The Pivot Fallacy

Haaaa ha ha ha haaaaa. Hello, dear friends. I'm back with another economic update for you.

Have you ever seen those old videos of Evel Knievel, the legendary stunt performer, taking his motorcycle and jumping over parts of the Grand Canyon? If he misjudged the speed of his motorcycle, the incline of the ramp, the distance of the jump...any slight miscalculation and the fall would certainly kill him. But he was an artist, and the variables he was working with were few. The only real secret ingredient to his success was courage.

Now imagine Federal Reserve Chairman Jay Powell in that motorcycle. Wearing the American cape on his back, there is determination on his face. He revs up the engine, sending the interest rates up many hundreds of basis points. His motorcycle hits the inclined ramp at an incredible speed, crushing residential and commercial real estate, tightening credit, setting off layoffs in the tech industry. And then at the very peak of his flight, he pivots, cutting interest rates back to zero, and landing safely on the other side. The crowd goes wild, investors throw themselves at his feet. He has achieved soft landing.

That's the fairy tale the stock market is feeding itself these days in a state of frenzied ecstasy. Sure ole Jay can do it. He can raise rates at historic rates for more than a year, and then when the economy goes into recession, he can quickly cut rates back to zero, and all will be well. No need to look down to see how deep the canyon is. He can make the jump.

This is a foolhardy assumption. The Federal Reserve board and it's chairman have made it clear multiple times that their priority right now is getting inflation back down to 2 percent, by creating tightness in the labor market. Which is Fed Speak for "we want people to get laid off and stop spending". Unemployment is a lagging indicator, usually the last shoe to drop in a slowing economy. So the Fed is ignoring all the coincident indicators that show that the economy is slowing dramatically, and riding that motorcycle looking in the rearview mirror. Even as all the forward looking indicators are flashing Red, the Fed is STILL raising rates. After the humiliation of getting "transitory inflation" call so wrong, they are determined to over correct on the other side. Jay Powell has made it clear that PAIN will be involved. Which means no PIVOT to cutting rates is coming. Not unless things break so badly that the Fed is forced to abandon it's inflation fight.

It's incredible that this is the thesis the market is resting it's hopes on. That the credit tightens so dramatically, and things break so clearly, the Fed is forced to pivot on it's policy stance. Even if the Fed does cut rates, like it has historically during economic crises, that pivot is usually accompanied by a crashing stock market. And low rates are no immediate panacea either. Just like high rates take anywhere between 12 to 18 months to show up in the economy, it's the same in converse when you're cutting rates. No matter what the Fed does, we WILL go through a severe downturn in the coming quarters. Pivot or not, an earnings recession is on it's way, combined with higher unemployment. The passive flows from retirement accounts into the stock market ETFs and mutual funds will reduce liquidity during a recession, as people get laid off or reduce contributions or reallocate assets. Credit is already tightening due to QT and higher rates. Add to that the regional bank crisis, which will tighten the availability of credit even more. After the failure of Silicon Valley Bank, which was the second largest in the American history, First Republic, another large regional presence, is now on the chopping block. As i give this market update on the 29th of April, it's likely that First Republic goes into receivership with the FDIC come Monday. More credit tightening.

The current fallacy of the Fed Pivot being a cure for a falling stock market will take retail investors by surprise, when they find that the act of cutting rates coincides with devastating financial events, and the Fed like always, will be way behind the curve, trying to dowse a fire they themselves started. To complete the motorcycle analogy, nobody knows how deep that canyon goes. Nobody. You're better off just clapping from the sidelines, as the Fed's motorcycle vanishes into the dark abyss. 

Cheerio!

Fed's Fatal Flaw

Psychologist Gabor Matay describes addiction as a response to trauma, and an attempt to escape suffering, at least temporarily. People partake in addictive substances or behaviors in order to feel momentary relief from the background of trauma and suffering that they have been exposed to. The problem of course is that this behavior does nothing to address the root cause of the suffering, but creates a downward spiral from which it's increasingly difficult to extricate oneself. The brain needs higher doses each time, and the crashes from those highs get increasingly debilitating. The final outcome, quite often, is complete destruction.

Given this context, one must wonder about the nature of pain and suffering that haunts the American economic landscape, and requires ever increasing amounts of drugs in the system. For no analogy fits better what the Federal Reserve has been doing to the American economy over the last two decades. As the ultimate drug peddler, the Fed has been forced to increase it's dosage....sorry, stimulus....with every new crisis. Interest rates, the beating heart of capitalism, for that's how capital risk is assessed, keeps getting pushed down to stimulate economic activity for longer and longer periods of time. Higher rates are now blips on the time series. Money printing, or what's popularly called debt monetization, has now become a permanent part of monetary policy. The economy at large is now addicted to artificially low rates and waves of easy liquidity sloshing around the system.

