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Confessions of a Dangerous, Racist Fool?

Confessions of a Dangerous, Racist Fool? | Breaking News from S.E.R.C.E | Scoop.it
They will claim anything to scare average people away from resisting federal power. Mike Maharrey takes these liars to task.
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What is the Value and Purpose of Sharing?

What is the Value and Purpose of Sharing? | Breaking News from S.E.R.C.E | Scoop.it
In the history of humankind, with the possible exception of the Gutenberg Press, there has not been a more disruptive advance in…
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Real Investment Report

Real Investment Report | Breaking News from S.E.R.C.E | Scoop.it
A full recap of the financial markets and prospects ahead following the recent volatility.   
 
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Measuring the Bubble

Measuring the Bubble | Breaking News from S.E.R.C.E | Scoop.it
Last week, the U.S. equity market climbed to the steepest valuation level in history, based on the valuation measures most highly correlated with actual subsequent S&P 500 10-12 year total returns, across a century of market cycles. These measures include the S&P 500 price/revenue ratio, the Margin-Adjusted CAPE (our more reliable variant of Robert Shiller’s cyclically-adjusted P/E), and MarketCap/GVA – the ratio of nonfinancial market capitalization to corporate gross value-added, including estimated foreign revenues – which is easily the most reliable valuation measure we’ve ever created or tested, among scores of alternatives.

A few charts will bring the valuation picture up-to-date. The first chart below shows the ratio of MarketCap/GVA, which now stands beyond even the 2000 market extreme.
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Is This Week's Mini-Crash Just the Beginning? 

Is This Week's Mini-Crash Just the Beginning?  | Breaking News from S.E.R.C.E | Scoop.it
According to the mainstream narratives, a state of inflation alert was the catalyst to the US stock market mini-crash of February 2 and February 5, 2018. This explanation echoes the run-up to the October 1987 stock market crash. On other occasions in history, inflation alerts have not had such an immediate effect, with the pull-back of asset price inflation (which typically leads reported goods and services inflation) waiting for a substantial tightening of monetary policy.

Now everyone and his dog realizes that an inflation “break-out” (from inertia under the 2 per cent standard) would mean a bigger take for Uncle Sam and an eventual crash and recession. Some investors who have been riding the “hunt for yield” train decide it is time to get off, but on approaching the exit they encounter a stampede of like-minded people. Asset prices have gapped down or, worse, the market has seized up. Aggravating the stampede is the arrival of fellow-investors who have suddenly discovered the state-of-the-art products and services they — during the hunt for yield — have blown up.

Many decide to postpone their exit hoping for a quieter time in the future. The history of the stampede and the realization that many of its one-time participants still “want out” weigh on markets and the economy going forward.

In autumn 1987, the trigger to the inflation alert had been the new Fed Chief (Alan Greenspan) hinting that he would no longer steer monetary policy towards bolstering the dollar in line with the Louvre Accord of early that year. Paul Volcker (the previous Fed Chief) had had late remorse for having pursued a policy of monetary inflation since the Plaza Accord of summer 1985 (where he had signed up for Treasury Secretary Baker’s dollar devaluation policy). In the first half of 1987, Volcker had been tightening policy, annoying the Treasury Secretary and thereby failing to gain a nomination for a further term. The Bundesbank quickly indicated that Germany (unlike Japan at the time) would not follow the US on this further journey into monetary inflation. The US-German policy divergence (underlined by Secretary Baker criticizing a Bundesbank rate hike) and the related dollar setback, triggered a US inflation alarm in the stock markets. 

The late Jude Wanniski, a well-known contemporary economist close to anti-Baker conservatives, saw this alarm as the crucial catalyst to Black Monday (October 19). Adding to the drama of the market quake was the failure of a newly popular strategy of portfolio insurance during the post-Plaza asset price inflation; many investors had become convinced that they could carry larger equity risk positions than in the past due to the hedging potential of the new equity future markets; but when prices suddenly gapped down they found this tool of “hedging on demand” froze.

Today Germany is out of the picture in terms of sounding an inflation alert. The new “grand” coalition deal concluded this week in Berlin seals German abdication as hard money sovereign in Europe, a role in practice abandoned in stages since the launch of European Monetary Union. At every point where Germany could have called a halt to the softening of the European monetary regime Chancellor Merkel has fallen back on the default position “there is no way back.”

Pundits suggest the Merkel coalition deal will culminate in an electoral disaster for her CDU/CSU alliance and its SPD partner, meaning an overall majority next time for the anti-euro and euro-sceptic parties (AfD, FDP, and Left). Perhaps that would make possible a German hard money restoration, especially if in a post-Merkel era the CDU/CSU move to the right, but that is too uncertain and too far ahead to become a matter of present market speculation.

Despite German abdication, the inflation alert this time did nonetheless come in part from a weakening of the dollar, which responded to the Davos chatter of Treasury Secretary Mnuchin (expressing fondness for a cheap greenback). But it was due more fundamentally to a US federal budget deficit in a late boom phase of the cycle projected now at as much as 6% of GDP next year. Another factor is the appointment of a Yellen loyalist who gets on well with the Treasury Secretary (and presumably President Trump) as Fed Chief, with only four Republican senators voting against.  Actual wage and price data was a factor as well. The approach of 10-year Treasury bond yields to 3% helped to precipitate the alert. 

Asset managers following the popular risk parity portfolio strategies using innovatory financial products based on trading so-called “market volatility” (the VIX) found themselves blindsided when the alert caused equity prices to gap down. Underlying the strategies had been the notion that asset managers could combine high leverage with assets of perceived low volatility to manufacture synthetic portfolios of a stipulated overall higher volatility and returns to match; they could also take advantage of an alleged overpricing of volatility in the markets to create arbitrage profit (taking short positions in volatility against long positions in risk). As the price for volatility and actual volatility gapped up at the start of this month, these strategies blew up. 

Central bank officials, whether from the Fed, ECB, or Bundesbank have been quick to say that there is no macro-economic significance or even serious financial consequence from the blow up and the related mini-crash. But how could it be that a jump in perceived asset risks (volatility) across the board and related jump in the price of put and call options can be so inconsequential?

