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Hallmark of an Economic Ponzi Scheme (hussmanfunds.com)
216 points by yuhong 6 months ago | hide | past | web | favorite | 114 comments

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.

> 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.

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.


Savings culture has beat me into submission, it only took a couple near death experiences from hitting zero in the bank account. So now what? My life is boring, fine. I accept I am a simple piece of human meat. Save for enough years and I suppose I can dream again.

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

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.

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.

"How about letting the productive capacity of the economy work for consumers rather than for politicians?"

Seriously, what are you talking about? If the government gives a large tax cut to every citizen, that citizen is also a consumer. When they take that tax cut money and they go spend it, then the large deficit is being put to work for consumers rather than for politicians.

Last time I checked, the Federal government was the consumer of about 1/3rd of the Federal budget. The rest of the budget is income transfers that are spent by someone else (for instance, Social Security, and also the money transfers to state and local governments, who then become the final consumers).

There are situations where it makes sense for the government to be the consumer of goods and services -- building bridges and ports and airports and such. Also, running the military. One can make the case that the USA would benefit from infrastructure spending right now. However, my original comment was completely neutral on the subject of who should spend the deficit. I only made the point that when productive capacity is going to waste due to lack of demand (in the context of this article, following a catastrophic shock to the financial system) then Congress should ensure a deficit sufficient to ensure the use of that productive capacity.

If Wall Street is not to blame for "business cycles", why are you against bailouts?

There's no such thing as sound money, it's always being manipulated. This is by design.

If I may suggest, looking into “Keynesian economy” will make it clearer what the gp meant.

Both conservatives and progressives subscribe to this theory, so your time will not be wasted.

“If congress would do its job...” is an interesting point. Congress have all sorts of incentives to consider “their” job is to stay elected by keeping special interests and local constituents happy. Perhaps we should have a few members of congress who are elected by the whole country and answer to the interests of the nation as a whole.

"a few members of congress who are elected by the whole country and answer to the interests of the nation as a whole"

I strongly agree. I would go further. The idea of a regional representative might have made sense in an era before the Internet, before the telephone, before the telegram and even before railroads could ensure fast delivery of written mail, but it does it make sense now? Why not have a legislature where every member is chosen based on a vote of the whole nation? Some parliamentary democracies do this, and their policies do seem more focused on national interests, as opposed to a bunch of local interests. Also evaporates the problem of gerrymandering.

> Why not have a legislature where every member is chosen based on a vote of the whole nation?

Because then whichever party currently has the support of the majority of the country would win every seat. Yes, you could do things like stagger elections, but overall I think it'd be worse: say each representative has a six-year term and there are six annual elections, you basically have six blocs in Congress instead of 435 members.

And of course the United States comprise a federal republic; most issues simply shouldn't be federal, and the vast majority are definitely not national. Who outside of Massachusetts cares if Massachusetts makes wearing a leek on St. David's Day compulsory or forbidden?

"Because then whichever party currently has the support of the majority of the country would win every seat."

That is incorrect. Every democracy that I'm aware of, which uses national voting, also has proportional representation based on the vote. The rules vary from country to country, but generally speaking, if a party gets 10% of the vote, then it gets 10% of Parliament. If they get 43% of the vote, then they get 43% of Parliament.

About this:

"most issues simply shouldn't be federal"

This is a straightforward assertion of nostalgia, regarding an era that died out more than a century ago. Nowadays nearly all politics is either national or international. Small scale political divisions simply get in the way of efficient government.

> Nowadays nearly all politics is either national or international.

I disagree. Just the politics you hear about. The rest of it is happening all around us, but your local paper went bust.

Local papers going bust is a big part of why politics is so national now.


Americans historically don't want an efficient government fucking them over efficiently. What do you want to do so efficiently at a national level? National defense, I'd agree, but with nuclear weapons, the early American ideal of no standing army seems like something to go back to.

Which countries have a nationally elected parliament?

Yeah, okay, but the candidates in those parliaments are still selected locally. It's just that the proportion is selected nationally.

