "crash", is hardly visible in a stock chart.
I'm just saying the conditions are already there for a massive re-set of stock markets and bond markets alike. And that means no other reason is needed for stocks to fall... or crash for that matter.
So, no, investors aren't cooly and rationally updating their excel models with new assumptions and recent data publications, or discussing said inputs during partner meetings. Nope, they are selling because somewhere in the market someone's sell order pushed one stock below a level that made somebody else sell - on a hunch, as a stop loss, a machine learning model, some esoteric and spurious correlation between normally unrelated instruments; I don't know and it doesn't matter - and that in turn made somebody else sell that or some other instrument.
Enough debt, enough leverage, enough trend following and passive investors, high enough valuations, too few short positions, too little cash reserves in big mutual funds and so on mean at a certain point there are no value based buyers left to mitigate the selling.
Again, whether this proves to be just a two day mini downturn, or the beginning of the worst bear market since the 70's, doesn't matter. The point is that nobody really knows what set off the selling. It wasn't Powell, Trump, treasury yields or cash flow models. It was simply one eager seller too many -- and that seller was baked in the cake since several years back, just being temporarily on hold due to increasingly deranged central bank policies.
Happy trading!
P.S. Bookmark my site, subscribe to my newsletter by entering your e-mail address, and finally DO CHECK OUT my recent podcast interview with the one and only Erik Townsend of Macro Voices (you can find the interview and Future Skills podcast on any podcast platform... and here).
Topic: There is no God
Summary: You are responsible for everything; you are your own god
Inspiration: Everything doesn't happen for a reason. Actually nothing does. Things just are. You, e.g., just are.
Conclusion: in investing, you are the one throwing all the pitches at yourself. Any impossible financial curve ball coming your way was originated by you, no matter if it's a Japanese Tsunami or a subprime meltdown. The core of the problem always lies with your own risk management.
Things affect other things, governed by mindless laws
Yes, things are connected, but not governed, not controlled or pre-ordained. I mean, if they were, by whom would that be, and more importantly why? What would be that force's motivation and ultimate goal?
RANT BEGINS ON GOD'S LACK OF ACTIVITY
Who that is mighty enough to be worthy of the "God" title (presumably creator and governor of all matter and energy in all time and space, and everything outside the time and space we humans think we understand) would go through the trouble of spending time in the infinitesimally limited light cone that includes the fate of humans on little insignificant Earth on the outskirts of just one unremarkable galaxy out of hundreds of billions, if not trillions of galaxies in just the universe we humans can observe?
OK, if said being could circumvent the lightspeed limit, bend time and so on, maybe governing Earth might make sense. But then think about everything else to govern. Can a single "mind" do that, given the laws of the universe as we understand them? Sure, if nothing we have mapped out with the scientific method holds any water whatsoever... If we assume anything goes, then anything goes. But then again, what's the matter of pure unscientific speculation about something we can't measure, have never seen a single shred of evidence of, that apparently couldn't care less about our existence, that for billions of years and billions of lightyears has been content with letting a few simple constants control everything without a single identifiable instance of interference?
RANT ENDS
OK, so nothing happens for a reason. However, you can take any situation and make the best of it, make it "yours" -- as if it were meant for you.
For example, you didn't miss the bus in order to meet that old friend. But you did miss the buss, and as a consequence you did meet that friend you otherwise wouldn't have. It had a lot of other less tangible consequences too (all without governance or externally imposed purpose), but you get to choose which unexpected and "new" events to focus on -- good or bad:
If you always focus on good outcomes and opportunities from chance; to you it's as if everything has a purpose. In reality as we know it, however, and the one that God has never interfered with in any outside-the-system-way (laws of nature), you are the one deciding to experience purpose (and thus it's you who create the purpose).
If you're well prepared, skill-wise and psychologically, you can make use of unexpected and random events. But if you just think things are laid out for you with a plan in mind, you risk not making the most of them.
God - what's the utility?
What is God? Here is one way to think about it that has been suggested to me:
Everything; as if humans were the neurons of a galactic-sized brain -- we are God and God is us; just like our brain is us and we are our brains. Everything is everything, and that is God. In other words we are God, we are the decentralized hubs of the all-encompassing being that is God: We created all this from nothing, and our objective is to understand ourselves and become whole again.
Oh, baloney!
Sure, there was a big bang, everything came into being from nothing. All matter and energy stem from a single dimensionless point, where notions like space, time and matter aren't even applicable. 14 billion years later humans appeared on Earth, and according to Einstein most of the Universe can't reach or affect us and we can't affect it. Even if everything has the same origin, almost nothing is causally connected anymore.
