MIAMI – On Thursday, the Dow rose 79 points – or about 0.5%. Nothing proved one way or the other. We told you about our visit with President Reagan’s former budget advisor and Wall Street veteran David Stockman.
Unlike almost every other analyst or investor we know, David has been a true insider. He has seen how the system really works from within. He played critical roles at critical moments – in Washington and on Wall Street.
So he understands, maybe better than anyone, how the game is played… and how the deck is stacked to favor the insiders, the elite, the cronies, and the Deep State.
David was cheerful when we met him on Wednesday. He makes “bubble finance” trades – shorting stocks that are overpriced, overhyped, and overdue a slide. Lately, he’s been making good money. And he’s looking forward to better times.
The cronies have gone about as far as they can, he said. He expects the markets to melt down and the credit bubble to burst – soon – marking the end of the Bubble Epoch. We’re not so sure…
The Deep State depends on bubble finance. It won’t give it up without a terrific fight. If the Bubble Epoch goes, it will be over the Deep State’s dead body. Which is the way we’d like it. But it won’t be smooth, easy, or fast.
Negative rates? A ban on cash? Helicopter money? Direct intervention in the markets? Depression? Hyperinflation? Dow 36,000? We’ll probably see it all before this is over.
And now… a Friday classic from the archives…
They Oughtta Know
[Ed note: Originally published January 9, 2003]
Today, we take another look at “ought” – and hope to discover more of life’s secrets. If “Ought” were a person, it would not be a bartender or a good-hearted whore. Ought is not the kind of word you would want to hang out with on a Saturday night… or relax with at home – for it would always be reminding you to take out the trash or fix the garage door.
If it were a Latin noun, Ought would be feminine, but more like a wife than a mistress. For Ought is judgmental… a nag, a scold. Even the sound of it is sharp. It comes up from the throat like a dagger and heads for soft tissue, remembering the location of weak spots and raw nerves for many years.
“Yes, I ought to have begun saving money for our retirement a long time ago,” you tell her.
“You’re right… I ought to have finished college. And I ought to have stopped after the third shot of Jack Daniels.”
Ought is neither a good-time companion nor a boon buddy, but more like the I-told-you-so who hands you aspirin on Sunday morning… tells you what a fool you were… and warns you what will happen if you keep it up.
“You get what you deserve,” she reminds you.
A Dullard, a Wimp, and a Wuss
A man who lets himself be bossed around by Ought is no man at all. He is a dullard, a wimp, and a wuss – a logical, rational, reasonable lump. Thankfully, most men, most of the time, will not readily submit. Instead, they do not what they ought to do, but what they want to do.
Stirred up by mob sentiments or private desires, they make fools of themselves regularly. Besides, they can’t help themselves. Of course, Ms. Ought is right: They get what they deserve. But sometimes it is worth it.
Modern economists no longer believe in Ought. They don’t appreciate her moral tone, and they don’t like it when she wags her finger at them. To them, the economy is a giant machine with no soul, no heart… no right and no wrong. It is just a matter of mastering the knobs and levers.
Since early in the 20th century economists have dreamed of “improving” the economy by means of central planning – since they of course “know better” than the market!
Cartoon by Claudio Munoz
The nature of the economists’ trade has changed completely in the last 200 years. Had he handed out business cards, Adam Smith’s would have borne the professional inscription: “Moral Philosopher,” not “Economist.”
Smith saw God’s “invisible hand” in the workings of the marketplace. Trying to understand how it worked, he looked for Oughts everywhere. Everywhere and always, people get what they deserve, Smith might have said. And if not… they ought to!
Today, the “Ought To” school of economics has few students and fewer teachers. Only here at the Diary is the flame still alive, flickering. Most economists consider it only one step removed from sorcery.
“Call it the overinvestment theory of recessions of ‘liquidationism,’ or just call it the ‘hangover theory,’” Paul Krugman began his critique of the Ought To school.
“It is the idea that slumps are the price we pay for booms, that the suffering the economy experiences during a recession is a necessary punishment for the excesses of the previous expansion…”
“The hangover theory is perversely seductive – not because it offers an easy way out but because it doesn’t,” he continued in his December 1998 attack.
“It turns the wiggles on our charts into a morality play, a tale of hubris and downfall. Powerful as these seductions may be, they must be resisted, for the hangover theory is disastrously wrongheaded…” he concluded. In Krugman’s mechanistic world, there is no room for Ought.