So what happens when these economic drugs are taken away, even briefly? What do the withdrawal symptoms look like? Well, given how deep the addiction now is, the face of economic withdrawal is quite ugly. Corporations that were until recently flushed with easy money and didn't have to show profit for years, are suddenly finding it hard to refinance their debt at higher interest rates. Layoffs have ensued, and will continue to pick up pace for the foreseeable future. Regional banks are suddenly realizing that their 'safe' bond assets have actually gone down significantly in real terms. I'm guessing many state pension plans have a similar issue. Residential real estate sales have fallen off a cliff. The devastating combination of high rates and high home prices have created an affordability crisis in the housing market. Commercial real estate is facing even worse headwinds. Office vacancies have skyrocketed due to the post-pandemic work preferences. And debt restructuring at higher rates has become much harder, especially with the current crisis in regional banking which constitutes most of the lending. Used car sales have also plunged, and prices have now begun to follow. The M1 money supply has seen it's sharpest rate of change contraction in many decades, which will show up in economic activity sooner than later. Speaking of long and variable lags, we have just begun to see the effects of last year's rate hikes manifest in the economy. At this point, no matter which way the Federal Reserve pivots, an economic recession is baked in.

Why not just cut rates and go back to the printing presses, you may ask? Well....one word.....the Fed's Achilles heel.....the Fatal Flaw in it's central planning agenda.......INFLATION! For over a decade, pundits have lambasted anyone that criticized Fed's loose monetary policy. "What's the problem"....they would ask...."money printing was supposed to create inflation......but it hasn't.....so why not keep doing it?" An entirely new economic philosophy called Modern Monetary Theory or MMT came into being around this premise. They completely ignored that money printing in fact DID create inflation. It was just in financial assets. The trillions of dollars that the Fed manufactured out of thin year never made it out of the canyons of Wall Street. Stocks and housing boomed, yet consumer inflation at large remained under control. There was no incentive for Wall Street to lend money out......their arrangement with the Fed gave them the profits they needed. ....Until Covid happened......, and the Fed, perhaps for the first time, was forced to share a piece of the pie with the public. Suddenly it wasn't just Wall Street getting bailed out, but Main Street as well. The drugs were now available at the local pharmacy, no prescription required. And general inflation raised it's ugly head across the American economy.......as had always been predicted. And now we're all on the same page.....after the initial high of seeing money magically appear in your bank account..... everyone  now understands the pain inflation can wrought, especially on those who can least afford it. It's the bitter invisible tax that nobody wants to admit.....a monster hiding in your finances, chewing away at your ability to proper and leave a legacy for your children.

That's the Fed's Fatal Flaw. It presumed that it could cover up the general suffering of the American way of life by drugging them up with extremely loose monetary policy. With no ill side effects. And now the chickens have come home to roost. The drugs are being withdrawn, and the patient is beginning to convulse, begging for more as time goes by. But the Fed's hands are tied, because it cannot risk the Inflation monster, created by it's own misshapen policies, to run loose. We are about to find out just how much trauma and suffering was being covered up by the Fed. The real rot in the system is soon going to reveal itself. ............... It will be on us to not shy away from it, and maybe in a very long time.......look our trauma right in the eyes. 

 

Burning with Bernie

Four years ago, in March of 2016, on this very blog, i warned that if people did not open their eyes to the new economic and political reality, Donald Trump would not only win the nomination, but the Presidency. This assumption was predicated on one crucial observation: Trump was tapping into a deep well of economic suppression that boiled all over the country, while Obama was insisting that anybody who said the economy was weak was selling 'snake oil' (Feb 2016). Instead, Democrats started casting aspersions on broad swathes of the country, explaining Trump's unlikely rise as a racist and sexist phenomenon, with a spattering of white nationalism thrown in. People who followed the real economy and the numbers behind it, few as they were, understood the meteoric rise of Trump much better than political analysts on TV. The writing was on the wall, but it might as well have been written in hieroglyphics as far as the pundits were concerned. An upset was coming.

And it did. And now, it seems we're headed for another one. 

A few months ago, very few would have been concerned with the prospects of a Bernie Sanders Presidency. Bernie has been an avowed socialist for all his long career in politics. Nobody really believed that somebody with those credentials could ever get the Democratic nomination, leave alone the Presidency. But the exact same phenomenon and set of circumstances that brought Trump to power as the anti-establishment candidate, are now propelling Bernie to the top of the heap. 

How could this be, you ask? Why would the average American, who we're told by one and all now lives in a booming economy, deliberately push a known socialist into the White House? Why would they risk such a massive shift in the status quo, when the status quo is working so great right now? Isn't that what we're told day and night? The economy is booming, manufacturing is back, stocks are at an all time high, unemployment is at an all time low. It's the 'greatest economy ever', if Trump and Co. are to be believed. So what gives?

You know what gives. Because you live in the real world. A world where wages stay stagnant, or barely keep up with inflation. Where healthcare costs can sink you. Where most of the jobs offered are low wage part-time jobs, and you often have more than one to make ends meet. Where credit card debt keeps you up at night, but there's nothing to be done but add more. Where student loans are an albatross across your neck that may never come off. You can't even declare them in bankruptcy. Yes, the stocks are high, but you don't own many. Yes house prices have gone up but you can't afford one. You're being told that you live in a golden era of economic opportunity, yet it doesn't feel like it in your bones. You feel like you're being screwed. And you're not wrong.

