• Blog

    2017 Year In Review

    Markets fiddle while Rome burns
    by David Collum

    Friday, December 22, 2017, 8:15 PM

Every year, friend-of-the-site David Collum writes a detailed "Year in Review" synopsis full of keen perspective and plenty of wit. This year's is no exception. As with past years, he has graciously selected PeakProsperity.com as the site where it will be published in full. It's quite longer than our usual posts, but worth the time to read in full. A downloadable pdf of the full article is available here, for those who prefer to do their power-reading offline. — cheers, Adam


“He is funnier than you are.”

~David Einhorn, Greenlight Capital, on Dave Barry’s Year in Review

Every December, I write a survey trying to capture the year’s prevailing themes. I appear to have stiff competition—the likes of Dave Barry on one extreme1 and on the other, Pornhub’s marvelous annual climax that probes deeply personal preferences in the world’s favorite pastime.2 (I know when I’m licked.) My efforts began as a few paragraphs discussing the markets on Doug Noland’s bear chat board and monotonically expanded to a tome covering the orb we call Earth. It posts at Peak Prosperity, reposts at ZeroHedge, and then fans out from there. Bearishness and right-leaning libertarianism shine through as I spelunk the Internet for human folly to couch in snarky prose while trying to avoid the “expensive laugh” (too much setup).3 I rely on quotes to let others do the intellectual heavy lifting.

“Consider adding more of your own thinking and judgment to the mix . . . most folks are familiar with general facts but are unable to process them into a coherent and actionable framework.”

~Tony Deden, founder of Edelweiss Holdings, on his second read through my 2016 Year in Review

“Just the facts, ma’am.”

~Joe Friday

By October, I have usually accrued 500 single-spaced pages of notes, quotes, and anecdotes. Fresh ideas occasionally emerge, but most of my distillation is an intellectual recycling program relying heavily on fair use laws.4 I often suffer from pareidolia—random images or sounds perceived as significant. Regarding the extent that self-serving men and women of wealth do sneaky crap, I am an out-of-the-closet conspiracy theorist. If you think conspiracies do not exist, then you are a card-carrying idiot. Currently, locating the increasingly fuzzy fact–fiction interfaces is nearly impossible thanks to the post-election bewitching of 50 percent of the populace.

“The best ideas come as jokes. Make your thinking as funny as possible.”

~David Ogilvy, marketing expert

You might be asking, “What’s with the title, Dave? My 401K is doing great, and I own a few Bitcoin!” Yes, indeed: your 401K fiddled its way to new highs day after day, but this too shall pass—it always does—and not without some turbulence. This year was indeed a tough one to survey. As many peer through beer goggles at intoxicatingly rising markets, I kept seeing dead people (Figure 1).

“We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping: I admit to not understanding it.”

~Richard Thaler, winner of the 2017 Nobel Prize in Economics

Figure 1. An original by CNBC's Jeff Macke, chartist and artist extraordinaire.

A poem for Dave's Year In Review

The bubble in everything grew

This nut from Cornell

Say's we're heading for hell

As I look at the data…#MeToo

[email protected]

Some will notice that in decidedly political sections, the term “progressives” is used pejoratively. Their behavior has become nearly incomprehensible to me. My almost complete neglect of the right wing loonies may reflect some bias, but politically, they have taken a knee. They have become irrelevant. Free speech is a recurring theme, introducing interesting paradoxes for employee–employer relationships.

Some say I have no filter. They obviously have no clue what I want to say. In case my hints are too subtle, I offer the following:


I sit in front of a computer 16 hours a day, at least three of which are dedicated to non-chemistry pursuits. I’m a huge fan of Adam Taggart and Chris Martenson (Peak Prosperity), Tony Greer (TG Macro), Doug Noland (Credit Bubble Bulletin), Grant Williams (Real Vision and TTMYGH), Raoul Pal (Real Vision), Bill Fleckenstein (Fleckenstein Capital), James Grant (Grant’s Interest Rate Observer), and Campus Reform—but there are so many more. ZeroHedge is by far my preferred consolidator of news. Twitter is a window to the world if managed correctly. Good luck with that. And don’t forget it’s public! Everything needs an open mind, discerning eye, and a coarse-frit filter.

“You are given a ticket to the freak show. When you’re born in America, you are given a front row seat, and some of us get to sit there with notebooks.”

~George Carlin, comedian


Footnotes appear as superscripts with hyperlinks in the “Links” section. The whole beast can be downloaded as a single PDF xxhere or viewed in parts—the sections are reasonably self-contained—via the linked contents as follows:

Part 1

Part 2

My Personal Year in Review

Who cares what an academic organic chemist thinks? I’m still groping for that narrative. In the meantime, let me offer a few personal milestones that serve as a résumé while feeding my inner narcissist. I remain linked into the podcast circuit, having had chats with Max Keiser and Stacy Herbert (Russia Today aka RT),5 Chris Martenson,6 Jim Kunstler (The KunstlerCast),7 Lior Gantz (Wealth Research Group),8 Anthony Crudele (Futures Radio Show),9 Susan Lustick (News-Talk 870 WHCU),10 Jason Burack (Wall St. for Main St.),11 Dale Pinkert (FXStreet),12 Lance Roberts (Lance Roberts Show),13 and Jason Hartman (Hartman Media Company).14 I also spoke at Lance Roberts’s Economic and Investment Summit discussing campus politics15 and the Stansberry Conference (Figure 2) arguing the merits of price gouging.16 I got into a big spat with the American Federation of Teachers and some local social justice warriors that made it to the national press (see “Unions”) and dropped 30 pounds unaided by disease.

“And, before anyone should doubt what a chemistry professor would know about unions and what effect they would have, it should be noted that Collum has amassed a following for his annual 100-page papers on the state of business and politics. Turns out, he knows a thing or two about economics and politics as well.”

~Joe Cunningham, RedState

Figure 2. The lovely Grant Williams, brainy Danielle DiMartino Booth, and one of the Paddock brothers in Las Vegas.

On the professional side, I had a great year: I finished my stint as department chair; started a sabbatical leave; broke my single-year total publication record; and broke my single-year record for papers in the elite Journal of the American Chemical Society. I attempted to extend a contiguous string of 20 federal grants without a rejection by submitting two NIH grants and subsequently got totally blown out of the water. (OK. I’m still walking that one off. I think the panel finally noticed that I am deranged.) I was accepted into an organization called the Heterodoxy Academy, whose membership includes hundreds of tenured professors standing up for free speech on college campuses.17

“My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.”

~Jason Zweig, Wall Street Journal columnist


“I dig your indefatigable bearishness, my friend.”

~Paul Kedrosky, one of the earliest bloggers

I’m sensing a tinge of Paul's sarcasm. My net worth from January 1, 2000, has compounded at a ballpark annualized rate of 7 percent. That’s not so bad, but the path has been rather screwy. From mid ’99 through early ’03, I carried cash, gold, silver, and a small short position. I kept buying gold through about 2005 (up to $700 an ounce), resumed in 2015, and bought several multiples of my annual salary’s worth in 2016. I’m done now. Gold is up 8 percent, and silver is down –2 percent in 2017 thanks to a minor end-of-year sell off. The spanking from ’11 to ’15 seems to have subsided.

Precious metals, etc.: 29%

Energy: 0%

Cash equivalent (short term): 62%

Standard equities: 9%

“Most people invest and then sit around worrying what the next blowup will be. I do the opposite. I wait for the blowup, then invest.”

~Richard Rainwater

I was totally blindsided by the downturn in gold starting in ’11 and energy in ’13. (Energy peaked in ’08 but was on the mend until ’13.) I bought energy steadily starting in ’01 with broadly based energy funds and a special emphasis on natural gas. The timing of entry was impeccable and all was going swimmingly—I was a genius!—until the Saudi oil minister attempted to talk oil down from $110 to $80 per barrel18 in '13. He thought he could blow the frackers out of the game fast, but it was a hold-my-beer moment for our credit system. The frackers kept fracking, the oil price overshot the Sheik's target by $50 per barrel, and I got whacked for 30–45% losses over four years starting in '14.19

It is impossible to know when you’re being a highly disciplined buy-and-hold investor—a Microsoft and Apple gazillionaire refusing to sell—or just an idiot. I sensed that the rotten debt had been purged and we were through the worst of the energy downturn. I worried that a recession could do a number on me, but it took years to get to my position through incremental buying. I’m holding on, goddammit! We seem to be running out of downside. Unbeknownst to me until October, however, my employer had liquidated my energy funds—every last one of them—and put me in a life-cycle fund in April. Sell ’em after they plummet? Thanks guys. A rational investor, if committed to hold them, would undo the general equity fund restrictions—I did—and buy the energy funds right back—I didn’t. Friends in high places all said to wait. About a week later, the Middle East erupted in what looked like a sand-to-glass phase transition (see “Middle East”), and energy started to move in sympathy. Peachy.

Fidelity actually saved me a little money, but I am still white-knuckling the cash, growing a long wishlist, waiting for a generalized sell-off/recession to offer some serious sub-historical-mean bargains (see “Broken Markets”). The correction in ’09 at the very bottom brought us to the historical mean, but not through it. For this reason, I have largely skipped this equity cycle. The current expansion is long in the tooth and founded on poor fundamentals. I hope that the wait won’t be too long. Until then . . .

“Remember, when Mr. Market shows up at your door, you don’t have to answer.”

~Meb Faber, co-founder and CIO of Cambria Investment Management


“A decade after the biggest crisis since the Depression, a broad synchronized recovery is under way.”

~The Economist, March 2016

Whoa! Fantastic! Goldilocks survived another bear. There is just one hitch: that was a total load of crap in 2016, and it’s a colossal load now. Let’s take a peek at a few gray rhinos—“large and visible problems in the economy that are ignored until they start moving fast.” GDP growth rates from 1930–39 and 2007–16 were as follows:20

GDP growth in the 1930’s

1930: –8.5%     1935: 8.9%
1931: –6.4%     1936: 12.9%
1932: –12.9%   1937: 5.1%
1933: –1.3%     1938: –3.3%
1934: 10.8%     1939: 8.0%

GDP growth in the new millennium

2007: 1.8%       2012: 2.2%
2008: –0.3%     2013: 1.7%
2009: –2.8%     2014: 2.4%
2010: 2.5%       2015: 2.6%
2011: 1.6%       2016: 1.6%

Whether you use the arithmetic or geometric mean, both gave us 1.3 percent annualized growth. Let’s spell this out: during the recent era in which markets soared, the economy tracked the Great Depression. It is instructive to look at the economy with a little more granularity than the writers at The Economist-Lite.

According to John Mauldin, total domestic corporate profits have grown at an annualized rate of just 0.1 percent over the last five years.21,22 Goldman’s Abby Joseph Cohen says R&D spending is down to 2.5 percent of GDP from 4.5 percent and is a drag on the economy.23 Economic bellwether General Electric saw revenue drop 12 percent and earnings fall 50 percent year-over-year,24 and these numbers are aided by the company’s legendary creative accounting schemes.25 Meanwhile, corporate America witnessed a 71 percent rise in business debt since 2008. According to economist Lacy Hunt, “It’s the investment, the real investment, which grows the economy,” prompting the legendary market maven @RudyHavenstein to state dryly, “I like Hunt.” Where are they spending all that borrowed money? Hold that thought. Long-term demographic problems—“quantitative aging” (Figure 3)—exacerbated by dropping sperm counts26 suggests the economy will continue to shoot blanks.

Figure 3. Demographics looking sketchy.

Putative job gains affiliated with this low growth are fragile if not dubious as hell and are being boosted by the “Dusenberry effect”—consumers’ reluctance to stop spending even after their income drops—which will cause the next recession to be a real Dusey. (Sorry.) Eventually, common sense prevails as companies run out of credit and savings-deficient consumers reassume the fetal position. According to extensive work by Ned Davis Research, cash levels among households are near their lowest levels of all time; consumer resiliency is always temporary.

“When it is all said and done, there are approximately 94 million full-time workers in private industry paying taxes to support 102 million non-workers and 21 million government workers. In what world does this represent a strong job market?”

~Jim Quinn, The Burning Platform blog

The Bureau of Labor Statistics has turned to Common Core math. How can we have 100 million working-age adults—40 percent of the working-age population—not working, 4 percent unemployment, and employers claiming the labor market is tight? Are 90 percent of those without jobs professional couch potatoes? Let’s first look at employment in some detail and then address that whole “tight” part. Googles of pixels have been dedicated to the obligatory labor force participation rate (Figure 4), a critical component of any economic debunking. Of those employed, 26 million people are in low-wage, part-time jobs (Figure 5), 8 million hold multiple jobs, and 10 million are “self-employed.”27 Another 21 million work for the government, which means they are a tax on the free market. In 2016, 40 percent of new jobs were fabricated through the specious “birth and death model.”28 2017 will presumably post similar numbers. Occasional reports of large job growth are deceptive. July, for example, witnessed 393,000 benefit-free, part-time, low-skill jobs offset by a drop of 54,000 full-time workers. Payroll numbers keep coming in lower than expected, which economists invariably blame on some big, yet unseen effect they are paid to notice. Nine out of 10 millennials living on their parents’ couches a year ago are still clutching TV remotes.29 There are now 45–50 million Americans on food stamps, up from 14 million in December 2007,30 when the last recession was already underway.

Figure 4. Labor force participation.

I am going to let Jeff Snyder take a crack at explaining the tight labor market:31

“The economy is tight, not favourably tight as in no slack in the labour market, but more so tight in that there is little margin for addition. . . . The reality in the markets is this: executives are reluctant to pay wages at a market-clearing rate.”

~Jeff Snyder, Alhambra Investments

Figure 5. Low-paying service jobs versus manufacturing jobs.

Poor economic numbers are pervasive. Auto sales are canaries in the coal mine and getting crushed despite aggressive incentives.32 Ford is already suffering and predicting a multi-year slowdown.33 A car industry crunch analogous to that in ’09 may appear in ’18 as expiring leases leave consumers underwater owing to dropping used car prices, and decreasing profits in the auto industry may “then turn from secular to structural problems.”34 Morgan Stanley predicts a 50 percent drop in used car prices over the next 4–5 years,35 which will gut the new car business. The auto downturn has already begun. Wells Fargo is reporting large drops in auto loans after a long stretch during which subprime car loans flourished yet again.36 That should put a fork in the new car market.

Yield-starved investors are chasing cash- and income-starved car buyers. Subprime auto-asset-backed securities will take yet another beating. Chrysler is teaming up with Santander Consumer USA to push out “unverified income” subprime auto loans using “automated decision making.” Santander seems to have nine lives, and they’ll need all of them. The hyperdeveloped loan market for used cars, however, is already faltering (Figure 6); delinquency rates are rising. Goldman expects “challenging consumer affordability” and has downgraded General Motors to “sell.”37 Those cars y’all bought on cheap credit yesterday will not be bought tomorrow. Claims that the hurricanes cleared out auto inventory38 are grotesquely underestimating the magnitude of the overhang and will be paid for by reduced consumption in other sectors. Any consumption pulled forward with debt has a deferred cost.

Figure 6. Some key auto industry stats (a) loans and leases, (b) loan delinquencies.

We’ll take a crack at the housing market in its own section and simply note here that the cost of renting or buying normalized to income has never been higher. Approximately half of tenants spend more than 30 percent of their income on rent, doubling from a decade ago.39 A survey of 20 cities showed that housing costs are growing at a 6 percent annualized pace. Our paychecks are not. Housing is a bubblette and likely to offer fire-sale bargains again. What many fail to grasp is that the reduced cost of borrowing owing to low rates is offset by higher prices. When interest rates were 15 percent, houses were cheap.

Austrian business cycle theory says easy money policies generate overdevelopment and other malinvestment. The day of reckoning appears to be here. (I say that every year…channeling Gail Dudek.) Familiar brands like Toys “R” Us (my keyboard has no backwards R), JCPenny, Abercrombie & Fitch, Sears, Bon-Ton, and Nordstrom are gasping their last gasps before drowning in debt with no customers to save them. Total retail revenues and sales (including online) are up only 28 percent from the 2007 high.40 The management of Ascena Retail referred to an “unprecedented secular change.”41 More than 100,000 retail jobs have vaporized since October 2016.42 Credit Suisse estimates that more than 8,000 retail outlets closed this year.43 Consumer goods companies have held up better because consumers generally put off starving or freezing to death until all options are exhausted. Restaurants are extending the longest stretch of year-over-year declines for 16 consecutive months (last I looked).44 Business Insider blames millennials because they are “more attracted than their elders to cooking at home” (particularly when it’s their parents’ home.) Manhattan retail bankruptcies are called “horrifying.”45

Chapter 11s and company reorganizations in foreign courts increased sevenfold.46 Mall owners are using jingle mail—a term from the ’08–’09 crisis referring to leaving keys to creditors. Commercial retail will be coming into its own refinancing wave in 2018. Bears are sniffing around commercial-mortgage-backed securities as malls around the country begin to die.47 The next downturn will finish many of them off. Exchange-traded funds (ETFs) are positioning to short the brick-and-mortar retail. (Quick: somebody grab the ticker symbol “MAUL.”) Some suggest the Rout in Retail is merely a secular shift to online. Sounds logical except online sales represent only 8.5 percent of total retail sales.48 This argument might be masking a huge downturn in retail corresponding to the bursting of yet another Fed-sponsored bubble.

As Amazon encroaches on every nook and cranny of retail sales, what began as a murmur has turned into a chorus: “This isn’t fair; somebody must do something!” Walmart knows this plotline. Market dominance does not connote “monopoly,” but Amazon has an image problem. Amazon gets a $1.46 subsidy (discount) per box from the USPS, well below its cost.49 Seems cheesy. Congress is showing concern out of self-interest. A monopoly is when a company uses its power to blow its competitors out of the water garishly. Who decides what is garish and when enough is enough? A judge under political pressure. A detailed summary of the breadth of Amazon’s market share and its anti-competitive pricing suggests that we are getting close.50 There’s nothing like a protracted anti-trust suit to mute the growth of a large conglomerate. Just ask the Microsoft high command.

If our problems are not Amazon, what are they? Austrian business cycle theory says that our debt-driven, consumer-based economy endorsed by sell-side economists and analysts worldwide is unsustainable. Wealth is made, mined, grown, or coded, only then do you get to consume it. Wealth is extinguished by consumption, depreciation, and destruction. Central bankers seem to believe you can will wealth into existence by generating animal spirits.

The next recession will start unnoticeably. Economists seem to miss every single one, often declaring telltale indicators irrelevant. Then you will hear phrases like “technical recession,” “growth recession,” or “earnings recession,” all eventually giving way to somebody opening the Lost Arc. If the next recession flushes the waste products (malinvestment) left behind by the central-bank-truncated ’08-’09 recession, it will reveal the central bankers to be charlatans. Even a typical recession witnesses near 40 percent losses in equity portfolios, which will leave already immunocompromised consumers vegetative. Banks will constrict lending to preserve capital, further slowing the economy. Weak businesses living off easy credit will become pink mist. An accelerating vicious cycle downward will take with it formerly viable businesses that could have survived a less arrogant monetary policy. This collateral damage was avoidable at least in its magnitude, but it can’t be avoided now. Are we on the cusp of the next recession? Citigroup “clients” say not even close (Figure 7). I think we are staring into the abyss.

Figure 7. June 2017 Citigroup client survey of recession odds.

Will this expansion continue because it has been pathetic or die because it is old? I cast my vote for the latter. The Fed and its central bank brethren, whether to retrieve residual credibility—they have precious little—or out of the deep-seated, albeit misguided belief that they are in charge of the economy, have decided it is time to “normalize rates” and undo quantitative easing. (We are now forced to accept the equally silly term “quantitative tightening.”) You can blame the ensuing problems on the tightening if you wish, but the huge mistakes were made long before this tightening cycle commenced. Every postwar recession until now was been preceded by a tightening cycle (although not all tightening cycles lead to recessions). Why not simply refuse to tighten? It won’t work, but the Fed governors are probably entertaining this possibility.

“The central banks did their job. Unfortunately, almost nobody else has done theirs.”

~Martin Wolf, Financial Times

“As has come to be commonplace, almost everything Mr. Wolf suggests is incorrect.”

~Tim F. Price, Cerberus Capital and author of Investing Through the Looking Glass (see “Books”)

I’ll close this discussion with a brief mention of “creative destruction,” the process by which the new (and improved) ushers out the decrepit and out-of-date. It is a central tenet of capitalism—survival of the fittest—but has a disruptive dark side. McDonald’s (and every other service industry) is turning to kiosks to replace more costly human labor. Driverless cars will be awesome but also force car-based workers—potentially millions of them—to find new work. The financialization of the economy by central bankers has tipped the capital–labor balance profoundly toward capital. We will produce goods better and more efficiently, but the Darwinian adjustments will rock the system. Accelerated product cycles facilitated by excess capital can also be highly inefficient. The Erie Canal was completed in 1825 and faced its own black swan—railroads—that same year. Blockbuster was offed by Netflix as fast as it appeared. Can creative destruction happen too fast? Have product cycles become too short? Bulldoze your house every five years to build a better one and tell me how that works. Loose credit accelerates creative destruction, but not without a price.

“A high initial saving rate has been associated with subsequently stronger economic growth, while a low saving rate produces a lower growth pattern.”

~Lacy Hunt, economist, noting soaring consumer debt

Broken Markets

“I think we have fake markets. . . . Everything is so tight, it is hard to pick a winner from a group that is fake.”

~Bill Gross, Janus

"One word characterizes why the bull market can go on for years…'Goldilocks'"

~Sam Ro, Yahoo Finance

“I’m not worried about the economy so much; what I’m concerned about is valuation.”

~David Swensen, Yale University’s longtime CIO

"I think the bull market could continue forever."

~Jim Paulsen, Wells Fargo

Regression to the mean is a force of nature. It is also a mathematical truism that markets reside below the mean for half of their price-weighted existence. The failure to go through the mean in ’09 is an anomaly caused by global central bankers that remains as an IOU on investors’ balance sheets and foreshadows trouble to come.

Our system is constantly being overtly displaced from equilibrium by central bankers who view displacement as their mandate. Physical scientists know that any system displaced from equilibrium tends to return to equilibrium. The French physicist Carnot, often called the father of modern thermodynamics, showed that the round trip necessarily comes at a cost no matter how efficient the process: it’s a law of physics. Any chemist will tell you that a system massively displaced often returns with a considerable cost: you blow up your laboratory. Geologists? Volcanoes and earthquakes. Ski bums? Avalanches. How far are asset markets from equilibrium? The pros have some opinions:

“Asset valuations historically aren’t way out of line, but elevated I would say, relative to historical averages.”