It is hard to believe that Mr. Krugman actually won a Nobel Prize in Economics. The above cartoon alludes to the fact that after the WTC attack, he seriously argued in his NYT column that the devastation had a “good side” as it would produce “economic stimulus”. Calling such a view economic ignorance runs the risk of insulting the term “ignorance”.
If the monetary grease monkeys of the Great Depression of the 1930s or of Japan in the 1990s failed to get their machines working properly, it was not because there are any invisible hands at work or any nagging moral principles to be reckoned with… but because they failed to turn the right screws!
It is completely incomprehensible to him that there may be no screws left to turn… or that the mechanics might inevitably turn the wrong screws as they play out their roles in the morality spectacle. Krugman is hardly alone.
Dilbert’s boss gets lectured by the master
Cartoon by Scott Adams
As the 20th century developed, mass democracy and mass markets gradually took the Ought out of both politics and markets. By the end of the century, investors no longer cared what interest rates ought to be… and voters no longer felt that the U.S. budget ought to be balanced. Whatever problems emerged, the feds would fix them!
In the 19th century, a man would go bust, and his friends and relatives would look upon it as a personal, moral failing. They would presume that he did something he oughtn’t have.
He gambled. He drank. He spent. He must have done something. But as economies collectivized, the risk of failure was removed from the individual and spread among the group.
If a man went broke in the 1930s, it wasn’t his fault; he could blame the Crash and Depression…
… if people were poor, it wasn’t their fault; it was society’s fault, for it had failed to provide jobs…
… if investors lost money, that, too, was no longer their fault, but the fault of the Fed… or the government…
… and if consumers spent too much money, whose fault was it?
The Fed had set rates too low… or something.
In every case, the masses recognized no personal failing. Instead, the failure was collective or technical… The mechanics had failed to turn the right screws. In politics, the masses recognized no higher authority than the will of the sacred majority. No matter what lame or abominable thing they decided to do, without an “ought,” how could it be wrong?
Likewise, economists won a Nobel Prize for pointing out that markets always know best. The Efficient Market Hypothesis demonstrated that the judgment of millions of investors and spenders is hard to improve upon. The method of modern economics shifted from exploring what a man ought to do… to statistical analysis.
“There is more than a germ of truth in the suggestion that, in a society where statisticians thrive, liberty and individuality are likely to be emasculated,” wrote M.J. Moroney in his Facts From Figures book.
“Historically,” Moroney explained, “statistics is no more than ‘State Arithmetic,’ a system by which differences between individuals are eliminated by the taking of an average.
“It has been used – indeed, still is used – to enable rulers to know just how far they may safely go in picking the pockets of their subjects.”
M.J. Moroney’s “Facts from Figures” – as you can see from the book’s price, this was first published several credit bubbles ago. Moroney fully understood why the State is so eager to collect statistics on everything – they provide it with the “justification” to meddle in our lives.
Economists attached sensors to various parts of the great machine as if they were running diagnostics on an auto engine. Inflation, unemployment, GDP – depending upon the information they receive, they twist up interest rates… or open up the throttle to let in more new money. But had not the efficient market already set rates exactly where they needed to be?
As far as we know, no theory was ever offered to explain the contradiction. Markets are believed to be perfect. Yet, PhD economists believe they can override them and make them more perfect. They must believe they are smarter than all the millions of savers, lenders, and borrowers put together.
They oughtta know better.
Chart by: StockCharts
Chart and image captions by PT
The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.
You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Most read in the last 20 days:
- Gold Sector: Positioning and Sentiment
A Case of Botched Timing, But... When last we wrote about the gold sector in mid February, we discussed historical patterns in the HUI following breaches of its 200-day moving average from below. Given that we expected such a breach to occur relatively soon, the post turned out to be rather ill-timed. Luckily we always advise readers that we are not exactly Nostradamus (occasionally our timing is a bit better). Below is a chart of the HUI Index depicting the action since the January...
- India: The next Pakistan?
India’s Rapid Degradation This is Part XI of a series of articles (the most recent of which is linked here) in which I have provided regular updates on what started as the demonetization of 86% of India's currency. The story of demonetization and the ensuing developments were merely a vehicle for me to explore Indian institutions, culture and society. The Modimobile is making the rounds amid a flower shower. [PT] Photo credit: PTI Photo Tribal cultures face...