[Insert ad hoc reasoning about quantum entanglement, wormholes in space-time, the simulation hypothesis, and AI-sophons (3-body problem) here; to try to save the idea of a single, all powerful, God, that can and does take action with a purpose directed at humans who occupy one single planet of hundreds of billions in a galaxy that is one of hundreds of billions of galaxies -- and that's just in our visible universe. And then stop to see if you're really adhering to the God you started out believing in (God is a data nerd? God is the Universe? God listens to our prayers through wormholes and entangled quantum particles?)]
Back to the one God - no equals, no parts
Let's get back to some sort of external, system-outside God with a mind of its own, and the power to change the laws of nature.
What could such an idea be used for? Where is there room for such a super entity? In what form, energy or dimension can it exist; since our current day instruments can't detect God?
Well, there is a huge amount of dark matter in the universe. Could that be considered "God"? It still sure doesn't seem to do anything -- not for billions of years, let alone the mere tens or hundreds of years humans would care about.
What criteria should we require for something to be considered the "God"?
- That God started it all? That he started just this universe? Or does the God title require starting all the other universes too?
- That God can and does work outside the laws of nature as we have mapped them?
- Would it be enough if there were lightcone local, super powerful AIs or aliens, that don't care to show themselves, since we are so far beneath them -- either because we are boring, or they don't want to scare us, confuse us, or disturb our evolutionary trajectory. My guess is they just wouldn't care at all. Such beings would be busy trying to understand and control the fate of the universe.
It seems to me, the lightspeed speed limit, lightcones and all that, would make it very hard for any kind of within-laws entity to be interestingly and meaningfully powerful. Oh, and then there's that thing again; that it at least hasn't exercised such powers in any identifiable way for all of time.
If God is local, it's not powerful enough to be the God, he's just a community sheriff. If on the other hand God is all encompassing, he has no way of knowing or governing (not to mention reason to) -- it would take tens of billions of years just to hear some prayers and at least as much additional time to do something about them.
What's the meaning of all this?
I just want you to use the same type of reasoning, as I did above, in all aspects of life: relationships, work, investing, love. Is your view logically consistent? If you assume A, what does that say about B; are A and B compatible?
Try to see the whole picture; try to understand what can be known and what can't; what matters and what doesn't; and perhaps most important of all; what you can influence and what you can't. If you ignore everything you can't change and focus on the things you can, your daily life will become much more enjoyable.
---
When you see platitudes and clichés like "Everything happens for a reason" or "You only get challenges you can handle", as if there were somebody orchestrating your life; call bullshit! Things just happen. And you just happened to be there.
The challenges you "get", i.e., that happen to you, they can kill you too. They can damage you for life -- irreparably. They aren't tailor made in order to make you grow as a person.
However, that doesn't mean you don't owe it to yourself to rise up as best you can to all events; or to grab opportunities that come your way by chance. Just know that no supernatural being threw them at you with a purpose in mind, or fine tuned them perfectly to something they knew for sure you could handle.
In life that is. In investing it can be a bit different.
Conclusions: Investing implictions of the No God Hypothesis
Come to think of it, in particularly in investing, you are the one throwing all the pitches at yourself. Any impossible financial curve ball coming your way was originated by you, no matter if it's a Japanese Tsunami or a subprime meltdown. The core of the problem always lies with your own risk management.
You shouldn't give yourself tougher challenges (when it comes to investments) than you can handle. In that respect, you actually never do get challenges you can't handle (unless you are stupid enough to wade neck-deep into cow dung by your own volition).
No, wait for the right opportunity. Size correctly. Never go all in. Do the math and take all the responsibility yourself for your actions. Adapt and improve your strategy over time, using your hits and misses wisely. Try to understand and strike preemptively at your human biases. Create systems of habits and checklists to check your emotions, and prevent easy mistakes. And most of all, stop both blaming and praising supernatural beings for what is ultimately your own doing.
God is dead! Long live God!
Please note I don't have anything against being spiritual, mindful, and searching for context or meaning.
Believing in some kind of personal or consequential God is ill-informed and illogical, but that doesn't mean it can be comforting to some. God doesn't hear your prayers, but you do.
In that respect you are your own God; by putting words to your thoughts, by making room for silent contemplation, for appreciation, for making plans, for preparing for future action; if done thoughtfully you are setting yourself up for reaching your goals. Football players praying to God to make them score and win against another team full of players doing the same are of course not really asking God to indulge their crass wishes. They are praying to themselves, reinforcing the idea that their training will be enough, visualizing the shot and goal. After the score they raise the index finger as if emphasizing "I am the one God, my prayer to myself was heard".