~Lael Brainard, Federal Reserve governor

“Measured against interest rates, stocks actually are on the cheap side compared to historic valuations.”

~Warren Buffett, Berkshire Hathaway, channeling the Fed model

“Compared to the Dutch Tulip Mania of 1637, stocks still look undervalued.”

~Rudy Havenstein (@RudyHavenstein), Funniest Tweeter of the Millennium

Case closed. Let’s get a six-pack and watch football. The problem is that Brainard is a Fed governor, Havenstein is nuts, and Buffett is known for spewing some serious bullshit. Buffett’s favorite indicator—market cap to GDP—is double the historical mean (vide infra)—what market analyst John Hussman calls “historically offensive valuations.” Buffett also wrote an article in 1999 stating without qualification that returns are not about the economy at all.51 Secular bull markets are powered by falling interest rates and secular bear markets by rising rates. With interest rates at multi-century lows, it seems likely the old codger knows that his implicit reliance on the Fed’s valuation model is lunacy. As an aside, Berkshire has the largest cash hoard in its history—$100 billion—and it’s not being used to buy stocks that are “on the cheap side.”

Others, only partially impeded by cognitive dissonance and the task of selling assets at any cost, seem to have neurons firing spasmotically (sense something):

“We think the market still has the potential to move higher as investors capitulate into equities.”

~Merrill Lynch

“Folks, I have been in this business for over 46 years, and observing markets with my father for 54 years, and I have never experienced anything like what is currently happening. . . . There are years left to run in this one.”

~Jeff Saut, Raymond James

“It seems like uncertainty is the new norm, so you just learn to live with it.”

~Ethan Harris, global economist at Bank of America Merrill Lynch

The fear of missing out (FOMO) is driving the markets way out over their skis. Markets could get much crazier, of course, but as any serious blackjack card counter will tell you, when the deck is stacked against you, size your bets accordingly.

"If you pay well above the historical mean for assets, you will get returns well below the historical mean."

~Paraphrased John Hussman

This Hussman quote is a recycle from last year but well worth repeating to make sure you understand it. He goes on to channel Ben Graham by noting that the devastating losses come from purchasing low-quality securities when times are good. The Hussman quote also pairs well with ideas about valuation I cobbled together from a well-known maxim about savings:

“Overvaluation is appreciation pulled forward.”

“Undervaluation is deferred appreciation.”

~David Collum

This one passed the Google test for originality. I don’t know about you, but I want my appreciation in the future, or as James Grant (channeling Joe Robillard) likes to say, “I want everybody to agree with me . . . only later.” Valuations are meaningless as long as market participants are determined to buy stocks, but that mood will change at some point. Once markets are overvalued, however, you will give back those and any further gains during the next irrepressible regression to the mean, more so as you linger below the mean. I hasten to add that slight overvaluation is not a problem: the regression will be embedded within the noise. If, however, markets are way overvalued, an unknowable but inevitable combination of price drop and time—a retrenchment that could last decades—will usher invested boomers to the Gates of Hell. What do current valuations tell us about future returns assuming the laws of thermodynamics have not been repealed?

Market Valuations

“The median stock in the S&P has never been valued higher than it is today.”

~Jesse Felder, The Felder Report

“There’s just no other way to say it: the market is insanely overvalued right now. It’s the longest recovery in history. It’s also the weakest. But you’d never know it from the stock market.”

~ David Stockman, former Reagan economic advisor and former Blackstone group partner

“We are observing an episode that will make future investors wince. Just like the two closest analogs, the 1929 high and the tech bubble, I expect that future investors will shake their heads in wonder at the stark raving madness of it all, and ask what Wall Street could possibly have been thinking.”

~John Hussman, Hussman Funds

“The gap between the S&P 500 and economic fundamentals can now be measured in light years.”

~Eric Pomboy, president of Meridian Macro Research

"I believe fragilities today are much more systemic on a global basis than back in 2007. Where’s the Bubble? Virtually everywhere… The scope of today’s global Bubble goes so far beyond 2007."

~Doug Noland, McAlvaney Wealth Management

It took a few years to blow up yet another equity bubble—referred to fondly by Jesse Felder and others as the “everything bubble”—but determined central bankers are not in short supply. A host of metrics point to a very mean regression cited below. As I rattle off a few stats, bear in mind the serious yet unknowable losses possible if regression rips through the mean.

“Russell 2000 with a 75 p/e is just astronomical.”

~Jesse Felder

Starting simple: McDonald’s saw zero revenue growth between 2008 and 2016 but had a 154 percent growth in debt. Its share price is up more than 200 percent. This is not an outlier. Additional examples assembled by Mike Lebowitz of 720Global are shown in Figure 8. I know it’s a table, but look at the contrasting revenue growth versus share price gains!

Figure 8. Revenue growth versus price change.

“And please don’t claim corporate profits are soaring, so the valuations are justified. . . . Corporate profits are unchanged since 2014—no growth at all.”

~Charles Hugh Smith, Of Two Minds blog

The S&P 500 resides 70 percent above its ’07 high even though nominal GDP and total sales rose 10 percent during the same period. Price-to-revenue ratios are sharing the nosebleed seats with 1929 and 2000 (Figure 9).52 Buffett’s market cap–to-GDP indicator is no better, prompting Felder to guesstimate prospective 10-year returns—returns going to somebody else, apparently—at -2.6% annualized.53 In case you suck at math, you will be 10 years older, 33 percent poorer, and in need of a 50 percent gain to stumble your way back to even. Ever the optimist, John Hussman and his relatively complex valuation model, which shows high correlations when back-tested, predicts 60–70 percent losses over the next 10 years.54 To help the value-driven bottom-feeders, Hussman broke down the markets by valuation “deciles” and found that even the deep-value guys are looking at a >50 percent haircut—“haircut” sounds better than “castration” or “blood eagle”—at the end of the current market cycle.55

“Given the performance of certain stocks, we wonder if the market has adopted an alternative paradigm for calculating equity value. . . . What if equity value has nothing to do with current or future profits and instead is derived from a company’s ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss? . . . After years of running into the wind, we are left with no sense stronger than, ‘it will turn when it turns.’ . . . Just because AMZN can disrupt somebody else’s profit stream, it doesn’t mean that AMZN earns that profit stream. For the moment, the market doesn’t agree. Perhaps, simply being disruptive is enough.”

~David Einhorn with tongue in cheek

The legendary Howard Marks, using non-GAAP earnings (with a 25 percent fictional fudge factor)56 to calculate trailing P/E ratios, sees a 40 percent regression to the mean. The Case-Shiller weighted P/E ratio—far superior to the non-GAAP alternatives—is in the top 3 percent of historical readings,57 prompting Bob Shiller to dryly note that the markets are “at unusual highs.” (By the way, it was Shiller who slipped Greenspan the phrase “irrational exuberance.”) Dividend yields have flopped around over the centuries. A 56 percent equity decline is required to attain the 150-year historical average of 4.4 percent—assuming reduced cash flows owing to the price collapse don’t lead to dividend cuts.58 Tobin’s Q—essentially price-to-book value ratio and the favorite of Mark Spitznagle—is at all-time highs. The Economist sounds dismissive by suggesting that “a high Tobin’s Q signals that an industry is earning a lot from its assets,"59 which suggests that The Economist is underutilizing its intellectual assets.

Figure 9. Valuation metrics from Grant Williams’s World of Pure Imagination.60

Consistency aside, how can these predictions possibly be correct? The reported P/Es are not that bad. The high-growth QQQ index, for instance, is sporting a P/E of only 22, and the Russell 2000—the small-cap engine of economic growth—is in the same neighborhood. Alas, Steve Bregman of Horizon Kinetics notes that the P/E of the QQQ is calculated by rounding all P/Es above 40 down to 40 and assigning a P/E of 40 to all negative P/Es—companies losing money, aka Money Pits.61 For some of the largest companies in the QQQ—think Amazon—with almost no GAAP earnings, these little fudge factors are not just rounding errors. In the scientific community, we call such adjustments “fraud.” Bregman pools the market caps and earnings to give a more honest analysis, which gently nudges the QQQ P/E to 87. In short, Wall Street is “making shit up.” Mark Hulbert, noting that more than 30 percent of the Russell 2000 companies are losing money, concurs with Bregman and suggests that the rascals at the parent company would get a P/E of 80 if they weren’t fibbing like teenagers.62

Market Sentiment

Which FANG Stock Will Be The First To Break Out?

~Headline, Investor’s Business Daily (September)

I couldn’t care less about market sentiment except to understand how we got to such lofty valuations and how investors have become drooling idiots babbling incoherently about their riches. Nothing scares these markets. Previous bubbles always had a great story, something that investors could legitimately hang their enthusiasm on. The 1929 and 2000 bubbles were floated by dreams of truly fabulous technological revolutions. The current bubble is based on a combination of religious faith in central bankers and, as always, investors’ deluded confidence in their own omnipotence as market timers. Oh gag me with a spoon, really? Unfortunately, some group of prospective toe-tagged investors with silver dollars on their eyes are going to own these investments to the bottom. For now, though, we have nothing to fear but fear itself. Veni vidi vici.

“This is not an earnings-driven market; it is a momentum, liquidity, and multiple-driven market, pure and simple.”

~David “Rosie” Rosenberg, economist at Gluskin Sheff

The FOMO model is not restricted to Joe and Jane Six-pack. Norway’s parliament ordered the $970 billion sovereign wealth fund to crank up its stock holdings from 60 percent to 70 percent.63 Queuing off an analysis I did last year, a collective (market-wide) allocation shift of such magnitude would cause a 55 percent gain in equities.64 The percentage of U.S. household wealth in equities is in its 94th percentile and above the 2007 numbers.65 A survey of wealthy folks shows they expect an annualized 8.5 percent return after inflation.66 Good luck with that if you wish to stay wealthy. At current bond yields, a 60:40 portfolio would need more than 12 percent each year on the equities. Venture capitalists think they can get 20 percent returns (despite data showing this to be nuts.)67 Maybe they can set up an ETF to track the 29-year-old high school dropout and avid video gamer who professed to love volatility and got himself a 295 percent gain in one year trading some crazy asset (probably Tesla or “vol”).68 He actually ordered a Tesla and proclaimed, “I will soon get my license!” Better get that Tesla ordered soon, young Jedi Knight, given the company’s annualized $2+ billion burn rate and stumbling production numbers. Meanwhile, the legendary Paul Tudor Jones' fund saw 50 percent redemptions.69 (Boomers: Insert Tudor Turtle joke here.) Prudence disappoints investors in the final stages of a market cycle.

Unsurprisingly, the complacency index is at an all-time high.70 The oft-cited Fear and Greed Index (explained here71) is pegging the needle on extreme greed (Figure 10). A survey by the National Association of Active Investment Managers found investment managers to be more than 90 percent long the market.72 An American Association of Individual Investors survey showed that retail portfolios were at their lowest cash levels in almost two decades.71 High “delta,” which supposedly reflects investors’ willingness to use levered calls to catch this rally,72 suggests that investors perceive that risk has been eradicated in these central-bank-supervised markets. The few investors retaining a modicum of circumspection are “suffering extreme mental exhaustion” (PTSD) watching the consequences of the “deadweight of [the] US$400 trillion ‘cloud’ of financial instruments . . . supported by ongoing financialization” levitate anything with a price tag on it.73 Booyah Skidaddy. Let’s not forget, however, that traders make tops and investors make bottoms. In the next bloodletting, we may see bonds and stocks compete in synchronized diving. While traders run with the Pamplona bulls, investors sit in the shadows waiting for their day in the sun.

Figure 10. Fear and Greed Index.


Market pundits hurl around several definitions of volatility, and both have gotten huge press this year. A narrow dispersion of prices has arisen from the collusion of sentiment, $3 trillion of quantitative easing this year alone,74 trading algos, and programmed contributions to index investments that have created markets that seem very tame (not volatile). Headlines reported all sorts of records such as days without a 1 percent drop,75 consecutive S&P 500 closes within 0.5 percent of previous closing price,76 longest streak of green closes on the S&P, consecutive months without a loss,77 index advances accompanied by new 52-week lows,78 and days without a 3 percent draw down.79 Often the records were kept intact thanks to late-day panic-buying by the FOMO crowd. For the short sellers, it has been the Bataan Death March, particularly in February, when a leveraged fund was forced to liquidate billions of dollars of short positions.80 Even the treasury market shows an “implied volatility” at its lowest level in more than 30 years,81 which highlights historic investor complacency. Some say it is a new era; others see a calm before the storm.

A second definition of volatility is explained in Investopedia:82

Volatility: A variable in option pricing formulas showing the extent to which the return of the underlying asset will fluctuate between now and the option’s expiration. Volatility, as expressed as a percentage coefficient within option-pricing formulas, arises from daily trading activities. How volatility is measured will affect the value of the coefficient used.

Glad to have cleared that up. It’s no surprise the market players found a way to turn an arcane market indicator into a trading device: you can buy and sell vol through various indices such as the “VIX,” XIV, and “SVXY.” What’s more, the buying and selling of vol influences the markets (10× leveraged according to Peter Tchir). As the vol indices go down, the markets go up, and if I have this right, there is causality in both directions. Vol has been plumbing record lows. Indeed, those shorting vol (driving it down) are making fortunes—a one-decision trade—at least until buying vol becomes the new-and-improved one-decision trade. Billions have flooded into vol short funds each week.83 It is estimated to be a $2 trillion market. Barron’s called shorting the VIX “the nearest thing to free money.”84 References to exceptionally high “risk-adjusted returns” leave me wondering: How do you adjust for risk on the vol trade? Maybe we should consult the logistics manager at a Target store who made a cool $12 million in five years by shorting the VIX.85 He reminds me of those Icelandic fishermen-turned-bankers. They did quite well for a while, but they returned to fishing the hard way.

In an incisive analysis of the risks of the vol trade,86 Eric Peters notes that “to sell implied volatility at current levels, investors must imagine tomorrow will be virtually identical to today.” Seems like a reach given that such an assumption has no precedent in the recorded history of anything. The fact that 97 percent of VIX shares are sold short also seems a wee bit lopsided (Figure 11).87 The VIX even had a flash crash88: how ironic is that? JPM’s Marko Kolanovic—reputed to be one of the best technical traders in the known universe—says that a regression of the VIX to the historical norm could cause “catastrophic losses” because of all the shorts.89 Given that volatility begets volatility, forcing an epic short squeeze on $2 trillion of vol shorts at some point, one wonders what comes after “catastrophic”?

Figure 11. Volatility (VIX) short positions.

Stock Buybacks

“Companies might have to start rotating out of the debt that they incurred to buy back their stock and start issuing stock.”

~Chris Whalen, The Institutional Risk Analyst

In 2016, I referred to Whalen’s vision of stock buybacks as “buying high–selling low.”90 Peter Lynch’s original enthusiasm for buybacks was that clever management sneakily buys back undervalued shares, not overvalued shares. This buyback ploy began to turn into a scam in 1982, when buybacks were excluded from rules prohibiting price manipulation.91 Buybacks are so large now that they correlate with and quite likely cause large market moves (Figure 12). Since 2009, U.S. companies have bought back 18 percent of the market cap, often using debt—lots of debt.92 The 30 Dow companies have 12.7 billion fewer shares today than in ’08: “the biggest debt-funded buyback spree in history.” An estimated 70 percent of the per-share earnings—24 percent versus only a 7 percent earnings gain since 2012—is traced to a share count reduction from buybacks.93 Pumping the share prices at the cost of rotting the balance sheet (which gullible investors ignore) achieves two imperatives: it prolongs executive employment and optimizes executive compensation. Contrast this with paying dividends to enrich shareholders to the detriment of option holders. The rank-and-file employees might be comforted if companies plugged the yawning pension gaps instead (vide infra), but such contributions would have to be expensed, lowering earnings and, stay with me here, reducing executive compensation.

Figure 12. (a) S&P real returns versus margin debt. (b) S&P nominal returns versus share buybacks, and (c) buybacks versus corporate debt.

In one hilarious case, Restoration Hardware, a loser by any standard except maybe Wall Street’s, used all available cash and even accumulated debt to buy back 50 percent of its outstanding shares to trigger a greater than 40 percent squeezing of the short sellers who, mysteriously, think the company is poorly run.94 In the “eating the seed corn” meme, the 18 biggest pharmaceutical companies’ buybacks and dividends exceed their R&D budgets.95

Market narrowing—the scenario in which a decreasing number of stocks are lifting the indices—is acute and ominous to those paying attention.96 The so-called FAANGs + M (Facebook, Apple, Amazon, Netflix, Google, and Microsoft) have witnessed a 50 percent spike in their P/E ratios in less than 3 years.97 The FAANGs compose 42 percent of the Nasdaq and 13 percent of the S&P. An astonishing 0.2 percent of the companies in the Nasdaq have accounted for 45 percent of the gains.98 This is a wilding. The average stock, by contrast, is still more than 20 percent off its all-time high. What is going on?

Indexing and Exchange-Traded Funds

“When a measure becomes an outcome, it ceases to be a good measure.”

~Goodhart’s Law

Charles Goodhart focused on measuring money supply,99 but his law loosely applies to any cute idea that becomes widely adopted (such as share buybacks). This is total blasphemy, but market indexing may be a colossal illustration of Goodhart’s Law. John Bogle was the first to articulate the merits of indexing in his undergraduate thesis at Princeton.100 Columbia University professor Burt Malkiel provided a theoretical framework for the notion that you cannot beat the market, which was translated into the best-selling book A Random Walk Down Wall Street. Even Warren Buffett endorses the merits of indexing, although once again, his words belie his actions. Bogle’s seminal S&P tracking fund now contains 10% of the market cap of the S&P 500 after quadrupling its share since ’08. (Behaviorist Peter Atwater attributes the recent enthusiasm to investors who are PO’d at active managers.)101

“When the world decides that there is no need for fundamental research and investors can just blindly purchase index funds and ETFs without any regard to valuation, we say the time to be fearful is now.”

~FPA Capital

Then there are the massively popular ETFs that allow you to index while picking your favorite basket of stocks (have your cake and eat it too). Is there anybody who disagrees with the merits of indexing? Didn’t think so. Do ya see the problem here? Goodhart might. Maybe I was oblivious, but acute concerns about indexing seem to have emerged only in the last year or so. Let’s ponder some of them, but only after a brief digression.

“There is no such thing as price discovery in index investing.”

~Eric Peters, CIO of One River Asset Management

In his must-read book The Wisdom of Crowds, James Surowiecki posits that a large sample size of non-experts, when asked to wager a guess about something—the number of jelly beans in a jar, for example—will generate a distribution centered on the correct answer. Compared with experts, a crowd of clueless people offers more wisdom. I submit that this collective wisdom extends to democracies and markets alike. A critical requirement, however, is that the voting must be uncorrelated. Each player must vote or guess independently. As correlation appears, the wisdom is lost, and the outcome is ruled by a single-minded mob. Thus, when everybody is buying baskets of stocks using the same, wholly thoughtless protocol (indexing), the correlation is quite high. Investors are no longer even taking their own best guesses. The influence of correlation is amplified by a flow of money (votes) putting natural bids under any stock in an index, even such treasures as Restoration Hardware. What percentage of your life’s savings should you invest without a clue? Cluelessness has been paying handsome rewards.

A big problem is that index funds and ETFs allocate resources weighted according to market cap and are float-adjusted, reflecting the market cap only of available shares not held by insiders. You certainly want more money in Intel and Apple than in Blue Apron, but indexing imposes a non-linearity that drives the most overpriced stocks to become even more overpriced. That is precisely why the lofty valuations on the FAANGs just keep getting loftier. The virtuous cycle is the antithesis of value investing. The float adjustment drives money away from shares with high insider ownership. Curiously, an emerging strategy that is not yet broadly based (recall Goodhart’s Law) is to find investments that are not represented in popular indices or ETFs on the notion that they have not been bid up by indexers.

“With $160-odd trillion global equity market capitalization, we have much more opportunities for ETFs to grow, not just on equities, but in fixed income. And I believe this is just the beginning.”

~Larry Fink, CEO of Blackrock, the largest provider of ETFs

The indexed subset of the investing world could be at the heart of the next liquidity crisis. In managed accounts, redemptions can be met with a stash of cash at least for the first portion of a sell-off. This is why air pockets (big drops) often don’t appear early in the downdraft. By contrast, ETFs trade shares robotically—quite literally by formulas and algos (the robots)—with zero cash buffer. The first hint of trouble causes cash inflows to dry up and buying to stop. Redemptions by nervous investors cause instantaneous selling. Passive buying will give way to active selling. The unwind should also be the mirror image of the ramp: FAANGs will lead the way down owing to their high market caps. Once again, selling begets selling, and the virtuous cycle quickly turns vicious. Investors will get ETF’d right up the…well, you get the idea.

“You’re better off knowing which ETFs hold this stock than what this company even does. . . . That’s scary to me. . . . The market needs to have a major crash.”

~Danny Moses, co-worker of Steve Eisman

“Throw them out the window.”

~Jeff Gundlach, CIO of DoubleLine Capital, on index funds

I would be remiss if I failed to note that there are also some really wretched ETFs. What are the odds, eh? I’m not sure I even believe this, but it has been claimed that a 3×-levered long gold mining ETF lost –86 percent while a 3×-levered short gold mining ETF lost –98 percent, both over the same time frame that the GDX returned zero percent. You wouldn’t want to pair-trade those bad boys. It is also rumored that the SEC has approved 4×-levered equity ETFs. Investors are going to be seeing the inside of a wood chipper at some point. A 3×-levered Brazilian ETF (BRZU) lost 50 percent in a single day. Apparently none of these investors ever saw The Deer Hunter. We might as well set up ETFs in which investors choose the leverage multiple. One quick click, and it's gone.

“ETFs are the new Investment Trusts (similar vehicles in 1920’s) that led to the Great Crash and will lead to the next crash.”

~Mark Yusko, CEO and CIO of Morgan Creek Capital Management

“Passive investing is in danger of devouring capitalism. . . . What may have been a clever idea in its infancy has grown into a blob which is destructive to the growth-creating and consensus-building prospects of free market capitalism.”

~Paul Singer, founder and president of Elliott Management Corporation

Miscellaneous Market Absurdities

“Last time this mood took over, it ended very badly. Look at your investments with 2009 eyes. Did you tail hedge then? Should you risk up now?”

~Jeff Gundlach

Recent initial public offerings (IPOs) get routinely flogged. SNAP’s 33 percent drop has become onomatopoetic. What would you expect for a company whose customer demographic is 12- to 18-year-olds with no income? GoPro (GPRO) has lost 95 percent in two years. A few more show precipitous drops from post-IPO highs: FIT, TWLO, FUEL, TWTR, ZNGA, and LC. Blue Apron (APRN) dropped 45 percent from its highs in the 36 days after its IPO. The company also cut 1,200 of a total of 5,000 jobs, prompting one veteran to ponder: “Seriously, how is that not illegal?” This is a new era, dude.