In Finance 101 we learn that the price of credit, especially high-risk credit, is tied by formula to the price of options on the underlying equity, and volatility is a key input to pricing (according to Black-Scholes). The spread on corporate bond yields (above Treasuries), for example, should now rise meaningfully, especially for high-risk categories. That is a potential big drag on overall risk markets and economic activity. Alongside we may well find a greater reticence of many households and businesses to spend now that the recent market tremor has heightened anxiety about the end game all know is coming for the monetary inflation created by our central bankers. 

No doubt the Fed, ECB and BoJ would exercise their “Greenspan puts” in response to an economic slowdown and continued market pullback this year by delaying still further policy normalization. That put was successful in 1987/8 in producing an eighteen-month respite before the final stage of asset price inflation set in (featuring then global real estate market downturn and eventually recession) while goods-inflation meanwhile did indeed spike upwards. This time a hypothetical Powell put may not even have that success given that so much of the speculative narrative that has accompanied asset market temperature rises to the sky in this cycle is already so aged and problematic sustained by market momentum which has faded away and even gone into reverse.
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Global Asset Allocation Update

Global Asset Allocation Update | Breaking News from S.E.R.C.E | Scoop.it
There is no change to the risk budget this month. For the moderate risk investor the allocation to bonds is 50%, risk assets 45% and cash 5%. Despite the selloff of the last week I don’t believe any portfolio action is warranted. While the overbought condition has largely been corrected now, the S&P 500 is far from the opposite condition, oversold. At the lows this morning, the S&P 500 was officially in correction territory, down 10% from the recent highs. That, in and of itself, is not sufficient in our process to dictate a change in allocation.



When I last wrote an asset allocation update on January 4, the S&P 500 closed at 2723.99. As I write this late on February 6th, the S&P 500 is trading at 2695.14, a drop of 1.1%. Now, if that was the only information you had, how would you feel about the stock market? Worried? Panicked? Kind of hard to get worked up about isn’t it? Of course, we do have other information and know that the market actually traded in a 280 point range during that time. First a quick 5.5% rally to the top and then an even quicker nearly 10% drop, mostly compressed into two and half trading days. Does that matter? Can you just ignore what happened in between and concentrate on the end result?

Mostly, I think that is pretty good advice. We know from research that the more often people look at their accounts the worse their returns. You can always find something to do with your portfolio – fear and greed are eternal – and checking your account makes it that much more likely that you will. And the more changes you make the more likely it is you’ll make a mistake. Investment advisers have to guard against this more than the average person because it is our job to look at the markets and most of us do it every day. And most of us are still human and susceptible to the same foibles as other investors.
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Class Theory and Cultural Marxism

Class Theory and Cultural Marxism | Breaking News from S.E.R.C.E | Scoop.it
When Karl Marx put forth his theory of history, one of the primary characteristics of the mechanical historical actors was their “class consciousness.” In Marxist doctrine, the whole of humanity in a capitalist society can be divided cleanly into two classes: the proletariat and the bourgeoisie. The proletariat was the exploited working class, and their class consciousness would eventually cause them to revolt against the capital-owning bourgeoisie, whose own class consciousness compelled them to exploit the proletariat by “stealing” the product of their labor.

Fallacies abound in Marxist theory, of course, but one of the commonly pointed-out fallacies of the class theory is that the so-called “working class” is impossible to cleanly define. After all, white-collar workers that comprise modern-day middle-class employees seem to have characteristics of both classes, as described by Marx. But this critique, though valid, misses the bigger point of Marxian theory and how it played out in the real world during the twentieth century.

While critics point out the impossibility of clearly defining the two classes, they overlook the very simple method of defining and distinguishing between the proletariat and the bourgeoisie that Vladimir Lenin recognized. Because Marx’s theory deterministically dictated that each class would display its respective “consciousness” – as opposed to simply asserting that they should or might — this absolutist assertion gives a very clear, if circular, means of determining which citizens fall into which class. Thus, Lenin decided simply, and in accordance with Marxist doctrine, that any Russian citizen who agreed with his revolutionary ideals, regardless of station, was a member of the proletariat, and anybody who opposed his revolution was, by default, an enemy bourgeoisie (with all the violent implications included).

This is circular reasoning, of course, but it is consistent with doctrinaire Marxism because if Marx’s class theory is dogmatically interpreted, such logical circularity is valid. This point is worth underscoring because of the swarms of modern defenders of Marx who deny that Lenin was a “true” Marxist.

Regardless, this was the interpretation of Marx’s theories that Lenin adopted and applied prior to the October revolution in 1917, and it had tyrannical implications for how the Soviet Union would be born. As the eminent Soviet historian Martin Malia points out in his great work The Soviet Tragedy:
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Trump Shows Us Why Its So Hard to "Drain the Swamp"

Trump Shows Us Why Its So Hard to "Drain the Swamp" | Breaking News from S.E.R.C.E | Scoop.it
A year after President Donald Trump’s inauguration, analysts and commentators are assessing both his performance in the first year of his presidency as well as the outlook for the remainder of his first term. Entering office as a surprise winner and a political neophyte, many people didn’t know just what to expect from Trump. Would he do what he pledged to do as a candidate, or was his campaign rhetoric just a lot of hot air to bamboozle enough people into voting for him? One of Trump’s most popular promises was to “drain the swamp” and, while the president has tried to make some strides in that respect over the past year, there are concerning signs that any swamp draining may be coming to an end.

Personnel Is Policy
One of the primary rules in politics is “personnel is policy.” What a politician says he’ll do is less important than who he hires to implement his policies. In many cases, the people he hires may not agree with his policies and may work to surreptitiously (or not so surreptitiously) undermine and co-opt him. We certainly see this on Capitol Hill all the time, where class after class of freshman Congressmen enters Congress pledging to fix the way Congress works. Yet time after time they get corrupted by the system in Washington. Why is that? It’s because of the people they hire.

Coming into office often with no experience of how things operate in DC, they rely on their respective party apparatuses to staff their offices. They’ll hire Hill veterans as their chiefs of staff and legislative directors, staffers who are more concerned with the future of their careers and who consequently do everything they can not to upset party leadership so that they can maintain their ability to work on the Hill and work the government/lobbying revolving door. We’re seeing much the same thing happening in the White House today too, as Trump continues to hire establishment Republicans who wouldn’t be out of place in a Jeb Bush, Mitt Romney, or John McCain White House.