Different branch, but isn't that effectively the President/Vice-President? Especially when you consider the VP is the head of the Senate.

Now it is, but the president originally won votes from representatives of the states (IIRC).

I think the US needs the ability for recall elections. It also needs newer voting procedures.

The President is only indirectly elected by the country as a whole. Therefore, the president is highly incentivized to pander to a half-dozen or so states. And a few key voters within those states. It's exactly the same problem created by regionally-allocated representatives; the only difference is that the mechanism is just a little more opaque.

Because strong presidents drive policy-making, this difference ("a few key states" vs. "the country as a whole") definitely shows up in Congressional behavior.

A much simpler (and more plausible) solution to chapium's problem is simply getting rid of the electoral college.

So instead of pandering to one small set of states you’d rather they pander to a different small set of states?

Perhaps the problem is federalism.

Hear hear... A parliamentary democracy would probably be better, but that’s not going to happen.

> A much simpler (and more plausible) solution to chapium's problem is simply getting rid of the electoral college.

Which would then require that a candidate only pander to an even smaller number of densely populated cities.

It would be far better to revoke much of the power of the central government rather than to try and debug our way through to a mythical process by which all individual interests are considered. Because, in the end, minority interests will always be cast aside once the election is over anyway.

> Which would then require that a candidate only pander to an even smaller number of densely populated cities.

NYC/LA/Chicago combined is only 15M people. That's clearly not enough people to win a majority of a 300M+ population. Perhaps you mean a wider class of cities. But 80% of Americans live in cities! If you can't get elected by "pandering" to a whopping 80% of your electorate then something is terribly wrong. We have to choose a very "just right" definition of "city" for your assertion to be true.

But there's an even more important misunderstanding here.

When discussing this topic, many people get distracted by the fact that removing the electoral college would increase the voting power of Massachusetts residents and decrease the voting power of Montana residents in presidential elections.

This is a distraction because neither Massachusetts nor Montana is the winner in the current system! It's states like Pennsylvania and Wisconsin that have a truly distortionary amount of power in the current system. Those states are not particularly rural or particularly urban.

Here's the key observation that could make changes to the electoral college politically feasible: if you don't live in a presidential swing state, getting rid of the electoral college increases the power of your region in selecting the president regardless of the size of your state/city.

So, this is not a case of favoring one small set of states over another small set. Removing the electoral college would substantially weaken the power of 5-6 states over the Executive branch and increase the power of the other 45 states (some more than others, sure, but nearly everyone wins compared to the status quo).

> Because, in the end, minority interests will always be cast aside once the election is over anyway.

This is exactly why I favor keeping Congress as it is but reforming the electoral process for the Executive branch. Montana has a very loud voice in the Senate and House relative to its population. I do not suggest changing that.

> It would be far better to...

1. An omniscient and beneficent dictator would be even better; the point of my post was to suggest plausible alternatives :-)

2. There are many merits to federalism, but this is quite a bag of worms and we're already straying OT.

When I think about history, and try to come up with initial conditions in government that could have brought the native tribes on board rather than deporting and destroying them, I thought that maybe people could make a voluntary declaration of their cultural identity during voter registration and again while voting. The House of Representatives would have a separate fixed pool of seats for cultural representation, but the cultural groups would not be guaranteed at least one seat, like the states; if your group doesn't have enough membership to meet the cutoff, you don't get seats that election. Every group with at least one Representative would get two seats in the Senate. Only those declaring for a culture could vote in the races for their seats.

You'd end up with the Senator from Southern Baptist arguing with the Senator from Postmodern Counterculture, or the Representative in Hispanic-American seat 5 hashing things out with the Representative from Secular Scientists. Mergers and schisms could cause the representation to track with changes in the population. Perhaps Iroquois Confederacy would have to merge with Algonquian Peoples and Five Civilized Tribes to stay politically relevant. Anglo Male Landowners might split into Urban-Industrial and Southern Whites.

It never could have happened, though. The only cultural group with representation back then was Anglo Male Landowners, and they were unlikely to share power voluntarily.

Anglo Male Landowners are still over-represented in US federal government.