The froth creeps into the screwiest places. The hard asset purchase of the year was the da Vinci painting of Salvatore Mundi that sold for $450 million. It was the only known da Vinci in private hands. A Modigliani nude sold for $170 million. A Basquiat painting purchased in 1984 for $19,000 moved across the auction block at a snot-bubble-blowing $111 million (23% compounded annualized return). The fabulously creative modern artwork, The Unmade Bed (Figure 13), sold for a cool $4 million.102 (I have one of those in my bedroom that I got for a lot less.) According to CBS News, a Harambe-shaped Cheeto sold for almost $100K on eBay.103 An obscure Danish penny stock company (Victoria Properties) surged nearly 1,000 percent in a few days, prompting management to remind investors that “there has been no change in Victoria Properties’ economic conditions. . . . The company’s equity is therefore still equal to about zero kroner.”104 Ford is valued at around $7,000 per car produced. Tesla is valued at $800,000 per car produced—they are literally making one model by hand on a Potemkin assembly line.105 A company called Switch has a “chief awesomeness officer.106 Ding! Ding! Ding!

Figure 13. A $4 million masterpiece of modern art.

Long-Term Real Returns and Risk Premia

“Maybe it’s time to quietly exit. Take the cash, hide it in the mattress, and wait for the next/coming storm to pass.”

~Bill Blain, Mint Partners

“People have just gotten so immune to any pain and anguish in any of these markets that when it happens it is going be very psychologically painful.”

~Marilyn Cohen, Envision Capital Management

If the next correction is only 20–30 percent, I was simply wrong. Mete out a 50 percent or larger thwacking, and I am declaring victory (in a twisted sort of way). When the pain finally arrives, the precious few positioned to take advantage of the closeout sales will include idiots sitting in cash through the current equity binge buying (me). In theory, the short sellers would be in great shape too, but they all reside in shallow graves behind the Eccles Building. Some wise folks, like Paul Singer, have had the capacity and foresight to be raising billions of dollars for the day when monkey-chucking darts can find a target.107

"We think that there has never been a larger (and more undeserved) spirit of financial market complacency in our experience.”

~Paul Singer after raising $5 billion to buy distressed assets in the future

There will be few victory laps, however, because boomers will be living on Kibbles ’n Bits. How painful will it be? Figure 14 from James Stack shows the fractions of the last 100 years’ bull markets that were given back.108 On only one occasion were investors lucky enough to hang onto three-fourths of their bull market gains. One-third of the bulls were given back entirely. Two-thirds of the bulls gave half back. The results are oddly quantized. How much will the next bear take back? It depends on how much the reasoning above is out of whack. Do ya feel lucky?

Figure 14. Fraction of the bull taken by the bear.108

“The vanquished cry, but the victor doesn’t laugh.”

~Roman proverb

Ethereal gains bring up an interesting point, more so than I first thought. In a brief exchange with Barry Ritholtz, I asserted that the “risk premia” on equities—the higher returns because of underlying risk—will be arbitraged away in the long run because occasionally risk turns into reality, and you get your ass kicked. I’m not talking inefficient high-frequency noise but rather the long term—call it a century if you will. With his characteristically delicate touch, Barry noted that I was full of hooey. Refusing to take any of his guff, I dug in. Certainly a free market would price equities much the way junk bonds are priced relative to treasuries to account for mishaps. Look back at Figure 14 in case it didn’t sink in. There is also the problem with interpreting index gains owing to survivor bias. Economist David Rosenberg claims that if the eight companies who left the Dow in April 2004 had remained, the Dow would still be below 13,000.109 Of course, presumably investors swapped them out as well if they were indexing (although somebody ate those losses).

“I will get back to you next week with the answer to your singular investment question. Should you have further easy questions such as: is there a God and what gender he/she may be, that will necessarily be part of a separate email chain.”

~Brian Murdoch, former CEO of TD Asset Management on bonds versus stocks

Start with the inflation-adjusted principle gains on the Dow (Figure 15), which returns less than 2 percent annualized. Think that’s too low? Take a look at my all-time favorite chart—the Dow in the first half of the 20th century, when inflation corrections weren’t needed (Figure 16). Now throw in some dividends (4 percent on average) and some wild-ass guesses on fees and taxes (including those on the inflated part of the gains). I get a real return on the Dow in the 20th century—a pretty credible century to boot—of only 4–5 percent annualized. Let’s adjust recent returns using the Big Mac inflation metric.110 Big Macs have appreciated sixfold since 1972 (4–5 percent compounded) with little change in quality. Over the same period, the capital gains on the Dow rose twentyfold. Adjusted for Big Mac–measured inflation, the Dow averaged less than 3 percent compounded (ex-dividends). An eightfold rise in the price of extra-large pizzas since 1970 (cited in my now-extinct blog for Elizabeth Warren) paints an even bleaker picture of inflation-adjusted S&P returns.

Figure 15. Inflation-adjusted DOW.

Figure 16. Non-inflation-adjusted Dow: 1900–1940.

Those 4–5 percent inflation-adjusted equity gains do not account for the fourfold increase in the U.S. population, which should be included because the wealth of the nation was shared by four times as many carbon-based life-forms. The returns are also not in the same zip code as the 7–8 percent assumed by many pensioners.

Back to the debate, the 4–5 percent inflation-adjusted equity gains contrast with 30-year treasuries returning about 4–5 percent nominally. Hmm…Seems like equities still won, and that Ritholtz appears to have been right. I consulted both digital and human sources (Brian Murdoch, Benn Steil, and Mark Gilbert), and everybody agreed: that punk Ritholtz was right. Even more disturbing, is it possible that Jeremy Siegel is not being a total meathead by asserting that you should buy equities at all times (BTFD)?

The explanations for why markets fail to arbitrage the risk premia are said to be rather “mysterious.” According to Brian Murdoch, “academics have been remarkably unsuccessful in modeling it. . . . Despite three decades of attempts, the puzzle remains essentially intact.” Benn Steil concurred. Academic studies (warning!) claim that bonds do not keep up with stocks even over profoundly long periods, and no amount of fudging (fees, taxes, disasters, or survivor bias) accounts for the failure to arbitrage the marginal advantage of stocks to zero. Schlomo Benartzi and Richard Thaler suggest that short-term losses obscuring long-term gains—“myopic loss aversion”—is the culprit.111 (Ironically, I read this paper a week before the Nobel committee told me to read this paper.) Elroy Dimson et al. dismiss all the possible errors that could be root causes and put the sustainable risk premium on stocks at 3–5 percent.112

Let’s flip the argument: Why would you ever own a bond? There are rational answers. To the extent that you do not buy and hold equities for 100 years (unless you are Jack Bogle), you also pay a premium for the liquidity—the ability to liquidate without a huge loss because you were forced to sell into a swoon. You also forfeit the ability to sell into a rally, however, and certainly wouldn't want to sell into a bond bear market either. Of course, the role of financial repression—sovereign states’ ability to force bond yields well below prices set by free markets—could explain it all. Governments like cheap money and have the wherewithal to demand it. Maybe the message is to never lend to governments. I remain in an enlightened state of confusion.


“Gold is no more of an investment than Beanie Babies.”

~Gary Smith, economist

“If you don’t have 5–10% of your assets in gold as a hedge, we’d suggest you relook at this. . . . [I]f you do have an excellent analysis of why you shouldn’t have such an allocation to gold, we’d appreciate you [sic] sharing it with us.

~Ray Dalio, Bridgewater Associates

Ray is rumored to have ramped Bridgewater’s gold position fivefold this fall. He cites geopolitical risk as a reason to own the barbecued relic.

“If we actually see missiles in the air, gold could go higher.”

~CNBC trader on thermonuclear war

Since the early 1970s, gold has had an annual return of 8 percent (nominal). Gold bears are quick to point out it doesn’t pay interest. Nor does my bank, and by the way, what part of 8 percent don’t they understand? By that standard, the 8 percent gain in 2017 was good but not statistically unusual. Coin sales are down,113 which suggests that either retail buyers are not in the game or the bug-out plans of hedge fund managers—I’m told they all have them—are complete. Sprott Asset Management made a hostile move on the Central Fund of Canada, a gold–silver holding company, in a move that might portend promising future returns.114

“Significant increases in inflation will ultimately increase the price of gold. . . . [I]nvestment in gold now is insurance. It’s not for short-term gain, but for long-term protection. . . . We would never have reached this position of extreme indebtedness were we on the gold standard. . . . It wasn’t the gold standard that failed; it was politics. . . . Today, going back on to the gold standard would be perceived as an act of desperation.”

~Alan Greenspan, 2017, still babbling

On the global geopolitical front, Deutsche Bundesbank completed repatriation of 700 tons of gold earlier than originally planned.115 The urgency may be bullish, but a possible source of demand is now gone. Chinese gold companies have been actively searching for domestic deposits and international acquisitions as they push to quadruple their reserves to 14,000 tons by 2020.116 (The U.S. sovereign stash is less than 9,000 tons.) The gold acquisitions of China (Figure 17) show a curious abrupt and sustained increase in activity in 2011. When did gold begin its major correction? Right: 2011. Makes you wonder if geopolitics somehow preempted the supply–demand curve. Because gold can leave Shanghai but not China, it’s a one-way trip. The Shanghai Gold Exchange must get its bullion from other sources. Russia continues to push its reserves up too. Rumors swirl that China and Russia are colluding for something grand, possibly a new global reserve currency based on the petro-yuan and gold. This would change the global landscape way beyond generic goldbuggery.

Figure 17. Abrupt changes in Chinese gold acquisitions through Hong Kong in 2011.

“Bringing back the gold standard would be very hard to do, but boy would it be wonderful. We’d have a standard on which to base our money.”

~Donald Trump, 2016

The gold market continues to be dominated by gold futures rather than physical gold. The bugs think this will end. I can only hope. In this paper market, gaming is the norm. On a seemingly monthly basis, gold takes swan dives as somebody decides to sell several billion-dollar equivalents (20,000–30,000 futures contracts) when the market is least liquid (thinly traded). Stories of fat-fingered trades abound, but I suspect these are just traders molesting the market for fun and profit, unconcerned that a regulator would ever call them on it. The silver market looked even creepier for 17 days in a row (Figure 18). I never trust that kind of linearity.

Figure 18. Silver acting odd over 5 minutes and 17 days.

Price changes often appear proximate to geopolitical events, but everything is proximate to a geopolitical event somewhere. India’s success at destroying its cash economy—the only economy it had—via the fiat removal of high-denomination bills117 was akin to announcing that only electric cars are legal starting next week. Some suggested that the move was also an attempt to flush gold out of households and into the banking system.118

Gold inched toward currency status at a more local level as Idaho, Arizona, and Louisiana voted to remove state capital gains taxes on gold—baby steps toward an emergent gold standard.119 The Brits are going the other way by banning salary payments in gold.120

Finishing with some fun anecdotes, a massive gold coin worth millions was stolen from a German museum.121 Some guy restoring a World War II tank found $2.5 million in gold bullion tucked in a fake fuel tank.122 A piano repairman discovered 13 pounds of gold in an old piano.123 According to British law, the repairman gets half, and the folks who donated the piano get squat. Beyond that, the gold market has been quiet for almost five years (Figure 19). Some wonder whether Bitcoin is sucking oxygen away from gold. Which way is gold gonna break if Bitcoin or the dollar tanks? Inquiring minds want to know.

Figure 19. Five years of gold price discovery.


“Worse than tulip bulbs. It won't end. Someone is going to get killed. . . . [A]ny [JPM] trader trading Bitcoin will be fired for being stupid. . . . [T]he currency isn’t going to work. You can’t have a business where people can invent a currency out of thin air and think the people buying it are really smart. It’s worse than tulip bulbs."

~Jamie Dimon, CEO of JPM

Unbeknownst to Dimon, his daughter was trading Bitcoin: “It went up and she thinks she is a genius.” More to the point, traders at JPM were already firing up crypto exchanges (while Goldman and the CFTC seemed to be positioning to enter the game). Dimon decided it was a prudent time to STFU (shut up) by declaring, “I'm not going to talk about Bitcoin anymore.” The joke was on us, however; nobody seemed to notice that Dimon slipped in an earnings warning the same day his Bitcoin quotes hit the media.124 Well played, Jamie.

“Bitcoin owners should appeal to the IRS for tax-exempt status as a faith-based organization.”

~Andy Kessler, former hedge fund manager

I wish I had a Bitcoin for every time somebody asked me about it. Cryptos and goldbugs share a common interest in escaping the gaze of the authorities. My ignorance of blockchain technology is profound, but I suspect that is true for many who talk the talk. I wonder if somehow blockchain might play a role in bypassing the SWIFT check-clearing system used by Western powers to shake down opposition (Russia).125 I also wonder, however, if the miracles of blockchain should not be confused with those of Bitcoin. Any mention of price or gains below should be followed with an implicit "last time I checked" or even “as of two minutes ago.”

My failure to jump on Bitcoin leaves no remorse: (a) I never take a position that risks a you-knew-better moment, and (b) I would have been flushed out, and then I really would have kicked myself. Recall the legendary founding shares in Apple that were sold for $800 and are now estimated to be worth maybe $100 billion?126 There’s rumor of a guy who lost his Bitcoin “codes” that are now estimated at more than $100 million. That’s real pain.

I offer my current view of cryptos from a position of total technical ignorance guided by an only slightly more refined understanding of history and markets. Please forgive me, crypto friends. I know you are tired of hearing the counter arguments and the cat calling. I am restrained by the words of a famous philosopher:

“Only God is an expert. We’re just guys paid to give our opinion.”

~Charles Barkley, former NBA star

What would have flushed me out of a Bitcoin long position? Let’s take it to the hoop:

  • The price action. Exponential gains, even wildly bent on a semi-log plot, have few analogs in history, all of which led to legendary busts (Figure 20). The South Sea bubble, Tulipmania, Beanie Baby, and Mentos-in-a-Coke analogies are legion. They all had a story that convinced many.

Figure 20. One-year price chart of Bitcoin (as of 2 minutes ago).

  • The participants. I have a friend—a very smart former Wall Street guy—who swears by it and is up 100,000 percent. You do not need to size your position correctly with that kind of gain. But then there is the clutch of camp followers emblematic of all manias. We have grad students speculating in Bitcoin. A 12-year-old bought his first Bitcoin in May 2011 with a gift from his grandmother.126a At more than $17,000 per coin, his stash is more than $5 million. On MarketWatch, he declared he had a price target of $1 million.

“I’m obviously very bullish, but I expect to make a couple million dollars off very little money. This is the opportunity of a lifetime. Finance is getting its Internet.”

~Bitcoin investor

  • Competitors. A Bitcoin competitor issued by Stratis soared to more than 100,000 percent since its initial coin offering (ICO) this past summer. As of December 1, there were 1,326 cryptocurrencies with a total market cap of >$400 billion.127 Paris Hilton has a cryptocurrency.128 The market is saturated more than the dot-com market ever was. It is a certainty that more than 99 percent will die much like most of the 270 auto companies in the ’20s and dot-coms in the ’90s. A site called Deadcoins shows that some already have.129 The debate is whether 100 percent is the final number.

  • Volatility. Massive corrections followed by ferocious rallies akin to a teenager on driving on black ice would have convinced me it was too crazy for my style. Corrections last seconds to hours, with wildly enthusiastic buyers poised to BTFD. Isaac Newton got into the South Sea bubble, was smart enough to get out, and then reentered in time to go bankrupt. I am decidedly dumber than Isaac.

Figure 21. Bitcoin photo bomber (acquiring $15K of Bitcoin via crowdsourcing).

For Bitcoin to become a currency in its current form, out of reach of sovereigns, seems to require a society-upheaving revolution, which is a rare event that usually gives way to new, equally ham-fisted regimes. The chances seem slim to none for several reasons.

“No government will ever support a virtual currency that goes around borders and doesn’t have the same controls. It’s not going to happen.”

~Jamie Dimon (again)

  • The competition. I am doubtless that central banks and sovereign states will never endorse Bitcoin in its current form. They have their own digital currencies and a monopoly on the power to create more, and they commandeer our assets through taxation. Existential risk will bring on the power of the State. When sovereigns decide to do battle, the cryptos will be brought to heel or forced underground.

  • Instabilities. Digital currencies are showing digital instabilities that could just be growing pains or evidence of more systemic problems. How software buffs who know that software is duct tape and bailing wire could think that a software-dependent currency is invincible is beyond me. Ethereum dropped 20 percent in a heartbeat when a hacker theft was reported.130 It dropped 96 percent after the Status ICO clogged the network.131 One user put a stop-loss on Ethereum at $316 on GDAX, which executed at $0.10 during a flash crash.132 So-called “wallets” have been freezing up, although there is some debate as to whether the owners lost the Bitcoins.133 This stuff happens with all risk assets now but not with usable currencies.

  • Volatility. Nobody will use a currency to pay for groceries if prices move 10 percent a day or even 5 percent as you move from the frozen food to the vegetable aisle. This, by the way, is the same explanation for why I don’t consider gold “money” or a “currency.” As long as there exists a Bitcoin–dollar conversion, a sovereign wishing to keep Bitcoin in the realm of a speculative plaything could use its unlimited liquidity to trigger price swings with a little day trading.

  • Legality. If up against the wall, sovereigns will use arguments about fighting crime, stemming ransomware, or controlling monetary policy and declare a War on Cryptos akin to the potential War on Cash. China has already blown shots across the Bitcoin bow by shutting down exchanges as well as ICOs as they struggle with excessive sovereign debt and capital outflows.134 Britain has also done some sabre rattling.135 The IRS has declared gains taxable (akin to gold) and is paying companies to locate digital wallets.136 The fans of BTC declare invincibility—freedom! The average blokes may smoke pot and drive too fast, but they seem less likely to risk a spat with the State on this stuff.

“Right now the trust is good—with Bitcoin people are buying and selling it, they think it’s a reasonable market—but there will come a day when government crackdowns come in and you begin to see the currency come down.”

~Mark Mobius, executive director at Franklin Templeton Investments

Others have unshakeable faith even in the more obscure cryptocurrencies. I’m unsure what I’m hoping for on this bet (Figure 22):

Figure 22. John McAfee, technology pioneer, chief of cybersecurity, visionary of MGT Capital Investments, going all in on cryptocurrencies.

Housing and Real Estate

“We bailed out the financial system so that financiers with access to cheap credit can buy up all of America’s real estate so that they can then rent it back to you later.”

~Mike Krieger, Liberty Blitzkrieg blog

Greenspan claimed those who predicted the housing bubble were “statistical illusions” (as were those who saw Greenspan as a charlatan). There are, once again, housing bubbles littered across the globe at various stages of expansion and contraction owing to central banks providing in excess of $3 trillion dollars of QE this year. Credit is fungible, so the flood of capital can come from anywhere and migrate to anywhere it finds an inflating asset. Hong Kong’s spiking prices are rising by dozens of basis points per day. Attempts by authorities to cool the market only fanned the flames, resulting in “a sea of madness.”137 Australian authorities tried to cap the dreaded interest-only loans at 30% of the total pool, prompting one hedge fund to return money to investors and declare that “Mortgage fraud is endemic; it’s systemic; it’s just terrible what’s going on. When you’ve got 30-year-olds, who have never seen a property downturn before, borrowing up to 80% to buy three and four apartments, it’s a bubble.”138

Prices in London are now collapsing.139 Why would anything collapse with so much global credit? Simple: top-heavy structures tend to collapse from even small shocks. I will focus, however, on only two countries—the U.S. because it is my home turf and Canada because it is the most interesting of the markets.

The U.S. appears to be in a bubblette, an overvalued market that does not approach the insanity of 2007 (detected by statistical illusions as early as 2002).140 Twenty percent down payments have become passé again. A survey of 20 cities reveals 5.9 percent annualized price rises.141 The median sale price of an existing home has set an all-time high and is up 40 percent since the start of 2014141 despite what seems to be muted demand (Figure 23). Thus, home ownership has dropped by 8 percent since ’09 because soaring prices have rendered them unaffordable. More than 40 percent of 25-34 year olds, a group historically en route to home ownership, have nothing set aside for a down payment.141 Those who scream about the need for affordable housing don’t notice that we have plenty of low-quality houses. We lack low-cost houses. And the Fed says inflation is good.

Figure 23. Median new home sales price in the U.S. versus number sold and versus home ownership rate.

In 1960, California had a median home price of $15,000—three times the salary of an elementary school teacher.142 The median home price in San Francisco is now $1.5 million,143 which is unlikely to be three times a teacher’s salary. A couple earning $138,000 will soon qualify for subsidized housing in San Francisco. California housing seems to be interminably overvalued, possibly owing to the draw of droughts, mudslides, crowds, and, fires. Despite modest 6 percent population growth since 2010, housing units have shown an only 2.9 percent increase. There could be a supply–demand problem, especially when the fires subside.

Florida is rumored to have eager post-hurricane sellers—those with something left to sell, that is.144 Condo flippers drove prices skyward in Miami, but they are heading earthward with a glut of units scheduled to come online in 2018. It’s not just the sand states starting to see softness. In New York City, rising rates seem to be nudging commercial and residential real estate down and foreclosures up to levels not seen since the 2009 crisis (79 percent year-over-year in Q3).145 Sam Zell is, once again, a seller and claims "it is getting hard."146 Recall that Zell nailed the real estate top by selling $38 billion in real estate in ’07.147

“The condo market at the high-end [in Manhattan] . . . is a catastrophe and will get worse.”

~Barry Sternlicht, Starwood Property Trust

Those who already own houses can once again “extract equity” from their homes using home equity lines of credit (HELOCs).148 They then wake up with more debt on the same house. Pundits claim consumers’ willingness to mortgage their future is “a healthy confidence in the economy.” Fannie Mae and Freddie Mac have also entered phase II of the catch-and-release program. Their regulators have authorized them to once again engage in unchecked, reckless lending, prompting some to begin estimating the cost of the next bailout.149

What happened to all that inventory from the colossal boom leading to the Great Recession? Some fell into the foundations, but a lot found its way into private equity firms. Mind you, single-family rentals are a low- or no-profit-margin business under normal circumstances. As long as rates stay low—Where have I heard that one before?—inherently thin profits can be amplified to a significant transitory revenue stream through leverage. A proposed merger of Invitation Homes (owned by Blackstone Group) and Starwood Waypoint Homes (owned by Starwood Capital) would spawn the largest owner of single-family homes in the United States with a portfolio worth over $20 billion.150 Of course, rates will rise again, and these sliced-and-diced tranches of mortgage-backed securities must be offloaded to greater fools. Private equity guys are already frantically boxing and shipping.151

To avoid costly and time-consuming appraisals, market players are using “broker price opinions,” which can be had by simply driving by the house and taking a guess (or just taking a guess). In ’09, the legendary “Linda Green” signed off on thousands using dozens of different signatures.152 U.S. securities regulators are investigating whether bonds backed by single-family rental homes and sold by Wall Street’s biggest residential landlords used overvalued property assessments.153 Let me help you guys out: yes.

