As the pearls piled up, so did his greed grow. A fable for our times, the ultimate disposition of extraordinary monetary policy. Bad news is good news until bad news is all we know. Global growth is the wife. Bernanke is right — economists are not put off by the idea of negative rates. Positive rates permit investing behaviors based on fundamentals and compounding.
Negative rates require investing behaviors based on hope for a greater fool. They talked about Noah and the ark because the story had animals in it. They failed to mention that this was when God massacred all of humanity. The condescension of modern status quo Narrative construction is staggering.
A major European power, a longtime defender of liberal democracy, pluralism and free markets, falls under the sway of a few cynical politicians who see a chance to exploit public fears of immigration to advance their careers. They create a stark binary choice on an incredibly complex issue, of which few people understand the full scope — stay in or quit the E.
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Nothing to see here folks, move along, just a sociable man trying to get out of the heat. Duck Soup Fiddlers Three You can learn a lot about political Narrative creation by looking at dominant forms of satire and comedy. Satire today is as arch and elitist as the status quo institutions it defends, in sharp contrast to the populist, slapstick comedy of the Marx Brothers or the Three Stooges. I wrote my way out of hell.
- Craft Perception and Practice: A Canadian Discourse, Volume 1;
- June 24, 12222!
- Kodiak Tales: Stories of Adventure on Alaskas Emerald Isle.
- The Little Fish and the Whale.
I wrote my way to revolution. I was louder than the crack in the bell. I wrote Eliza love letters until she fell. I wrote about The Constitution and defended it well. And in the face of ignorance and resistance, I wrote financial systems into existence. And when my prayers to God were met with indifference, I picked up a pen, I wrote my own deliverance. Because it takes one of the most powerful and long-lived Narratives in modern history — the Founding Fathers — and tells the story without irony, without condescension, and without the literal whitewashing of other storytellers.
The Old Stories still work when you play them straight. Thank you, Lin-Manuel.
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There was a tale he had read once, long ago, as a small boy: the story of a traveler who had slipped down a cliff, with man-eating tigers above him and a lethal fall below him, who managed to stop his fall halfway down the side of the cliff, holding on for dear life. There was a clump of strawberries beside him, and certain death above him and below. What should he do? Eat the strawberries. What I care deeply about, however, is how the Narrative around these events is being shaped and reshaped, because that Narrative will determine the path and outcome of every election and every market on Earth.
And what I can tell you is that I am shocked by the diminishing half-life of status quo protecting Narratives, by the inability of Big Institutions and Big Money and Big Media and Big War and Big Academia to lock down an effective story that protects the State, even when their competition is primarily comprised of clowns dangerous clowns, but clowns all the same like Donald Trump and Nigel Farage.
History is littered with failed Narratives, once-powerful arrays of Common Knowledge that somehow lose their ability to compel human behavior and eventually become mere myth. Manifest Destiny … Cultural Revolution … these were Narratives every bit as powerful in their day as European Union or Clinton in ours. For example, the Narrative of the American Founding Fathers is as potent today as it was years ago, maybe more so, and that was before Hamilton gave it a new telling and a new power chord. Why are the status quo protecting Narratives faltering so badly?
And as the McKinsey chart here shows , by Q2 they had largely succeeded on all counts, certainly in getting the corporate and government sectors to borrow trillions in new debt. The result, or so the thinking went, of all this pump-priming or bridge-building or whatever metaphor you please would be for all four basic sectors of the global economy — households, corporations, governments, and financial institutions — to consume more and invest more and fail never, which would in turn create a virtuous, self-sustaining cycle of risk taking, real growth, and real wealth creation.
It was a reasonable bet to make. But the bet failed. Some of the time. Well … kind of funny. I guess. First, little of the increased corporate or government borrowing trickled down into jobs or wage income growth. Real wage growth is nonexistent in the Western world. The status quo Narratives could survive and have many times an assault from one wing of the electorate or the other.
But from both simultaneously? These are two entirely different investor populations from a behavioral perspective , with different languages and different investment genotypes. Where can I buy one of those? The only rational owner of a negative rate bond is a pure return seeker; there are zero income seekers holding negative rate bonds. Why is this a problem?
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Because income seekers will continue to own bonds even if the price goes down for a while, anyway; at the very least, they are sticky owners. Return seekers, on the other hand, are not sticky owners at all. They will only own a bond if they think that the price is going up — meaning in this case that yields will continue to become even more negative, i. When that Narrative failed, the entire inverted pyramid came crashing down. If this Narrative fails, the entire inverted pyramid will come crashing down again. Hence my punchline: monitoring this and related status quo protecting Narratives like the concerted effort to paint Brexit as a one-off blunder , just like Bear Stearns was painted in is the only thing that really matters for our investment reality.
What to do? Convexity, convexity, convexity. Our portfolios should minimize the maximum risk the world actually presents, not maximize the reward our crystal ball models predict. Timing, timing, timing. And one more thing.
For me, that means real assets and real yield, fractional ownership in real companies with real cash flows from real economic activity with real people. You know, what a stock market used to mean before it became a Central Bank casino. But is this a hopeless situation? The most important lesson I ever learned from my mentors in this business is this: always live to fight another day.
We can do that.
The useful lesson is that hubris must be confronted, hope is always present, and that preparation and honest actions will see us through any storm. Yes, we can do that. Humpty Dumpty sat on a wall, Humpty Dumpty had a great fall. Brexit is a Bear Stearns moment, not a Lehman moment. Why not? But it is an event that forces investors to wake up and prepare their portfolios for the very real systemic risks ahead.
There are two market risks associated with Brexit, just as there were two market risks associated with Bear Stearns. That could happen today, or it could happen next week if some hedge fund or shadow banking counterparty got totally wrong-footed on this trade and — like Bear Stearns — is taken out into the street and shot in the head. In the long term, the risk is an acceleration of a Eurozone break-up, which is indeed a Lehman moment literally, as banks like Deutsche Bank will become both insolvent and illiquid. There are two paths for this. Brexit just increased the likelihood of these Humpty Dumpty events by a non-trivial degree.
I think it works for while, just like it worked in the aftermath of Bear Stearns. By May , credit and equity markets had retraced almost the entire Bear-driven decline.
How do we prepare? Bottom line … if you ever needed a wake-up call that every crystal ball is broken and we are in a political storm of global proportions, today is it. PS — for some earlier Epsilon Theory notes on Europe, all of which are highly pertinent today, see:. It consists of one word and a period. Negative rates are ice-nine. Spoiler alert: the world ends. It is anticipated that unless interest rates rise sufficiently, one or more classes of the CREF Money Market Account may have negative yields after the waiver ends.
Admit it. Read it again. Emily Dickinson is a total badass. The Federal Reserve Bank of St.