This article was originally published by Charles Hugh Smith at Of Two Minds Blog
All of which sounds very pretty indeed, but it does raise a question: can risk really be destroyed, or can it only be transferred? And if it can only be transferred, then what’s it been transferred to?
What a remarkable moment in time: every asset is lofting higher, with no limits in sight. The path ahead is already well-scouted: the U.S. economy will add a million jobs a month until the cows come home, Covid will continue fading until it basically disappears as an issue, the dollar and volatility will continue their death march toward zero (good for risk assets), oil and commodities are entering a new super-cycle of growth, as are stocks, bonds (now that pesky yields are falling), cryptocurrencies and housing– all are entering super-cycles of high growth and essentially limitless expansion of speculative gains.
It’s dreadful having a skeptical default setting, but there you have it: what could go awry? Seemingly nothing. Everything’s accounted for and for anything out of the blue, we have the trusty Fed Put, the Federal Reserve’s implicit promise to crush any spot of bother with a wall of freshly issued dollars and near-infinite credit.
Look on our works, ye Mighty, and despair, for we are the greatest power in the Universe! Resistance is futile, and so on. Indeed.
Since we’re in an era in which speculators in any asset can’t possibly lose, it’s no surprise that punters are borrowing buckets of cash to increase their stake in the casinos can’t lose gaming tables. The chart of margin debt offers an instructive history of can’t lose speculative borrowing.
Margin debt is money borrowed from brokers against the collateral of stocks, mutual funds, ETFs, etc. The more your portfolio rises, the more money you can borrow on the margin because your collateral is rising.
Let’s start with the sad, pathetic pre-speculative Stone Age of the 1950s, 60s and 70s, dreary decades of rapid economic expansion and higher wages but dismally low levels of margin debt. The poor cave-creatures back then made little use of margin debt because their lives were an unending misery of risk. Back in that Dark Age, stock market participants could actually lose money–oh the horror!
The Black Death of risk roamed the land unhindered until the all-mighty Federal Reserve established its impregnable fortress of the Fed Put: every market decline will be crushed, and speculators will be rewarded.
And so the glorious age of Speculative Mania began. The rules to guaranteed gain were simple:
1. Buy every dip, as the Fed Put would soon reverse any decline.
2. Borrow as much money as possible and throw it onto the gambling tables because the larger your bets, the greater your gains.
With risk vanquished, everyone who embraced speculation became a winner–a big winner. Only chumps didn’t buy GameStop calls and reap a quick $250,000 or more in a few weeks.
And so margin debt soared and speculators prospered. All was right with the world. But then inexplicably, some sort of glitch occurred and the dot-com euphoria popped and stocks actually dropped. Punters received the dreaded margin call for cash or they had to liquidate their positions to reduce their margin debt.
Stocks soon recovered, and easy-to-borrow money flooded into housing and stocks, lifting markets to new euphoric heights. Another inexplicable glitch occurred, however, and that bubble popped, too, with extremely awkward consequences–the Global Financial Meltdown. But after the Fed tossed around a few tens of trillions of dollars in backstops, guarantees, mortgage purchases, bond-buying, lines of credit for any bank that faced losses, and so on, that strange interlude ended and margin debt and speculative gains continued their march to new heights of glory and guaranteed gains.
This brings us to the present unprecedented levels of margin debt and can’t lose speculative mania. Everyone is supremely confident that inexplicable glitches are now impossible, and nothing can possibly go awry on the path to new super-cycles of growth and speculative gains.
All of which sounds very pretty indeed, but it does raise a question: can risk really be destroyed, or can it only be transferred? And if it can only be transferred, then what’s it been transferred to? The only possible answer appears to be the financial system itself. But never mind skeptical questions, the Fed Put is now the greatest power in the Universe and so speculative gains are guaranteed, forever and ever.
“Look on my works, ye Mighty, and despair!”
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away.