“The main risk on the domestic side is a sharp correction in the housing market that impairs bank balance sheets, triggers negative feedback loops in the economy, and increases contingent claims on the government.”

~IMF, on the Canadian housing market

Heading north, we find that Canada’s real estate market never collapsed in ’09 (Figure 24), an outcome often ascribed to the virtues of the country’s banking system. An estimated 7 percent of Canadians work in housing construction,154 and Canadians are using HELOCs like crazy.155 After Vancouver tried to burst a huge bubble in 2016 with a 15 percent buyers’ tax,156 Chinese buyers chased Toronto houses instead. Annualized gains of 33 percent with average prices of $1.5 million are pushing even the one-percentile crowd to remote ’burbs.157 Toronto authorities have now imposed the Vancouver-like 15 percent foreign buyers tax,158 causing a single-month 26 percent drop in sales and ultimately chasing the hot money to Montreal,159 Guelph, and even Barrie.160

“Make no mistake, the Toronto real estate market is in a bubble of historic proportions.”

~David Rosenberg


Figure 24. Canadian versus U.S. median home prices and what they buy ($700,000 for that little gem).

The most interesting plotline and a smoking gun in Canada’s bursting bubble was failing subprime lender Home Capital Group (HCG). Marc Cahodes, referred to as a “free-range short seller” and “the scourge of Wall Street,” spotted criminality and shorted HCG for a handsome profit.161 HCG was so bad it was vilified by its auditor, KPMG.162 Imagine that. HCG dropped 60 percent in one day when news hit of an emergency $2 billion credit line at 22.5 percent interest by the Healthcare of Ontario Pension Plan.163 (The CEO of the pension plan sits on Home Capital’s board and is also a shareholder.) Cahodes was printing money and ranting about jail sentences when, without warning, the legendary stockjobber Warren Buffett took a highly visible 20 percent stake in HCG at “mob rates” (38 percent discount).164 The short squeeze was vicious, and Cahodes was PO’d. As Paul Harvey would say, “now for the rest of the story.”

HCG is, by all reckoning, the piece of crap Cahodes claims it is. Buffett couldn’t care less about HCG’s assets—Berkshire can swallow the losses for eternity. Warren may have bought this loser as a legal entry to the Canadian banking system, which is loaded with hundreds of billions of “self-securitized” mortgages. The plot thickened as a story leaked that Buffett met with Justin Trudeau (on a tarmac).165 When the Canadian real estate bust begins in earnest, Buffett will have the machinery of HCG and the political capital to feed on the carcasses of the big-five Canadian banks.


“This massive financial bubble is a ticking time bomb, and when it finally goes off, it is going to wipe out virtually every pension fund in the United States.”

~Michael Snyder, DollarCollapse.com blog

The impending pension crisis is global and monumental with no obvious way out. The World Economic Forum estimates the pension gap—unfunded pension liabilities—at $70 trillion and headed for $250 trillion by 2050.166 Conservative but still conventional assumptions about prospective investment returns and spending patterns in old age suggest that retiring into the American dream in your mid 60s requires you bank 20–25 multiples of your annual salary (or a defined benefit plan that is the functional equivalent) to avoid the risk of running out of money. A friend—a corporate executive no less—retired with 10 multiples; he could be broke within a decade (much sooner if markets regress to historical means). Of course, you can defiantly declare you will work ’till you drop, but then there are those unexpected aneurysms, bypass surgeries, layoffs, and ailing spouses needing care. I’ve seen claims that more than 50 percent of retirees do not fully control their retirement age.

“Companies are doing everything they can to get rid of pension plans, and they will succeed.”

~Ben Stein, political commentator

The problem began as worker compensation became reliant on future promises—IOUs planted in pension plans—often assuming the future was far, far away. However, a small cadre of demographers in the ’70s smelled the risk of the boomer retirements and began swapping defined-benefit plans for defined-contribution plans.167 (A hybrid of the two traces back to 18th century Scottish clergy.168) The process was enabled by the corporate-friendly Tax Reform Act of ’86.169 Employees were unknowingly handed all the risk and became their own human resource specialists.

Retirement risk depends on the source of your retirement funds. Federal employees are backstopped by the printing press, although defaults cannot be ruled out if you read the fine print.170 States and municipalities could get bailed out, but there are no guarantees. Defined-benefit corporate plans can be topped off by digging into cash flows provided that the cash flows and even the corporation exist. The depletion of corporate earnings to top off the deficits, however, will erode equity performance, which will wash back on all pension funds. The multitude of defined-contribution plans such as 401(k)s and IRAs managed by individuals are totally on their own and suffer from a profound lack of savings.

Corporate and municipal defined-benefit plans assumed added risks by falling behind in pension contributions motivated by efforts to balance the books and, in the corporate world, create the illusion of profits. The moment organizations began reducing the requisite payments by applying flawed assumptions about prospective returns, pensions shifted to Ponzi finance. My uncanny ability to oversimplify anything is illustrated by the imitation semi-log plot in Figure 25. The red line reflects the assumed average compounded balance sheet from both contributions and market gains. The blue squiggle reflects the vicissitudes of the market wobbling above and below the projection. If the projections are too optimistic—the commonly reported 7–8 percent market returns certainly are—the slope is too high, and the plan will fall short. If the projected returns are reasonable but management stops contributing during good times—embezzling the returns above the norm to boost profits—the plan will fall below projection again. Of course, once the plan falls behind, nobody wants to dump precious capital into making up the difference when you can simply goose projected returns with new and improved assumptions. In a rational world, pensions would be overfunded during booms and underfunded during busts. Assuming we can agree that we are deep into both equity and bond bull markets and possibly near their ends, pensions should be bloated with excess reserves (near a maximum on the blue curve), and bean counters should keep their dirty little paws off those assets and keep contributing because we won’t stay there.

Figure 25. Childish construct of pension assets.

That’s a good segue to drill down into the contemporaneous details. Public pensions are more than 30 percent underfunded ($2 trillion).171 A buzzkiller at the Hoover Institution says that the government disclosures are wrong and puts the deficit at $3.8 trillion.172 Bloomberg says that “if honest math was being used . . . the real number would actually be closer to 6 trillion dollars.”173 What is honest math? Using prevailing treasury yields for starters. Bill Gross—the former Bond King—says that if we get only 4.0 percent total nominal return rather than the presumed 7.5 percent, pensions are $5 trillion underfunded.174 Assuming 100 million taxpayers, that’s $50,000 we all have to pony up. California’s CalPERS fund dropped its assumption to a 6.2 percent return—still seriously optimistic in my opinion—leaving a $170 billion shortfall.175 The Illinois retirement system is towing a liability of $208 billion with $78 billion in assets ($130 billion unfunded).176 Connecticut is heading for a “Greece-style debt crisis” with $6,500 in debt per capita (every man, woman, and child?).177 The capital, Hartford, is heading for bankruptcy.178 South Carolina’s government pension plan is $24 billion in the hole. Kentucky’s attempt to fill a gigantic hole in its pension fund (31 percent funded) was felled by politics.179 A detailed survey of municipal pension obligations shows funding ranging from 23 percent (Chicago) to 98 percent (Suffolk).180 My eyeball average says about 70 percent overall. Notice that despite being at the peak of an investment cycle, none are overfunded (Figure 26.) Large and quite unpopular 30 percent hikes in employee contributions are suggested. The alternative of taking on more municipal debt to top off pension funds is a common stop-gap measure of little merit long term; somebody still has to pay.

Figure 26. State pension deficits.

The 100 largest U.S. corporate defined-benefit plans have dropped to 85 percent funded from almost 110 percent in 2007. During the recent market cycle that burned bright on just fumes, the companies gained only 6 percent above the 80 percent funding at the end of 2008. Of the top 200 corporate pensions in the S&P, 186 are underfunded to the tune of $382 billion (Figure 27). General Electric, for example, is $31 billion in the hole while using $45 billion for share buybacks.

Figure 27. Underfunding of 20 S&P pension funds.

When are serious problems supposed to start, and what will they look like? Jim Bianco says “slowly and then suddenly.” Some would argue “now.” The Dallas Police and Firemen Pension Fund is experiencing a run on the bank.181 They are suing a real estate fund who slimed them out of more than $300 million182 and are said to be looking at $1 billion in “clawbacks” from those who got out early trying to avoid the pain.183 The Teamsters Central States and the United Mineworkers of America plans are failing.184 The New York Teamsters have spent their last penny of pension reserves.185 The Pension Benefit Guaranty Corporation has paid out nearly $6 billion in benefits to participants of failed pension plans (albeit at less than 50 cents on the dollar), increasing its deficit to $76 billion. CalPERS intends to cut payouts owing to low returns and inadequate contributions (during a boom, I remind you).

“The middle 40% [of 50- to 64-year olds] earn $97,000 and have saved $121,000, while the top 10% make $251,000 and have $450,000 socked away.”

~Wall Street Journal

Looks like those self-directed IRAs aren’t working out so well either. Two-thirds of Americans don’t contribute anything to retirement. Only 4 percent of those earning below $50,000 a year maxes out their 401(k)s at the current limits.186 They are so screwed, but I get it: they are struggling to pay their bills. However, only 32 percent of the $100,000+ crowd maxes out the contribution. When the top 10 percent of the younger boomers have two multiples of their annual salary stashed away, you’ve got a problem.186 If they retired today, how long would their money last? That’s not a trick question: two years according to my math. Half the boomers have no money set aside for retirement. A survey shows that a significant majority of boomers are finding their adult children to be a financial hardship.187 Indeed, the young punks aren’t doing well in all financial categories; retirement planning is no exception. Almost half of Gen Xers agreed with this statement: “I prefer not to think about or concern myself with retirement investing until I get closer to my retirement date.”

Moody’s actuarial math concluded that a modest draw down would cause pension fund liabilities to soar owing to a depletion of reserves.188 There is a bill going through Congress to allow public pensions to borrow from the treasury; they are bracing for something.189 This is a tacit bailout being structured. The Fed cowers at the thought of a recession with good reason: Can the system endure 50% equity and bond corrections—regressions to the historical mean valuation? What happens when monumental claims to wealth—$200 trillion in unfunded liabilities—far exceed our wealth? Laurence Kotlikoff warned us; we are about to find out.190 Beware of any thinly veiled claim that the redivision of an existing pie will create more pie.

My sense is that we are on the cusp of a phase change. Stresses are too large to ignore and are beginning to cause failures and welched promises. Runs on pension funds akin to runs on banks would be deadly: people would quit working to get their pensions. At this late stage in the cycle, you simply cannot make it up with higher returns. Enormous appreciation has been pulled forward; somebody is going to get hosed. It’s only fourth grade math. Bankruptcy laws exist to bring order to the division of limited assets. We got into this mess one flawed assumption at a time.

On a final note, there is a move afoot to massively reduce contributions to sheltered retirement accounts. This seems precisely wrong. (I have routinely sheltered 25–30 percent of my gross income as a point of reference.) Congress is also pondering new contributions be forced into Roth-like accounts rather than regular IRAs. I have put a bat to the Roth IRA both in print191 and in a half-hour talk.192 Here is the bumper sticker version:

  • Roth IRAs pull revenue forward, leaving future generations to fend for themselves;

  • Fourth grade math shows that Roth and regular IRAs, if compounded at the same rate and taxed at the same rate, provide the same cash for retirement.

  • Roth IRAs are taxed at the highest tax bracket—the marginal rate—whereas regular IRAs are taxed integrated over all brackets—the effective tax rate.

If you read a comparison of Roth versus regular IRAs without reference to the “effective” versus “marginal” rate, the author is either ignorant or trying to scam you. Phrases like “it depends on your personal circumstances” are double-talk. This synopsis of a Harvard study has two fundamental errors: Can you find them?

“If a worker saves $5,000 a year in a 401(k) for 40 years and earns 5% return a year, the final balance will be more than $600,000. If the 401(k) is a Roth, the full balance is available for retirement spending. If the 401(k) is a traditional one, taxes are due on the balance. Let’s say the person’s tax rate is 20% in retirement. That makes for a difference of $120,000 in spending power, which a life annuity will translate into about $700 a month in extra spending.”

~John Beshears, lead author of a Harvard study

Inflation versus Deflation

“Deflation does not destroy these resources physically. It merely diminishes their monetary value, which is why their present owners go bankrupt. Thus, deflation by and large boils down to a redistribution of productive assets from old owners to new owners. The net impact on production is likely to be zero.”

~Guido Hülsmann. Mises Institute

“My own view is that we should be cautious about tightening policy further until we are confident inflation is on track to achieve our target.”

~Lael Brainard

“Inflation is a tax and those least able to afford it generally suffer the most.”

~Esther George, president and CEO of the Federal Reserve Bank of Kansas City

“Barring major swings in value of the dollar, inflation is likely to move up to 2 percent over the next couple of years.”

~Janet Yellen, Federal Open Market Committee chair

Barring major swings in the value of the dollar? What kind of circular reasoning is that? The Fed tells us inflation is too low relative to their arbitrary 2 percent target. I say they are lying—through their teeth—and I have company. John Williams of ShadowStats has been ringing the alarm for decades, currently putting inflation at 6 percent compared with official numbers of less than 2 percent (Figure 28).193 A study by the Devonshire Group concurs with Williams.194 The most notable support for the official consumer price index (CPI) inflation numbers comes from MIT’s Billion Prices Project (BPP). I hammered this in 2014 and repeat it here.195 Rumor is that the BPP is reverse-engineered to match the CPI, presumably to maintain credibility while usurping the CPI market share by claiming a bigger sample size. The BPP is statistically flawed, ironically, because its sample size is too large. There is no way to statistically weight a billion prices. Ask the creator (Roberto Rigobon) how he does it. I did.

Figure 28. CPI-based versus ShadowStats-based inflation.

Many cite fantastic product improvements to justify low inflation numbers. The price of front-edge tech is always dropping. Having a supercomputer in your pocket is cool and getting cheaper on a performance-adjusted basis. Yes: that stuff is deflationary. Nonetheless, every one of those rug rats you sired necessarily owns one along with the bigger laptop version and requisite Internet connection fees. The digital world is not making paychecks go further. More to the point, however, no savings on your tech tools and toys can possibly offset the soaring tuition, food, healthcare, and rent that account for a vast percentage of a lifetime consumption. But, hey, at least you have a cool $1,000 iPhone 8!

“The deflation devil is gone.”

~Jens Kramer, NordLB

The divergences of the CPI from alternative measures began decades ago and have gotten progressively worse. The discrepancies trace to tricks like “hedonic adjustments” and “substitutions” that would in any other setting euphemistically be called “bullshit.”196 Hedonically adjusted car prices are reported to have been flat since the late ’90s; the median price rose 73 percent.197 Nobody seems to correct for the fact that the stuff we buy has the life expectancy of a fruit fly and can’t be repaired. The fraud is motivated by cost-of-living adjustments in government payouts that would soar if tethered by reality. The fudge also causes the reported inflation-corrected GDP to be grossly overestimated (Figure 29), which makes politicians and central bankers look good. (The GDP has its own goofy fudge factors, too, like payments by you to you for mowing your lawn.) There is, of course, the fact that every interest-bearing asset requires the system have more money at the end of the year to pay the interest in lieu of offsetting losses elsewhere. The miracle of compound interest requires a compounding money supply. Read that one again. Take the time to watch physicist Albert Bartlett discuss exponential functions.198

Figure 29. CPI- and ShadowStats-adjusted GDP.

Inflation also creates an insidious taxation that confounds most investors. Consider two hypothetical scenarios in a 10-year investment:

(A) Six percent nominal annualized gain negated by +6 percent annualized inflation;

(B) Six percent nominal annualized loss negated by –6 percent annualized inflation (6 percent deflation).

The inflationary 80 percent nominal gain in Model A feels a lot better than the deflationary –48 percent nominal loss in Model B. But adjusted for the two ’flations, they are necessarily equal—they both sported precisely 0 percent real return. But that is not really true. In the inflationary case, your 80 percent nominal gain gets tagged with a 20 percent capital gains tax, bringing your real return over the decade to –16 percent! The technical term for that is “loss.” If taxes are meted out annually, the loss is closer to –20 percent. By contrast, the dreaded deflationary nominal loss leaves you with the same buying power (zero percent loss), no taxes, and a potential tax write-off against future gains. How odd: a ’flation-adjusted return in a deflationary environment costs you nothing and the State gets nothing. By contrast, the inflationary environment causes you to forfeit 16 percent of your assets to the State. Gains resulting from the inflation component are not just zero, but net losses after taxes. The windfall profit for the State from printing money for free and the taxes on the inflationary gains leaves little wonder that the State likes inflation.

“If one is completely honest, how much do we really know about the inflation process?”

~Claudio Borio, Bank for International Settlements

The Phillips curve—the relationship between low unemployment and high inflation and vice versa (Figure 30)—appears to be flummoxing the Fed governors. Why is inflation low concurrent with low unemployment? This is yet another conundrum resolvable with low-level neural activity. Both inflation and employment stats are unsuitable for wrapping fish. Moreover, claims of a tight labor market are really employers being unable to pay new employees the going wage. Supply–demand curves meet at price, but employers refuse to go there because, quite simply, the economy has a degenerative rot (see “Economy,” above).

Figure 30. Phillips curve created by William Phillips.

A point that I’ve made before but feel compelled to dwell on199 is that the most hidden inflation of them all is accelerated depreciation. If you create wealth at the same rate you consume it, depreciate it, or destroy it, wealth will not compound. Any apparent compounding is in the metric of wealth—inflation. That said, the garbage I buy depreciates very quickly. My house and its contents are depreciating assets on a tear. What used to last 20 years lasts one-tenth of that. Consequently, any adjustment for inflation must include depreciation.

“What fraction of nominal gains at the top of the distribution gets eaten up by disproportionately high-price inflation for status goods? That is, some of this just means higher prices for fine art and Hamptons real estate, not standard of living gains.”

~Josh Barro, Business Insider, explaining how inflation hurts the rich

"What is a dick?"

~Austin Rogers, Jeopardy

The velocity of money is, in simple terms, the sum of financial transactions divided by the money supply. It stands to reason that if you jam money into the system (the denominator) via quantitative easing and other dubious monetary policies, the velocity of money will necessarily drop, particularly if you saturate the financial system, as shown in Figure 31. This figure also shows what the Fed chooses to ignore—asset inflation. We'll see that again in the section on bonds. The Fed and markets seem to interpret low velocity as a low inflation risk. The money velocity in Weimar Germany also plummeted—twice even—but then it took off like a discharging monetary capacitor (or smacking the bottom of a ketchup bottle).200 Once faith in the money erodes, it starts moving in highly inflationary ways. The “Financial Stability Monitor” of the U.S. Department of the Treasury shows that inflation risk and contagion risk are very, very low.201 Even if true—it’s not—it won’t last forever. On a final humorous note, workers at the Bank of England may strike for a pay raise to counter rising prices. These blokes are unable to hedonically adjust their lifestyles.

Figure 31. Velocity of money versus the S&P 500.

Let’s take a protracted walk down memory lane to see what uncontrolled inflation looks like at the street level:

“Along with the paradoxical wealth and poverty, other characteristics were masked by the boom and less easy to see until after it had destroyed itself. One was the difference between mere feverish activity, which did certainly exist, and real prosperity, which appeared, but only appeared, to be the same thing. There was no unemployment, but there was vast spurious employment—activity in unproductive or useless pursuits. The ratio of office and administrative workers to production workers rose out of all control. Paperwork and paperworkers proliferated. Government workers abounded, and heavy restraints against layoffs and discharges kept multitudes of redundant employees ostensibly employed. The incessant labor disputes and collective bargaining consumed great amounts of time and effort. Whole industries of fringe activities, chains of middlemen, and an undergrowth of general economic hangers-on sprang up. Almost any kind of business could make money. Business failures and bankruptcies became few. The boom suspended the normal processes of natural selection by which the nonessential and ineffective otherwise would have been culled out. Practically all of this vanished after the inflation blew itself out.”

~Jens O. Parsson, The Dying of Money, on the great Weimer inflation

“Let us at least hope that the great monetary misadventure has burned itself out. In the wrong circumstances, such a doctrine is a formula for asset bubbles and deranged financial cycles, and that is precisely what events have conspired to produce.”

~Ambrose Evans-Pritchard, editor of the Daily Telegraph


“Observe Mr. Bond, the instruments of Armageddon.”

~Stromberg in The Spy Who Loved Me

It is difficult to cordon off bonds, debt, banks, pensions, etc. This section focuses on some of the zanier aspects of dumb creditors. Bonds are like stocks: low yields reflect appreciation pulled forward, appreciation that you will not get prospectively. As a rule of thumb, the nominal return on bonds is approximated by the interest rates. What are the odds, eh? That estimate is the upper limit, however, because defaults become large as rates rise. The paradox of the new-era bond market is that monetary inflation, rather than scaring the credit markets and driving up yields, has charged into bonds to drive the yields down. Once rates start rising, banks tighten lending, which causes high-risk creditors to roll over their debts at higher cost . . . or default. Delinquencies beget delinquencies, and the edifice begins to crumble. When the 36-year secular bond bull market finally ends, duck, because it's gonna get fugly.

“If 2.60% is broken on the upside—if yields move higher than 2.60%—a secular bear bond market has begun.”

~Bill Gross, the former Bond King

“If we take out 3 percent in 2017, it’s bye-bye bond bull market. Rest in peace.”

~Jeff Gundlach, the new Bond King

The $13 trillion in bonds returning negative nominal yields is exceedingly likely to cause catastrophic damage because it represents colossal losses before inflation adjustments. The idiocy of negative rates was concocted by men and women attempting to be important. As we ponder some bond anecdotes, ask yourself whether bonds have adequate risk premia to protect against their two arch nemeses: inflation and default. Are you counting on selling your bonds to someone who is even more gullible than you, possibly even a sovereign state in a bailout?

“The idea of negative nominal interest rates takes some getting used to, but it should be possible to persuade the public that such flexibility is well worth it to provide better employment security and more secure lifetime savings.”

~Marvin Goodfriend, professor of economics at Carnegie Mellon University

“I find a lot of what is written by representatives of the financial sector—they’re very hostile to negative rates—to be kind of ignorant.”

~Ken Rogoff, professor of public policy and economics at Harvard University

"Mainstream economics had come to rest on a number of gloriously improbable assumptions."

