Men in the city are in a frenzy. March is back and the lion’s roar of ’23 echoes in the rattling caverns around us (read more here). As above, so below, as before, so again the seasonal seesaw between reality and delusion, mania and FUD (Fear, Uncertainty, Doubt), between bulls and bears clashes in a battle over momentum and narrative. The Boomers and bulls, the Panglossian purveyors of hopium, the Betas and Normies swoon for the greed fest so markets howl ever higher. Yet more proof that P.T. Barnum was right – “a sucker is born every minute.”
Manias like these come and go. What we can say with certainty is that market manias share two universal characteristics: 1.) they go on longer than anyone thinks, and 2.) they end more disastrously than anyone believes. Ah yes, I can hear the skeptics retort, but this time is different, we have the Fed, the reserve currency, and if all else fails, the “full, faith, and credit” of Uncle Sam in our corner. Who in his right mind would bet against that? Sadly, similar claims have been made before, and perhaps with greater credibility. Indeed, the tragic flaw that continues to bedevil Americans and the solipsistic culture we propagate is willful amnesia.
the tragic flaw that continues to bedevil Americans and the solipsistic culture we propagate is willful amnesia.
Human nature suggests the current mania will be no different. There are many soothsayers promising “the clouds will open and show riches ready to drop upon us.” Artificial General Intelligence (AGI) promises a “productivity miracle,” impending rate cuts insure a return to cheap money, and inflation has been licked by the central planners so good times are here again. Don’t be fooled, we will wake up like Caliban before us to lament the Tempest to come. Any thoughtful pushback easily impugns these euphoric claims and just as quickly provokes the ire of market participants adamant that bears are just bitter. As John Kenneth Galbraith wrote last century, such indignation might be the reddest of red flags:
Haves Against Have Nots
Economic inequality born of human inequality is a fact of life, but the concentration of wealth in the upper income brackets is of a different sort altogether. The “wealth gap” is largely the product of financialization, more specifically the Cantillon Effect; if you own assets, you get rich and richer, if you do not, you stay poor. By virtue of globalization, a project to deindustrialize and financialize Western economies, the once mutualistic relationship between markets and economies is now parasitic. Put differently, money flows into stocks, bonds, and real estate and into the pockets of Wall Street, the Treasury, and the upper 5-10% asset holders, where it remains. Meanwhile, starved of cash for capital expenditure and economic expansion, the real economy that average people depend on withers.
The “wealth gap” is largely the product of financialization; if you own assets, you get rich and richer, if you do not, you stay poor.
Financialization can go on and on and on but in a hyper-financialized economy banks are ground zero for highly flammable systemic fires. New York Community Bank (NYCB) is sounding smoke alarms yet again signaling more trouble ahead for the banks. Apparently, NYCB has big losses on major loans to rent-controlled multi-family housing units (remember Signature Bank?) and commercial real estate. Moody’s subsequently downgraded the bank’s credit rating to junk status, and NYCB’s stock collapsed before trading was halted this past Wednesday. To quell concerns, the bank has burned through 3 CEOs in as many weeks. Ironically, NYCB bought out Signature bank assets after it failed last year.
The panic was only tempered by a $1B bailout package led by Steve Mnuchin (Trump's Treasury Secretary) of Liberty Strategic Capital. Given the scale of NYCB's exposure to New York real estate the bailout will not be enough (see more here), and contagion will spread. How bad the situation really is at this point is impossible to know but given the fragility in the banking system due to ever-climbing interest rates exacerbated by self-destructive New York politics it is a safe bet this fire is just starting.
Is this something, nothing, or everything? As I am fond of saying, America is a financial system with an economy, not an economy with a financial system. As such, as recession strikes in Germany, Japan, and China and the global dynamos of industrial productivity falter the US economy will be the last to go, less an indicator of American exceptionalism than of the benumbing effects of fiscal stimulus and dollar dominance. However, much evidence suggests recession is an idea whose time is coming and that NYCB’s issues represent multiple breakdowns on the financial conveyor belt.
Whack-A-Mole or Chernobyl?