I don't think an "at large" position would actually represent the whole country. It would give more power to the one of two political parties with support of the majority that election. You really need a mechanism to ensure minority positions can get more representation, such that any majority blocs have to seek consensus with at least one minority bloc to get anything done. The two-party system is washing out a lot of voices that never even get lip service from anybody, ever.

> Bubbles and crashes will repeat again and again, and nothing will be learned from them.

This is a larger scale version of the same psychological factors that power Las Vegas. Go to a Vegas casino's slots section and you'll see people sitting for hours and hours and hours staring blankly into slot machines. They're kept there by those hits of dopamine they get when they occasionally win, and the slots are calibrated so as to time those wins so as to slowly empty their wallets over time.


Gamified social media, grinding-based MMORPGs, adversarial bullshit jobs, and many other things share similar characteristics.

Should we expect humans to behave differently on Wall St.?

I just want to make a point about the analogy (because it is a very commonly used one) given the additional and often overlooked aspects of what also powers casinos, namely social interaction. If you go to a casino today (almost anywhere but the few very touristy ones on the strip) you'll see a lot of folks who are just lonely and for whom gambling fills an emotional void. The dopamine hits from winning are nice, but the power of having someone who knows your name and your drink order and has a conversation with you shouldn't be overlooked as a motivating factor for why people are at those machines day after day hour after hour.

Source: Working as a bank teller near the Reno strip and having people of all walks of life come by day after day to get cash before going to the casino

edited last sentence for clarity

What are "market internals"? I didn't see that defined in the article.

> 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.

I'm not sure how you get that from the quoted passage, nor from the article.

The author doesn’t seem to like fiscal deficits either, though, as they too can lead to asset bubbles.

I don't like it either BTW. My favorite is how spending on the FBI/NSA is based on government debt.

“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.

> 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

[2] https://fredblog.stlouisfed.org/2018/02/are-wages-increasing...

[2] https://www.wsj.com/articles/grandfather-of-cdos-trying-to-d...

> 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

> 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...

But the big problem with CPI is that it fudges housing costs so that it doesn't properly take into account the massive rise in property prices.

Heres how it could be fixed: http://www.slate.com/blogs/moneybox/2014/02/24/housing_infla...

The U.S. measures mean real wages adjusted by cost of living to the county level. For example, Manhattanites earned 39.9 1999 U.S. dollars in 2009; that went up, adjusting for cost of living, to 50.36 in 2016 [1]. This trend, of higher real wages today than pre-crisis, is substantiated across the population.

Real wages have not gone up as much as productivity. And their gains have been unequally distributed. But it is important, in such discussions, to maintain objectivity. Most Americans are better off than they were before the crisis.

[1] https://fred.stlouisfed.org/series/MWACL36061

The page you linked: https://fred.stlouisfed.org/series/LES1252881600Q Is employed wages which is why it went up from 2007 to 2009. It's really not measuring what you're describing.


Employment rate in the United States from 1990 to 2017. 63% in 07 60% in 2017. So we still have not gotten back, and it's still down.

PS: On very long timescales employment rate is a poor metric, but over the short term it says a lot more about the economy than 'unemployment' rate or employed wages. It for example very clearly shows the last 2 recessions unlike employed wages.

See [1]. It's really hard to tell and there are big short-term swings.

[1] https://fredblog.stlouisfed.org/2018/02/are-wages-increasing...

> It's really hard to tell and there are big short-term swings

I completely agree. That said, we have enough data to conclude that real wages are higher today than they were pre-crisis for the vast majority of Americans. The uncertainty is more pronounced if one were to ask the same question in respect of the last 4 or 5 years, in which case I'd have to say "we don't know".

"for the vast majority of Americans"

That isn't quite right. Labor force participation fell after 2008, and it has never recovered. While wages might have seen a revival for those lucky enough to have a job, there remains a large block of people who were pushed out of the work force and never found a way back in. See the chart here:


Labor force participation is age dependent. If someone is 45 they expect to work another 20 years. But if they lose their job, they have little hope of finding another job that pays as much as their previous job. Generally, an unemployed 50 year old would be lucky to get a minimum wage job. Presumably they made more than that during their career. They won't get back what they used to make (exceptions for those at the peak of their professions).