A prime example of that was Reince Priebus, President Trump’s first White House chief of staff. Trump’s initial appointment of Priebus as chief of staff was a confusing one, as Priebus’s establishment credentials all but guaranteed that he would try to bring as many establishment operatives to the White House as possible. By all accounts there was a civil war of sorts within the White House regarding appointments both within the White House and at cabinet agencies, as the pro-Trump insurgent wing fought things out with the establishment and its cadre of opportunistic former never-Trumpers.

While rumors of Priebus’s ouster were at first thought to be a promising sign that the insurgents were winning, Trump’s appointment of Secretary of Homeland Security and former Marine Corps general John Kelly as Priebus’s successor dashed any hopes of that occurring. Kelly immediately cracked down on access to the president, appointing himself as the gatekeeper through whom all information to and from the president was to flow. In less than a month Kelly had forced Steve Bannon out of the White House, and he slowly began to purge the White House of Trump loyalists. Anyone who wasn’t going to go along with Kelly’s organizational plans wasn’t going to last long.

One of the more recent loyalist departures was that of Omarosa Manigault, the former The Apprentice contestant who served as Director of Communications for the White House Office of Public Liaison and who reportedly enjoyed direct access to President Trump. By all accounts Omarosa bristled at Kelly’s attempts to control staffers’ access to the president, and attempted to continue contacting the president directly. Kelly obviously couldn’t handle what he viewed as insubordination and, after a series of scathingly negative articles in the media about Omarosa’s personality and job performance, she was forced out too.

Trump Supporters Replaced With Establishment Figures
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Central Banks Put a Safety Net Under Financial Markets

Central Banks Put a Safety Net Under Financial Markets | Breaking News from S.E.R.C.E | Scoop.it
Most early business cycle indicators suggest that the global economy is pretty much roaring ahead. Production and employment are rising. Firms keep investing and show decent profits. International trade is expanding. Credit is easy to obtain. Stock prices keep moving up to ever higher levels. All seems to be well. Or does it? Unfortunately, the economic upswing shows the devil’s footprints: central banks have set it in motion with their extremely low, end in some countries even negative, interest rate policy and rampant monetary expansion.

Artificially depressed borrowing costs are fueling a “boom.” Consumer loans are as cheap as never before, seducing people to increasingly spend beyond their means. Low interest rates push down companies' cost of capital, encouraging additional, and in particular risky investments – they would not have entered into under "normal" interest rate conditions. Financially strained borrowers – in particular states and banks – can refinance their maturing debt load at extremely low interest rates and even take on new debt easily.

By no means less important is the fact that central banks have effectively spread a “safety net” under financial markets: Investors feel assured that monetary authorities will, in case things turning sour, step in and fend off any crisis. The central banks’ safety net has lowered investors' risk concern. Investors are willing to lend even to borrowers with relatively poor financial strength. Furthermore, it has suppressed risk premia in credit yields, having lowered firms’ cost of debt, which encourages them to run up their leverage to increase return on equity.

The boom stands and falls with persisting low interest rates. Higher interest rates make it increasingly difficult for borrowers to service their debt. If borrowers’ credit quality deteriorates, banks reign in their loan supply, putting even more pressure on struggling debtors. Also, higher interest rates cause asset prices – stock and real estate market prices in particular – to come down, putting the banking system under massive strain. In fact, higher rates have the potential to turn the boom into bust.

The US Federal Reserve (Fed), at the beginning of the 21st century, hiked interest rates, putting an end to the "New Economy Boom." Stock markets collapsed. As a reaction, the Fed delivered hefty interest rate cuts – and triggered an unprecedented credit boom that burst in 2007/2008 and developed into a global economic and financial crisis. Then, the Fed lowered interest rates to record low levels and run the printing press on a colossal scale to keep financially overstretched states and banks afloat. The question is: will it be different this time?
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Does Bitcoin Use Too Much Electricity?

Does Bitcoin Use Too Much Electricity? | Breaking News from S.E.R.C.E | Scoop.it
An optimist says the glass is half full. A pessimist says the glass if half empty. And a Vox writer says if you drink 60 glasses of that stuff in the next hour, it’ll kill you.

A case in point is the recent Vox column by Umair Irfan, warning that the Bitcoin network has caused a huge surge in energy consumption. And yet, Irfan’s own article admits that even the largest estimate—which could be double the actual figure—suggests Bitcoin only uses about 0.14 percent of global electricity. It seems somewhat unfair to single out Bitcoin and ignore the other 99.86 percent of the activities that use electricity.

Snark aside, Bitcoin admittedly does use a surprising amount of electricity. Although the estimates are uncertain, Irfan quotes figures suggesting that (in early December) it took some 250 kilowatt-hours of energy to process a single transaction. (For a frame of reference, that’s enough energy to support a typical U.S. household for eight days.) Other statistics show that—assuming the figures on Bitcoin’s usage are correct—the network consumes more electricity than the country of Serbia, and the electricity used to run the Bitcoin network is enough to provide for almost 3 million U.S. households.

Yet how meaningful are these types of stats? Wikipedia reports that in June 2015, the website Vox.com had 54 million unique visitors. If those people had spent their time volunteering, rather than reading Vox, can you imagine how much litter could have been picked up? How many trees planted? How many stories could have been read to children?
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The Blatant Dishonesty of the ‘Boom’

The Blatant Dishonesty of the ‘Boom’ | Breaking News from S.E.R.C.E | Scoop.it
Why do humans tend to behave in herds? It’s a fundamental question that only recently have researchers been able to better understand. On the one hand, it doesn’t take an advanced degree in some neurological science to see the basis behind it; survival for our ancestors often meant getting along with the crowd. There are times when that very trait applies still.

In 2009, neurologists in the UK conducted function magnetic resonance imaging (fMRI) scans on volunteers. The subjects were asked to rate the attractiveness of faces while being swayed by what they were told were the group’s overall assessments. What scientists found on those scans was that when one person’s rating conflicted with the group’s view that person’s brain gave off what was characterized as a “prediction error-like response.”

In other words, researchers believe that our brains rewire or retool themselves when our own opinions or beliefs fall outside those perceived of the group. It can help explain cults, Nazis, and maybe even Economists.