In a recent interview (see above) with Wall Street Golden Grandpa Jamie Dimon, JP Morgan’s CEO framed the banking problems like this: “As long as the economy stays like this it will be more of a whack-a-mol. There should be no domino effect.” In other words, if there is no recession, there will be no contagion knocking out banks like dominos. Of course, the likelihood that the US economy will avoid catching the recession cold is growing dimmer by the week but what Dimon is missing is that a banking crisis is just as likely to catalyze recession as a recession is to catalyze a banking crisis.
The global financial system has become a cesspool of interconnected “financial products” (IOUs) sloshing around like free agents inside a nuclear reactor. The nuclear metaphor was theatrically employed by the eccentric investor Hugh Hendry who suggested in a tweet that Fed Members have become frantic Russian Nuclear Physicists before Chernobyl’s fatal accident:
“Chernobyl had this ominous term called a ‘positive void coefficient,’ which meant that when things changed inside the reactor, the control mechanisms went haywire. Instead of cooling down the reactor, they cranked it up, creating sheer chaos… Imagine if, in the realm of monetary policy, raising interest rates to calm the economic storm sent the whole stew into a psychedelic meltdown. So, when central banks tried to raise rates, they turned the economic soup into a raging inferno instead.”
Hendry appropriately warns of the inextricable link between “control mechanisms” and “unintended consequences.” Quantitative Easing (QE) to stimulate economic growth, debt monetization to keep governments solvent, credit facilities to re-liquefy shaky banks, and Zero-Interest-Rate-Policy (ZIRP) to finance corporate and household debt have combined to bankrupt the entire global economy. As a result, a cascading tidal wave of defaults could come from anywhere at any time: public debt markets, residential real-estate, corporate defaults, or a good old-fashioned derivatives unwind. The more alphabet programs (BTFP, APF, RRO etc.) are deployed to patch holes in the wooden hull, the more likely the tiniest of tiny cracks will capsize the creaky boat. As a result, there will be no recession ahead, there will be a catastrophic failure.
A Blow Off Top Before the Collapse?
For the moment, market euphoria is back in full swing. Refinancing some $1.5T in commercial properties and almost $7T in national debt by 2025 are tomorrow’s problems. Housing prices may be falling (see below), small businesses may be failing, and U6 (a better measure) unemployment may be rising but Mr. Market is looking through to the future so don’t worry about it, AGI will save us. Adlai E. Stevenson II once said, “Americans are suckers for good news;” boy was he right. Still, the danger in today’s euphoria is not blindness as much as complacency.
So much of America’s wealth depends on ever-higher stock prices, gluttonous consumer spending and the global essentialism of the US dollar. Ironically, these dependencies are widely known and celebrated by market makers as indomitable features firmly in the grip of Wall Street, the Fed and DC elites. Such indefatigable faith blatantly ignores the escalating creep of regional war in the Middle East, the West’s blunder in Ukraine, and a dramatic shift in the global balance of power from West to East. Nevertheless, so long as the top 50% income earners appear to be getting rich on paper, who cares? For the moment, no one.
the economy is a human system, which means that if the human system fails the economy does too.
I repeatedly emphasize that the economy is a human system. In fact, the economy exists within a human system, not the other way around, which means that if the human system fails the economy does too. What speculators, fund managers, and Western policymakers, the dominant constituents of the Gerontocracy, are missing is that there is a cost to market mania. Inflation is a compounding effect raising the cost-of-living on vulnerable average people, passive investing concentrated in the Magnificent Seven and public debt (Federal debt) is crowding out investment that would otherwise go to productive sectors that desperately need it.
These imbalances build overtime and explain the recurring manias that bring eras to disastrous ends. Long-term cycles are as much karmic as they are mathematical fractals. The hundred year anniversary of Black Tuesday, the Wall Street crash of 1929, fast approaches, as does the 80 year mark since VE Day. On this basis alone, never mind the warning signs piling up like waste in public streets, caveat emptor ("buyer beware") must be the order of the day. No one knows the future, what we do know as Winston Churchill famously said is, “The farther back you can look, the farther forward you are likely to see.
For more, sign up for the MEN AND THE CITY email list, subscribe on YouTube, and follow me on Twitter and Instagram.
Comentarios