
Hallmark of an Economic Ponzi Scheme - yuhong
https://www.hussmanfunds.com/comment/mc180604/
======
lkrubner
The thesis statement of this essay is buried fairly far into the essay, but it
seems this paragraph is the heart of their argument:

" _The lesson to be learned from quantitative easing, zero-interest rate
policy, and the bubble advance of recent years is simple: one must accept that
there is no limit at all to the myopic speculation and self-interested amnesia
of Wall Street. Bubbles and crashes will repeat again and again, and nothing
will be learned from them. However, that does not mean abandoning the
information from valuations or market internals. It means refraining from a
negative market outlook, even amid extreme valuations and reckless
speculation, until dispersion and divergences emerge in market internals
(signaling a shift in investor psychology from speculation to risk-aversion).
A neutral outlook is fine if conditions are sufficiently overextended, but
defer a negative market outlook until market internals deteriorate._ "

Basically, this can be read as a complaint about how distorted the financial
markets become when we rely on the Fed to protect us from recessions. If
Congress would do its job, and provide sufficiently large deficits to absorb
the productive capacity of the modern economy, then there would be no need for
the Fed to engage in such extreme behaviors, and we would not see this kind of
distortion in the financial markets.

~~~
clarkmoody
> provide sufficiently large deficits to absorb the productive capacity of the
> modern economy

Are you serious? How about letting the productive capacity of the economy work
for consumers rather than for politicians?

Of course I agree that there should be no bailouts for Wall Street firms, but
I would also argue that the business cycle itself is induced by the lack of a
sound money in the economy. Easy money tricks entrepreneurs into investing in
long-term capital projects prematurely and causes malinvestment.

So Wall Street is not to blame for business cycles. It's the soft-money fiat
system that causes so much economic calamity. When the Fed steps in to stop
recessions, nobody asks why we had the boom that preceded the bust, which was
fueled by the Fed itself.

~~~
njarboe
There was a time before the soft-money fiat system. Not really that long ago.
It was also marked with many boom/bust cycles. The business cycle was probably
first formally named and studied by Jean Charles Léonard de Sismondi and
described in the 1819 book, "Nouveaux Principes d'économie politique"[1]. I
would suggest that the cycle is not necessarily bad. During good times ideas
are tried that would not be otherwise and people with little experience can
get jobs and show their competence. Then some bad year forces some tightening
and a serious evaluation of investments of all types.

The big downfall with recessions is that people with little or no savings can
end up in a very bad place economically. Not sure how or if our consumer
culture could change to a saving culture, but I'd be interested in reading a
book that compares the two.

[1][https://en.wikipedia.org/wiki/Business_cycle](https://en.wikipedia.org/wiki/Business_cycle)

~~~
yuhong
IMO it really became bad after US left the gold standard in 1971 and the
petrodollar was invented.

~~~
Latteland
there seem to be serious problems with the gold standard because of what
attracts people, that it is rigid and unchanging. If the us economy grows a
lot, how do we get more gold? what if a ship with a lot of our gold on it goes
down in the middle of the ocean?

What problems would it improve? if we have a recession, how would the govt
help keep things going (ie print dollars)? Most people wouldn't have been
better off if most large banks had failed then.

~~~
yuhong
The point would be to not print more and more dollars to "boost" the economy
and run more trade deficits, especially using debt. With the gold standard
trade deficits would result in less money being printed.

------
Animats
_“the extreme brevity of the financial memory.”_

Yes. It's only been since 2008 since the US economy tanked, it took five years
to dig out of that one, and real wages never fully came back. That wasn't long
ago.

It's about time for Silicon Valley to tank. There's nothing big in the
pipeline comparable to the Internet or smartphones. Laptops, notebooks,
tablets, and phones have all passed peak sales. The businesses that assume
endless growth are maxing out.

The next big thing may be solar, wind, and storage taking over the energy
industry, which is a good thing. That's a slow, capital-intensive, heavy-
industry infrastructure upgrade, driven by manufacturing cost reduction. It's
going to happen, but it's not a go-go business.

~~~
JumpCrisscross
> _real wages never fully came back_

Real median usual weekly earnings for full-time Americans 16 and over went
from 332 1982-84 CPI-adjusted U.S. dollars in Q4 2007 to 350 in Q1 2018 [1].
Americans are in the midst of record high real wages.