You do the math
Just to be clear, the one single message of this post is that I am God you have to take full responsibility for your own actions, for your success, for your happiness, for your investment risk management.
In short: You. Do. The. Math (do the math, devise/revise your strategy, wait, implement it unemotionally, repeat)
The biggest risk is being invested at all times
When I was a hedge fund manager, we took two full breaks of a month each. We sold all our positions and just sat on the cash. During the hiatus we honed our pitches for our old and potantially new positions, as well as our arguments for why some of the other managers' positions shouldn't be let back in. Then we re-invested from scratch with fresh minds.
This process cost a few tens of a per cent per break in terms of spreads and commission, and possibly theoretically half a per cent in lost returns. Let's say we left a full per cent of returns on the table per year due to the roundabout. However, I dare say we gained much more in perspective and fresh analysis.
Okay, I'll come clean. We actually only discussed implenting hard breaks like outlined above, but never had the guts to do it. I still think we should have, but I think two things stopped us:
- convention - what would clients say, in particular if prices moved favorably for the portfolio we just sold
- fear - we were afraid we would either become lazy and just use the breaks for leisure, or that we would be afraid to put on our positions again, in particular the best ones if they had become more expensive
No matter, breaks are a part of the human condition. We aren't designed for going full throttle all the time. There's a reason we sleep.
However, "take a break" does not mean being passive, it means shaking things up, doing other things rather than nothing. At the gym, supersetting could be a break from old habits. Personally, travel is a way of taking a break from my ususal surroundings -- just note that it probably shouldn't mean lying on the beach or by the pool all week. See something new, talk to a stranger, try new food, read a book instead of computer screens.
Take stock
What's your current situation? Perhaps you trade the stock market all day, go to the gym three times a week and hit the bar 1-2 times a week. Perhaps a good non-fiction book would be the perfect break for you, i.e., a slow, long focus activity as opposed to all the adrenaline you usually get.
I'll tell you a trick that keeps surprising me: Take a walk.
No matter how you're feeling or what you're doing, if you just get outside and start walking round the block, you'll suddenly feel much much better. I know this, and I practice it a lot (thankfully I have a dog, so I get out at least 3 times a day). Nevertheless, I'm often struck by how clear and relieved I feel after just 20 seconds outside.
Sometimes, I might be procrastinating over buying groceries, posting the mail, running an errand, or just going downtown to buy new underwear. Somehow I think it's a hassle, until I just do it, and realize (again!) how everyting becomes brighter and easier as soon as my feet hit the sidewalk. It definitely beats watching TV in the sofa (even if that feels more tempting right before). Even vacuuming the apartment is refreshing once I muster the strength to just start the damn thing :D
Alright, walks are good, you get it. But the real message here is to take breaks, to go against your habits, to stop the homeostasis. The message is to take active breaks where you do something different, rather than taking a break to do nothing.
- Do you read a lot? Then write!
- Do you write a lot? The talk!
- Do you run a lot? Then lift heavy things!
- Do you have a lot of indoor sitting meetings? Then take walking meetings outside!
I'm a bit of a loner, so my breaks often entail meeting people. I can't say it charges me, quite the opposite in the short term. But I appreciate my normal activities all the more, and I gain perspective from it.
When it comes to investing, these days I definitely take complete breaks from considering public companies' financials. That way, I can start over completely fresh from psychological anchoring points. What I do during my breaks from stocks? I read books I didn't think I would, and I try new podcasts or podcast episodes that I'm not sure I'll like (my habit is to only listen to topics and people I'm pretty sure I'll enjoy and learn useful things from).
In particular regarding investing on the stock market, the most important rule there is is "never rush". Investing is a game of several decades. In that perspective a month here or there is completely inconsequential, whereas the gained insight can prove invulauable.
When did you last take a constructive break? And from what to what?
Here is a tip: plan a strategic getaway, where you alone, or you and your life partner, or you and your business partner travel to a quiet location. Leave all electronics behind and spend, e.g., 2-6 full days planning your life from a several months to several years perspective. Try to take everything into account: personal development, financial goals, realtionships, health etc.
If that isn't a REAL, ACTIVE BREAK, I don't know what is. As a bonus, you'll get to practice mindfulness, deep work, and loosen social media's addictive grip on you.