In the public opinion regarding the economy, what counts as the “norm” is harder to see and appreciate. We can’t observe the economy directly, so our views on it are shaped by a variety of outside factors. Figuring what everyone else thinks is left often to what “experts” believe. This top-down method becomes, I think, quite easily the case where everyone tends to think what those at the top do, especially when it is repeated so often.

For my work, that’s about the only way I can begin to explain the current economic boom. I don’t mean that this particular psychological study unleashed a torrent of similar ones, so much that there has been a burst of medical equipment spending sufficient to bring the global economy right out of its decade-long funk.

What I do mean is much simpler. “They” keep calling this a boom, and it is often characterized in the mainstream as a big one – the biggest, some people are saying, since 2007 (which isn’t really a sufficient standard to begin with, but that’s for another day). Economists are constantly characterizing the economy as great, therefore the norm has become the economy is great, leaving our brains to believe it has to be because that’s what everyone else thinks.

And I keep asking where?
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Bob Dylan as Economic Prophet

Bob Dylan as Economic Prophet | Breaking News from S.E.R.C.E | Scoop.it
We have a habit on our trading floor of playing Bob Dylan whenever the markets start selling off. We hardly ever play Dylan these days. Though I consider the Nobel Laureate something of a personal classical liberal icon, I don’t remember exactly how this office tradition ever started. But the connection is appropriate, a nod to the enigmatic genius who wrote anthems for freedom, against power and coercion, and, most relevantly, on change—irrepressible, revolutionary, and sometimes catastrophic change.

Change is the defining feature of our modern age, from science to business to politics, both in its extraordinary speed and magnitude. But you would never know it when surveying today’s financial market landscape. We are also living in the age of government-mandated financial repression—which has created a forced, false financial stability. These exist like two contradictory, parallel universes.

Thanks to almost a decade of unprecedented market interventions by global central banks (which have collectively acquired assets totaling over $20 trillion), everywhere you look there is repression of yields, repression of market volatility, and their side effects of exploding asset valuations (to heights not seen since shortly before past historic crashes), financial-engineered debt, leverage, stock-buybacks, cryptocurrency-insanity, “short volatility” and all manner of reckless yield-chasing investment schemes. This is an age of massive artificial economic imbalances and systemic risks.

Such powerful interventions hurt the weakest and benefit the strongest (the holders of assets) as they create unsustainable, destructive distortions that ultimately lead to catastrophe. This is a universal historical theme, perhaps nowhere better chronicled than by Bob Dylan starting back in the early 1960s. And underlying Dylan’s theme has been a prophetic message, one that speaks uncannily to today’s incoherently changeless and riskless market climate: Change is irrepressible, whether we accept it or (especially) even if we do not; “the times they are a-changin’.” It is fundamental to life; “he not busy being born is busy dying.” And it is often revolutionary, even appearing apocalyptic; “a hard rain’s a-gonna fall.” The examples could go on and on, as the message runs deep through his work.

This has similarly been a central message of the great free-market Austrian School economists, most notably Ludwig von Mises (another personal classical liberal icon), who in his 1949 magnum opus Human Action claimed:

Human action originates change. As far as there is human action there is no stability, but ceaseless alteration. The historical process is a sequence of changes. It is beyond the power of man to stop it and to bring about an age of stability in which all history comes to a standstill.

The market is a process of change and discovery, innovation and adaptation, destruction of the old and growth of the new, as winners become losers, on and on. And it is entirely facilitated by the information always being conveyed by price changes. They are the market’s lifeblood, moving capital from the less to the most efficient players—propelling civilization’s relentless progress. All of this is the very meaning of price changes—of market volatility.

Repress change, and you repress all that it means. Repressing it is sheer hubris and, in Dylan’s words, “beyond your command.” You can only defer it, not stop it. (Juxtapose this view with outgoing U.S. Federal Reserve Chair Janet Yellen’s ambitious claim that there will not be another financial crisis “in our lifetimes.”) When we try enforcing stability by decree, a reckoning always follows. An unsustainable boom leads headlong to an inevitable bust. A hard rain falls.

Rather than fear it, we should “tell it and think it and speak it and breathe it.” This is Dylan’s resolve. Something really big is coming. Let the central bankers try to keep standing in its way, but as investors we need to recognize and accept its logical consequence of a return to the meaning of volatility. Change and volatility are good. “There is nothing perpetual but change”—according to Mises, who surely must have loved Dylan just as much as I do.

Dylan obviously wasn’t writing about central bank interventionism or market crashes—at least not specifically. But it’s a universal enough theme for him to have made the point, whether he knew it or not. In my view, it’s but another feather in his cap, this time as economic soothsayer.

So think of Dylan’s prophetic message the next time the markets start to fall, whether it be in days or years. He reminds us that times change, prices change, and progress, though sometimes hard and catastrophic, is irrepressible.
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These Are the Top Risks We Face in 2018

These Are the Top Risks We Face in 2018 | Breaking News from S.E.R.C.E | Scoop.it
A decade ago, Ian Bremmer, president of Eurasia Group, launched one of the geopolitical world’s greatest marketing coups: an annual list of key global risks.

 2018 version is finely balanced to generate maximum interest among the consultancy’s global banking, defence and government sector clients. China, Russia, North Korea and Iran all figure highly, as do terrorism, Islamic- and cyber- threats.

Naturally, it has made Bremmer a favourite among the plutocracy and Bilderberg set. But what would the list look like if it targeted the needs of ordinary Americans?

Following are our suggestions:

1. The Krugman con
The biggestthreatto America (and the rest of the world) is the coming implosion of the Krugman Con . This “con” gets its name from the Nobel Prize-winning economist and New York Times columnist who (like most of the economics profession) has spent decades advocating the continuous growth of government spending, taxation, borrowing and money-printing at a pace that is faster than economic growth.

The policies—camouflaged in terms like “fiscal stimulus,” “multiplier effect” and “Phillips curve”—are worse than a Ponzi scheme. They are a Ponzi scheme any grade 10 student can understand.

2. Governments, businesses and ordinary Americans powerless to act.
A couple of years back, McKinsey group published a study which showed that global government, business and private sector debts had reached 289% of GDP. However, few public sector officials have grasped the implications of this key statistic: if everyone is strapped, there is no one left to bail anyone out. That means even the slightest tremor could bring down the entire system.

