Saturday, November 09, 2013

A bearish view for the long-term

SocGen analyst Albert Edwards paints a picture that sends shivers down my spine:

"Many investors I meet continue to marvel at US labour's inability to rebuild its wage share of GDP and how dominant capital and profits have become. I believe society will ultimately demand and implement a change. We have already seen a potent grass-roots backlash against cross-border tax arbitrage and tax-havens, which has forced the politicians to react here in the UK. Yet inequality in the US continues to grow.

Investors should make no mistake. The anger of the 99% will ultimately not be bought off by yet another central bank inspired housing bubble, engineered to pacify them and divert their attention as their real incomes fall and inequality continues to grow.

The current bubble will burst, despite the Fed postponing the event by climbing to ever higher diving boards. All the time rising inequality is draining the swimming pool dry and the crunch when it comes will be ugly."
Note how he who once ruled the world (Alan Greenspan) stepped off the world stage and straight into obscurity, from light to dark. There is a useful lesson in this observation: people in powerful positions appreciate that they are in the spotlight only while they reign. Thereafter, they have limited "skin in the game", (to steal an analogy from Taleb). Thus, the effects of their actions that are of greater relevant to them are those that manifest during their reign.

You could say their decision making carries a very high discount factor, with a step change higher in the rate at the point of the person's expected exit of the elite, decision-makers' podium. This model explains why happens on these people's watch is of greater import to them than the lasting legacies, particularly when the benefits of these legacies require reputational costs during in the years of their reign (i.e. costs have a low discount factor and future benefits a very high discount rate). 

There are trade-offs that will be made, but generally speaking the rulers of the world economies will do every thing in their power to shift the pain of economic crisis across the masses (diluting effect combined with obfuscation)  and forward in time (projecting effect). And so it is, that policy makers will spread and push, and spread and push, until they can spread and push no more. The end times are not necessary calamitous but the rising levels of inequality and generational transfer suggest an element of system is starting to fold in on itself.

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