Hourly wages for manufacturing employees haven't recovered to their 2004 peak,
but they too are well above where they were pre-crisis [2].

Broadly, the country's balance sheet is healthier in 2018 than it was in 2008.
Savings are higher, banks are plumper and then economy's productive capacity
has grown. The next recession will be a regular one, not a full-blown crisis.

> _It 's about time for Silicon Valley to tank_

Wall Street may beat us to it:

"Christopher Ricciardi, a former Merrill Lynch banker, was known as the
'grandfather of CDOs' for helping popularize these complex structured products
that blew up during the financial crisis.

Now, he is bringing his experience to another corner of the financial world
with mounds of debt: student loans" [3].

[1]
[https://fred.stlouisfed.org/series/LES1252881600Q](https://fred.stlouisfed.org/series/LES1252881600Q)

[2] [https://fredblog.stlouisfed.org/2018/02/are-wages-
increasing...](https://fredblog.stlouisfed.org/2018/02/are-wages-increasing-
or-
decreasing/?utm_source=series_page&utm_medium=related_content&utm_term=related_resources&utm_campaign=fredblog)

[2] [https://www.wsj.com/articles/grandfather-of-cdos-trying-
to-d...](https://www.wsj.com/articles/grandfather-of-cdos-trying-to-do-for-
higher-education-what-he-did-for-mortgages-1526652000)

~~~
tremon
> Americans are in the midst of record high real wages.

The article shows a different view: total wages dropped as a percentage of GDP
from 50% post-WWII to 42% in 2011. This is the basis for the Ponzi-economy
argument:

 _consumption is largely financed by accumulating debt liabilities to
supplement inadequate wages and salaries, where government runs massive fiscal
deficits, not only to support the income shortfalls of its citizens, but
increasingly to serve and enhance corporate profits themselves_

~~~
JumpCrisscross
> _The article shows a different view: total wages dropped as a percentage of
> GDP from 50% post-WWII to 42% in 2011_

The article and I are in agreement on this narrow point. Wages as a fraction
of GDP are down. Wages, themselves, are up.

Broadly, I disagree with the assertion that our economy's growth is unusually
debt-fueled. Total debt as a fraction of GDP is worryingly high [1]. Strip out
financial sector indebtedness, however, and we're where we were in the 80s.
Household debt explains a relatively narrow slice of recent GDP growth.

[1]
[https://en.wikipedia.org/wiki/Financial_position_of_the_Unit...](https://en.wikipedia.org/wiki/Financial_position_of_the_United_States#/media/File:Components-
of-total-US-debt.jpg)

------
erikb
I don't know. I stopped believing in that the average citizen is really doing
his job of self preservation. We always expect others to keep us save and then
hastily put all our value (work time, energy, money) into lies that tell us
that everything is fine and even better in the future. Blaming Wallstreet is
part of that. Sure, they are selfish sharks. But that shouldn't overshadow
that they have masses of customers who buy the junk from them without ever
checking if everything is really as good as it looks on the cover.

Nowadays I'm worried more about what I as a person can actually do to
circumvent that. And sadly the only reliable thing I can see is becoming part
of the sharks and selling junk, thereby drastically increasing my private cash
budget. Everything else, like raw resources, real estate, stocks, start-ups
are all so overvalued with the b.s. that it's not really worth to put money in
because of so many people continuing to buy despite knowing that the stuff
they buy is overvalued by a margin.

That really makes one sad, you know...

~~~
frockington
The macro commodities picture is looking pretty solid, I've been looking at
getting into raw materials. If anything they seem undervalued

~~~
erikb
Are you buying directly or derivates? With derivates nowadays you might run
the risk that they are not backed by anything. This needs to be considered in
the evaluation.

------
koliber
It tires me when I hear people ranting that some government backed &
sanctioned economic institution is an illegal ponzi scheme.

Why? Because they are a ponzi scheme, and they are legal by the virtue of
being run by the government.