A couple of examples suffice. First, economists say that things could never get as bad as in Japan, now capping two “lost decades” of economic growth. In fact, things could get much worse, because Japan’s “lost” two decades were cushioned by massive exports to still-growing US and European economies.

In a similar fashion, China helped prop up the rest of the global economy following the 2008 global financial crisis by borrowing and printing tens of trillions of dollars and importing a lot of stuff—a move that created jobs both in China and elsewhere. But if the entire global economy goes down together, there won’t be any Martians who will boost their imports to bail us out.

3. Free markets are dead, but will be blamed for the coming crisis
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What Will Cause The Next Recession?

What Will Cause The Next Recession? | Breaking News from S.E.R.C.E | Scoop.it
The most recent consensus estimates for global Gross Domestic Product growth show a healthy “synchronised” development in most economies. Expectations for the major economies are much stronger than what economists expected at the end of 2016 for the next three years. Seems all concerns about a global slowdown and subsequent recession have disappeared. What has changed?

China
The first major driver of this newfound optimism is China. The Chinese economy has not slowed down as aggressively as predicted nor has the Yuan devalued as much as feared. The counterpart is that deleveraging and structural reforms have vanished from the China debate. Chinese total debt has surpassed 300%. In the first ten months of the year, money supply has increased by 9.2%, significantly above estimates. From January to October 2017, China has added more debt than the UK, EU, US and Japan together, and that should be a cause of concern in the next months.

Bond yields are already rising in China and the stubborn decision of the government to “print” an official growth above 6% is also creating significant imbalances in the economy that will be more difficult to solve if ignored.

Political Catalysts
The second factor behind the current wave of optimism can be found in the excessive risk attached to political catalysts in the past two years. As economists, many of us were concerned about the different events in the political calendar, from Brexit to the Trump presidency, to the French and German elections. None of these events have generated a dramatic negative effect on the major economies.

The feared “rise of protectionism” did not happen, and trade growth rose above expectations, and economic recovery accelerated throughout the year. In effect, many were wrong attaching too much risk to political events, but this has led to an opposite effect. By the end of 2017 what we can read out of consensus estimates is that political risk has been all but ignored.

Inflation Expectations
The third relevant factor has been the gradual increase in inflation expectations. For many, it does not matter that it comes mostly from rising food and energy, two elements that are not positive economic growth drivers in most major economies. These analysts just see that inflation is picking up and that must be good. Well, it is not. Productivity growth is still very poor in OECD countries and core inflation rising is not driving real wages higher.

If we look at 2018 and 2019 expectations, the risks of rising debt and elevated bond and risky asset valuations are being completely ignored. Global debt stands above 325% of GDP, an all-time high even though solvency and liquidity ratios have deteriorated according to Moody’s. Meanwhile, bonds and equities continue to post record-high levels. Today, this excess risk-taking in financial assets is evident and clearly beyond fundamental valuations, and should be addressed. Extremely loose monetary policy is driving risky assets to constantly higher valuations and the risk of a financial bubble is clear.

Looming Risks
Once we look at the global economy from the risk relative to opportunity perspective we can easily conclude that the concerted action of global central banks has disguised risks under a massive cloud of debt and money supply. As such, it may be the case that 2018 does not bring a recession, but it is at the same time a concern that the optimism is based on excessive leverage and risk-taking. Again.
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Independence, At Some Point

Independence, At Some Point | Breaking News from S.E.R.C.E | Scoop.it
The Federal Reserve is ostensibly an independent agency of the government. Already it is beset by a contradiction. How can it be independent if it is otherwise an arm of the federal structure? It’s a problem beyond mere perception that officials have struggled to overcome since its inception.

Between the Banking Act of 1935 that restructured the central bank in the wake of its biggest failure (the very thing it was created to avoid) and 1951, the Fed was a literal rather than figurative part of the Treasury apparatus. It was obliged to, among other things, buy government debt first for WWII so that the federal budget was never at risk over interest rates.

In 1951, FOMC officials sparked a minor controversy by refusing to keep to its UST ceiling, that is to buy all the government bonds in the market required so that yields never rose above the expressed threshold. Treasury eventually backed down, which created this myth that the Fed “won” for a second time its independence.

The issue is degree. Disagreeing with a Treasury policy and acting in defiance of it does not necessarily constitute full political detachment. On the contrary, the central bank and that part of the federal government have maintained a close working relationship for a century apart from one minor episode.

In 2018, it’s not uncommon to hear whispers of further collusion, meaning that perhaps rising interest rates will motivate the Federal Reserve to act on behalf of the government in keeping interest rates low for as long as possible. Some even argue that is why the FOMC has taken its time in normalizing monetary policy, a coordinated effort to keep the budget from being exposed to potentially massive interest costs in the future.
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Three Delusions: Paper Wealth, a Booming Economy, and Bitcoin

Three Delusions: Paper Wealth, a Booming Economy, and Bitcoin | Breaking News from S.E.R.C.E | Scoop.it
Delusions are often viewed as reflecting some deficiency in reasoning ability. The risk of thinking about delusions in this way is that it encourages the belief that logical, intelligent people are incapable of delusion. An examination of the history of financial markets suggests a different view. Specifically, faced with unusual or extraordinary price advances, there is a natural tendency (particularly in the presence of crowds, feedback loops, and potential rewards) to look for explanations. The problem isn’t that logic or reason has failed, but that the inputs have been distorted, and in the attempt to justify the advance amid the speculative excitement, careful data-gathering is replaced by a tendency to confuse temporary factors for fundamental underpinnings.

While true psychological delusions are different from financial ones, a similar principle is suggested by psychological research. Delusions are best understood not as deficiencies in logic, but rather as explanations that have been logically reached on the basis of distorted inputs. For example, individuals with delusions appear vulnerable to differences in perception that may involve more vivid, intense, or emotionally-charged sensory input. While those differences might be driven by neurological factors, the person experiencing these unusual perceptions looks to develop an explanation. Maher emphasized that despite the skewed input, the delusions themselves are derived by completely normal reasoning processes. Similarly, Garety & Freeman found that delusions appear to reflect not a defect in reasoning itself, but a defect “which is best described as a data-gathering bias, a tendency for people with delusions to gather less evidence” so they tend to jump to conclusions.

