Robert Shiller, co-creator of the Case-Shiller index for US housing and author of Irrational Exuberance, has an interesting perspective on markets. Unlike the vast majority of economists, he recognises both the role of speculative fervour in driving prices to over-reach themselves as a bubble develops and the fact that bubbles and their aftermath are swings of positive feedback inherently grounded in ponzi dynamics. As such, his position has considerable overlap with ours at The Automatic Earth:
Markets and the Lemming Factor (2008)
Some trends are persistent enough that they eventually attract a very wide pool of participants, as apparent gains amongst one’s peers eventually overcome the caution even of many inherently skeptical people. When they last long enough to overcome the caution of bankers, the result is easy credit to fuel the fire, and a blatant disregard for systemic risk. This is how the largest speculative bandwagons are formed – the ones that become manias and eventually lead to ruin for a large percentage of the population.
Prices are continually pushed up, irrespective of any reasonable objective measure of value, by those who think that it does not matter how much they pay for something if there will always be a Greater Fool who will pay even more. The evidence of pyramid dynamics where insiders and early movers benefit at the expense of later generations destined to become empty-bag holders – should be abundantly clear. The pool of Greater Fools is not limitless.
Continue reading “Bubbles and the Titanic Betrayal of Public Trust”
Despite the continuing atmosphere of optimism and denial (that’s par for the course during long-lived counter-trend rallies), we are witnessing a slow-motion crash of the juggernaut that is the real US economy. The unemployment situation is already the worst since the Great Depression and showing no signs of recovery.
David Rosenberg provides his take on the data from the latest Bureau of Labor Statistics report:
Just How Ugly Is The Truth Of America’s Unemployment
The data from the Household survey are truly insane. The labour force has plunged an epic 764k in the past two months. The level of unemployment has collapsed 1.2 million, which has never happened before. People not counted in the labour force soared 753k in the past two months. These numbers are simply off the charts and likely reflect the throngs of unemployed people starting to lose their extended benefits and no longer continuing their job search (for the two-thirds of them not finding a new job). These folks either go on welfare or they rely on their spouse or other family members or friends for support.
Continue reading “An Unstable Tower of Breaking Promises”
Relationships of trust are the glue that holds societies together. Trust takes a long time to establish, and much less time to destroy, hence societies where trust is wide-spread, particularly for long periods of time, are relatively rare. In contrast, societies where trust does not extend beyond the family, or clan, level are very common in history.
The spread of trust is a characteristic of expansionary times, along with increasing inclusion, and a weakening of the ‘Us vs Them’ divide. Essentially, the trust horizon expands, both within and between societies. Over time it can encompass higher levels of organisation – from family to community to municipality to region to nation and beyond – so long as the expansionary dynamic continues to support it. Continue reading “Beyond the Trust Horizon”
The attempts on both sides of the US-Canadian border to bail out the auto industry are a taste of things to come for many other sectors. The cuts that unions will be required to agree to will be very significant, probably unacceptable to the membership, and ultimately will not be sufficient to save the companies in any case. Bailouts can postpone, but not prevent the recognition of losses that have already occurred.
In order to shed light on why the current situation will be so divisive, we return to an important distinction – that between nominal and real terms. During inflationary times (ie where the money supply is increasing relative to available goods and services), people do not notice their purchasing power being eroded, as they only see their pay in nominal terms. They collect their annual wage increases and almost never notice that inflation usually consumes that increase and then some. In real terms, the change in their purchasing power would be the increase minus inflation, where inflation is usually the larger factor, especially if the full effects of credit expansion are factored into the inflation figure rather than just the CPI. Continue reading “War in the Labour Markets”