- The Long Run Economics of Debt Based Stimulus
Onward vs. Upward Something both unwanted and unexpected has tormented western economies in the 21st century. Gross domestic product (GDP) has moderated onward while government debt has spiked upward. Orthodox economists continue to be flummoxed by what has transpired. What happened to the miracle? The Keynesian wet dream of an unfettered fiat debt money system has been realized, and debt has been duly expanded at every opportunity. Although the fat lady has so far only...
- Welcome to Totalitarian America, President Trump!
Trump vs. the Deep State If there had been any doubt that the land of the free and home of the brave is now a totalitarian society, the revelations that its Chief Executive Officer has been spied upon while campaigning for that office and during his brief tenure as president should now be allayed. Image adapted from the cover of “Deep State #5” - depicting an assassin from the future President Trump joins the very crowded list of opponents of the American...
- March to Default
Style Over Substance “May you live in interesting times,” says the ancient Chinese curse. No doubt about it, we live in interesting times. Hardly a day goes by that we’re not aghast and astounded by a series of grotesque caricatures of the world as at devolves towards vulgarity. Just this week, for instance, U.S. Representative Maxine Waters tweeted, “Get ready for impeachment.” Well, Maxine Waters is obviously right – impeaching the president is an urgent...
- Boosting Stock Market Returns With A Simple Trick
Systematic Trading Based on Statistics Trading methods based on statistics represent an unusual approach for many investors. Evaluation of a security's fundamental merits is not of concern, even though it can of course be done additionally. Rather, the only important criterion consists of typical price patterns determined by statistical examination of past trends. Fundamental considerations such as the valuation of stocks are not really relevant to the statistics-based trading...
- Searching for Truth
Heresy or Truth? RANCHO SANTANA, NICARAGUA – In the fifth century, Christian scholars counted 88 different heresies. Arianism. Eutychianism. Nestorianism. If there was a way to “offend” God, they had a name for it. One group of “heretics” argued that there was no such thing as “original sin.” Another denied the trinity. And another claimed Jesus was not divine. Which one had the truth? Depiction of the first Council of Ephesus in 431 AD, convened by Emperor...
- Why the 21st Century Sucks - Turtles All the Way Down
A Truly Sucky Century BALTIMORE – What an awful century! Worst we’ve ever seen. Household incomes are down. Employment is down, with 7 million people in the U.S. of working age without jobs. Productivity growth is down. GDP growth is down – to only about 0.5% per capita last year. Even life expectancies are down. Drug overdoses are up. Suicides are up. One out of every eight children lives in a family getting food stamps. One of out every eight adults takes psychoactive drugs...
- Gold and the Fed's Looming Rate Hike in March
Long Term Technical Backdrop Constructive After a challenging Q4 in 2016 in the context of rising bond yields and a stronger US dollar, gold seems to be getting its shine back in Q1. The technical picture is beginning to look a little more constructive and the “reflation trade”, spurred on further by expectations of higher infrastructure spending and tax cuts in the US, has thus far also benefited gold. From a technical perspective, there are indications that the low at $1045.40,...
- The Unstable Empire – A Campfire Tale
Campfire Tale Caesar: The Ides of March are come. Soothsayer: Ay, Caesar, but not gone. — Julius Caesar, Shakespeare GRANADA, NICARAGUA – Today, we stop the horses and circle the wagons. For 19 years, we have been rolling along, exploring, discovering. We began with the assumption that we didn’t “know” anything - so we kept our eyes open. Now we know even less. Famous people who knew nothing and were not shy to admit it: Sergeant Schultz...
- Off the Beaten Path in Mesoamerica
Greeted by Rooster There’s an endearing quality to a steadfast rooster call at the crack of dawn when overheard from a warm country farmhouse. There’s a reassuring charm that comes with the committed gallinaceous greeting of daybreak that’s particularly suited to a rural ambiance. The allure of a morning cock-a-doodle-doo somehow falls flat in all other settings. Good morning everyone! Before meteorological forecasts were available on TV and smart phones, people...
- Why Silver Went Down – Precious Metals Supply and Demand
Rumor-Mongering vs. Data The question on the lips of everyone who plans to exchange his metal for dollars—widely thought to be money—is why did silver go down? The price of silver in dollar terms dropped from about 18 bucks to about 17, or about 5 percent. Reportedly silver was already assassinated in the late 19th century... so last week they must have assassinated its corpse. [PT] Illustration taken from 'Coin's Financial School' The facile answer is...