So folks with jobs are seeing slightly higher wages, but you also need to take into account all the folks who lost their jobs permanently.

> you also need to take into account all the folks who lost their jobs permanently

Another group that needs to be taken into account is the younger generation that is having problems even starting a career.

My sister graduated from university a few years ago, and - like almost everybody else she knows in her generation - is bouncing between unemployment and terrible minimum wage jobs (some are de facto lower than minimum wage due to wage theft).

Baby boomers had the luxury of low housing prices, a massive stock bull market, and low education costs. There was never a better time to start a business -- overhead was low. The generation coming up now has to hit the proverbial lottery to have a similar chance today given the high fixed living expenses of housing, student loans, and health care.

Don't forget about biotech. The whole medical/pharma industry hasn't really changed for over 20 years. CRISPR is pretty much common knowledge but there's tons of other less-known tech being developed in this field that's going to slowly hit the market in next 10 to 20 years.

The biggest change in pharma in the past 20 years is that the FDA loosened direct to consumer advertising restrictions in 1997. Now 9 out of the top 10 pharma companies spend more on advertising than they do on research.


That's because the nature of drug development has been changing significantly over the last 20 years as the well of small molecule blockbuster drugs runs dry. Large pharmaceutical companies are becoming acquisition machines for startups that show promise in the early stages of drug development instead of spending their own capital on research. They do this to increasingly dump more and more of their risk onto venture capitalists and other institutional investors as the cost of drug development climbs slowly upward. Public numbers for pharma R&D budgets rarely reflect the acquisition costs, focusing only on the follow up approval process.

The consumer advertising change did contribute to this though, by allowing pharma companies to concentrate their core competency on acquisition, distribution, and marketing instead of R&D.

I'd push back against biotech/pharma/medical industry not really changing for 20 years. The advances of computation and biostatistics that leverage increasing computational power are huge waves to hit the industry. The field of pharmacoepidemiology, for instance, which uses computer programs to analyze big pharma data, that barely existed in 1998. Consider all the analysts and researchers using tools never even dreamed of in 1998, whether we're talking modeling of biological processes, advanced microscopy, advances in countless biological fields that make the process of manipulating cells much more easy. It's just not accurate to say the field hasn't changed for over 20 years.

Talk a walk around MIT 20 years ago and this year and there would be a MASSIVE build-out of biotech companies. That alone is evidence to refute your claim.

too unreliable for the purposes of economic growth, tbh.

based on my time in the industry, the typical biotech company lives with one foot in the grave -- and we're talking about the ones which have a product on the market.

Based on my time in tech, every company lives with one foot in the grave unless they're a post-exit giant. Hell, I have a whole sheet in my budget dedicated to what I'm going to do when Uber goes bust or stops subsidizing my transportation.

Data from the Venture Capital Association show that annualized returns from biotech investments were double that of the tech startup scene at 8% to 4% with comparable investment volume. Throw in the biotech companies that have multibillion dollar IPOs with zero revenue and you're just looking at a higher risk, higher reward version of tech.

the extreme brevity of the financial memory

is a product of the extreme brevity of political memory. These people know exactly what they are doing.

My favorite is Google, Larry/Sergey, and the ad bubble. It is so complex I even wrote an entire essay about it.

Don't forget the acknowledged end of Moore's Law... which may well lead to reduced investment (due to lower perceived ROI), which is a self-fulfilling prophecy. I'd also say that the mobile and Internet Ad spending may peak by 2020...or not.

OTOH, Big Deep Artificial Learning Data Intelligence.

Well, what about Deep Real-time Machine Learning at scale in the Cloud on Big Data powered by Blockchains™?

And to a non-tech this basically translate to "Super Cowboy USA Hot Dog Rocket Ship American Number One"...

As I grew older I start to feel that tech community have the responsibility to stop everything from turning into marketing buzzwords.

That actually sounds like a really good idea if it's possible.