The reason that delusions are so hard to fight with logic is that delusions themselves are established through the exercise of logic. Responsibility for delusions is more likely to be found in distorted perception or inadequate information. The problem isn’t disturbed reasoning, but distorted or inadequate inputs that the eyes, ears, and mind perceive as undeniably real.

Let’s begin by examining the anatomy of speculative bubbles. We’ll follow with a discussion of three popular delusions that have taken hold of the crowd, and the premises that drive them: the delusion of paper wealth, the delusion of a booming economy, and the delusion that is Bitcoin.

The anatomy of speculative bubbles
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Democracy Won't Save Minorities from the Majority

Democracy Won't Save Minorities from the Majority | Breaking News from S.E.R.C.E | Scoop.it
The UK Independent reported last week that legislators in Iceland have proposed a ban on circumcision of boys. In practice of course, a ban on male circumcisions essentially outlaws Judaism. Anticipating opposition from advocates for religious freedom, the legislation "insists the 'rights of the child' always exceed the 'right of the parents to give their children guidance when it comes to religion'."1

Iceland is not alone in considering laws that pit the majority against the allegedly barbaric practices of a minority group. 

In the Netherlands, for example, animal rights activists are hard at work trying to outlaw kosher and halal meats. The laws will, as one Jewish activist noted "make Europe more uncomfortable for Jews, because the essence and centrality of our life are our ancient traditions." 

Meanwhile, in Quebec, lawmakers have recently prohibited the use of head coverings by — presumably Muslim — women in certain public places. 

Nor is the circumcision debate limited to Iceland. Male circumcision has been on shaky legal ground in Germany in recent years where a court banned the practice in 2012. Perhaps recognizing that banning Judaism could look bad for German "tolerance," lawmakers intervened to allow the practice again. 

In cases such as these, whose values ought to prevail? 

Democracy Doesn't Always Work
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Thinking Liquidation

Thinking Liquidation | Breaking News from S.E.R.C.E | Scoop.it
It’s impossible to tell what drives the short run in anything, so anything we describe and attempt to ascribe moves to comes with a grain of salt. That said, there are clearly some things missing here. I’m not talking about big stuff like overrating the Fed’s predictive abilities and its resolve, ridiculous stock valuations, or anything of the like.

Stocks peaked on Friday, January 26. The following Monday, they hit a small pocket of more intense selling late in the day, the sort of liquidation trend that has become more apparent this week.

Gold peaked on January 25. It was down about $6 that Friday (26th) and then another $6 the next Monday (29th). When we see these sorts of gold pukes we immediately think of repo. Over the past year, repo and collateral difficulties suggest T-bills. In other words, throughout 2017 there was a clear and intuitive relationship between especially the 4-week bill equivalent yield in discount to the supposed monetary “floor” of the RRP, and repo market collateral problems.

A premium paid for bills is nothing other than a shortage of collateral. Thus, given the setup I describe above, we should have expected to find last week and this week the 4-week bill yield challenging and subverting the RRP, right? No.
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Why Intellectuals Fall for Socialism

Why Intellectuals Fall for Socialism | Breaking News from S.E.R.C.E | Scoop.it
In all democratic countries, in the United States even more than elsewhere, a strong belief prevails that the influence of the intellectuals on politics is negligible. This is no doubt true of the power of intellectuals to make their peculiar opinions of the moment influence decisions, of the extent to which they can sway the popular vote on questions on which they differ from the current views of the masses. Yet over somewhat longer periods they have probably never exercised so great an influence as they do today in those countries. This power they wield by shaping public opinion.

In the light of recent history it is somewhat curious that this decisive power of the professional secondhand dealers in ideas should not yet be more generally recognized. The political development of the Western World during the last hundred years furnishes the clearest demonstration. Socialism has never and nowhere been at first a working-class movement. It is by no means an obvious remedy for the obvious evil which the interests of that class will necessarily demand. It is a construction of theorists, deriving from certain tendencies of abstract thought with which for a long time only the intellectuals were familiar; and it required long efforts by the intellectuals before the working classes could be persuaded to adopt it as their program.

In every country that has moved toward socialism, the phase of the development in which socialism becomes a determining influence on politics has been preceded for many years by a period during which socialist ideals governed the thinking of the more active intellectuals. In Germany this stage had been reached toward the end of the last century; in England and France, about the time of the first World War. To the casual observer it would seem as if the United States had reached this phase after World War II and that the attraction of a planned and directed economic system is now as strong among the American intellectuals as it ever was among their German or English fellows. Experience suggests that, once this phase has been reached, it is merely a question of time until the views now held by the intellectuals become the governing force of politics.

The character of the process by which the views of the intellectuals influence the politics of tomorrow is therefore of much more than academic interest. Whether we merely wish to foresee or attempt to influence the course of events, it is a factor of much greater importance than is generally understood. What to the contemporary observer appears as the battle of conflicting interests has indeed often been decided long before in a clash of ideas confined to narrow circles. Paradoxically enough, however, in general only the parties of the Left have done most to spread the belief that it was the numerical strength of the opposing material interests which decided political issues, whereas in practice these same parties have regularly and successfully acted as if they understood the key position of the intellectuals. Whether by design or driven by the force of circumstances, they have always directed their main effort toward gaining the support of this "elite," while the more conservative groups have acted, as regularly but unsuccessfully, on a more naive view of mass democracy and have usually vainly tried directly to reach and to persuade the individual voter.
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The Historical Warnings of Money

The Historical Warnings of Money | Breaking News from S.E.R.C.E | Scoop.it
It’s interesting, to me anyway, that an image of the Roman goddess Juno remains to this day on the logo of the Bank of England. There are many stories about her role as it relates to money, but what cannot be denied is that the very word itself came to us from her temple. The Latin moneta was derived from the word monere, a verb meaning to warn. Moneta was Juno’s surname.

One fable has it where the goddess’s sacred geese saved Rome from being sacked and destroyed, cackling loudly in the night so as to alert Roman soldiers of the presence of enemy troops so close at hand with widespread slaughter in their hearts. The great politician Cicero wrote that it was Juno’s commanding of a sacrifice (ut sue plena procuratio fieret) given in a temple that had alerted Romans to a forthcoming and devastating earthquake. He also chronicled in De Divinatione an earlier writing from Coelius that she had cautioned Hannibal not to carry off the golden column from her temple at Lacinium lest he lose the use of his remaining good eye (according to the earlier writing, he wisely heeded that advice).