Aside from the top 10-15% of wage earners, the average American continues to suffer in the EXACT same way he was suffering under Obama. The Fed and Wall St continue their financial engineering, getting rich off money printing and artificially low rates, while you can't get a return on your savings to save your life. They say that high-paying manufacturing is back. But in reality Trump has presided over a manufacturing recession. They say jobs are being created at the highest rate ever. But in reality Obama created more jobs in his last 3 years than Trump did in his first 3. Government debt continues to spin out of control. We now have Trillion dollar deficits as far as the eye can see, but you don't see a dime of that money. Our soldiers continue to die in wars far away from our shores. Nothing has changed. People are still angry, still struggling. 

But Trump and the Republicans have taken the exact same self-defeating approach that Obama and the Democrats took in 2016. Talk endlessly about the stock market and unemployment and berate anyone who disagrees with them on the state of the economy. Trump, who thought the stock market under Obama was a 'big fat ugly bubble', now thinks the same market much higher is the sign of a 'booming economy'. While the rest of the industrialized world is teetering on the edge of a depression, Trump continues to tout his GDP numbers that he bought via massive deficit spending. It's all set up exactly the same it was 4 years ago.

So what's the problem, you ask? If Bernie sees the issues, let him speak truth to power, and in fact be that power. 

The problem is that Bernie is an ideologue. He understands nothing outside of his own socialist echo chamber of talking points. He may see the problems, but he doesn't have the faintest clue what caused them, and is very likely to exacerbate them. Do you think Bernie understands how government intervention in healthcare via Medicare and Medicaid distorts prices of drugs? Or how government backstopping of student loans let banks burden children with loans they had no prayer of paying back, with zero risk to the banks? That by 'loan forgiveness', what he really means is 'pay back the banks on their ridiculously large loans by putting the taxpayer on the hook'? Does he understand that our debt/GDP ratio is 3 times the Scandinavian countries that he wants to emulate? 'Affordability' is not a word in Bernie's dictionary. Does he know that the Fed keeping rates down has created an economy of bubbles? We have bubbles in stocks, in corporate debt, in pension funds, in bonds, in auto loans, in housing. If there is a credit event, do you think Bernie is going to say to himself .... 'hey, let the markets do their work and reallocate capital'.  Hell no. Bernie knows one thing, and one thing only. State Power. It's part of his ideological fabric. Every problem you throw at him, in his mind, it can be solved by state power. He will never understand the role government has played in messing up the markets and creating these great wealth inequalities we see today. His solution to everything will only be more government, sucking up more limited capital, to the detriment of the economy that is still able to limp along. If Bernie comes to power, the face of American economy will change forever, not because of Bernie, but what his election represents at the grass roots across America. A loss of faith in the market, and the institutions that were supposed to protect it. Bernie will be the one big pin that pops all the bubbles, and we may not see growth for years, or decades. 

So, there's a lot at stake. And if you have a rational bone in your body, you know that you don't fix the gangrene in your arm by taking a hammer to your head in anger. All said and done, America is still one of the few harbors in the world for individuals seeking freedom from state tyranny. It's capitalist roots have been a shining beacon for all those who have suffered under socialist/communist/fascist regimes across the planet. Let's find a way to fix things by first understanding what's making us sick, instead of running to the local witch doctor, who has come into sudden prominence because a plague has broken out and we want to do 'something'. Don't panic. Sometimes doing nothing is better than the alternative. 

I'll come back after 4 years. Hopefully with better tidings. Cheers.  

Why Trump Is Winning

As i write this, Donald Trump is well on his way to becoming the Republican Nominee for the 2016 US Presidential election. It is already a historic run, even keeping aside the Trump histrionics. He has risen on a wave of widespread anger towards the establishment, self-funded his campaign for the most part, and his non-political demeanor has endeared him to swathes of middle America that has become nauseated by the stench of unfulfilled promises emanating from the D.C beltway.

I write this today specifically for my friends and colleagues, who have largely been confounded by the Hitler-esque enthusiasm that Trump has generated. He has breached the line of civil discourse so often, it has left the intellectual elite tattered and fumbling for explanations. 'Surely the American public can't be gullible enough to put up with this bile?' they ask with red faced exasperation. Exhausted, they just chalk it up to hatred and ignorance among the general public.

I think this is a mistake. What many don't seem to realize is that despite President Obama's protestations to the contrary, the economy is indeed in decline. The average household, which makes around $50K annually, is struggling due to high rents, rising healthcare premiums, record credit card debt, record student debt, which can't be serviced adequately even with multiple part-time jobs that make up most of the 'good' jobs numbers. Their savings have been decimated by the Fed keeping rates at zero for nearly a decade. They are living paycheck to paycheck, many requiring food stamps to feed the family, and are a layoff away from being kicked to the curb, dignity and all. 