~Edward Chancellor

We begin with the gold standard—the U.S. sovereign debt. Wonky folks often extol the virtues of low rates, noting that the U.S. should borrow as much money as possible because it’s cheap! We as a nation can sell 30-year bonds at less than 3 percent yield. Would you lock in less than 3 percent for 30 years? I wouldn’t buy those with your money, but somebody will own those bonds for the next 30 years. Economists estimate the rate on a 100-year U.S. bond should be around 4 percent.202 That’s a darker kind of stupid. Treasury Inflation-Protected Securities (TIPS) are priced to earn approximately 0.50 percent;203 try to live off $5,000 (before taxes) for every $1 million in savings. The Fed took control of the bond market to force us to look elsewhere for returns. Let’s reach for more yield and see where it takes us.

“More people have died reaching for yield than at the point of a gun.”

Staying in the U.S., you could get Apple 30-year bonds for about 1 percent over the treasuries.204 Will Apple exist in 30 years? Will you? Amazon—that wonderful juggernaut—offers 10-year bonds that pay less than 1 percent over treasuries. Illinois is within a whisker of being the first state to have its bonds rated as “junk,” which has caused yields on their 10-year bonds to “soar” to 4.8 percent.205 I think they will find a legal default mechanism before you get your money back. Hartford municipal bonds are already junk. I can’t imagine buying bonds deemed worse than those in Illinois. Inflation in Germany is heading for 2 percent with 10-year bonds around 30 basis points (0.3 percent), but maybe you can make it up with risk-parity leverage.

“As banks are the transmission mechanism of monetary policy, we all have to wonder why central bankers think that damaging bank profitability is a good strategy.”

~Peter Boockvar, Lindsey Group

There was a fledgling bond rout in Japan, prompting the Bank of Japan to put a bid under its 10-year bonds to keep rates at 0.11 percent.206 Nothing there. The Japanese bond market is so dysfunctional that there are days in which not a single bond trades.207 The nearly $2 trillion Chinese bond market showed an inverted yield curve suggesting that something is seriously wrong.208 Europe is also bad. It’s the home of negative interest rate policy. I’ll pass on losing money like that. Irish 5-year paper paid 17 percent six years ago and now has negative yields.

“When there’s in fact no apparent difference anymore between euro junk bonds and U.S. treasuries, then all kinds of bad economic decisions are going to be made and capital is going to get misallocated.”

~Wolf Richter, Wolf Street blog

The real toxic brew was generated when Mario Draghi’s QE targeted corporate bonds, taking possession of 15 percent of all eligible European corporate bonds and driving yields on high-yield corporate bonds below those of U.S. treasuries (Figure 32). To clarify, they are called “high-yield” bonds because “junk bonds” sounds bad, and “widow-making sacks of shit” suffers serious branding issues. Quality European corporate bonds have, by proxy, become way overpriced too: Nestle now has negative-yielding bonds (and chocolate bars with negative calories).209 You can get positive yields on Austrian 100-year “century bonds.”210 Recall that we were bombing the hell out of them only 70 years ago. Draghi said he would “do whatever it takes,” which translated to the purchase of $2.6 trillion in QE (monetary bestiality). Those who took him at his word in 2012 have made 1,000 percent returns on friggin’ bonds.211 You must also do whatever it takes too—whatever that means now.

Figure 32. European high-yield corporate bond yields relative to treasuries.

Now let’s try groping for yield. According to Stuart Culverhouse, chief economist at Exotix Partners, “there is strong appetite for frontier issues—and markets have taken the Federal Reserve tightening policy in their stride.” The phrase “strong appetite” means that the nutjobs are already in the markets. “Frontier” is where law and order comes from the barrels of AK47s. Culverhouse alerts readers to upcoming issues from Sri Lanka and Papua New Guinea.212 I imagine the bonds are covenant-lite too. A Nigerian 30-year series sold at 7.6 percent.213 Recall that Nigerian princes often solicit your help moving their assets offshore. ZeroHedge rhetorically asked, “When does North Korea come to the market?”

"Junk Bond Fever Hits a New High in Tajikistan"

~Bloomberg headline

We should probably go south of the border, if only for entertainment’s sake. Argentina has issued a MOAB (mother of all bonds)—a 100-year bond that yields 8 percent. For those keeping score, the gauchos have defaulted six friggin’ times in the previous 100 years. There is no chance the buyers of those bonds assumed a free-market-based profit (cough*bailout*cough). Venezuelan 10-year bonds are currently returning 32 percent with inflation at 900 percent.214 They were denominated in dollars, which means the socialists held the duration risk while the bond holders retained the default risk. I’m using past tense because they defaulted.215 For inexplicable reasons, Trump banned the trading of Venezuelan bonds.216 Does anybody really need to be banned from this? In the category of “I’m not making this up,” Goldman got an exemption.

Our last stop is Puerto Rican municipal bonds. Puerto Rico has more debt than any state except California, New York, and Massachusetts. Kyle Bass noted they owe $50,000 per worker when you include off-balance-sheet crap.217 They’re never gonna pay up. Kyle said maybe 10–20 cents on the dollar after a “record-setting bankruptcy.” This analysis was before the hurricanes squeegeed every last tangible asset off the island. According to Cate Long, less than 25% of Puerto Rican debt is held by hedge funds, and the bonds have been in technical default since 2015.218 Bass’s comrade, Seth Klarman of Bauposte, was sitting on over $1 billion of these things that, for reasons beyond me, were held in various well-concealed shell companies.219 Klarman has tricks up his sleeve, but it seems clear that owners of Puerto Rican debt are explicitly betting that insolvency will be precluded by interventions.

When the headlines read that we “forgave” or “wiped out” sovereign debt for some banana republic, we are not doing God’s work. We are sending your dollars directly to the banks that are on the hook. This is cronyism of a higher order, not free-market capitalism. Once the hurricane hit Puerto Rico, The Donald chimed in:

“You know they owe a lot of money to your friends on Wall Street. We’re gonna have to wipe that out. That’s gonna have to be—you know, you can say goodbye to that. I don’t know if it’s Goldman Sachs, but whoever it is, you can wave goodbye to that.”

~Donald Trump

My read says he is telling the banks to swallow it. One could imagine that the Trumpster has few if any warm memories of bankers from his multiple bankruptcies. His utterances caused a rout in Puerto Rican bond prices. A bill in Congress allocated billions of hurricane aid (and bailed out the highly subsidized and fully insolvent National Flood Insurance Program),220 but it does not appear to have explicit debt bailout. Nonetheless, it is suggested that “creditors will be lining up to try to claim portions of the aid intended for Puerto Rico, a complication democrats in Congress are working to sort out.”221 NPR suggests that wiping out the debt “would be a drastic and highly unusual intrusion of the government into the debt markets.” Unusual intrusion into the debt markets? Sure.

“Be careful what you wish for, Ray [Dalio]. You may find that risk you are looking for and then some. Unwinding risk parity funds will add some serious fuel to the inferno. Bridgewater Associates will probably apply for bank status late some Sunday night.”

~David Collum, 2015 Year in Review

“It will be a lively day on Wall Street if, in response to an upside spike in volatility, risk-parity portfolios have to unwind all at once.”

~James Grant, writer and publisher, October 6, 2017

Ray Dalio brought us “risk parity” investing: you lever up your bond portfolio to achieve the equivalent risk and, by implication, returns on bonds relative to equities.222 I’ll take the other side of that bet: real risk parity might be achieved by having fewer dollars committed to bonds than equities. James Grant made some pointed assertions that Ray Dalio is doing some very quirky (and even dubious) things of late,223 which no doubt pissed off Ray. Mark Yusko claims that Ray retained enough marbles to exit his risk parity trade, leaving others to wonder what happened when the bond rout arrives. The possible unwinding of risk parity trades prompted Goldman to suggest that “as an alternative to bonds and given little potential for diversification across assets, we remain overweight cash.” The junk bond market has seen some big outflows and looks ready to topple. Junk bond funds are now buying equities.224 Bad decisions make good stories.

“Liquidity that has been pumping up the markets will be drying up in 2018. . . . We’ve been in an artificially inflated market for stocks and bonds largely around the world.”

~Jeff Gundlach


“We are trying to preserve conglomeration. . . . There will be another financial crisis. And it will pop out. And we’ll all say, ‘How did it happen?’”

~Henry Kaufman, legend of Wall Street

More than scandals in any other industry, banking scandals follow the business cycle, which means they are currently in a period of relative calm. That said, Wells Fargo’s problems continue to mount, as estimates of the bogus accounts first reported in 2016 nearly doubled to 3.5 million.225 Almost a million auto loans were tagged with unnecessary (and difficult to cancel) insurance policies reputed to push a quarter million drivers into delinquency and create a pile of wrongful repossessions.226 Management is gobsmacked at how this occurred right under its nose. Reserves for legal costs are in the many billions.227 Warren Buffett, a big fan of owning well-managed companies and the largest shareholder of Wells Fargo, could not be reached for comment. Meanwhile, Wells Fargo director Elaine Chao joined the Trump administration, but not before collecting a $5 million bonus paid to all banking executives for taking government jobs to continue working for the banking industry.228

Bankers haven’t gone to jail because they haven’t committed crimes

~Wall Street Journal headline

Speaking of non-criminal behavior, the U.S. Supreme Court ruled that a municipality can sue banks under the Fair Housing Act of 1968 for preying on people of color and saddling them with high-risk loans. The investigation of the infamous London Whale who lost billions of dollars for JPM got dropped—vaporized, to use an MF Global term—without explanation. Prosecutors claim that he was hiding offshore and refused to come when summoned.229 It’s unclear which JPM office he works at now. Monte dei Paschi di Siena—Didn’t they die?—has earmarked 1.5 billion euros to compensate retail junior bondholders who were, technically speaking, “reamed out” by deceptive sales tactics.230 Retail senior bond investors will be reimbursed by the Italian government.230 Only Italian debt holders will be paid back, while those outside of Italy will get hosed. The entire Italian banking system is a hot mess. Bailouts are following the usual playbook: the banks get to keep the good stuff, and taxpayers get the bad.231 Heads I win, tails you lose. Nothing changes. On the bright side, Vietnam gave the death penalty to bank frauds. Odd that it gets called “third world.”

I’ve droned on incessantly about depositors in banks getting nothing for their hard-saved capital. Bank of America, for example, paid $200 million in interest on $500 billion of deposits while those same retail depositors paid $4.1 billion in fees, which corresponds to a negative interest rate of 0.64 percent.232 On the bright side, Interactive Brokers established a “Stock Yield Enhancement Program” that enables clients to participate in picking up extra yield by allowing their shares to be lent out for shorting.233 Isn’t that how it used to be done?

Despite favorable borrowing rates and end-of-cycle booms, stresses in the banking system can be detected. Banks are not that profitable owing to central bank policies. Chris Whalen notes that Citigroup has picked up the synthetic collateralized debt obligation (CDO) pipe once again in what is likely an epic reach for yield.234 The word “synthetic” is always a red flag. A CDO is “a product that fraudulently leverages the real world and literally caused the bank to fail a decade ago.” The too-big-to-fail crowd is, once again, using dubious off-balance-sheet derivatives, which illustrates that, and I quote Chris,

“The large banks cannot survive without cheating customers, creditors and shareholders . . . and, eventually, will suffer a catastrophic systemic risk event.”

~Chris Whalen, Risk Analytics

The bank derivative positions (Figure 33) are huge. I am well aware that those are notional values, but the trick of “netting”—cancelling positions like you factor equations in algebra—failed in ’09 and will fail in the next crisis because crises don’t wait for humans to catch up. The only thing worse than “excessive” leverage is excessive off-balance-sheet leverage. Deutsche Bank continues to struggle and seems likely to be at the heart of the next banking crisis. If you would like an incisive description of what the money markets looked like from inside the system during the last crisis, check out this link.235

Figure 33. Top 25 bank assets ($8 trillion) and derivatives ($230 trillion).

Corporate Scandals

“Would you like to pay the $50 upcharge to not be beaten unconscious in an overbooking re-accommodation situation?”

~United Airlines (not)

The shenanigans of corporate America are always a source of considerable entertainment. Some are hunormous, posing existential risk, whereas others simply make you wonder who is driving that cab (like when the CEO of Uber got in a kerfuffle with an Uber driver on camera.)236 The transportation industry was on a roll.

Airlines became frequent flyers in the mile-high club. United booted two women for wearing yoga pants.237 I can only imagine. EasyJet bumped a kid off a flight and abandoned him unsupervised.238 The big story, however, was when United kicked a doctor off a flight, breaking his nose in the process.239 An out-of-court settlement within the week probably made the good doctor some serious money and tainted the “fly the friendly skies” slogan forever. The plot within the plot is that the free market was subverted. If the flight attendants had the authority to up the bid—they did not—or if the airlines sold cheaper tickets to passengers willing to risk getting booted, both parties would have parted ways satisfied.

Once passengers got grumpy, all hell broke loose. American Airlines got sued by a passenger who claims to have been crushed between two obese passengers.240 For a brief moment, laptops were banned from air flights from Europe.241 The reversal of that bit of genius was predictable. A passenger threw such a shit fit over a $12 blanket that Hawaiian Airlines had to divert the flight.242 A man was thrown out of a plane in Mexico—not off the plane, out of the plane.243 He landed on a hospital (no joke) but had lapsed in paying his Obamacare premiums (joke).

“I think all CEOs should keep their mouths shut. You want to be a political pundit? Go on CNN.”

~Caller to talk radio

Politics crept into the boardroom, often with no obvious gain and dubious results. The Camping World CEO told Trump supporters to shop elsewhere, somehow missing the subtlety that the Field & Stream crowd might include more than a few Trump supporters.244 A Pepsi commercial depicted one of the Kardashians breaking the ice with Orwellian police in a scene right out of 1984.245 Target took an overt and very progressive stand supporting the notion that you should use whichever bathroom you identify with, forgetting that their customers are demographically a bunch of parents.246 The Starbucks CEO announced he would hire 10,000 refugees.247 Potential domestic baristas were not happy. Walmart was forced to apologize for a sign marketing a rack of guns as back-to-school supplies.248 A Keurig spokesperson tweeted that the company tried to pull its ads on Sean Hannity’s show because of a controversial guest, forgetting that those who would be offended by his guests don’t watch the show. Youtube filled with scenes of creative destruction (smashing Keurig coffee makers).249 Sean overtly helped Keurig pull their beans from the fire (possibly for additional remuneration).250 A Google employee on her way out the door cancelled the account of Twitter's most famous poster, Donald Trump (Figure 34); Kellyanne thanks you for trying.

Figure 34. Trump supporting Twitter employee cancels Trump’s Twitter account.

Poland Spring got in hot water for selling bottled tap water.251 You gotta love the profit margin on that product. By the way, anybody who is buying bottled water while not fully funding their 401(k) and paying off all debts public and private is more than a few quarts short. Kobe Steel got caught faking quality standards for the last 50 years.252 Its credit default swaps have soared, suggesting that more problems are coming. Amazon got grief for its searches being biased toward placing more expensively priced products as top links. That’s not a scandal—it’s how the world works.

Over at Equifax, 143 million accounts got hacked—a little ironic for a company that monitors credit records and protects against identity theft.253 The fun started when three senior executives were outed for selling shares after the company discovered the security breach but before it was announced.254 Bond rating agencies tagged their “less than creditworthy” bonds with downgrades.255 Customers scampered over to LifeLock, not realizing it purchases data from Equifax. Few may recall that the LifeLock CEO posted his social security number on a truck to demonstrate his conviction in his own product and then got his identity stolen 13 times.256 And when you thought the bottom had been plumbed, Equifax sent out an email asking people to check their accounts—sounds like a phish—by making customers agree not to sue them.257 Soon thereafter, Uncle Sam hired Equifax to safeguard taxpayer data.258

The Fed

“I find myself more and more relying for a solution of our problems on the invisible hand which I tried to eject from economic thinking twenty years ago.”

~John Maynard Keynes

“Fed officials are launching a political campaign to retain their vast discretionary control over the American financial system. The brazenness of the effort shows how far afield central bankers have roamed from their traditional remit of monetary policy. . . . [T]he Fed has succeeded in lifting some asset prices, and no one knows what will happen to those prices once the Fed begins unwinding its portfolio. (Yes we do!) . . . You have to ignore history to believe that regulators are suddenly so wise that they know the current regulatory regime will prevent the next crisis.”

~Wall Street Journal Editorial Board

The Fed governors—including a few ex-Fed governors—seemed particularly rudderless this year. In the spirit of David Letterman, I begin with “Stupid Fed Tricks” interwoven with some of the Fed’s most enthusiastic detractors.

“A return to a reasonable pattern of home equity extraction would be a positive development for retailers and would provide a boost to economic growth. . . . The previous behavior of using housing debt to finance other kinds of consumption seems to have completely disappeared.”

~Bill Dudley, president of the Federal Reserve Bank of New York

“Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road—either too much inflation, financial instability, or both.”

~Janet Yellen, after 8 years of waiting too long

“What Yellen had to say doesn’t even reach the status of babbling; it was flaming incoherence.”

~David A. Stockman (@DA_Stockman)

“The good news is that, while the current expansion is quite old in chronological terms, it is still relatively young in terms of the health of household finances.”

~Bill Dudley

“Are you kidding? Are you kidding? No one knows what you’re doing.”

~ John Taylor, economist, replying to Bill Dudley’s claims of clarity

“There doesn’t seem to be any risk to keeping rates low and lots of benefits to it.”

~Narayana Kocherlakota, former president of the Federal Reserve Bank of Minneapolis

“Each and every subsequent economic and financial hiatus has been a direct result of excessively loose monetary policy to clear up the previous mess. The current perilous state of the global financial system is evident to anyone who scrapes at the cheap veneer of normality. . . . The Yellen Fed is no longer data dependent, but is instead thinking of its legacy.”

~Albert Edwards, Société Générale

“Maybe our rate hikes are actually doing real harm to the economy.”

~Neel Kashkari, president of the Federal Reserve Bank of Minneapolis

“If there’s a future crisis and we really need people to believe in us, we’ve earned and established that credibility.”

~Neel Kashkari

“I don’t think you have to have a PhD in Economics . . . to be Fed chair or governor or president of the Federal Reserve Banks.”

~Bill Dudley, GED

“The Federal Reserve might have PhDs from great Ivy League schools, but they don’t understand markets.”

~Rick Santelli, CNBC

“The Fed has been reluctant to target equity prices.”

~James Bullard, president of the Federal Reserve Bank of St. Louis (tacitly admitting they target equity prices)

“Normalizing monetary policy will require that the Fed disown the idea that the level of wealth (i.e., financial-asset valuations) is an appropriate objective of monetary policy.”

~Peter Fisher, former Fed Governor

“I actually feel bad for Bullard. The cognitive dissonance between what the job requires and what any thinking human being observes must be crippling.”

~Ben Hunt (@EpsilonTheory)

“Are central bankers twisted geniuses manipulating the markets in order to meet their inflation goals? Or are they bumbling ex-academics whose ramblings are over interpreted by investors besotted with their brilliance?”

~James Mackintosh, Wall Street Journal

And just a few more detractors to pile on.

“The Fed remains incoherent on their objectives and the means used to achieve them.”

~Mike Lebowitz, Clarity Financial, LLC

“For non-gamblers at home that means there’s as much of a chance she’s bluffing as she is full of sh*t.”

~Tony Greer (@TGNY2000), TG Macro, on Yellen

“I think we injected cocaine and heroin into the system and now we are maintaining it on Ritalin.”

~Richard Fisher, former president of the Federal Reserve Bank of Dallas

I have all but given up trying to understand the hubris—the Hayekian fatal conceit—the Fed suffers to conclude that it can and should control the economy. The best economic analyses draw strong analogies from Darwinism, wherein repeated trial and error nudges markets in a relentless quest toward equilibrium. The notion of QE is anathema to free market thinkers, but not new. Tiberius called for it in 33 AD to stem a panic, and just as we have witnessed of late, it worked for a while.259 Those who credit the Fed for saving us from disaster in ’08–’09 ignore two teeny details: (1) they were the root cause of the crisis by fueling and cheerleading a systemically dangerous housing bubble; and (2) the subsequent stick save cost a fortune, and the bill has yet to be delivered. We are way more out of whack now than in ’07. It is reminiscent of WWI failing to correct the imbalances—and actually generating new ones—which made the conflagration in WWII inevitable. The next recession should make my point.

The markets are buoyed by unprecedented QE, also known as batshit-crazy money printing. In case you are tempted to say the Fed is on the sidelines (with the cash, apparently), money is fungible: global money printing creates bubbles globally. We are on target for $3 trillion in global QE this year, $1 trillion more than last year.260 The total since ’09 is quoted to range from $20 to $33 trillion.261 In case you’re wondering what a trillion means, I find this useful:

One million seconds = 11 days ago (your bread is now stale)

One billion seconds = 1985 (Madonna was like a virgin)

One trillion seconds = 32,000 BC (central bankers began to roam Europe)

All this money has done a lot of long-lasting damage to the economy. Savers and wage earners were sacrificed to the Gods of Banking (unless they bought Bitcoin or the FAANGs). Claims that the economy is in great shape are unsupported by the numbers (see “The Economy”). Inflation is not tame, which the monkey-spankers at the Fed would know if they realized that everything “is rising faster than inflation” or if they simply went shopping. Wage inflation, by contrast, is stupendously under control. The Fed gave bankers gobs of money to use during the next crisis and then, by paying interest on reserves at the Fed, compensated the banks for not lending it (except to companies for share buybacks).

“Just a word about money-market mutual funds. They should not exist. Unfortunately, they do.”

~Ben Bernanke, Citadel and former chairman of the Federal Reserve, in 2011 Fed meeting minutes

Bernanke may have, by his own assertion, a huge IQ, but he is dead wrong: the most important price in the world—the price of capital—should be determined by price discovery in the money markets rather than under the jurisdiction of a committee of clueless academics. Past Fed heads have been criticized for causing recessions through Fed-induced monetary contraction. This current gaggle of governors is a cowardly one. The Greenspan–Bernanke–Yellen-era Fed developed a neurodegenerative aversion to the natural restorative forces that corrections have on markets and recessions have on economies.

The current Fed governors have been left with a huge debt overhang and $200 trillion in unfunded liabilities ($2 million per taxpayer).262 Their working model seems to be that they can “inflate it away” without riling markets. Mind you, this notion has been around a long time, but it leaves some yawning unresolved issues. First, it presumes that inflation is some kind of smart bomb. It’s more like a biological weapon, heading where it wants, not where central bankers want. Right now, the inflationary tractor beam is financial assets. The Fed must know this. Second, money is created by creating debt:

“Loans create deposits, not the other way around.”