There are different laws that govern what an individual or a corporation can
do, and what a government can do. We give the government a limited right to do
lots of things (in certain circumstances) which we don't let individuals and
corporations do:

\- kill people (military, capital punishment) \- kidnap people (police
arrests) \- imprison people (jail, prison) \- run protection rackets/extortion
(taxation) \- gambling (state lotteries) \- run ponzi schemes (social security
system, fractional reserve banking)

We agree to all of this as a society. Therefore, it is not illegal.

We should always keep an eye on the extent to which those special rights are
exercised by the government. We should actively discuss and modify laws that
govern these special rights we grant to the government, so that they reflect
the will of the people. However, just yelling "Ponzi scheme! Illegal!" is
ignorant. It's as if someone stood up all of a sudden and yelled "The
government is killing people in wars! That's illegal". Of course they are, and
to a large extent it is legal, because we have implicitly granted the
government that right as society.

~~~
dwater
That does not seem relevant to this article, because it does not call the
system illegal. It calls it "effectively a Ponzi scheme", and then goes on to
offer evidence to support that claim.

A Ponzi scheme is "an investment system where the investment profits are paid
with the money from other investors, and those who experience profit believe
the profits come from non-investors such as business activities, or the
earnings and growth of a company." (Wikipedia)

The author makes a clear attempt at analogy: "Debt-financed prosperity is
typically abetted by central banks that encourage consumers and speculators to
borrow (the demand side of Ponzi finance) and also encourage yield-seeking
demand among investors for newly-issued debt securities that offer a “pickup”
in yield (the supply side of Ponzi finance)."

~~~
koliber
I think you're right. This was more of a pent up reaction triggered by the
article, even though the article is not making that point directly. It seems I
am coming across the naive view a lot lately.

Thanks for listening to me rant.

------
caffeine5150
A buddy of mine is a wealth manager. His opinion is that this guy obtained
significant ears because he predicted and profited off the '08 crisis, but
that overall he's a a bit of a "clown". As linked below, his main fund has a
10% performance of -6.45% and he's basically always bearish.

~~~
Confusion
Is your buddy one of the very few beating the market or is he one of the many
with clients who would be better of just tracking the S&P 500? Because if the
latter, he is just as much of a clown, just one whose strategies by accident
happen to be less bad for their clients.

The number of ‘wealth managers’ who add value for their clients (which can
also be done by reducing risk in exchange for lower yields or in several other
ways) is very small and the remainder are leeches.

------
korethr
I read this lat night. As I read it, I found myself wondering, "Okay, what am
I supposed to do with this info? How am I supposed to act upon this guy's
bearish outlook and pretty charts?"

Somewhere in article, the point is made that one's paper wealth will be hit
hard by the coming crash. My thought there is, "So what?". My present
investments in securities are long term; I'm not planning on having to touch
them for a few decades. In that time period, if the economy stays crashed for
so hard so long that they make no gains over those decades, I'm very likely to
have more pressing immediate problems that I won't have the time or energy to
care about my securities investments.

I remember looking at graphs of the stock market and realizing that, while the
2008/2009 downturn would have been a terrifying time to begin investing, if I
_had_ begun investing then, and ridden out the cycle. I would have come out
ahead. If today's market conditions are the boom of another boom/bust cycle,
why would that not still be true?

------
SagelyGuru
The problem is not with memory but with the fact that it is just too easy, too
tempting and too profitable to run Ponzi schemes, especially one as big as
this. Plus, as any banker would tell you, he who does not steal is robbing his
own family.

------
thinkcomp
I find the economic analysis here extremely compelling, but it's worth noting
that at least one of the Hussman funds has had pretty awful returns
historically:

[https://finance.yahoo.com/quote/HSGFX?p=HSGFX](https://finance.yahoo.com/quote/HSGFX?p=HSGFX)

What I take away from this is that understanding macroeconomic trends is
different than being a successful investor.

~~~
a008t
How are they even still in business?

~~~
exHFGuy
You should question his economic analysis also.

Ask yourself, "if his understanding of markets and economics is correct, how
come he is consistently wrong, over and over, in his investment decisions?"

This guy has been weaving stories about economics for years and years and been
consistently wrong for years and years.

His understanding of how economics and markets work is simply incorrect (even
if it sounds compelling).

~~~
alphacatcher
Being a big shorter isn't for the weary.... Most will accumulate large losses
until they go bankrupt or the freak black swan happens and they make 1000x%
for the trouble (erasing the accumulated losses very quickly, if smartly
positioned).