Their anger is economic, not racial.

First, let me lay out exactly why i think the economy is rolling back into a recession some time before the election, and why the mainstream media is missing the boat completely on Trump's popularity. I'll try to keep the data points as recent as possible. 

1. Chicago PMI: Expectation from the talking heads on TV was 52.5. The actual figure came out as 47.6 (below 50 is a contraction). Not only is that a big miss, it fits the contractionary trend of the last few months.

2. Pending Home Sales for Jan: Expectation was .5%. It fell -2.5%. Again, a big miss on expectations.
3. Dallas Fed Manufacturing: Expectation was -30(huge contraction). Came out at -31.8 (worse)

4. Markit Manufacturing PMI: Expectation was 51.2. Came in at 51.3, the lowest rise in output since Oct 2013.
5. ISM Manufacturing: Expectation was 48.5, came in at 49.5 (still a contraction, that has continued the trend from the last few months)

6. Auto Sales for Feb: Expectation was 17.7 million, came out at 17.43 million. Auto sales are in a bubble imo, driven by artificially low interest rates and lax lending standards. Housing Crisis 2.0 if you will. Subprime auto loan defaults are already at a record high.
7. Markit Services PMI: Expectation was 50, came out at 49.7 (contraction). This is important since services form a great deal of our economy.
8. ISM Non-Manufacturing: Expectation was 53.0, came out at 53.4, still lower than January's 53.5.
9. US Factory Orders: Expectation was 2.1, came in at 1.6.
10. Baltic Dry Index: All time low at 290. Shipping worldwide is falling off the cliff. 
11. Sales to Inventory Ratio: The inventory-to-sales ratio rose 1.35 in January from 1.33 in December, the highest ratio since April 2009.

12. Retail Sales for January: Expectation was .2% increase, came in at -.4%. Another huge miss for an extremely important economic indicator for the US consumer economy. 

This litany of bad economic news goes on and on. Export numbers for January fell for the fourth consecutive month. The national debt continues its inexorable march towards 20 trillion dollars. Corporate earnings were down 3.5% in the 4th quarter 2015 compared to 4th quarter 2014. Even the sole positive indicator being bandied about with much fanfare, the jobs numbers, falls apart at closer inspection. The latest jobs figures showed close to 88% of new jobs created to be part-time low wage jobs. All this facade of economic recovery has been kept alive under the aegis of ridiculously low interest rates kept for an unprecedented period of time. Not to mention low gas prices that should have propelled the consumer instead of stalling it to 1% GDP growth in the 4th quarter. 

Black Swans are circling the American economy in anticipation, yet the mainstream media continues to peddle the fiction the Obama administration is feeding it: that the economy is just fine. They just need this lie to stay the course until the end of the election. 

Without this necessary context, it is impossible to fully understand and appreciate the radical success of the Trump campaign. He is sourcing Howard Beale and his 'Im mad as hell, and im not going to take it anymore' moment. Sure, like most well meaning demagogues, in absence of real thought out policy, he goes after the low hanging fruit to direct people's frustration. Immigrants, terrorists, minorities, foreign threats, real or imagined. But he also mixes it with real concerns. Like the national debt. Like terrible trade deals in NAFTA and TPP, or the worldwide currency war. Like the absolute lack of a cohesive foreign policy, especially in the middle east. Even he's constantly surprised by how far he can push the envelope. That should tell you how desperate people are, how ripe the system is for a violent implosion, no matter who lights the fuse on the dynamite of discontent. 

Yet, we comfort ourselves with tired slogans that fit our trained Pavlovian responses. He must be a misogynist, a racist, a xenophobe, a fascist, a tyrant. He's none of those things, yet. He's a manifestation of our inability to listen. People are afraid, living hand to mouth, and you continue to berate them as 'Trump's stupid racist supporters'. If you do not open your eyes to what is happening in the economy, the real economy, not the New York Casinos, you will never see it coming. 

I worry about what a President Trump would do once he figures out that he can't fix the system by plugging it with the 'best people'. That the system is terminal. Would his megalomania be able to handle the failure? I worry about that.

The economy will be in much worse shape six months from now, and Donald Trump will be within a hair's breadth of the most powerful seat in the history of the world. If you want to stop him, listen to the people supporting him. They're not racists. And you're not listening. Your dismissiveness feeds their anger, and makes him stronger. 

Ramgarh Ke Sholay

The citizens of Ramgarh, a quaint village of interesting characters and abundant crop, enjoyed a tranquil existence. The farmers were productive, and managed enough of a surplus to sell to the entire village. Merchants, shoemakers, blacksmiths, weavers and other professionals kept the local Bazaar humming with activity, from the break of dawn till the last vegetable vendor pulled down the shutters and walked home happily to his family. Crime was low, and justice was meted out swiftly by the council of the village elders. All was well. 

But power can smell wealth like a shark smelling blood in the water, and so Gabbar Singh and his gang of marauders arrived on the scene. They shot up the marketplace, destroyed equipment, held the children hostage. A cloud of terror came over the simple village. 