If you like my writing you really should check out my podcast Future Skills, which discusses habits, tools and role models that keep you relevant in a future of accelerating technological and societal change.
The show has three kinds of episodes: 1) short, one-idea regular episodes, 2) longer format interviews with authors, researchers, investors etc., 3) medium-length expert episodes and a specific theme.
Check it out, and please leave a rating or review on iTunes to help others find the show.
Do you think you know better than a central banker? Of course you do.
Topic: trust, policy, facts and lies
Conclusion: big lies are as easy to reveal, as they are to believe
Conclusion 2: Do the math, make the effort, a simple checksum will often do - many lies are easy to catch if you at least try. Trust nobody!
Central banks use sophisticated time-tested methods to set a policy rate that reliably leads to a predictable range of inflation
-NOT!
In theory, central banks control things like economic growth and consumer price inflation, by setting their policy rates (a set of interest rates that banks pay or receive when borrowing or making deposits at the central bank. In practice, their theories, models, and actions are at best worthless but most likely incredibly harmful.
Central banks often publish their forecasts for various macroeconomic variables, including their own policy rate (that they themselves can control to a fundred percent certainty). Amazingly, even though central banks are supposed to understand how the economy works, and how their policy rate is supposed to decide among other things the future rate of inflation - and thus also what the appropriate future policy rate would be - the CB prediction errors for their own policy rate are higher than for any other phenomenon tou can think of.
Not only are the errors wrong in direction (which would be completely out of the question if their models had any relevance for the real world), when they get the direction right they are often an order of magnitude (10 times) wrong in amplitude.
The following picture shows the situation for the Swedish central bank "Riksbanken"
The central bank policy rate hedgehog
(aka the map of lies, more lies, the worst modelling in history, blind academics, power hunger, hubris and stupidity)
On September 6, 2018, the Swedish central bank, known for being the oldest and most retarded central bank in history, publishes its latest stupidity (interest rate decision). Just 15 years ago, careful modelling and the most thoughtful decision process Riksbanken's members could muster resulted in a policy rate of 500 per cent. Yes, that's 50 000 basis points. In a few weeks on September 6, they are expected to stick to their current world record breaking moronic idea of a negative interest rate being prudent, effective, and simply the absolute best the central bank committee members can conceive.
Take a look at the chart below. Yes, they really are that oblivious.
Over the last ten years, Riksbanken has managed to do among other things the following:
- Predict that they will increase their policy rate to 4.5-5 per cent, but in reality they lowered it to 0.5 per cent, i.e. 1/10 of their prediction level, not to mention the error in direction
- When the rate was 0.25 per cent, they thought they would soon raise it to 4 per cent, but only briefly reached a peak of 2 per cent before backing down to around zero again (while most of the time holding on to delusions of going to around 3 per cent)
- In over 25 consecutive predictions, consistently predict increasing the rate (that they control, Nota Bene) by 1.5-2 percentage points over the following few years, but in every single instant actually reducing the policy rate, most often ending up some 2.5 percentage points below their own prediction.
Most of these decisions are so wrong, ignorant and stupid that they defy mathematical description. How wrong actually is going from +1.0 per cent to -.5 per cent while predicting going to +3 per cent?
How can they, or anybody else for that matter, have any confidence whatsoever in what they are doing, when they predict increasing the policy rate by 5x from 0.5 per cent to 2.5 per cent, but actually lowering it to a NEGATIVE 0.5 per cent?
Imagine performing in a similar way at your job, or having employees with that kind of track record. It's even worse than the performance of professional Tesla profit forecasters (picture below)
It is by now of course patently obvious that the Riksbank members have no clue what they are doing, that their models have no relevance at all for the real economy, that they are perfectly incapable of adapting (25 consecutive predictions that were completely off the mark, remember?), and that they have no concept of the complexities of real life and the dangers of unintended consequences of their retarded experiments -- ever heard of phase shifts* for example?
* there is a real possibility that very weird and adverse (unknown) effects** can result from negative interest rates. Just take a moment to ponder Credit Suisse that raised their mortgage rates when the SNB's policy rate was lowered below zero, to compensate for the cost of keeping funds at the central bank
** but who cares? Let's ban cash to prevent people from avoiding bank accounts with negative interest rates
Conclusion: trust nobody, do the math
Question: Do you think the authorities have this covered? Do you think they know better than you, or even than most? Think again, their models and myopic thinking combined with greed and hunger for power have made them the least fit of all to do what they are doing. And yet, the more damage they do, the more power they are awarded.
Oh yeah, this will end well.
If you own physical gold that is.