Juno Moneta came to be regarded in this way, a representation of sound practice and advice. Because of this, coins were made in her temple, giving us the modern words money as well as mint.



Obviously, the concept of money has evolved like everything else. One modern invocation was in the form of the central bank, those with and without Juno and her warnings in their logos. It was Walter Bagehot in the nineteenth century who at the Old Lady set down the rules, so called, of central banking in an advanced mercantilist economy. Writing in Lombard Street, Bagehot argued:
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Stocks Dive as Treasury Yields Set Off Alarm Bells

Stocks Dive as Treasury Yields Set Off Alarm Bells | Breaking News from S.E.R.C.E | Scoop.it
The benchmark 10-year U.S. Treasury yield touched 2.7 percent on Monday and as of 8:16 a.m. this morning it has returned to that level. The sharp rise in Treasury yields produced a 177 point drop in the Dow Jones Industrial Average yesterday. As of 10:07 a.m. this morning, the Dow had lost an additional 334 points. Many market watchers see even more dangerous headwinds for the stock market if the 10-year Treasury reaches a 3 percent yield. (See our analysis: Rising Treasury Yields Pose Risk for Those Over-Weighted in Stocks.)

The recent market action suggests that investors are about to get a serious investing lesson in the concept of supply and demand. According to research from the major Wall Street banks, there is going to be a stunning doubling of the net issuance of U.S. Treasury securities in the current Federal fiscal year versus last year. Net issuance of Treasuries in the last fiscal year was approximately $500 billion. For the coming year, Goldman Sachs projects the amount will be $1.03 trillion; Deutsche Bank thinks it will be about $1 trillion while JPMorgan Chase is floating the breathtaking figure of $1.42 trillion.

The huge increase comes from two primary factors: a mushrooming budget deficit from the recently passed tax cuts and the wind down by the Federal Reserve of its Treasury purchases.

Until last October, the Federal Reserve was sopping up Treasury issuance by rolling over all of its maturing holdings of Treasuries into newly issued Treasuries. The Federal Reserve is now in the runoff mode in order to “normalize” its balance sheet from its Quantitative Easing (QE) days during the financial crisis when it purchased more than $3 trillion of Treasuries and mortgage-backed bonds.

The first Fed runoff came in October of last year with the Fed shrinking the amount of maturing Treasury principal it was rolling over into new Treasuries by $6 billion a month. According to its preset schedule, that figure was boosted to $12 billion this month. The shrinkage amount will grow gradually until October of this year when the Fed will roll over $30 billion less each month in Treasuries going forward than it had in prior years. (The Fed also acquired huge holdings in mortgage-backed bonds during the financial crisis and it is trimming its rollover of maturing principal in those as well.)

To summarize, Treasury supply is going to double while one major buyer, the Fed, is
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Can China Really Dethrone the Dollar?

Can China Really Dethrone the Dollar? | Breaking News from S.E.R.C.E | Scoop.it
If there is something ironic, it is that, whatever happens, politicians always think that money is their monopoly.

The data for 2016 of the BIS (Bank of International Settlement) show a very different reality from the one that the European, Japanese, and Chinese central banks want us to see. The US dollar is not only the most traded currency in the world but its use has increased since 2013 from 87% to 87.6% of global transactions.

The euro not only continues to be a global anecdote but its use has fallen since 2013, from 33% to 31% of transactions. Remember that the sum of all the transactions that the BIS calculates is 200% because each monetary transaction includes a pair in another currency.

The Chinese currency, the yuan, is only used in 4.0% of transactions, in a country that is more than 15% of the world economy.

Now, as we have heard on dozens of occasions in the past, when the conspiracy theories are dusted off and we read in different news reports that China and Russia are going to dethrone the US dollar by launching contracts in oil and other commodities in yuan. China and Russia have switched to domestic currencies in trading using financial tools as swaps and forwards, seeking to reduce the influence of the US dollar and foreign exchange risks.

Will these measures dethrone the US dollar as king of currencies?

I am very sorry, but the reports of the end of the US dollar are simply conspiracy theories.
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Nothing Goes In A Straight Line

Nothing Goes In A Straight Line | Breaking News from S.E.R.C.E | Scoop.it
A decade ago, the financial world was alive. I don’t mean alive in the same way much of humanity was at the fall of the Berlin Wall or on VE Day in 1945. Rather, people at that particular moment had their eyes pulled opened just a bit for the first time in a very long time, maybe in the same way as an animal startled to realize that it is potentially prey. The burst of adrenaline not drawn from joy but instead terror.

Ten years ago this weekend, on Monday, January 21, 2008, the FOMC members and staff gathered at their various far flung locations spread across the United States to participate in an emergency conference call. It’s hard to go back in time to that point, to relive the conditions of early 2008 without having them colored after-the-fact but what eventually followed.

It was this call that perhaps began the crisis at least in the official sense. A little over a month before it (December 12, 2007), the Federal Reserve along with four other foreign central banks announced dollar swap lines (and still people didn’t get the sense this was an overseas dollar issue?). The FOMC had also voted for short-term liquidity, the Term Auction Facility (TAF), first offered on December 17 for a then-unheard of sum of $20 billion.

These were big things at the time,, radical departures from all prior experience; dollar swaps and extraordinary liquidity? At $20 billion? If you didn’t know something was really up before, there was really no other way to take it following. Things were just getting serious.

And there was two ways to take all that. There was the Greenspan way, the idea of sound policy being designed and adopted by capable technocrats responding rationally to the irrationality of emotional markets (toxic waste). On the other side, there was the less appealing idea that the Fed was at best way behind the curve, at worst way in over their heads.

On January 21, a holiday no less (MLK), the FOMC less than a month (December 21, 2007) after extending its TAF auctions into the foreseeable future and just two weeks after raising the allotment to $30 billion (January 4, 2008), the FOMC felt it had no choice but to do even more. Despite their efforts to that point, described in the media as considerable, conditions were still deteriorating.

What worried the Fed then wasn’t just subprime and OIS spreads. They were starting to see spillover, the one thing Bernanke had previously promised wouldn’t happen (subprime is contained). The economy for the first time (to them) appeared to be heading toward more serious trouble even though the Fed’s models at that moment still didn’t foresee any, even a mild recession. Long infatuated with stocks, the committee couldn’t help but notice the sharp selloff and what, for them, it might mean.
From the January 21 call transcript:
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Just How Big a Player Is the Federal Reserve in the Stock Market?