'I want 2 out of every 4 bags of grain you have', thundered Gabbar, as he walked slowly across the deathly silent cobbled street, his cartridge belt dragging ominously behind him. 'I could have taken them all, but i want only half. That is the generosity of Gabbar.'

The villagers didn't feel it was particularly generous, but they had no choice. It was pay or die. So pay they did. Every month, Gabbar would send his vicious goons to collect the bounty. Sometimes they would prey on the women, and kill anyone who dared intervene. The grain surplus was lost, and the marketplace began to collapse. The farmers now had little to sell, and hence could not ask for services in return. The demand for professionals began to take a nosedive and soon the children began to starve due to the severe rationing of food.

The oppression began to take its toll and the grain output fell from 4 bags to 2 bags per family. Gabbar wouldn't relent, and the people became desperate. A group of brave young men, tired of watching their families suffer, organized an attack against Gabbar. Using pitchforks and other farming instruments, they waylaid a couple of Gabbar's men. But the taste of victory was short lived, and Gabbar's retribution was merciless. The village lost half their men that day.

As the gypsy woman danced late into the night around the campfire, Gabbar smoked his chillum and was lost deep in thought. The state of affairs with Ramgarh could not continue. A peasant revolution could only be quelled so many times, before they figure out a way to overthrow his dominion over them. Brute force would not do. He needed a more sophisticated and nuanced approach. 

He sent his foot soldier, Kaalia, to go find Jay and Veeru, Mumbai's noted thieves and scamsters. Gabbar had run into them once on a robbery, and had been impressed by their metropolitan intellect. Kaalia failed in his mission, and returned with somebody named Surma Bhopali, who claimed to be as good as JaynVeeru. Gabbar laughed manically at the idiocy of it all, and then shot them both. He then sent his second-in-command, Sambha to finish the job. Sambha broke out Jay and Veeru from a strange prison run by a Hitler lookalike, and brought them back to Gabbar. 

INTERMISSION

Gabbar, over tea and biscuits, explained to JnV what a pickle he was in. He could not continue in his current model without risking another uprising. But he could not give up the bounty either. He was a notorious and feared robber for god's sake. He had a reputation to protect, especially among children who wouldn't sleep at night. JnV expressed their sympathy with G, but explained that this problem had been solved a long time ago. No need to reinvent the wheel. Jay explained the plan as such:

"As you rightly pointed out Gabbar, the people will not stay oppressed forever. Productivity falls under dictatorship as freedom is restricted. Sooner or later, the lack of freedom and choice breaks them, and they resort to violence and revolution ensues. What you need to do is provide them with the illusion of Choice. They will still pay the bounty, but of their own volition. In the outside world, this scheme is called 'Democracy'."

"Demo-what-see-now?", inquired a curious Gabbar, who had never heard of such delicious deviousness before.

"Democracy", explained Veeru. "It is when people believe that those in power have their best interest in mind. Only because they 'choose' them in events called 'elections'. Once every 5 years, we will hold these elections, and let them 'choose' who will lord over them and get the bounty."

"But what if they choose someone among themselves?"

"Oh, but thats the beauty of it all." picked up Jay. "Nobody in their right mind would want the job. Only the power hungry and lazy like us seek the throne. No farmer, or butcher, or weaver would be attracted enough to the seat of power to quit what they want to do. Power makes them uncomfortable. Anybody who seriously considers it, we can buy off."

Gabbar's eyes shone as he understood it all. The answer to all his problems was Choice.

Next day, Jay and Veeru dragged a chained Gabbar into Ramgarh. There were howls of surprise, followed by exuberant fist waving and sporadic clapping. JnV stood on a pedestal and enamored the stunned audience with tales of bravery and sacrifice. They had heard of the trials of the people of Ramgarh, and with great danger to themselves caught the dreaded dacoit Gabbar and disbanded his gang. The days of indigence for Ramgarh were over. 

The village erupted in jubilation. Girls swooned over the heroes and clouds of color enveloped the previous grayness that had descended on the hapless village. Happy days were here again!

The next day JnV announced a new plan for the village. So the village is never at the mercy of the likes of Gabbar again, it was decided that the village would become a Democracy. Every 5 years the villagers would choose a protector from among themselves who would wield enough power to save them from external threats. Jay and Veeru would run in the first democratic elections of Ramgarh. Again, the village was overjoyed at this news. They would be protected, and all they had to do in return was give the 'representative' 1 out of every 4 bags of grain. Surely, that was reasonable. After all, they could Choose. 

And so elections were held. Both Jay and Veeru campaigned vigorously for the seat of power. Jay promised free grain to the poor mendicants of the village, whereas Veeru sold special privileges to some merchants who had trouble competing in the Bazaar. 