~Bank of England

Inflating away debt is an Escherian paradox unless you do so by loss of confidence in the money itself.

Third, an oft-stated tenet of the inflate-it-away model is that the inflation must be unexpected. Once the markets and society at large subliminally sniff out the inflation, they begin to adjust. It is no longer unexpected, and the pushback becomes an overwhelming force of nature that can run uncontrollably. I’m not sure I even believe what I just said, but it may explain why the Fed claims inflation is low: it is trying to dupe us.

“We’ve never had QE like this before; we’ve never had unwinding like this before. Obviously, that should say something to you about the risk that might mean, because we’ve never lived with it before. . . . The tide is going out.”

~Jamie Dimon

I believe the Fed governors are terrified of recessions because of the awareness—yes, I believe they have some left—that a recession will cause pensions, municipal budgets, and economically sensitive social structures to break. By contrast, they seem unafraid of inflation out of a misplaced 100% confidence they can control it. Nobody else believes this.

“Inflation cannot be allowed to develop because there would be no way of avoiding a dramatic rise in rates.”

~Aleksandar Kocic, Deutsche Bank

“The Federal Reserve . . . has no clue what they are doing. They are going to ruin us all.”

~Jim Rogers

If the Fed has inflation under control, why do they proclaim ignorance?

“We do not, at present, have a theory of inflation dynamics that works sufficiently well to be of use for the business of real-time monetary policymaking.”

~Daniel Tarullo, former Fed governor

“This year the shortfall of inflation from 2%, when none of those factors is operative, is more of a mystery, and I will not say that the committee clearly understands what the causes are of that.”

~Janet Yellen

“Our understanding of the forces driving inflation is imperfect.”

~Janet Yellen

“If inflation remains in a slump, the Fed may require a shallower path of rate rises.”

~Charles Evans, Federal Open Market Committee

The Fed has kept interest rates “too low for too long” yet again. Dubious claims about tame inflation and the strong economy that don’t square with the numbers are a narrative to justify rate hikes. Many share the belief that the Fed was offered opportunities to lift the rates over the last eight years but stood with the bat on its shoulders, frozen in fear of a 1937-like downturn. It is now forced to raise rates into an economy that is weakening.

“I have confidence in one thing: The Fed will blow it.”

~Robert Rodriguez, FPA Capital Fund

The Fed is also wrestling with what to do about its balance sheet in the aftermath of QE. A chat with Jim Kunstler got me thinking too. I must confess that the transmission mechanism through which a bloated Fed balance sheet causes future economic problems is not in my wheelhouse. That aside, the governors have pondered reducing it very slowly by letting the assets expire,263 but how? The balance sheet expanded when the Fed created money “from thin air” with a simple spreadsheet entry and then bought bonds and who knows what else. By statute, all interest payments (minus expenses) are remitted back to the Treasury. In essence, the interest paid by the Treasury to the Fed gets returned to the Treasury: The Fed monetized Treasury debt (free money). When a bond expires, the Treasury pays the principal to the Fed. So here is the big question: does the Fed extinguish it with the stroke of the same accounting pen that created it, in turn negating the original monetization? Alternatively, the Fed could pass the principal back to the Treasury, making it a permanent fixture of the monetary base. I asked some smart people about this: nobody knew, although David Andolfatto, vice president of the Federal Reserve Bank of St. Louis, was confident the money would be extinguished. Given that remittance back to the Treasury would be inflationary, I'll take the other side of David's bet; the Fed will choose the inflationary path.

“The unpopularity of inflation may be due to reasons that economists find unpersuasive.”

~Ben Bernanke

Unpersuasive? No offense, but you are clueless. Try this one: us plebes are getting donkey-punched by your financially repressive policies. Unfazed by my opinion, Bernanke chimed in with a paradigm-shifting new theory on inflation targeting.264 Instead of trying to stick inflation at 2 percent like a Mary Lou Retton vault, the Fed should pursue “price-level targeting,” which sounds like inflation targeting to me. The distinction is that price-level targeting can, in his words, “‘look through’ a temporary change in the inflation rate so long as inflation returns to target after a time.” He’s had years to ponder this problem, and his grand epiphany is to target an average inflation rate of 2 percent? The cleverness of that solution is impossible to underestimate.

The Fed took money from the savers and gave it to the debtors, who then took out more debt. The patients have now all been bled. Both groups are broke and wages are stagnant. Is it any wonder the economy is stuck? Neel Kashkari wrote an essay explaining why the Fed protects financial institutions during a crisis, but he fails to detect the circular reasoning: the Fed defines a crisis as any time the financial institutions need protection.265 The Fed lacks the DNA to let a credit purge play out. I leave you with a few more words from some veterans:

“While conventional monetary policy boosts economic activity in the pre-crisis period, bond purchases are found to have no statistically significant real effects post-crisis.”

~Bank of International Settlements

“With all the thought and work and good intentions, which we provided, we achieved absolutely nothing. . . . [N]othing that I did, and very little that old Ben [Strong of the Federal Reserve] did, internationally produced any good effect or indeed any effect at all except that we collected money from a lot of poor devils and gave it over to the four winds.”

~Montagu Norman, governor of the Bank of England (1920–1944)

“I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit . . . by the opinion and duress of a small group of dominant men.”

~Woodrow Wilson, after signing the Federal Reserve into existence


“The divide is not between the left and the right anymore but between patriots and globalists!”

~Marine Le Pen, French politician

“Many people are saying that the world and Europe are going a bit off the rails.”

~Angela Merkel, chancellor of Germany

“Let’s hope that nothing is declared tomorrow because perhaps the person who makes the declaration will end up like the person who made the declaration 83 years ago."

~Spanish spokesperson, delivering a death threat to the president of Catalonia

Given that a bad year for Europe is when the entire continent is a raging inferno, life was good. Many geopolitical events—movements of chess pieces—make sense in the context of post-WWII attempts to prevent WWIII.

Europe continues to try to “unlock value” by spinning off components. I’m still trying to figure out whether Brexit is going to happen or if the gaffers and nobs will tell the sods to wank themselves. Secession movements moved from Britain to Spain. Catalonians began seceding from Spain, whose measured response included beating voters senseless and hurling death threats at the Catalonian leader. Catalonians voted 90 percent in favor of secession.266 The Spanish high command said “screw that” and ousted the Catalonian government, which is still stuck in Belgium avoiding extradition. Catalonia will be governed from Madrid by a party that got 8.5 percent of the vote.267 Meanwhile, Spanish bond yields plumbed unbelievable lows. Spain sure looked like a failed state to me, with an insolvent banking system, precisely zero euros in its pension fund, and heading into anarchy and chaos. I stand corrected. At least Madrid solved the “manspreading” problem—the crime against humanity of sitting on a subway or train with your legs apart for thermal regulation—by simply banning it.268

“Europe will be devastated by African refugees if they don’t make it more difficult for Africans to reach the continent.”

~Bill Gates, co-founder of the Gates Foundation

“Immigrants who don’t like The Netherlands’ freedoms should ‘f*** off’ and leave."

~Ahmed Aboutaleb, Muslim mayor of Rotterdam (2015)

Millions of teddy-bear-clutching immigrants from North Africa and the Middle East face challenges settling into their new digs in Europe. There are sovereign battles over how many refugees each country should take. Seems that only Poland has a target number of zero.269 (It has credits accrued for taking in Jews during the early 16th century.270) Rioting in Paris continues in areas that the police refuse to enter.271 France set up a decidedly Orwellian site for Muslims who wish to voluntarily “deradicalize.” There have been no takers.272 Shockingly, lucrative contracts are to be had in the “deradicalization industry." The French are finally getting ahead of the problem: they've banned burkinis (swimwear).273 In Rotherham, UK, cops have been overwhelmed by pressure to create a Sharia-based no-go zone. A Huffington Post article by René Zografos stated, “It’s well known for Scandinavians and other Europeans that liberal immigration comes with drugs, rapes, gang wars, robbery and violence…we see the respective nations’ cultures fading away, for good and for bad.”274 The article was deleted by sundown.

The situation in countries like Sweden and the Netherlands appears dire, with cultural clashes commonplace. Sweden is a superpower of humanitarianism: it culturally seems to take whatever guff comes its way. Those who speak out are called racists or Islamophobes.275 I’m not sure whether the criteria of phobia—irrational fear—is warranted in some cases (vide supra). In one Swedish city, 268 apartments were commandeered by local officials for immigrants while existing residents have been placed on a three-year waiting list.276 Those working at the police station in Rinkeby, Sweden require police escorts to go to work. Sweden has 55 no-go zones at last count.277 At some point, that number will begin to drop as they merge. In high-density neighborhoods, modest garb is being demanded of non-Muslim residents. Given that dogs are “impure”—my three Labs certainly are—dog owners are being told to keep the dogs indoors. Could get a little rank in there. The Swedes response is a little odd: they are proposing an hour-long paid break each week for sex.278

Hamburg authorities took possession of six residential units and are now renovating the properties for immigrants.279 A district spokeswoman noted that “all renovation costs will be billed to the owner.” Ouch. The chairman of the Association of German Administrative Law Judges, says that “courts are now completely stretched to our limits. . . . At some point, everything will collapse.” They are imitating the Swedes (sort of) by setting up bestiality brothels as part of a push for “lifestyle choice.”280 A year after accepting billions of euros to retain millions of refugees, President Erdogan (pronounced er-do-wan or air-jor-dan) threatened to open Turkey’s borders to Europe.281 Of course, Switzerland is way too busy printing money and buying hard assets (like FAANG stocks)282 to worry about immigrants.


“Would the Left’s greatest minds still proclaim the Gospel of Socialism after Venezuela’s collapse? Unlikely.”

~Steve Hanke, professor of economics, Johns Hopkins University

The big story south of the border is Venezuela. The lethal combination of dictatorial rule, socialism, the “curse of resources,” and consequent hyperinflation has created a “failed state.” While getting some help from Russia and China,281 U.S. sanctions and who knows what else nudged the country off the cliff. Nonetheless, the wounds are largely self-inflicted. (As an aside, Overthrow is a much better look at the U.S.’s role in toppling governments than Confessions of an Economic Hit Man.)

Hyperinflation reached more than 4,000 percent by November while the bolivar headed to zero (Figure 35). You lose half your spending power in a week at that rate. They tried the standard “out with the old, in with the new” currency swap ploy, which never solves the problem without structural reform. It didn’t this time either; they are flirting with establishing their own oil-backed cryptocurrency even though they seem incapable of producing oil now.282 Although Venezuela has the largest reserves of crude oil in the world—296 billion barrels—its production collapsed because, well, that’s what happens in failed states. The country degraded into anarchy and defaulted on its sovereign debt. In the unlikely event the U.S. does a humanitarian debt forgiveness, it will merely be to give money to influential banks who bet that we would bail them out.


Figure 35. Venezuelan hyperinflation and the value of the bolivar.

Venezuela is a case study in life during the zombie apocalypse. Angry mobs— quite literally millions of people—rioted in the streets.283 Gangs of marauding bikers using Molotov cocktails robbed tractor trailers—full Mad Max.284 Venezuelans are starving, losing an average of 19 pounds in 2016.285 I suspect that they lost more in 2017. Although citizens in the U.S. are getting rather numb to scandals, in Venezuela, footage of a portly dictator eating an empanada raised eyebrows.286

North Korea

“Little Rocket Man . . . We’re going to do it because we really have no choice.”

~Donald Trump

Things are heating up in North Korea—or at least that’s what we’re told. I sensed this in 2016 when the rhetoric demonizing Kim Jun Un (K’Jun or L’il Kim) ramped up. Of course, he is a bad dude—demonizing him is trivial—but the volume and frequency was the tell. K’Jun played into our hands by sending American tourist Otto Warmbier home in a basket after the putative hijinx of stealing a banner.287 Whether he did it or not, Warmbier should get a Darwin Award for merely traveling to North Korea. China was rumored to be preparing to whack K’Jun and install his brother, Kim Jong Nam, until somebody—K’Jun maybe—whacked Mr. Nam. Two apparently white women swiped Nam with nerve-gas-impregnated ointment and then claimed they thought it was a spoof. The message was similar to the message sent when a Roosky got offed using plutonium. In any event, it would be logical that it was K’Jun's doings. . . or somebody making it look like K’Jun assassinated him . . . or somebody else making it look like the first somebody assassinated him. Whatever.

We’re told that K’Jun launched rockets that could destroy Earth with footage serving as trailers for WWIII. Seems a little unnerving. The baffling part is that propaganda footage coming from the north invariably shows K’Jun with his 65-pound big-hatted generals (Figure 36) displaying military weaponry that he got because he didn’t sell enough flower seeds to get the coveted Daisy BB gun. Alternatively, his armaments were grabbed from the “free” table after a circa 1950 global military–industrial arms show. These rather elaborate shows are where the U.S. sells weapons to its enemies . . . such as the North Koreans.288

Figure 36. Kim Jun Un and the North Korean Navy.

One theory is that we have wars to teach ourselves geography. Maxine Waters confused Crimea with North Korea. I would expect nothing less. An online survey showed that few could identify North Korea on a map (Figure 37). No problem, because for a while at least, it looked like North Korea soon wouldn’t be on any maps.

Figure 37. Survey showing putative locations of North Korea.

"[Trump] has dispatched Maxine Waters to NOKO to talk to Lil Kim. After 1/2 hour with her he will drink whatever he gave to his 1/2 brother."

~Mike Huckabee


“If command and control economies worked, we’d all be speaking Russian.”

~Kyle Bass, Hayman Capital

China is approaching superpower status if it is not already there. Like everybody else, I don’t really have a clue what’s happening, but China is key. Trump played a game of chicken with China over North Korean strategy. (I hope it’s a strategy.) The world was too busy criticizing The Donald to notice that China blinked: they banned steel and coal imports from North Korea and forbid business owners from transactions with North Korea to satisfy UN mandates.289 North Korea is very much China’s problem, and they will probably deal with K’Jun at some point.

I suspect several big issues are in China’s interest: (a) establishing a petro-yuan—a market for oil denominated in yuan to unseat the dollar as the reserve currency, (b) creating (in conjunction with Russia) an alternative to the euro-dominated banking system (specifically the SWIFT check-clearing system290) because of our tendency to use it as a blackmail device, and (c) surviving the next recession without losing control of its banking industry or the masses.

The dollar has been the global reserve currency since the fateful Bretton Woods Conference in 1944.291 It is a mixed blessing in that we get to print dollars recklessly, and the world absorbs them. The problem, however, was described by Robert Triffen and is called Triffen’s dilemma or paradox.292 The requisite trade imbalance eventually destroys your currency (Day of the Triffens). Reserve currency status is a suicide mission in which you get the 72 virgins up front. China seems positioned to take on the burden, as evidenced by aggressive gold purchases (see Figure 17) and increasing numbers of bilateral trade agreements and exchanges. It buys oil from the Saudis, oil and other resources from the Russians (maybe uranium with help from the Clintons?), and gold from a number of countries using newly formed gold exchanges.

“China is the largest global imbalance that I’ve ever seen in my life.”

~Kyle Bass, on China’s $40 trillion in debt

A few obstacles stand between China and global domination. It has expanded credit at an annualized rate of 25 percent for years, causing huge distortions in its banking system.293 It also has a two-tiered economy: a vibrant private sector and stagnant state-sponsored economy. Luke Gromen says that if US dollar printing goes supernova to cover $200 trillion in unfunded liabilities—$1–2 million per taxpayer—it will also break China if the petro-yuan is not firmly established.294 China’s stock market is now state sponsored (supported by central planners). It has the same kind of record-breaking streaks as US markets without corrections. Admittedly, all equity and bond markets are state sponsored, but misery will not love company; it never really does. China’s yield curve just inverted:295 short-term interest rates rose above long-term rates. Pundits will claim it doesn’t matter this time, which will coincide with China entering recession. Then we begin to probe the durability of its banking and social structures under stress.

“Considering the pace of the slump, which is very fast, it’s fair to say we are likely in a bond disaster.”

~Qin Han, Guotai Junan Securities, on the yield curve inversion

How dangerous is China’s next recession? It has a truly gargantuan 300 percent debt-to-GDP ratio.296 Its banks have “ghost capital,” rehypothecated (repeatedly) to support this mountain of debt and rendering debts essentially uncollateralized.297 Pundits around the globe raved about China’s Forex reserves to protect them.298 The U.S. had them in the 1920s, and Japan had them in the 1980s. How’d they work out? China’s reserves have already dropped 25 percent since 2014.299 A thorough report by Myrmikan Capital describes in lurid detail the near tripling of China’s bank assets since 2008 to stimulate the smokestack industries.300 It concluded that “the insanity is unwinding.”

“China is done.”

~Myrmikan Capital

If you think big change will occur seamlessly, you might be optimistic. I was amazed that beginning in the early ’80s, China sent its best students to the U.S., many never to return. In retrospect, it seems like a diplomatically strategic move. And then there’s the Chinese pilot who pulled a Top Gun–quality stunt by flying upside down above a U.S. spy plane.301 China has no intention of forging a future without carrying a big stick.

“If the U.S. and South Korea carry out strikes and try to overthrow the North Korean regime and change the political pattern of the Korean Peninsula, China will prevent them from doing so.”

~Global Times, China’s state-run newspaper

Middle East

“This is not a war. It is cruel murder.”

~Ron Paul, former politician, on our support of the Saudis in Yemen

What an odd mix of cultures. Portions of the Middle East are 21st century on steroids, whereas other parts remain unchanged since the Crusades. We should just stay the hell out, but somehow our oil ended up under their sand. U.S. Middle East policy has been abysmal for decades, acutely so since 9/11/01. Millions have died, and much of the death and dismemberment traces to U.S. Middle East policies that look like war crimes in a war with the criminal price tag of $4–6 trillion.302 If I were king, I would put the sheiks on notice:

“Guys. We want to buy your oil at market price. We’re going home now. If you should decide not sell us the oil, we’ll be back, and there will be hell to pay. Have a nice day.”

Dave Collum, as King

Weird things are happening in the Middle East even by Middle East standards. Saudi power shifts were supposedly evident in 2014, but chess pieces started moving around the board quickly this year. Soon after Trump got the red-carpet treatment in Saudi Arabia,303 King Salman arrested 11 Saudi princes, including some famous ones (Prince of Persia).304 That same day, another eight big wigs (tall turbans?) died in a helicopter crash (or at least feigned doing so). The princes were shaken down for an estimated $800 billion in assets, although that might have been an afterthought.305 Missiles started sailing over the kingdom and were soon being blamed on Iran306 (a theory supported by U.S. neocons). The prime minister of Lebanon wussed out—resigned out of fear of assassination.307 Qatar was hit by an embargo cutting off an estimated 40% of its food supply while the country was already embroiled in a serious cash crunch.308 It looked like game day, but then all seemed to go quiet again.

I'm not sure where this fits in, but we dropped the MOAB (mother of all bombs) with a kill radius of a mile to remove 36 terrorists in what seemed like overkill in the most literal sense.309 It was likely a message to somebody—maybe everybody—that we could nuke them without leaving a radiation afterglow.

“It doesn’t make sense that Assad would do it. Let’s not leave our brains outside the door when we examine evidence. It would be totally self-defeating as shown by the results. . . . Assad is not mad.”

~Peter Ford, former UK ambassador to Syria

Of course, the war in Syria is a bloodbath that has left an estimated 500,000 dead310 and millions displaced into Turkey and Europe. The demonization of Assad continued to focus on gas attacks that nobody seems to believe happened. None of this makes sense to me. None.

Given its length, we've had to break this report in half so as not to crash your browser. Click here to read Part 2 of David Collum's 2017 Year in Review, available free to all readers.

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  • Sat, Dec 23, 2017 - 9:24am

    Chris Martenson

    Chris Martenson

    Status: Platinum Member

    Joined: Jun 07 2007

    Posts: 6234


    An astonishing tour de force!

    A big thank you(!) to Dave Collum for writing this year end review with such completeness and humor.

    We are honored to have it posted here at Peak Prosperity.

    I hardly know where to begin so perhaps I'll summarize;  We're scroomed.

    And I am a die-hard doom-ist!*  🙂






    * Actually an optimistic realist.  But no such shade of gray is allowed in the USA right now.  You are either with the Pollyannas or against them.

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  • Sat, Dec 23, 2017 - 10:20am



    Status: Silver Member

    Joined: Mar 19 2011

    Posts: 340


    Eagerly Awaited Seasonal Present

    This is one of my favorite annual gifts and an eagerly awaited, multi-layered present that is fun to unwrap chapter by chapter.  Thank you David, and Adam and Chris!

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  • Sat, Dec 23, 2017 - 12:20pm



    Status: Bronze Member

    Joined: May 03 2014

    Posts: 534


    Under lying discomfort, cynically enjoyed!

    Thank you PP for including this year-end tome on David's analysis of our species sybaritic predicament. Always a hoot! The analogy of Rome burning is appropriate given our current state. Smoldering may be the more apt term.

    “This is the way the world ends
    Not with a bang but a whimper.” -T.S. Elliot

    As long as we(humans) continue to shape our environment to meet our needs, we will live beyond this planet's capacity to meet those needs. As David points out"

     "Wealth is made, mined, grown, or coded, only then do you get to consume it. Wealth is extinguished by consumption, depreciation, and destruction. Central bankers seem to believe you can will wealth into existence by generating animal spirits."

    PP's emphasis on preserving wealth and living resiliently is admirable, but only highlight's our inability to achieve a meaningful existence while preoccupied with the mundane exigencies of life. Ironically, the Christmas message of salvation from ourselves seems well timed with David's observations. Merry Christmas; and "peace on earth and good will toward men".

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  • Sun, Dec 24, 2017 - 9:10am



    Status: Bronze Member

    Joined: Feb 06 2013

    Posts: 652


    I don't

    ...agree with him on all of his political leanings, but I heartily embrace and welcome his year-in-review. I would agree that he and others like him should have the freedom to express these points of view openly. I lean liberal on most issues, but if I want to debate his points of view then I should do so with data, facts, and honest discussion rather than silencing him through some kind of faux-liberalism that ignores one of the fundamental tenets of the Enlightenment: freedom of expression.


    I'm not sure how my fellow liberals have forgotten what liberalism means, but I suppose that ranks right up there with people who thought Obama was going to make us socialist; a perspective that ignores history - we've been socialist since the 1930s, it's just a question of degree of socialist. Ignorance abounds, I suppose.

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  • Mon, Dec 25, 2017 - 1:20pm



    Status: Member

    Joined: Sep 30 2008

    Posts: 22


    PDF format

    Is there any chance you can post the PDF version with embedded links preserved? It would be oh-so-much more useful.