It would be a blockchain-based neural network which people can sell training data to (in exchange for the underlying cryptocurrency) and which other people can use via an API to do pattern recognition on their own user data (by paying in the same cryptocurrency).

It would be a decentralized, autonomous AI.

That sounda like an incredibly bad idea from incentives and exploitability alone. Machine learning on public data is bad enough /without/ paying people for it. At that point you'll get random garbage from a bot at best or deliberate attempts to turn your application as vulgar, violent, and racist as possible. Just look at the Twitch talking banana and the sheer level of effort to make it say racial slurs.

The redditors in /r/machinelearning have shot this idea down many times. A few common arguments:

1) It costs more and isn't as performant as tuned machines. 2) The training data is very valuable and shouldn't be shared on a blockchain and restricted to a closed network.

Maybe there is one advantage though. Crypto people have bought up all the GPU's.

1) There are many possible implementations. Right now the problem is that very few software engineers understand blockchain sufficiently so that they can design efficient solutions. There is always an overhead when coupling a service to a blockchain but it can be minimal if done correctly.

2) People get paid to provide quality training data... So yeah it's valuable but if there is a built-in financial incentive to share data with the system then people will do it. Also, other people could get paid to verify/curate the training data. The system just needs to setup the right incentives.

Why would Tesla share valuable training data with Ford?

Didn’t you to forget to include IoT?

Nah IoT is so 2017.

IoT is definitely going to be a thing, but only after the market realizes that connecting your light bulb to the internet so that you can turn it on and off from the Bahamas makes zero fucking sense.

Are you trying to say that my startup that creates deep learning solutions in blokchain for internet of self-driving things might not be successful?

Not unless your parents donated millions to Stanford.

> It's about time for Silicon Valley to tank.

I think the ZTE dispute may be the inflection point here. Despite their evident complacency to date China isn't going to allow itself to remain vulnerable to US semiconductor embargoes. Silicon Valley will see its core competency commoditized.

> The next big thing may be solar, wind, and storage taking over the energy industry

That, and perhaps also space. If half of the plans on the board are realized we're going to increase the number of operating satellites by an order of magnitude, for starters.

> Silicon Valley will see its core competency commoditized

It's been a long time since semiconductors were Silicon Valley's core competence.

>The next big thing may be

how about autonomous cars, weapons, and everything else in between?

>That's a slow, capital-intensive, heavy-industry infrastructure upgrade, driven by manufacturing cost reduction.

manufacturing cost reduction would come from those autonomous systems and overall tech based approach (when Musk succeeds with his Model 3 production goals it will be only light preview of autonomous manufacturing of the future), and as result the "infrastructure upgrade" will be faster and less capital-intensive.

In general, the SV starts to move beyond the pure computing tech and into the other industries. Again, Musk as an example, with Tesla and SpaceX being more of tech companies in car and space business and less of just car and space companies. Or Uber - a tech company in taxi business. One can also see a rise of a tech company in agriculture, be it farm-in-container or autonomous fleet of tractors doing its stuff on huge people-less farms (kind of next iteration of transition like that described in Grapes of Wrath)

And the "solar, wind, and storage taking over the energy industry" also will be done based on tech, if not by a tech company, as the distributed and less predictable nature of those sources would require orders of magnitude better monitoring of the whole energy grid, real-time prediction, planning and redistribution.

"based on tech" as opposed to based on belief?

as opposed to human labor. In other words, robots and software.

"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.

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.

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

Link to the essay for those who are unfamiliar: http://yuhongbao.blogspot.com/2018/04/google-doubleclick-moz...

When have businesses not treated people as consumers?

I mean treating people as consumers to extract more and more money from. Note that I am just saying that the current economy encourages such a culture too.

Consumer culture was created really at the dawn of the 20th century. The elites realized that in order to keep 'growth' going they had to get people to continuously 'buy stuff'. Hence consumer culture has been systematically promoted since then.

I once visited a friend in London, his family had a really nice property, worth millions for sure. And then in this kitchen some really funny ancient oven and toaster stuff. It still worked fine. So why replace it? North Americans just keeping buying new, we're the epiphany of that culture.