It was a close election, but Veeru won out in the end. As promised, he soon started forcing the competitors of his campaign donors to pay levies. He also made it easier for his friends to start businesses by enacting special laws that favored them. His close friend, a corn farmer, convinced him that corn was the best crop for the village. It also meant greater profits for Veeru. So laws were passed that made corn farming the most profitable by subsidizing the crop. Soon the entire village was just consuming corn and corn products. Disease became rampant, as diets became corn based. The children became obese and the doctors made more money than they knew what to do with. The local bank began speculating with the villager's money, once Veeru backed the speculation with the villager's bounties. It was a great time for anybody who could buy Veeru's favor. Monopolies began to form. Soon, even those who had previously succeeded in the Bazaar themselves, needed Veeru's blessing to stay afloat. Everybody got in line. It was the scam of the century. 

The common man was severely disappointed with Veeru's reign. So he eagerly voted for Jay in the next elections. Most of Jay's votes came from the poor, who had increased in number during Veeru's term and were thrilled by promises of free food. As soon as Jay came to power, he increased the monthly payment from 1 to 2 bags of grain. Yes, this was what Gabbar had been getting in his day, but the people Chose this option. Surely they can't go wrong. What about the poor!

As had happened during Gabbar's reign of terror, the extra bags of grain that were going to feed the poor, created stresses in the Bazaar. The surplus was gone, and soon productive jobs followed. The number of people that qualified as poor and needed free food went up exponentially. The war on poverty had created more poverty. The people were miserable.

Of course, Jay Veeru and Gabbar made out like bandits. Only this was legalized banditry and they couldn't be happier. Since only Gabbar could save the village from Gabbar's wrath, he became a private contractor and got paid handsomely by the administration for 'protecting' the village from himself! Veeru married the daughter of a religious clergyman, and cornered that market. Jay married the widowed daughter of a village intellectual named Thakur, who immediately hailed the elections and democracy as a victory of the people and freedom. He wrote extensively in the local newspaper, his hands now the property of Gabbar incorporated. Soon, his daughter became a political force of her own, and her family became a dynasty.

So life continues today in the village of Ramgarh, as miserable as it had been during the troubled days of Gabbar Singh. Jay and Veeru both had children, who have grown up to ride the streets of the village with impunity. Little children often come under the hoofs of their wild horses, and the princes wave it off with a flourish of their gun. The families of Jay and Veeru are now the law and the justice of the land. Every 5 years the villagers of Ramgarh, their hope broken, walk up to the ballot box to choose between the large families of Jay and Veeru. Surely, they tell themselves, and their children, it is not all bad. Because, at least there is that....at least there is Choice. 

ashes! ashes! we all fall down

I have often been accused of imagining the Federal Reserve to be the boogeyman of the world. I have never refuted this accusation. To me, all the roads to Hell lead back to the Fed. Whether its world hunger through inflation, or world tyranny by sponsoring a militaristic government, the Fed in my view is central to all that is vile. 

I will not indulge here in an exposition of why this is my belief. My beliefs aren't as relevant. But facts are. The future is. 

My cautionary tales often seem exaggerated and hyperbolic. But i would rather err on the side of caution when the fate of so many is at stake. So humor me. 

I believe that a perfect storm of economic calamity is brewing, has been brewing for a while, and is now gathering frightening speed. I base my assertion on the following observations:

1. Bonds

For the last several years, the Federal Reserve has been keeping interest rates at near zero values, by engaging in what is popularly known as Quantitative Easing. QE is fed-speak for money printing. In its latest avatar, QE is now engaged through Fed purchase of bonds worth $85 billion a month. In the absence of this Fed bond buying scheme, market interest rates would be much higher. So the Fed has effectively been keeping bond rates low by becoming the buyer of first resort. 

At last glance, the Fed balance sheet was close to $3.5 trillion. They have painted themselves into such a tight corner, that even 'talk' of tapering back the bond buying shot up the yield on the 10-Yr Treasury note by a 100 whole basis points. If yields continue to rise, bond values will fall enough to disrupt a multitude of funds. The bond market has a massive impact on both domestic and foreign fronts. From 401Ks to mutual funds to the trillions worth of treasuries held by China and Japan, an implosion in bond market would have a devastating impact on world markets. If the world becomes a net seller, the Fed will some day become the buyer of only resort. 

2. Stocks

With the Fed keeping rates at record lows through trillion dollar a year money printing, a big chunk of that liquidity has found its way into the equities market. While the economy is still on Fed life support, the stock market has managed to find all time highs. So deep is the perversion of the capital markets, that the S&P tanks every time there is positive news on the economy. The investors know that with every good news, the chances of a Fed tapering its extraordinary easing increases. So good news is bad news for the stock market. They thrive on data that keeps the Fed inconclusive. The days when economic indicators dont show a lot of strength, or a lot of weakness, are the ones where the indexes make new tops. Even a suggestion of ending the Fed's program sends the stock market reeling. 

There was a time when stocks indices were representative of the health of the economy. Not anymore. The Fed, by fixing the price of money through interest rate manipulation, has completely distorted the old indicators. The money supply has increased manifold, and the waves of liquidity dont know where to crash. The bond bull market seems ready to finally keel over, saving cash is a losing proposition with zero bank rates and rising inflation, and the scars of the real estate market have not yet healed for many. So the Fed is forcing the citizenry as well as investors to speculate in the stock market, which is increasingly disconnected with the state of the real economy. 