On the otherside, Bullish banks/etc will make small profits consistently for
long periods of time on bullish bets but when the black swan happens, will
lose everything they made over the years and more, to the shorters (in 2008
banks had record profits until they lost more money than banks ever made in
the history of modern banking).

Gabish?

~~~
a008t
On the other hand:

1\. Determining skill from luck is difficult if we have a very small sample of
successful trades (e.g. shorting banks correctly in 2008, but getting
everything else wrong)

2\. In order for a diversified investor (e.g. into FTSE World, some bonds and
precious metals) to lose everything would require one hell of a black swan.
Some kind of forceful expropriation of their assets is much more likely.

The problem for the shorters now is that the exact same arguments they are
making now could have been made 5 years ago.

------
caffeine5150
A negative take on one of Hussman's funds:
[http://thereformedbroker.com/2017/09/05/when-the-hedge-is-
wo...](http://thereformedbroker.com/2017/09/05/when-the-hedge-is-worse-than-
the-thing-being-hedged/)

------
skybrian
It seems like if corporations are very unequal, we should be suspicious of
averages.

Taking an average for corporations that includes Apple and Alphabet is sort of
like taking average wealth for a small number of people that includes Bill
Gates.

So, I'm not sure how seriously to take this? A company with very high, durable
profit margins doing a stock buyback or taking on debt at low interest rates
doesn't seem like much of a problem either now or in a recession?

Other companies may be in a much more risky position. It seems important to
analyze them in separate groups.

------
grosjona
I think it's related to the interest rate. If the interest rate is 0% then it
means that money is worthless (because in that case debt behaves exactly the
same as actual money)... If money is worthless then assets which produce money
(profit) are also worthless... So what is actually valuable in a world where
money is worthless? Human attention (brand awareness)! Because brand awareness
is probably the only asset that won't be affected by a rise in interest rates.
So brand awareness is the key to getting a good share of tomorrow-money
(which, unlike today-money, might actually have value). So that's why
advertising is so valuable now.

~~~
JumpCrisscross
> _If the interest rate is 0% then it means that money is worthless (because
> in that case debt behaves exactly the same as actual money)_

Zero or even negative interest rates don't mean money is worthless. Money
money, as in cash, always yields zero.

And even in a zero or negative rate environment, there are still assets
(including debt) which have a positive yield. The point of lowering interest
rates is to drive capital to those riskier ventures.

~~~
chii
> zero or negative rate

i don't understand how this is even possible.

~~~
JumpCrisscross
> _i don 't understand how this is even possible_

$1 loaned for one year at 10% means, after 1 year, you get $1 back plus 10¢ of
interest. $1 loaned for one year at -10% means, after 1 year, you get back
$90. This is reality in multiple economies [1].

Traditionally, monetary policy hit a zero bound with rates. Why would one
deposit money at -10% when one can hold cash at 0%? But modern finance
sometimes means it's better to hold bonds yielding -1% than it is to withdraw
physical cash. (For example, to use as collateral.) The ultimate goal of these
policies is to make holding cash so uncomfortable that investors _have_ to
deploy the capital.

[1]
[https://www.bbc.com/news/business-32284393](https://www.bbc.com/news/business-32284393)

------
yuhong
"When U.S. corporate profits are unusually high, it’s typically an indication
that households and the government are cutting their savings and going into
debt." Pretty much one of the reasons why I dislike the current economy and
what I mean by treating people as "consumers" to be extracted from. This has
been a problem since the 1970s.

~~~
yuhong
BTW, the way the current economy works is also why revenue of for example Sun
and Novell declined quickly. I have an entire paragraph about that in the
essay.

~~~
datahack
I really, really enjoyed that. What else have you written?

~~~
yuhong
Link to the essay for those who are unfamiliar:
[http://yuhongbao.blogspot.com/2018/04/google-doubleclick-
moz...](http://yuhongbao.blogspot.com/2018/04/google-doubleclick-mozilla-
essay-final.html)

------
KasianFranks
Flight to quality will go into crypto and for many of the reasons mentioned in
the write-up.

~~~
rwmj
I can't tell if this is satire or not.

