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:
- India: The World’s Fastest Growing Large Economy?
Popular Narrative India has been the world’s favorite country for the last three years. It is believed to have superseded China as the world’s fastest growing large economy. India is expected to grow at 7.5%. Compare that to the mere 6.3% growth that China has “fallen” to. India's quarterly annualized GDP growth rate since 2008, according to MOSPI (statistics ministry) - click to enlarge. The IMF, the World Bank, and the international media have celebrated...
- Gold Sector Update – What Stance is Appropriate?
The Technical Picture - a Comparison of Antecedents We wanted to post an update to our late December post on the gold sector for some time now (see “Gold – Ready to Spring Another Surprise?” for the details). Perhaps it was a good thing that some time has passed, as the current juncture seems particularly interesting. We received quite a few mails from friends and readers recently, expressing concern about the inability of gold stocks to lead, or even confirm strength in gold of...
- Don’t Blame Trump When the World Ends
Alien Economics There was, indeed, a time when clear thinking and lucid communication via the written word were held in high regard. As far as we can tell, this wonderful epoch concluded in 1936. Everything since has been tortured with varying degrees of gobbledygook. One should probably not be overly surprised that the abominable statist rag Time Magazine is fulsomely praising Keynes' nigh unreadable tome. We too suspect that this book has actually lowered the planet-wide IQ –...
- What is the Best Time to Buy Stocks?
Chasing Entry Points Something similar to the following has probably happened to you at some point: you want to buy a stock on a certain day and in order to time your entry, you start watching how it trades. Alas, the price rises and rises, and your patience begins to wear thin. Shouldn't a correction set in soon and provide you with a more favorable buying opportunity? Apple-Spotting – a five minute intraday chart showing the action in AAPL on February 1, 2017 - an...
- Incrementum Advisory Board Meeting, Q1 2017 and Some Additional Reflections
Looming Currency and Liquidity Problems The quarterly meeting of the Incrementum Advisory Board was held on January 11, approximately one month ago. A download link to a PDF document containing the full transcript including charts an be found at the end of this post. As always, a broad range of topics was discussed; although some time has passed since the meeting, all these issues remain relevant. Our comments below are taking developments that have taken place since then into...
- Trump and the Draining of the Swamp
Swamp Critters BALTIMORE – The Dow is back above the 20,000-point mark. Federal debt, as officially tallied, is up to nearly $20 trillion. The two go together, egging each other on. The Dow is up 20 times since 1980. So is the U.S. national debt. Debt feeds the stock market and the swamp. What’s not up so much is real output, as measured by GDP. It’s up only 6.4 times over the same period. Debt and asset prices have been rising three times as fast as GDP for 36 years! Best...
- Gold and Silver Divergence – Precious Metals Supply and Demand
Gold and Silver Divergence – Precious Metals Supply and Demand Last week, the prices of the metals went up, with the gold price rising every day and the silver price stalling out after rising 42 cents on Tuesday. The gold-silver ratio went up a bit this week, an unusual occurrence when prices are rising. Everyone knows that the price of silver is supposed to outperform — the way Pavlov’s Dogs know that food comes after the bell. Speculators usually make it...
- Making America Great Again – How to Judge Policy
A Simple Formula MIAMI – How do we know if new programs will make the economy better... or worse? Here’s a simple formula: W = rv (w-w – w-l) That is, wealth is equal to the real value of win-win exchanges minus the loss from win-lose exchanges. Yes, dear reader, it’s as simple as that. Like a whittler working on a piece of wood, we’ve shaved so much off, there is nothing left of it... except the essential heartwood. When devising a win-win,...
- When Trumponomics Meets Abenomics
Thirty Year Retread What will President Trump and Japanese Prime Minister Shinzo Abe talk about when they meet later today? Will they gab about what fishing holes the big belly bass are biting at? Will they share insider secrets on what watering holes are serving up the stiffest drinks? [ed. note: when we edited this article for Acting Man, the meeting was already underway] Japan's prime minister Shinzo Abe, a dyed-in-the-wool Keynesian and militarist, meets America's...
- The Great Wailing
Regret and Suffering BALTIMORE – Victoribus spolia... So far, the most satisfying thing about the Trump win has been the howls and whines coming from the establishment. Each appointment – some good, some bad from our perspective – has brought forth such heavy lamentations. Oh no! Alaric the Visigoth is here! Hide the women and children! And don't forget the vestal virgins, if you can find any... You’d think Washington had been invaded by Goths, now...
- Receive a One Percent Gift When Buying or Selling a Home
How to Save Money When Buying or Make More When Selling a Home In your professional capacity and perhaps also in your private life, you may be closely involved with financial and commodity markets. Trading in stocks, bonds or futures is part of your daily routine. Occasionally you probably have to deal with real estate as well though – if you e.g. want to purchase an apartment or a house, or if own a home you wish to sell. The people who took this photograph probably want to...
- Silver Futures Market Assistance – Precious Metals Supply and Demand
Silver Is Pushed Up Again This week, the prices of the metals moved up on Monday. Then the gold price went sideways for the rest of the week, but the silver price jumped on Friday. Taking off for real or not? Photo credit: NASA Is this the rocket ship to $50? Will Trump’s stimulus plan push up the price of silver? Or just push silver speculators to push up the price, at their own expense, again? This will again be a brief Report this week, as we are busy...