3. Real Estate

After the 2008 crash, experts believed that the housing market would not recover for many years to come. And yet, we find ourselves in the midst of another mini-housing bubble, which looks suspiciously like a 'dead cat bounce'. I think a 'pump and dump' is a more apt description. Institutional investors, flush with free money, are a substantial driving force behind this 'recovery'. As opposed to the the historical average of 10%, cash investors form more than 30% of the current buyers. Once again, speculation is rife in housing, and these investors will be the first to flee with their profits when the market begins to turn sour and houses become unaffordable due to rising rates.

After the bond and the stock markets, real estate forms the 3rd leg of the economic stool that is supported by the Fed's zero interest rate policies. For these 3 markets to remain intact, the Fed needs to keep printing money, creating further distortions, and many more bubbles. It is imperative that the Fed stop its madness soon, but its clear that it cannot. All the taper talk is nonsense. The Keynesian medicine has poisoned the blood, and any effort to restore it will now only result in withdrawal symptoms unlike anything seen before. The Fed will continue printing till it all comes crashing down.

4. Unemployment

The labor participation rate has been shrinking, and 70% of the jobs that are being created are non-tradable service sector jobs. Manufacturing jobs have actually been decreasing. The corporations have been able to show steady profits by cutting cost and moving more of their jobs offshore. The high paying jobs are being moved overseas, while the earlier full time jobs are being converted into part-time jobs to avoid Obamacare mandates and other labor expenses. While restaurants, malls and fast food chains seem to be the pre-dominant employers now, since the US economy is driven by consumption rather than production, the overall consumption will continue to fall as the rotation from high paying full time jobs to low wage part time jobs continues. 

5. Student debt

Student debt in the US is now higher than credit card debt. As students graduate into low wage service sector jobs, many are beginning to default on this debt. It is also affecting their behavior towards traditional investments/expenses that pulled the US economy : cars and houses. More and more graduates are moving in with their parents, burdened by excessive debt acquired all too easily from willing government lending programs. 

6. National Debt/Municipal Debt

Alan Greenspan and Ben Bernanke have effectively bankrolled the gambling at Wall St, as well as profligate government spending, for well over a decade. Greenspan's low rates along with Bush's populist housing policies precipitated the housing bubble, while Bernanke and Obama seem hell bent on outdoing their predecessors by creating multiple simultaneous bubbles of their own. The national debt now stands at a staggering $16.7 trillion. The interest payments on this debt could easily balloon from $250 billion to $850 billion a year, if interest rates resume their upward march towards historical averages. In an age of decreasing income revenue, this could put a tight squeeze on government spending. With food stamps, disability payments and other social handouts at an all time high, cuts in government spending will radically increase social tensions. 

Municipal debt is another ticking time bomb, waiting for the economic fundamentals to reveal the fraud perpetuated by the Federal Reserve. As rates rise, it will become harder and harder for cities to service their debt, increasing the likelihood of Detroit-like bankruptcies all over the country. Unmanaged bankruptcies have a deleterious impact on workers expecting a pension, basic government services etc.

7. Too big to fail

As capitalism was betrayed during the TARP bank bailouts, a dangerous precedent was set. Moral hazard was ignored. Risk was socialized, profits privatized. Those banks, now even more dependent on  making profits via low interest spreads, are bigger than ever. As rates rise, bonds stocks and real estate markets get knocked down one at a time, these banks will find themselves back at the government trough. 

8. Emerging markets

From China to India to Brazil, emerging markets have struggled to get their economies going. Facing currency wars arising at the Fed, most of the developing world has been forced to print money and create domestic inflation to maintain parity with the dollar and continue their export driven economies. None of these policies have worked to their benefit. China has a serious real estate bubble and shadow banking issues.  India is getting mired deeper into its socialist spending habits by guaranteeing food and employment to the poor, while ignoring the capital creation needed for such endeavors. Unlike the 2008 crisis, in the next financial collapse, there is nobody left to take up the slack. 

In the coming global reset, we are all looking at painful resolutions. This time, we all fall down. When will this reset happen? A few months from now? A few years? Who knows. But it does seem inevitable doesn't it. 

And yes, i blame the Fed. I blame the elite. I blame a system of ownership, that has decided to consume itself by not checking it's short term greed for long term ruin. A modern-day Ouroboros, oblivious of it's nature to eat itself. Human history is saturated with examples of strife during economic cataclysms, governments out of control, out of sense. We think it can't happen to us. 

It can. And it will. 

Crossing the Rubicon

When Julius Caesar marched on Rome with his legions, the Senate collectively exclaimed in shock. How could this happen? No Roman general had marched on Rome before. It was unprecedented. A direct attack on the Republic and the Constitution. It was blasphemy, treason. 