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  • Tue, Dec 26, 2017 - 6:12am



    Status: Member

    Joined: Oct 16 2011

    Posts: 12


    Could it be “different this time”?

    I agree that one way or another this central bank induced fiasco will end badly but has the stock market ever been manipulated by central banks before as it is now? The insanity of the Swiss,Japanese,and European central banks buying shares will newly “printed” money is unprecedented isn’t it? Even the FED mentioned that stock purchases might be necessary in the future. Doesn’t reversion to the mean require at least some semblance of a free market?

     I’m not comparing our situation at this point to Venezuela but their stock market is on a tear even if in real terms it’s down somewhat. If my choice is holding cash in a currency that quickly looses value or owning part of some crappy business that may make a small profit I’ll go with the business.

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  • Tue, Dec 26, 2017 - 11:47am



    Status: Bronze Member

    Joined: Dec 10 2013

    Posts: 309


    The Future is Just Like the Past, Only More So...

    The Guardian has an article about New York's vanishing shops and storefronts: "It's not Amazon, it's rent"

    I was reminded of Niall Ferguson's "The Ascent of Money" where he looks down on Manhattan and realizes how it's just like Venice, only without the gondolas. It's never different, anytime. Not even extinction.


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  • Tue, Dec 26, 2017 - 12:28pm

    bugmenot bugmenot

    bugmenot bugmenot

    Status: Member

    Joined: Oct 09 2016

    Posts: 4


    Please Stop Dave

    Dave Collum has a posted a year in review at PeakProsperity since 2010.  8 years.

    He used to give his personal return in these tomes, but it's strangely absent in this one; another year of under-performance is the most likely culprit.  Based on his allocation for the year I would guess it was sub 5%.  

    Going back over his old reviews, Dave's annualized return since the end of 2009?  1.5%.  (Feel free to correct me) 

    His preferred benchmark, Berkshire, has been up close to 15% annualized.  
    Let's face it Dave.  Your track record is dismal.  I don't think that even counts the physical gold you lost in 2016.   Is it possible you had a negative total return over 8 years during one of the greatest bull market runs in recent history???
    If you had put your money in a CD you would have made more money, slept better, and probably be in better health.  But I guess then you wouldn't be semi-famous on financial twitter.
    Please... Stop writing these.  Close the conspiracy theory websites.  Put down the twitter.  Take a deep breath.  Open a Vanguard account.

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  • Tue, Dec 26, 2017 - 1:25pm

    Matt Holbert

    Status: Bronze Member

    Joined: Oct 03 2008

    Posts: 122


    Don't judge a man simply because...

    he thinks the equity markets are insane...

    and do take the time to read the article in its entirety.

    My net worth from January 1, 2000, has compounded at a ballpark annualized rate of 7 percent. That’s not so bad, but the path has been rather screwy. From mid ’99 through early ’03, I carried cash, gold, silver, and a small short position. I kept buying gold through about 2005 (up to $700 an ounce), resumed in 2015, and bought several multiples of my annual salary’s worth in 2016. I’m done now. Gold is up 8 percent, and silver is down –2 percent in 2017 thanks to a minor end-of-year sell off. The spanking from ’11 to ’15 seems to have subsided.

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  • Tue, Dec 26, 2017 - 3:05pm

    bugmenot bugmenot

    bugmenot bugmenot

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    I have read it (unfortunately)

    I was talking about his returns specifically for 2017. Makes it easier add it all up.

    Dave rode the gold wave for a decade and thought he was smart. Go back and read his letters from 2010/2011. The smart investor would re-evaluate his thesis after getting crushed the way Dave has; instead he dives deeper down the rabbit hole. I'm just trying to help him get healthy. 

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  • Tue, Dec 26, 2017 - 8:09pm



    Status: Member

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    marking the low

    Dave rode the gold wave for a decade and thought he was smart. Go back and read his letters from 2010/2011. The smart investor would re-evaluate his thesis after getting crushed the way Dave has; instead he dives deeper down the rabbit hole. I'm just trying to help him get healthy.

    I am always happy when I read stuff like this.  It is a) very true, and b) probably marks the low for us long-suffering goldbugs.

    I was buying oil stocks back in 2016.  Boy was that an unhappy trade.  I was too early.  As a result, my returns also looked terrible.  Fortunately I don't publish an annual message, so nobody makes fun of me.  This year, they are much improved.

    If and when "oil really comes back" I'm going to do well, but in the intervening period - waiting for the market to come back around - can be really annoying.

    Still, a useful observation is that when markets get extended (as gold was in 2011), its probably a good idea to take some money off the table.  At the same time, getting off the train before it arrives at the station is no fun too.  Selling your dotcom in 1997, for instance, leaves you 3 years of regret.  Bitcoin owners who "sold the top" at 1100 in 2014 are probably not so happy right now.

    It is really a hard question to answer: "how far do we ride the move?"   We can make fun of Dave all we like, but that's because we're armed with 20/20 hindsight.  Lots and lots of smart people thought money printing would lead to inflation - so did the Fed - but it turns out the only inflation we saw was asset price inflation, due to the reach for yield.  2011 marked "peak inflation expectations from money printing."

    But as a result of our experience, we now know the equation: hand money to banks = asset price inflation.  Hand money to people = "real" inflation.

    Interestingly: the Trump tax cut hands money to people.  And companies.  How will that differ from what the Fed did?  The tax cut should be inflationary. The government will be taking less money out of normal people's paychecks and borrowing the difference.  That's a stimulus package - even more so because its (semi) permanent rather than a one-time money drop.

    It is possible we will get a mini boom that will kick in right before the 2018 midterms - assuming the EU doesn't blow up because of the Italian elections.

    I'm also watching bitcoin keenly, so I can learn lessons for when gold does its big move.  I, too, don't want to think I'm dreadfully smart, and hold all the way up - and then all the way back down again.  Nor do I want to sell my telecom in 1997.

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  • Thu, Dec 28, 2017 - 11:24am



    Status: Platinum Member

    Joined: Feb 15 2011

    Posts: 1033


    A Tall Order

    Snydeman wrote:

    I'm not sure how my fellow liberals have forgotten what liberalism means, but I suppose that ranks right up there with people who thought Obama was going to make us socialist; a perspective that ignores history - we've been socialist since the 1930s, it's just a question of degree of socialist. Ignorance abounds, I suppose.


    I'm curious ... because I really don't know. Would you mind detailing what liberalism means? I'll give you extra style points if you can show how we can un-hijack what-liberalism-has-become away from the moneyed interests inhabiting the swamp.


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  • Thu, Dec 28, 2017 - 11:53am

    Matt Holbert

    Status: Bronze Member

    Joined: Oct 03 2008

    Posts: 122


    I've found the work of John Gray (Philosopher) to be helpful...


    Gray helped me gain a perspective on the meaning of liberalism and why it is a problem. Specifically, I would recommend Enlightenment's Wake: Politics and Culture At the Close of the Modern Age. John Gray is Nassim Taleb's favorite philosopher.

    worldcat link: http://www.worldcat.org/title/enlightenments-wake-politics-and-culture-at-the-close-of-the-modern-age/oclc/941437450&referer=brief_results

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  • Thu, Dec 28, 2017 - 1:05pm

    bugmenot bugmenot

    bugmenot bugmenot

    Status: Member

    Joined: Oct 09 2016

    Posts: 4


    No No No

    davefairtex wrote:

    I am always happy when I read stuff like this.  It is a) very true, and b) probably marks the low for us long-suffering goldbugs.


    Fortunately I don't publish an annual message, so nobody makes fun of me.  This year, they are much improved.


    We can make fun of Dave all we like, but that's because we're armed with 20/20 hindsight. 

    You seem confused. 

    I am not here to make fun of Dave Collum's horrible, no good, very bad returns the last 8 years.  And gold bottoming here would not make these novel-like "Year-in-Reviews" any better.  He has been 80%+ in cash/gold for 8 years (and probably since the late 90's).  Random chance would say he should have a good year here or there.

    I am saying he should probably just buy a simple life-cycle fund and forget about investing.  Ironically, whatever gains he had this year were likely from his employer forcing him out of his more esoteric holdings and into a life-cycle fund.  It's like the Investment gods themselves are trying to get his attention but he can't see it.

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  • Thu, Dec 28, 2017 - 1:23pm



    Status: Member

    Joined: Sep 03 2008

    Posts: 2729


    communication issue

    Yes we are definitely having a communication issue then.  You certainly seemed to be making fun of him.  Me, if I wanted to make fun of someone, I'd be happy to own it.  But that's me.

    So gold from 2000-present was a pretty good trade.  Was SPX as good?

    Let's see.  SPX:

    2000-01-03: 1455.17

    2017-12-27: 2682.62

    Looks like 84% to me.

    Now what did gold do again?

    2000-01-04: 283.70

    2017-12-27: 1291.40

    Isn't that 356%?

    Even if all the man did was stay in gold, he'd still have beaten one of those index funds.  Do you have a "life cycle fund" example we could look at?  I know its incredibly cool at other sites to just make fun of people without showing your work, but...we're not like that here.

    So here's your chance.  Show your work.  What life-cycle fund would have beaten gold 2000-2017?  Maybe I'll give one a try.

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  • Thu, Dec 28, 2017 - 2:43pm

    bugmenot bugmenot

    bugmenot bugmenot

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    The man didn't just stay in gold; he mixed in some poor stock selection and large cash allocations as well!

    Did your gold number include losses from physical gold stolen from the dealer?  That can put a damper on returns.  I also like how you excluded dividends from the S&P's return.  Are you trying to sell me a FIA?

    I will measure Dave by his (previous) preferred benchmark of Berkshire. 

    Let's see. BRK.B:

    2000-01-03: 35.30

    2017-12-27: 198.69

    Is that 463%? 

    It's strange he stopped the comparisons when he couldn't pretend to be smarter than Buffett. 

    In fact, everyone should just read Warren's annual letter instead.

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  • Fri, Dec 29, 2017 - 3:21am



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    the numbers

    Sure the SPX dividends are worth something.  With dividends included, does it beat gold's return?   Likewise, I'm still waiting for the 17-year returns on the lifecycle fund you suggested.  If you provide me a symbol I can look it up myself.

    But I see you've moved onto Berkshire Hathaway.  I confess, I like Buffet's general view on how to buy things: straw hats in the wintertime, it just makes sense.  So maybe we should all just buy Berkshire and forget about everything else.  He's very well connected.

    So the math: 199/35 = 468%.  That's really good.  Buffet beats gold by quite a lot.  And it crushes SPX, and I suspect your hypothetical lifecycle fund.

    Ok, so that brings us to timing.

    Is it wintertime?  Is now the time to buy straw hats?  Honestly, it doesn't feel like it to me.  So I'm not in the market for straw hats.  In fact, it sounds like you might be suggesting that we buy straw hats during the summer - right at the tail end of an 8 year "expansion".

    Definitely, people waiting for cheaper prices have not done well in recent years. Even Buffet's own metrics (calculated before the age of money printing) are screaming "right now is really expensive."  Should we all pile into Buffets fund right now?

    Snark aside, that is the point.

    Even Buffet has a 109 billion dollar cash hoard right now.

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  • Fri, Dec 29, 2017 - 10:05am


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    Grover wrote: Snydeman

    Grover wrote:
    Snydeman wrote:

    I'm not sure how my fellow liberals have forgotten what liberalism means, but I suppose that ranks right up there with people who thought Obama was going to make us socialist; a perspective that ignores history - we've been socialist since the 1930s, it's just a question of degree of socialist. Ignorance abounds, I suppose.


    I'm curious ... because I really don't know. Would you mind detailing what liberalism means? I'll give you extra style points if you can show how we can un-hijack what-liberalism-has-become away from the moneyed interests inhabiting the swamp.





    I can absolutely try! Forgive any mistyping, please, as I’m at the in-laws and typing with fat fingers on a small screen.


    Historically speaking, liberalism emerged out of the Enlightenment period, and liberals were those who embraced the ideals commonly espoused by so-called “Enlightenment thinkers,” which can be more or less listed as:

    -freedom of expression

    -religious tolerance

    -humane treatment of people (mostly, a fair system of justice that didn’t have separate punishments for one class or another)

    -freedom from governmental interference in the economy (opposing mercantilism was a core principle for many Enlightenment thinkers)

    -more equitable or representational systems of government and taxation, although there was less unanimity among the philosophers of the Enlightenment over which type of government would be best - Voltaire and Rousseau would hardly have agreed on that - but there was a general sense that government by the nobility was less desirable than some level of participation  by “the people.”


    -freedom of the press


    etc. In essence, the things embodied in the English Bill of Rights, and then the US Bill of Rights, are a good example of Enlightenment ideals in action.


    So, the early liberals were those who embraced the Enlightenment, but more broadly speaking the definition can be elucidated as the desire to bring more equal and fair treatment to more people, as well as allow more people to participate in the political, economic, and social systems. The problem is that liberalism is constantly shifting (as is conservatism), because what was “liberal” change in one generation is a given in the next, and so the definitions of each are constantly evolving. Most broadly speaking, liberalism is the idea of changing to something new, usually rapidly, while conservativism advocates tradition or at least slower rates of change; both are definitions I find too obtuse and generic for my tastes.


    However, at its core, liberalism as an ideal has its origins in the Enlightenment philosophies that spawned those ideals - it should be noted that “conservativism” also did not become a formulated “ideal” until the emergence of liberalism (best elucidated by Edmund Burke at the time) - and so it seems ironic to me that any fellow liberals would try to shut down the free speech of others. That’s a violation of a core tenet of the Enlightenment, and hardly strikes me as liberal in any meaningful way. This is probably why I was as viciously attacked on my Facebook feed as much from the left as from the right when I tried to advocate that perhaps, maybe, possibly we should try to understand the dynamics of what’s going on in our county instead of just pointing fingers at each other and calling each other names. I advocated this silly thing called “listening with an open mind” and all. Heresy, apparently.


    Hopefully this all makes sense- I’m being interrupted by my kids and relatives every third minute, so hopefully I maintained a clear thought process all throughout my response...



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  • Fri, Dec 29, 2017 - 10:09am


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    And I’ll try to tackle the second half of what you asked as soon as things die down here. Plus, I need to think on it! It’s a tall order indeed!

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  • Fri, Dec 29, 2017 - 12:34pm



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    I feel like I just got an entire semester's worth of humanities lectures distilled down to five paragraphs.

    Totally worth reading.  Great job.

    Hmm.  One question: when talking about religious tolerance, were they mostly referring to differences within Christianity, or did the enlightenment thinkers apply their sense more broadly.  Way back then, the religious wars were a really big deal.  As I recall anyway.

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  • Fri, Dec 29, 2017 - 3:37pm



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    Great Response, Snydeman


    I agree with Dave. Wow! You got a thumbs-up from me. As I was reading, I was thinking that each of your points for the basis of liberalism could be listed by a modern day conservative as well. It is more or less a matter of degrees. The point about freedom from governmental interference in the economy by opposing mercantilism doesn't quite make sense to me. I looked up the definition of mercantilism to see if there is a minor definition that would help. Not really. What was it about mercantilism that had to be opposed? Is that point still espoused by modern day liberals? (More of a modern conservative strong point from my view.)

    I really liked this paragraph:

    So, the early liberals were those who embraced the Enlightenment, but more broadly speaking the definition can be elucidated as the desire to bring more equal and fair treatment to more people, as well as allow more people to participate in the political, economic, and social systems. The problem is that liberalism is constantly shifting (as is conservatism), because what was “liberal” change in one generation is a given in the next, and so the definitions of each are constantly evolving. Most broadly speaking, liberalism is the idea of changing to something new, usually rapidly, while conservativism advocates tradition or at least slower rates of change; both are definitions I find too obtuse and generic for my tastes.

    The bolded sentence pretty much explains why I had such a hard time defining what liberalism means. It is a moving target. I'm really looking forward to your response to un-hijacking liberalism from the moneyed interest.


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  • Fri, Dec 29, 2017 - 3:48pm



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    Trim it down

    A lot of work has gone into this, and I am still wading through. Unfortunately the first two footnotes I have tried (73, 74) have gone to either broken links or the wrong content. Maybe keeping the sources to (under a hundred?) would result in a more concise, more easily digestible body of text.

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  • Sun, Dec 31, 2017 - 7:59am


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    Grover wrote: I agree with

    Grover wrote:

    I agree with Dave. Wow! You got a thumbs-up from me. As I was reading, I was thinking that each of your points for the basis of liberalism could be listed by a modern day conservative as well. It is more or less a matter of degrees. The point about freedom from governmental interference in the economy by opposing mercantilism doesn't quite make sense to me. I looked up the definition of mercantilism to see if there is a minor definition that would help. Not really. What was it about mercantilism that had to be opposed? Is that point still espoused by modern day liberals? (More of a modern conservative strong point from my view.)

    Grover and Dave,

    You're welcome!

    So, Mercantilism was basically an economic system - more of a philosophical view of how resources and national economies should operate than an actual system, per se - that had two major premises; 1) since gold and silver were the basis of wealth (currencies at the time were made of PMs), and there was a limited supply on earth of gold and silver, wealth had a finite limit; 2) If national wealth = national power, and wealth was finite, then the more wealth YOUR nation held, the less your competitors held. Hence, you could gain power against your rivals by insuring that you held on to, or acquired, more wealth than anyone else.


    The primary reason wealth leaves one's national economy was through trade; selling less to your neighbors than you bought from them meant you were losing wealth and power. So the name of the game was to either make your empire self-sufficient at the very least, and make it export more products to other nations and self-sufficient as well (the dream option!). What this essentially led to was the idea that a kingdom had as its primary duty the expansion of the empire over lands that held the requisite raw materials, so that colonies established in those lands would provide those raw materials to the mother country. Even better that those colonies only buy manufactured goods from the mother country as well! So colonies would be established, and raw materials produced there and shipped back to the mother country, which would then manufacture products to sell back to the colonies as well as other nations and empires. This would allow a nation to hold on to its existing wealth and resources while gaining more wealth from its rivals. Of course, it worked far less in reality than in theory...like most human-concocted systems.


    Where this fits in with the Enlightenment is that the philosophers had as a central idea the freedom of individuals, essentially from state interference, as much as possible. Many business people chafed under the restrictions to sell only to the mother country, because there was often far more profit to be gained from selling to other nations directly, or buying manufactured products from someone other than your mother country. By way of example, if you were a merchant in Boston, it might be cheaper to buy furs directly from French trappers in Nova Scotia, then sell the finished furs to the mother country (or other English colonies), rather than buy the furs from England. However, doing that meant wealth was leaving English hands and going to French ones, so Kings and Parliament created all sorts of taxes, tariffs and duties on foreign-made or foreign-acquired goods in order to discourage this type of business. I'm pretty sure you learned enough American history to know how well received those taxes, tariffs and duties were! In essence, the Enlightenment thinkers believed that merchants should be free to sell to the highest payer and buy from the lowest seller because that, too, represented freedom of the individual. They did not like mercantilism because it throttled the business enterprises of the day (keep in mind most Philosophers and "founders" came from either the established landed classes or the up-and-coming upper middle class of businessmen and entrepreneurs who had much to lose under mercantilism) - which explains why Adam Smith's The Wealth of Nations was so ground-breaking in its day and age; it was a repudiation of the existing system. It also embraced a system which would allow for more profits for the upper and upper middle classes, and nothing in history gains as much popularity as ideas which help line one's own pockets...


    Keep in mind, and I'm looping in Dave's question here, that the "founders" of the United States were heavily educated in the writings of many Enlightenment philosophers - Baron d' Montesquieu, Jean-Jacques Rousseau, Voltaire, Cesare Beccaria, John Locke, Adam Smith - who were themselves either born during the chaos of the 30-Years war (THE defining war of religion, next to maybe the Crusades), or belonged to the generations that came afterwards, which meant they were as steeped in its lore and lessons as we are in those of World War Two. Add to that the chaos produced by the turbulence in England during the 1600s (the Stuarts, Catholicism vs Anglicans, Puritans, the English Civil war, etc), and what you in essence got were several generations of English colonists who understood that government meddling and conflicts over religious views were bad mojo through and through. To say that our Constitution is a product of the writings of the Enlightenment and the circumstances and lessons of the time period would be a gross understatement. In fact, it's hard to understand the Constitution without some knowledge of what was going on and why the "founders" saw the world the way they did.


    To directly answer the religion question, Dave, no, I don't think the earliest Enlightenment thinkers were imagining every religious possibility/combination when they were discussing religious tolerance. I have a hard time imagining Washington or Jefferson imagining Islam in the United States, for example. What they did seem to agree upon, however, was that you needed to keep government separate from religion - in fact it was imperative to do so - and ultimately the question of which religious beliefs were followed or allowed in a nation wasn't a political question so much as a social one. If you drill down into Enlightenment philosophy, though, there's nothing in there that prevents the co-mingling of vastly different religious views in a nation. Then again, these guys often held humans in bondage (a pathetic and inefficient economic system in its own right) and never imagined females as being citizens, so they were far from "perfect" in their thinking. As a professor from my university, Dr. John Jeffries, would point out though: History is nothing more than men and women acting in time and circumstance, so I don't lay blame on them for their limitations...I just seek to understand them better, sans judgement.


    As always, I'm losing some of the complexity of everything I'm talking about when I truncate it into a few paragraphs, but the main ideas still hold.


    As for how we disentangle liberalism from the stranglehold the powers that be seem to have on it, that's a great question. However, my sense is that we can only do so by liberating conservatism from the same powers as well, because it seems to me that liberals and conservatives could actually find a lot more common ground if the media, elite, and PTB weren't constantly imposing a binary view of the two philosophies, and instead reinforced the truth that they are a spectrum of beliefs and opinions rather than absolutes. I'm fiscally more conservative, socially very liberal, environmentally radical as hell, believe that the death penalty should be rare but exist, that abortion is morally wrong though I'm pro-choice, and I own guns and believe in the 2nd amendment. So where the fuck does that put me? None of us fit into neat little checkboxes, so I think the first step is to reinforce that narrative rather than the "us-them" or "Red Team-Blue Team" narrative that seems to hold sway right now.



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  • Mon, Jan 01, 2018 - 1:11am



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    Coin Flip

    Thanks again, Snydeman! Another thumbs up.That's a wonderful primer on the reasons powering the Enlightenment movement. As you noted, word meanings and concepts evolve over time.  Pretty groovy, right? 😉 The modern day conservatives have adopted the ideals espoused by "Enlightenment thinkers" as well. It's just a matter of degrees of acceptance. The Left and Right are two sides of the same coin. (I prefer my politics on the serrated edge of this coin - but it is still part of the same coin.) I agree that we can't rescue one side of the coin (from the stranglehold of moneyed interests) without rescuing the other side. Of course, when things go badly, the media, elite, and PTB have a convenient scapegoat to blame on the other side of the coin. Heads - they win. Tails - they win. The rest of us lose each time. When will we learn?