Just How Big a Player Is the Federal Reserve in the Stock Market? | Breaking News from S.E.R.C.E | Scoop.it
To understand how the U.S. central bank, known as the Federal Reserve, is influencing the froth of the stock market, you need to take a few moments to understand the interaction of bond yields with stock prices. Sophisticated investors who predominate in the markets compare the yield on bonds to the cash dividend yield on stocks to determine which is a better value. Following the financial crash of 2008, the Federal Reserve began buying up Treasury bonds and mortgage-backed bonds in the marketplace to the overall tune of more than $3 trillion. This has driven down bond yields and provided an artificial boost to the stock market.

The Fed’s assets swelled from $914.8 billion at the end of 2007 to $4.5 trillion in 2014 from its bond buying program. In just the single year of 2013 the Fed’s assets mushroomed by a staggering $1 trillion — from $2.9 trillion at the end of 2012 to $4 trillion at the end of 2013, according to the audited financial statement of the Fed’s books. As of October 25, 2017, its assets remain in the $4.5 trillion arena, at $4.461 trillion.

The Fed’s active involvement in messing with the stock market as a fair stock pricing mechanism through its massive purchases of bonds was quaintly called Quantitative Easing (QE) and the public was treated to three doses of it: QE1, QE2 and QE3.
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Silver Antidote to Bubble Craziness

Silver Antidote to Bubble Craziness | Breaking News from S.E.R.C.E | Scoop.it

CHARACTERISTICS OF BUBBLE CRAZINESS:


U.S. stocks, according to many measures, are the most over-valued in history. We live in a Bubble Zone!


Bitcoin and other cryptos are definitely in a bubble, but they could rise even higher.


Bonds yield little, and in many European countries, less than zero. Central banks have created this distortion to the detriment of savers, insurance companies and pension funds.


Real estate: Some locations, such as New Zealand, Canada and Australia are up a factor of 8 to 20 since 1980. Houses have become unaffordable for many, even with historically low interest rates.


Silver and gold: No bubble since 1980. Prices have been repressed since 2011 and are attractive now.

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The Swiss Franc and The Euro: What Now?

The Swiss Franc and The Euro: What Now? | Breaking News from S.E.R.C.E | Scoop.it
In January 2015, the Swiss National Bank (SNB) unexpectedly removed the de facto peg of the franc to the euro.1 The move was welcomed by free-market economists, including in contributions on Mises Wire2. It was deemed that the short-run adjustments to the Swiss economy triggered by the appreciation of the franc were preferable to the macro-economic stability risks posed by the inflation imported from the euro area during the peg. Yet, it would have been difficult to anticipate that the SNB's interventionist monetary policy would continue aggressively also after the peg.

Let's give some background. Since the onset of the Great Recession, investors flocked into the Swiss franc as a safe haven asset. They feared that ultra-loose monetary and fiscal policies would damage the quality of most other major currencies. Significant net financial inflows to the tune of CHF 460bn (70% of 2016 GDP) made their way into the alpine economy as a repatriation of bank deposits. Simultaneously, large current account surpluses amounting to about CHF 600bn were recorded. More than half of the external inflows were purchased by the SNB in order to limit the appreciation of the franc and help exporters. It led to a vast increase in foreign reserve assets of about CHF 690 bn3. The SNB also reduced aggressively its interest rates to negative levels, surpassing both the Fed and the ECB. 

The extremely large scale of SNB monetary interventions, not only during, but also outside of the peg, has probably been less obvious to most observers. Helped by the negative interest rate differential, the monthly average of external financial inflows dropped into half during the peg (left chart below). Nevertheless, the SNB's FX purchases - measured as the change in foreign reserves – absorbed almost fully the external inflows. After the peg, SNB's FX purchases declined to about 60% of foreign inflows, but the average monthly increase in reserves declined by only 20% in absolute terms vs. the peg. This shows that the unpegging of the franc was followed by heavy SNB monetary interventions. At the same time the domestic liquidity absorbed by the SNB increased significantly after the unpegging of the franc.4
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Three Delusions: Paper Wealth, a Booming Economy, and Bitcoin

Three Delusions: Paper Wealth, a Booming Economy, and Bitcoin | Breaking News from S.E.R.C.E | Scoop.it
Delusions are often viewed as reflecting some deficiency in reasoning ability. The risk of thinking about delusions in this way is that it encourages the belief that logical, intelligent people are incapable of delusion. An examination of the history of financial markets suggests a different view. Specifically, faced with unusual or extraordinary price advances, there is a natural tendency (particularly in the presence of crowds, feedback loops, and potential rewards) to look for explanations. The problem isn’t that logic or reason has failed, but that the inputs have been distorted, and in the attempt to justify the advance amid the speculative excitement, careful data-gathering is replaced by a tendency to confuse temporary factors for fundamental underpinnings.

While true psychological delusions are different from financial ones, a similar principle is suggested by psychological research. Delusions are best understood not as deficiencies in logic, but rather as explanations that have been logically reached on the basis of distorted inputs. For example, individuals with delusions appear vulnerable to differences in perception that may involve more vivid, intense, or emotionally-charged sensory input. While those differences might be driven by neurological factors, the person experiencing these unusual perceptions looks to develop an explanation. Maher emphasized that despite the skewed input, the delusions themselves are derived by completely normal reasoning processes. Similarly, Garety & Freeman found that delusions appear to reflect not a defect in reasoning itself, but a defect “which is best described as a data-gathering bias, a tendency for people with delusions to gather less evidence” so they tend to jump to conclusions.

The reason that delusions are so hard to fight with logic is that delusions themselves are established through the exercise of logic. Responsibility for delusions is more likely to be found in distorted perception or inadequate information. The problem isn’t disturbed reasoning, but distorted or inadequate inputs that the eyes, ears, and mind perceive as undeniably real.

Let’s begin by examining the anatomy of speculative bubbles. We’ll follow with a discussion of three popular delusions that have taken hold of the crowd, and the premises that drive them: the delusion of paper wealth, the delusion of a booming economy, and the delusion that is Bitcoin.

The anatomy of speculative bubbles
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