This article by Mr Smith, as SHTF posted, was very interesting. So I followed a few links from his various pages, and also found this above bitcoin article. Remarkable, an interesting read on bitcoin, capturing the energy of last resort. Read this, learn something new.
However, it seems the bitcoin event will always be bullish, what will they do when the last hash is discovered and mined? Who will have the incentive to keep the blockchain up and running? Who’s going to pay for all the equipment and energy use once the function of those machines eventually smoothens and calms down, to a mere management of the blockchain function, as profitable mining is no longer feasible or possible?
Speculative mania is supported by poisonous protectionism, the taxpayer backing the insurability of so many ‘financial products’. It’s a worldwide event which answers the age old question; If the whole world is in debt, to whom are we indebted? There is no sound money left except for gold and silver, the closest proximation of a litmus test you’ll get out of the financial system. As the plunge protection team props precious metals up too, as I said, a closest available proximation. Inexorably tied together, one falls the other rises, vice versa.
From where I’m sitting, I used to get 5 silver round ounces for under a hundred just a few years ago, and just paid $150 bucks for a mere 4 of them yesterday. My house has tripled in price in 10 years, if not more, wages not keeping up, although more money is flowing, I still seem to be just affording the same routine measure of purchasing power, sometimes even less. Prosperity by value of money devaluation, resulting in increasing prices, the illusion of gains. Price does not equal value. There sure is a lot more money going around which results in higher prices, yet the question remains, has increased value been delivered?
History provides us the insight we need to understand this issue more clearly, in our complex modern times:
Jackson: I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits among you, and when you lost, you charged it to the bank. You are a den of vipers and thieves. / President Andrew Jackson 1834 on closing the second bank of the United States.
Jackson: There are no necessary evils in government. It’s evils exist only in it’s abuses.
I mean dude, it’s not as complex, you don’t need charts and graphs to explain this, in fact that approach merely props up Mr Van Burean from the dead, his ghastly image still observed in these modern times. Speculation with other peoples money is theft. Abolish the fed. We’re living in the era of the Continental Dollar, all over again. Love it or leave it.
Want a revolutionary movement to correct these offenses? Look no further than history. There is no greater objection than absence. Article 1 section X. No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make any thing but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility.
The sooner people get over the ‘value argument’, and just stick with what actually works, regardless of how difficult it may be to get back there, the sooner the world can be a better place. Nothing will ever replace tangible finite resource as a currency. And once you expend energy to mine gold and silver, no more energy needed, thereby reducing the demand for energy exploration. How high can gold go, how high can silver go? You know before fiat currency took hold in this country, a $5 gold coin was exchangeable as $5 in any fungible form, for about a hundred years time without any inflation what so ever. Know your history or be condemned to repeat it, which is in fact, happening real time right now. The bank is trying to kill me Mr Van Buren, but I will kill it. Rising price is an illusion, it has a direct corelation to decreased value. First receivers of money argument, understand that and you will better understand why fiat money is perpetuated by the rich and powerful. Can you imagine if the central planners needed more money, and had to call the miners and tell them to produce more silver? With fiat money the concept of checks and balances is absent, the root cause of all our financial woes.
Mr. Yesterday, awesome post.
The fed believes that playing ‘the opposite game’ has a stabilizing influence against booms and busts.
So, when virtual money leaves the system, they hypothecate more into existence, or they reduce the speculative value of tangible metals.
I defy anyone to charge a higher price than the price fixer, if you want to say that a value has been determined, democratically.
In very short order, immediate future, one segment of the commodities market will fail to deliver, and it will spell the end for most mankind over a very short period. What will bring on this failure of the oil market? I could take three days to list the myriad way the PTB intend to bring it down. Even the PTB don’t know which of the scenarios will take place that they are orchestrating. This gives them exceptional plausible denial of culpability/knowledge. Don’t fret children, no matter what, the uberevil schizophrenic nuclear cabal have made sure that the planet Earth will look just like the FUGGIN Moon soon!!