Of course, history reminds us that this was not really true. Caesar was not the first appointed dictator to turn on the Republic. Only a few decades ago, Sulla had marched on Rome as well and won handily. The purge that followed saw close to 10,000 anti-Sulla Romans massacred. The curious thing, not often seen in history, is that Sulla gave up his absolute powers and retired. Caesar, the embodiment of the hunger for power, would not make that mistake. The precedent had been set, and he would not waste it. 

It is also important to remember that when the Senate tried to correct this fatal error on the Ides of March, by slicing and dicing Caesar up on the Senate floor, they ignored the most basic tenet of life on this planet. Violence begets violence. Before they could claim the Republic restored, a civil war broke out between Marc Antony and Octavian, rendering the point of the assassination moot. Out of the ashes of Caesars pyre, was born the great Roman Empire, with Octavian transforming into the divine Emperor Augustus. 

For the next 400 years, the Senate tried in vain to go back to the Republic. But the dice as Caesar famously said, had been cast. Years later, senators loyal to the republican government conspired to kill the mad Caligula, who would become the first, but not the only, emperor to be assassinated. But the Praetorian Guard would choose the 'half-wit' Claudius as their next anointed one. And so it was, the power that had been unleashed, would not be reigned back in. Not until it had completely consumed the Empire, and the quaint idea of Republicanism with it. When the Empire finally dissolved in 476 AD, freedom and liberty were dangerous ideas, not to be trifled with. The stage had been set for the onset of the Dark Ages. The Roman experiment with democracy and a people's government had led to the greatest empire the world had ever seen. 

Flash forward 2000 years, and power seems to have lost none of its potency. The American experiment  in the republic and individual liberty has once again led to the most powerful government the world has ever seen. Rule of thumb seems to be, the smaller they start, the bigger they get. Just like with Caesar and the Senate, the US Congress today seems flummoxed by the NSA revelations. How could this happen under their watch? Has the surveillance state reached the point of no return? This of course ignores the fact that the power being abused was set in motion by the Congress itself, in the form of the Patriot Act a decade ago. Americans, like their Roman pleb counterparts, seem more interested in the bread and circus routine. They seem to forget that where power exists, it will be abused. For the longest time, conservatives challenged civil libertarians in finding Patriot Act abuse. Now that the abuse has been revealed, the public seems to be hiding behind the 'i have nothing to hide, so nothing to fear' sand of self-delusion. Liberals scoff at the apprehension behind the NDAA Indefinite Detention Act, safe behind their leader's assurance that he will never use it. Of course it is only a matter of time before the power that exists, shall find hands that are willing to abuse it. 

At the height of backlash against the NSA, things stand such - Snowden has been called a traitor by the highest ranking members of the Congress on both sides of the aisle, the Amash amendment seeking to end the NSA spying on citizens has been defeated, and other agencies like the FBI and the DEA, not wanting to be left behind, are seeking their own spying infrastructure, to rival the NSA. Meanwhile, Manning faces life in prison for uploading a video of American 'soldiers' gleefully cutting to ribbons unarmed men and children through what would look like a gaming console. As if to drive home the point, the Obama administration, that paragon of transparency, has persecuted whistle blowers under the Espionage Act seven times, more than all the previous Presidents combined since 1917. 

It may seem like we are on the verge of crossing the Rubicon once again, but like in the past, that too would be a misunderstanding of events. We have already done so. The public outrage over government overreach, whether in personal lives, or economic activity, or foreign policy, is decidedly anachronistic in nature. It is out of place, out of time. The Republic is dead, the emperors behind the curtains have become adept at pulling the strings, and the dice.....it was cast long ago.

The only question that now remains, is whether we will learn anything from history at all. Will we wait, till things fall apart completely, and we are forced to resort to violence and the irrationality of it. We must remember the Senators of Rome, who for centuries tried to overthrow the Empire through assassinations, never to succeed. We must remember the French revolution, led by the goddess of Liberty herself, only to pave way for Napoleon. How about the Russian revolution of the proletariat, that led to its own empire, and its eventual bankrupt collapse. Even the contemporary violent orchestrated overthrows in Iraq, Afghanistan, Libya, Egypt scream the same lessons. Violence is not the answer. We must don the cape of peace, in all aspects of our lives - personal, social and political. Economic peace (no coercion through taxation, no Fed distortions through price fixing of rates, zero support for warfare/welfare state, personal responsibility, charity, liberty). Social peace (no coercion through federal laws enforced by the State, let gay-rights drug-rights abortion-rights and other divisive social issues be decided at the most atomic community level, live and let live). Personal peace (in spite of our innate violence, never to give in to it, especially with children. violence begets violence). 

These are difficult choices to make. But make them we must. Only individual responsibility towards peace can turn us from the course we are on. Only a philosophical change in our mindset to shun violence and coercion in all its forms, State and Individual, can prevent the unmooring of our social fabric. We must abandon moral relativism, and stand strong for the defense of individual life, liberty and property. Only then can we break away from this gory pattern of history, the endless cyclical lust for power, and those few who seek and use it against the majority.