    Since words and concepts morph over time, I'm going to list the categories you listed as the basis for liberalism back then and give my assessment of which side "owns" it today. I'm associating Liberals and Liberalism with "the Left" and Conservatives and Conservatism with "the Right."

    freedom of expression Both liberals and conservatives like the freedom of expressing their own thoughts. The Left is more likely to shut down opposing views while the Right is more likely to turn a deaf ear when others express thoughts they don't accept. Extremes on both sides resort to violence to silence the opposition. I give the Right a slight edge here.

    religious tolerance The Left is much more tolerant of religious pinnings outside of the Judeo Christian realm. The Right believes that tolerance basically applies to the different flavors of protestant religions, Catholicism, and Judaism. The Left wins this battle (I think???)

    humane treatment of people (mostly, a fair system of justice that didn’t have separate punishments for one class or another) In theory, both sides agree with this concept. We have a system of laws and require proof of guilt before exacting punishment. Those with sufficient funds can hire lawyers who work to ensure that there is enough doubt to keep the guilty verdict away. Poor people don't have that option. As a result, the basic concept has been perverted by the moneyed classes. Justice isn't available to the poor and escapable by the rich. Justice is a concept that applies to the middle class only. Neither side wins this one in practice.

    From what I've seen, the Left is more interested in FAIRNESS while the right is more interested in JUSTICE. (Is it fair that women generally get paid less than men for the same work? Shouldn't we get paid whatever we negotiate? Is it fair that we subjugated a race of people to slavery in the past? How can discriminatory practices against one group today fix discriminatory practices against another group in the past?)

    Abortion belongs in this category. It boils down to the question of when does a fetus begin being human? The Right generally believes it is at conception. The Left believes it is generally later - up to the moment of completed birthing. If one believes that human being status begins at conception, then abortion is murder - of those least capable of defending themselves. If one believes humanness begins at birth, then abortion is just a medical procedure. Carl Sagan and Ann Druyan wrote an essay concerning this question. Essentially, they argue that what makes us human is our ability to think (brain waves.) If a fetus exhibits brain function, consider it human. Before then, it is a "potential human." Here is a link to the first of 4 parts of their essay.

    freedom from governmental interference in the economy (opposing mercantilism was a core principle for many Enlightenment thinkers)​ Now that you've explained mercantilism, I understand the basis for this concept. Government (really those running government) was limiting individual choices to promote its own wealth. Again, this concept has morphed over time. Conservatives still want business to be unfettered by government actions. Liberals want to use government regulations to constrain business. I have to give this one to the conservatives.

    more equitable or representational systems of government and taxation Both sides like the idea of democracy and fair taxation (as long as their particular candidate wins the election and fair taxation is only taken from all the other guys.) Unfortunately, the moneyed interests have learned how to get all relevant candidates owing them favors for campaign contributions. Paybacks are expected. As a result, we have the best laws that money can buy. The more money and power in government, the more influence that can be peddled. It's hard to say which side loses more.

    freedom of the press The press used to be a powerful voice to keep government actors in check. Moneyed interests have bought these once cherished outlets and use them to dispense propaganda. Investigative journalism has been relegated to knowing what the Kardashians are doing 24 hours each day. Both sides lose.

    Snydeman wrote:

    I'm fiscally more conservative, socially very liberal, environmentally radical as hell, believe that the death penalty should be rare but exist, that abortion is morally wrong though I'm pro-choice, and I own guns and believe in the 2nd amendment.

    Sounds to me like you are the political equivalent of a platypus. 😉


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  • Mon, Jan 01, 2018 - 2:14am



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    reminding me


    You are reminding me why I got my best grades in my History classes.  I love this stuff.  I can read it all day long.

    There is nothing like historical context to provide for us the basis for understanding our current time & circumstance - why is it that we hold certain truths to be self evident.

    I will observe that things seemed a lot "cleaner" back then.  There didn't seem to be any "deep state" which masqueraded as one thing, but had an entirely different value system under the covers.

    Ok, maybe I'm wrong.  I'd say the Church qualified.  Perhaps it was the "Deep State" of its time, supposedly the guardian of Christian values, but in fact acting very, very differently.

    Its just that today deception appears to be so institutionalized, and we have no group of "founders" who have clearly sorted out just why our modern equivalent of mercantilism and non-religious freedom causes trouble.  Do we have to go through a 30 years war to come up with that level of clarity?  Our only choice today appears to be a slider-bar that allows us to select what degree of "Social Justice + Political Correctness" we want, while remaining utterly chained to constant Economic (Debt) Slavery and Forever War that both "Liberal" and "Conservative" sides tacitly support - while at or beyond peak resources!

    Whoops, I've gone from "history" to complaining.  🙂

    It really does feel like we the people now have just a simulacrum of choice, while the Deep State has arrogated to itself the Divine Right of Kings.  If they appeared to be clever, that would be one thing, but it is not clear at all that they know what they are doing.  Blowback, for instance, is a concept which appears to be utterly absent from their decision-making.

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  • Mon, Jan 01, 2018 - 5:31am



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    Dave, Grover. (and Snydeman)

    Let's start with Dave: the deep state you see in the old church, I think, is a result within a powerful organization of hypocrites and psychopaths within the church, crossed with a mix of good and bad information, and others who really do want to do well, but have an unsure footing (either realizing it or not).

    A prime example of this would be Columbus, (a hypocrite who realized his hypocrisy late) who wanted to run and therefore finance another crusade; he reported back to the vatican that the Indians who were providing gold were animals in human form. He forgot the main command of Christ, in his interest of advancing the cause of Christ.

    So the Vatican declared that as animals in human form, property rights (by them) and justice (to them) did not apply; you had to be humane within the limits of your needs, but you could eat them if you wanted.

    Thus, the destruction of the Hispanola Indians there. The system was simple: when a young man turned a certain age, he had to provide a certain quantity of gold, or his hand was cut off. No attempt was made to save him from bleeding out by the authorities, either. That worked nicely, early: only the rebels were killed. Until the easy gold ran out.

    Now, missionaries elsewhere sent back word, "you've made a terrible mistake". So then the Vatican forced through a treaty between all European nations requiring full justice for American Indians; however, the damage had been done. Precedent had been set, and psychopaths were in control (who else would have been willing to do the job?) Columbus returned from Spain, and saw the extent of the damage, and attempted to fight it, and as a result was then hauled back to Spain in chains to spend the rest of his life in prison.

    I wonder if modern deep state developed similarly?

    That said, I do suspect there is a deeper story here, but don't have full facts.

    2) Grover (and snydeman): the things you compared the Left and Right upon, presumed constructs that are "self evident", are weak on logic. As a result, the left and right can both claim the moral high ground while taking the low ground. Other, single issue people, attempt to influence the position while appealing to this (anti abortion videos showing intelligence in some foetuses, for example) while not agreeing with some of the premises. The result is lots of serrated edge platypuses, and more power for psychopaths (who of course find it self evident that they desire power). Might I question, that if Carl Sagan were right, then why does a pig not have rights? Or why has nobody noticed that even a paramecium acts with intelligence? Indeed, animals at all levels communicate (the advantage to this is huge) and have self awareness (again the advantage is huge, and there is nothing that is more in the control and view of a creature, than the self.) So the logic is weak here. Sandpuppy recently posted elsewhere, "when the logic is weak and the guise of virtue worn, look for the real reasons to be in hiding".

    Thus, I'm going to say that you won't judge well -- and cannot hope to do so -- unless you start applying good logic, reason, and especially truth.

    You won't wield the two-edged sword of truth very effectively, either, unless you first shave with it. Don't worry, it looks like one of those old razor things, with two blades, one on each side. Every so often you're going to think that you'll die, but you have to be brave enough to shave with it anyhow.

    Have a can of shaving cream, on me, for 2018.

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  • Mon, Jan 01, 2018 - 9:45am



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    Only starting to read the OP article...

    ... and run into several things: one, are you the same as David J. Collum, of the Pocket Testament league?

    Two, what is the tie to that photo of "one of the paddock brothers in Vegas"? In the main article, I see neither another mention of Vegas (except in TOC) nor Paddock, nor text around the photo satisfactorily explaining the photo and why it's here. But the guy in back looks a lot like the other Collum. What's up?

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  • Mon, Jan 01, 2018 - 12:04pm



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    A Few of my Thoughts Whilst Reading this Thread

    Noam Chomsky on Liberalism - 1977


    Well, this raises quite a welter of questions. Let me begin by saying something about liberalism,
    which is a very complicated concept, I think. It's correct, surely, that liberalism grew
    up in the intellectual environment of empiricism, and the rejection of authority, and trust
    in the evidence of the sciences, and so on. However, liberalism has undergone a very complex
    evolution as a social philosophy over the years.
    If we go back to the classics, or at least, what I regard as the classics, say, for example,
    Humboldt's limits of state action which inspired Mill and is a true libertarian, liberal classic,
    if you'd like. The world that Humboldt was considering, which was partially an imaginary
    world, but the world for which he was developing this political philosophy was a post-feudal
    but pre-capitalist world. That is, it was a world in which there was no great divergence
    among individuals in the kind of power that they have, and what they command, let's say.
    But there was a tremendous disparity between individuals, on one hand, and the state on
    the other. Consequently, it was the task of a liberalism that was concerned with human
    rights, and the quality of individuals, and so on-- it was the task of liberalism to dissolve
    the enormous power of state, which was such an authoritarian threat to individual liberties.
    And from that, you develop a classical liberal theory in, say, Humboldt's or Mill's sense.
    Well, of course, that is pre-capitalist. He couldn't conceive of an era in which a corporation
    would be regarded as an individual, let's say. Or in which enormous disparities in control
    over resources and production would distinguish between individuals in a massive fashion.
    Now, in that kind of society, to take the Humboldtian view is a very superficial liberalism.
    Because while opposition to state power in an era of such divergence conforms to Humboldt's
    conclusions, it doesn't do so for his reasons. That is, his reasons lead to very different
    conclusions in that case namely, I think, his reasons lead to the conclusion that we
    must dissolve the authoritarian control over production resources which leads to such divergence
    as among individuals. In fact, I think, one might draw a direct line between classical
    liberalism and a kind of libertarian socialism which, I think, can be regarded as a kind
    of adapting of the basic reasoning of classical liberalism to a very different social era.
    Now if we come to the modern period, here liberalism has taken on a very strange sense,
    if you think of its history. Now liberalism is essentially the theory of state capitalism.
    Of state intervention in a capitalist economy. Well, there's very little relation to classical
    liberalism. In fact, classical liberalism is what's now called conservatism, I suppose.
    But this new view, I think, really is, in my view at least, a highly authoritarian position.
    That is, it's one which accepts a number of centers of authority and control-- the state
    on one hand, agglomerations of private power on the other hand, all interacting with individuals
    as malleable cogs in this highly constrained machine, which may be called democratic. But
    given the actual distribution of powers, very far from being meaningfully democratic and
    cannot be so.
    So my own feeling has always been that to achieve the classical liberal ideals-- for
    the reasons that led to them being put forth-- in a society so different, we must be led
    in a very different direction. It's superficial and erroneous to accept the conclusions which
    were reached for different society and not to consider the reasoning that led to those
    conclusions. The reasoning, I think, is very substantial. I'm a classical liberal in this
    sense. But I think it leads me to be kind of an anarchist, an anarchist socialist.

    The Engineering of Consent - Edward Bernays - 1947

    Link to PDF

    Freedom of speech and its democratic corollary, a free press, have tacitly expanded our Bill of Rights to include the right of persuasion. This development was an inevitable result of the expansion of the media of free speech and persuasion, defined in other articles in this volume. All these media provide open doors to the public mind. Any one of us through these media may influence the attitudes and actions of our fellow citizens.

    The tremendous expansion of communications in the United States has given this Nation the world's most penetrating and effective apparatus for the transmission of ideas. Every resident is constantly exposed to the impact of our vast network of communications which reach every corner of the country, no matter how remote or isolated. Words hammer continually at the eyes and ears of America.

    The United States has become a small room in which a single whisper is magnified thousands of times. Knowledge of how to use this enormous amplifying system becomes a matter of primary concern to those who are interested in socially constructive action. There are two main divisions of this communications system which maintain social cohesion. On the first level there are the commercial media. Almost 1,800 daily newspapers in the United States have a combined circulation of around 44,000,000. There are approximately 10,000 weekly newspapers and almost 6,000 magazines. Approximately 2,000 radio stations of various types broadcast to the Nation's 60,000,000 receiving sets. Approximately 16,500 motion picture houses have a capacity of almost 10,500,000. A deluge of books and pamphlets is published annually. The country is blanketed with billboards, handbills, throwaways, and direct mail advertising. Round tables, panels and forums, classrooms and legislative assemblies, and public platforms—any and all media, day after day, spread the word, someone's word.

    On the second level there are the specialized media owned and operated by the many organized groups in this country. Almost all such groups (and many of their subdivisions) have their own communications systems. They disseminate ideas not only by means of the formal written word in labor papers, house organs, special bulletins, and the like, but also through lectures, meetings, discussions, and rank-and-file conversations.


    Which leads me to use a relevant passage from page 770 of Alexis De Tocquevilles

     On Democracy in America - 1835

    I therefore believe that the kind of oppression that threatens democratic peoples is unlike any the world has seen before. Our contemporaries will find no image of it in their memories. I search in vain for an expression that exactly reproduces my idea of it and captures it fully. The old words “despotism” and “tyranny” will not do. The thing is new, hence I must try to define it, since I cannot give it a name.

    I am trying to imagine what new features despotism might have in today’s world: I see an innumerable host of men, all alike and equal, endlessly hastening after petty and vulgar pleasures with which they fill their souls. Each of them, withdrawn into himself, is virtually a stranger to the fate of all the others. For him, his children and personal friends comprise the entire human race. As for the remainder of his fellow citizens, he lives alongside them but does not see them. He touches them but does not feel them. He exists only in himself and for himself, and if he still has a family, he no longer has a country.

    Over these men stands an immense tutelary power, which assumes sole responsibility for securing their pleasure and watching over their fate. It is absolute, meticulous, regular, provident, and mild. It would resemble paternal authority if only its purpose were the same, namely, to prepare men for manhood. But on the contrary, it seeks only to keep them in childhood irrevocably. It likes citizens to rejoice, provided they think only of rejoicing. It works willingly for their happiness. It provides for their security, foresees and takes care of their needs, facilitates their pleasures, manages their most important affairs, directs their industry, regulates their successions, and divides their inheritances. Why not relieve them entirely of the trouble of thinking and the difficulty of living?

    Every day it thus makes man’s use of his free will rarer and more futile. It circumscribes the action of the will more narrowly, and little by little robs each citizen of the use of his own faculties.

    Then again, this could just be an exercise in herding cats

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  • Mon, Jan 01, 2018 - 5:24pm


    Status: Gold Member

    Joined: Jun 25 2014

    Posts: 881


    I've read a lot more of it now...

    ... boy, is this long.

    And I now see the Vegas stuff is in the second chapter; but I don't see how that original picture ties into anything. Does anyone have some clarification of that?

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  • Tue, Jan 02, 2018 - 11:22pm



    Status: Platinum Member

    Joined: Feb 15 2011

    Posts: 1033


    Life Happens


    You've noted numerous times that you are a devout Christian. I have no doubt that you are. My beliefs are very dissimilar from yours. I consider myself to be very devout as well. I cannot prove my belief to be the truth, nor can I disprove your belief. You are in the same boat here. (That's why we refer to them as "Beliefs.") If you want the freedom to worship your god as you see fit, you need to allow others that freedom as well.

    I'm assuming that you believe that life begins at conception. I'm also assuming that your primary basis for this determination is your belief in your god. So, what do you say to someone who doesn't share your particular belief? Are you going to effectively cram it down their throats because that is what you believe it should be? Wouldn't it be better to have some scientific, measurable milestone where reasonable people concur that life has begun? Not just the possibility for life, but the beginning of intellectually aware, human life. For instance, if onset of brain waves is that set point, a brain-dead fetus would never achieve that status. In fact, just like a pig or paramecium, it will never achieve viable human standing. (Please note that pigs or paramecium will never achieve human standing - the reason should not require explanation to any reasonable person.)

    You may think that I'm a fan of abortion. I'm not. I feel that every child has a right to be wanted. (That's what I'm a fan of.) I really applaud people who plan their family timing and accept responsibility to raise their children as best as they can (just like you do!) Unfortunately, life happens. What do we do with unwanted children? I wish I could report that there are none. A quick internet search for foster children in your area will dash that hope. Work to reduce the number of unwanted children and you'll reduce the need for abortion.

    Wouldn't it be great if no church goers were psychopaths. Again, unfortunately, the church has its share of psychopaths who prey on victims. There have been many reports recently to support this assertion. Your hallowed halls aren't any more sacred than my serrated edges. I'd suggest getting off your high horse and embracing reality for what it is. Keep your shaving cream for yourself. You need it.


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  • Wed, Jan 03, 2018 - 5:41am


    Status: Gold Member

    Joined: Jun 25 2014

    Posts: 881



    ... I don't think I've noted that I am a devout Christian... I don't think a devout Christian would do that. I think if you go back, you will see posts that imply I'm a devout Christian.

    The truth there is perhaps a lot darker. I am at a very dark spot in my life right now.

    I devoutly believe that truth is more important than life.

    I believe that a god that does what he wants as his definition has made a god out of his want -- then if fulfilled, his wants are gone; his god self destructs and so might he. Therefore such a god is no god, though there are. many who attempt to be such a god. But the God of Truth who makes truth as his definition, has made a god out of truth, and if fulfilled self-reinforces. So the definition of the true God must be truth.

    And if we are to worship such a God, it must only be with truth -- any other worship falsifies that. And we must be as true as we know.

    So if you are doing that then perhaps we are on the same page.

    So if a seeker of truth's assumptions don't match truth, then a seeker of truth will cull his assumptions; will he not?

    Are you willing to do that?

    Most of your assumptions about me are partially true, and largely false.

    Also, your comment about how our church has its share of psychopaths... I believe I covered that in my very first full sentence: "the deep state you see in the old church, I think, is a result within a powerful organization of hypocrites and psychopaths within the church..." Your assumption that I have a holier-than-thou attitude is also wrong.

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  • Wed, Jan 03, 2018 - 2:39pm



    Status: Platinum Member

    Joined: Feb 15 2011

    Posts: 1033




    I sat on that post for most of the day. I don't like writing emotionally charged posts like that, but I felt that you were dissing me in your post. I see that I inferred things that you did not intend. I apologize for that. I'm also sincerely sorry that you are going through a dark period. I have faith that you'll get through it.

    I'm not so sure that there is a universal truth anymore. If there is one, we're only seeing the shadows it casts on Plato's cave - not the truth itself. Interpreting the shadows gets us another layer farther away from the truth. You can also view it mathematically as a curve that asymptotically approaches the truth. The closer you get, the more effort it takes to get that next increment of "truth." The last miniscule amount of truth will take an infinite amount of effort to attain. You can seek the truth, but you'll never completely find it. That's life.

    Wisdom, on the other hand, allows you to deal with the shortcomings that life invariably offers. Knowing that I can't know gives me the peace of mind to appreciate the roller coaster ride we're on. I can appreciate that every snowflake is unique - and then I get to shovel those unique snowflakes into a pile. In a few months, snow will melt and the daffodils will bloom. Then, the busy period of gardening begins in earnest. Then, summer with hot days and warm nights will come and go. Soon thereafter, the harvest will be complete, days will seem too short again, and the year end festivities will begin again. Next year, we'll all be another year older. Should we be sad that our short time on earth is disappearing ... or should we step back and be grateful for the important things in our lives?


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  • Wed, Jan 03, 2018 - 8:31pm


    Status: Gold Member

    Joined: Jun 25 2014

    Posts: 881



    I don't know how to approach wisdom without truth.

    That, perhaps, is part of the dark problem I am facing right now. When truth seems shaky, then wisdom stands aloof; and continuing with the old only goes so far.

    Suffice it to say, that no disrespect was intended on my part. Indeed, my post is deep into my own shaving, as it were, as much as anyone else.

    I don't know if I've mentioned, but you remind me of a favorite uncle of mine, who... has different, unknown beliefs. I say unknown, but I'd suspect him of holding a viewpoint similar to "right to be wanted."

    That said, on the subject of abortion, I don't find a consensus without understanding to be very valid, even using scientific terms. I agree with you that a pig and a paramecium are never going to be human. But the point of that case was to show how we beg the question of why a thing is right or wrong, and don't even try to gain an understandrng it.

    Let me try a different thought experiment. Is there any condition, which will cause a newborn baby to automatically suicide? If there were, then (if you had the power and authority of a god) you might find it compassionate to kill it before letting it suffer pointlessly. But there's a different, better answer: fulfill its need. And in fact, there actually IS a condition as I described: the withholding of human contact. So one person might say "abort", but another person might say, "no, cuddle the child". Cuddling, it might seem, is a denial of the unwanted condition. Good pick of a condition: it was yours, not mine. What do you mean by right, though? Do you not mean that he can demand it, and it is unjust not to provide it? If so, then abortion isn't the answer. Preventing the demand isn't the answer. Once life has happened, it already has demands.

    It's a complicated question. But to have any hope of viewing it correctly, I don't see anything for this but to view it in the light of truth. Subject EVERY preconception to truth, and see what falls out.

    I guess since I have too many loose ends here, I'll simply close this post with a favorite Chesterton quote, taken from the detective story "The Blue Cross":

    "Valentin almost broke his bamboo stick with rage.
    “Proof!” he cried. “Good God! the man is looking for proof’ Why, of course, the chances are twenty to one that it has _nothing_ to do with them. But what else can we do? Don’t you see we must either follow one wild possibility or else go home to bed?”

    (Except for me the wild possibility is the possibility of truth.)

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  • Thu, Jan 04, 2018 - 3:42am


    Status: Bronze Member

    Joined: Feb 07 2010

    Posts: 407



    Grover & Michael,

    There are many truth claims - one source of truth. 

    I found this information to be extremely compelling.  John 18:37


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  • Thu, Jan 04, 2018 - 12:13pm



    Status: Bronze Member

    Joined: Feb 06 2013

    Posts: 652


    Universal truth

    I think there are universal guidelines moreso than truths, since truth is usually in the eye of the beholder. 


    Two guidelines, for instance, would be diversity and complexity. There are so many examples just on our planet alone of how complex and diverse the natural world is - it defies every category we invent for its various participants and systems - and that's just one planet!


    One of my universal truths is to respect and admire this complexity and diversity, and to marvel in the majesty of it all. Your results may vary.

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