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2020-

2020-02-15
Potemkin Planet (an occasional series)

An early spring has come and risk is in the air: systemic risk, counterparty risk, political risk, viral risk and bubble-popping risk. However, I'm concentrating first on the stench of risk emanating from Wall Street and the ineffectual overnight deodorizing activities of the New York Fed, around the corner at 33 Liberty Street. The REPO men from the New York Fed have been busy almost every night since September 16/17 of last year. They, at best, have managed to contain the smell wafting from a dead or dying too-big-to-fail bank and/or primary dealer and/or hedge fund. The wise guys with the liquidity perfume are hoping their potions will give the current reincarnation of LTCM enough time to unwind their derivatives bets to avoid a cascade of defaults. I wonder if they have read Friedrich Hayek's Nobel prize acceptance speech from 11 December 1974? It has the catchy title of, The Pretense of Knowledge.

I am not the first to notice that the Price-to-Earnings ratio is no longer stratospheric - it is in low earth orbit. Corporate stock buybacks, a primary driver of stock price increases, and a total disconnect between the health of the overall economy and the major stock indices, are not good portents. Additionally, corporate debt levels are totally unsustainable.

The magicians and inflators at the Federal Reserve and the Plunge Protection Team are fallible human beings. I'm certain they are working overtime to keep the lumbering beast of the US economy staggering along at least through November. But any seemingly little disruption could unravel everything and spark a Black Swan event.

Already falling global demand for goods and services, and possible supply chain disruptions resulting from the novel Coronavirus (2019-nCoV) could provide the pin that pops this bubble. Reports that this virus escaped from the Wuhan Institute of Virology’s Department of Emerging Infectious Diseases and its Biosafety Level 4 laboratory are apparent disinformation. No sane nation would carry out such research within a mega-city, Anyway, Chinese bio-warfare labs are far to the northwest in Xinjiang.

But that's not all folks. I've not yet considered second-order effects. Those are difficult to define and quantify. Divining second-order effects basically starts with a what-can-go-wrong line of thinking magnified to the nth degree. You'll know you're on the right track if the answers frighten you.

All this reminds me of the joke where two women are talking about the recent deaths of loved ones. The second woman says her grandfather died in his sleep... but, ... his passengers died screaming as he drove off a cliff. Today, imagine Grandpa Jay Powell is at the wheel of a classic station wagon. We are the passengers, and the New York Fed guys? They're strapped to the luggage rack, playing a high-stakes poker game on the roof, with hundred dollar bills flying away from the pot - just like Helicopter money. That's not a problem. Whenever they run low, they pound on the roof and Grandpa Jay hands them another stack of Benjamins.

Did I mention that Grandpa Jay is driving us to Big Sur for the three-day weekend?

Digression #1 - See these links for more about the REPO market and the clearinghouse of the REPO market, the Fixed Income Clearing Corporation (FICC).

Digression #2 - LTCM, or Long Term Capital Management, collapsed spectacularly despite the high-powered guys running it. In his book, The Great Deformation, David Stockman wrote, "LTCM was an egregious financial train wreck that had amassed leverage ratios of 100 to 1 in order to fund giant speculative bets in currency, equity, bond, and derivatives markets around the globe. The sheer recklessness and scale of LTCM’s speculations had no parallel in American financial history … LTCM stunk to high heaven, and had absolutely no claim on public authority, resources, or even sympathy."

Digression #3 - The Nobel Prize in Economics is funded by the Royal Bank of Sweden, not by the Nobel Foundation. Friedrich Hayek's speech (11 December 1974), The Pretense of Knowledge, begins thus:
"The Nobel award comes as a surprise on two counts. Not only because all the previous Nobel Prizes in economics have gone to left-liberals and opponents of the free market, but also because they have gone uniformly to economists who have transformed the discipline into a supposed "science" filled with mathematical jargon and unrealistic "models" which are then used to criticize the free-enterprise system and to attempt to plan the economy by the central government."

Digression #4 - This extensive article presents other theories concerning the origin of the 2019-nCoV betacoronavirus. Though it is a speculative article, it does provide many references and is cited here for you to read and draw your own conclusions. The references immediately below are intriguing:
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https://www.zerohedge.com/geopolitical/coronavirus-contains-hiv-insertions-stoking-fears-over-artificially-created-bioweapon
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https://247sports.com/college/usc/board/59419/Contents/-coronavirus-hiv-insertions-of-artificially-created-bioweapon-142791737/
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https://bigleaguepolitics.com/zerohedge-banned-from-twitter-after-posting-findings-of-hiv-insertions-in-coronavirus-bioweapon-possibility/
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http://stateofthenation.co/?p=6150
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https://biology.stackexchange.com/questions/90034/does-2019-ncov-really-has-4-hiv-insertions
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Digression #5 - Helicopter money was the brilliant solution proposed by B. S. Bernanke for papering over any problems with the economy. B. S. Bernanke is also known for his flawed analysis of the Great Depression. The best work on that topic is, America's Great Depression by Murray Rothbard.

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