But at some point in your career you might connect the dots and realize you need people to 'buy buy buy' in order for your sales to remain healthy and for you to keep your job so you can support your family etc. etc..

It's a weird vicious/virtuous circle and I don't thin UBI etc. will solve it. There are innumerable actual innovations and advancements that come out of the rat race :).

> Consumer culture was created really at the dawn of the 20th century. The elites realized that in order to keep 'growth' going they had to get people to continuously 'buy stuff'

This reverses cause and effect. For most of human history, real productive capacity didn't change from generation to generation. Elites fought to sit on more stuff; there was no point bringing peasants into the mix.

The industrial revolution (and the Black Plague, in Europe) changed that dynamic. Real economic growth became a thing. And workers needed to be competed for. That gave them bargaining power in the economy, which they converted into re-tooling it away from solely making toys for the elites and towards producing goods and services for the masses.

It's always comforting to imagine some disembodied "elites" calling the shots and making a plan. In reality, our systems are more chaotic.

> And then in this kitchen some really funny ancient oven and toaster stuff.

Sounds like an AGA [1], they are still a consumer culture signal even if they don't look it to an outsider.

[1] https://en.wikipedia.org/wiki/AGA_cooker

If so, the parent post couldn't have chosen a more ironic example. AGA cookers are a ridiculous Veblen good, regardless of age.

If the AGA is new (within the last decade or two), those people spent tens of thousands of dollars on a freaking oven. That's more than most people would spend on an entire kitchen remodel.

If the AGA is not new (from before 1990 or so), it's horrendously energy inefficient. A modern sub-$1,000 oven would pay for itself in energy savings in no time.

> we're the epiphany of that culture


Or, if you want to use hyperbole, we're the apotheosis of that culture--in the "exalted or glorified example" sense.

Note that what I mean is that it is not just to buy stuff, but also to extract as much profit as possible. And commodities where that isn't possible tends to be outsourced to other countries like China, making our trade deficit worse.

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...

Or, you know, we could be moral beings and create solid protections from the sharks among us. Even if those protections mean there's a ceiling on profits, or even if it feels like you have a gun to your head as one of the "enlightened and responsible" beings.

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

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.

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.

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)."

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.

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.

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.

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?

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.

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:


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

How are they even still in business?

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).

it's an interesting perspective that provides a dissenting opinion. it doesn't really need to be correct to stimulate thought and lead you to a better disposition in your own investments.

notably, he makes no specific suggestions on what kind of stuff people should buy or what they should do to take advantage of both the upside (the bubble) and the downside (the crash). it might be because there is some law stopping him from giving that advice, i'm not sure.

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).


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.

A negative take on one of Hussman's funds: http://thereformedbroker.com/2017/09/05/when-the-hedge-is-wo...

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.

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.

> 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.

> zero or negative rate

i don't understand how this is even possible.

> 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

Your chain of logic isn't correct. Money isn't worthless today because rates are 0%. Ask yourself if you really believe that????

After you ponder that a bit, and if you still believe it, send us your money.

Unfortunately for you, I don't have any money to give. When I get my paycheck, I do my best to get rid of it as fast as I can.

> If the interest rate is 0% then it means that money is worthless

Essentially all debt has a maturity (there are rare exceptions). What you're saying is only true if interest rates are 0%, and will be forever more. If someone borrows a lot of money at 0%, they face the risk that eventually they're going to have to refinance at a higher rate.

It's often possible for people to shift the risk towards other entities. In the absence of criminal misconduct, if a corporation goes bankrupt, it wont affect the shareholders or executives. They can still walk away with huge paychecks and bonuses from preceding years.

It's pretty simple; create a corporation with yourself as CEO, make that corporation take a huge loan using overvalued corporate assets (paid for by someone else) as collateral, then as the CEO, give yourself huge paychecks and bonuses and then run the corporation into the ground over the course of a few years. The lower the interest rate, the more time you have to enrich yourself before the company goes belly up.

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

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

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