Friday, March 14, 2014

I Was Sooooooo Wrong

It takes some honesty and fortitude to confront one's mistakes. Everyone makes them, though not everyone admits to them, perma-bears (like ZH & MISH) being, being amongst the worst offenders. Many Hedgies, most likely for reasons of ego and hubris, also have great difficulty accepting culpability for their errors, evidenced by their letters, blaming everything and everyone but themselves and wayward theses. Hugh Hendry, at least, maintains the intellectual flexibility to thoughtfully, and articulately throw in the towel, whereas the most effective do not invest themselves so fully into their investment theses that they cannot cut-and-run without inflicting egotistical self-harm. Because I operate in the land of the diversified portfolio, excising errant positions has never been traumatic, nor do I self-flagellate with cutters-regret. So long as my distribution is skewed-right, and the tail not overly kurtotic, I am sanguine.

Macro is different. The calls are fewer. Gestation time to trade maturity is longer. False breakouts and devasting swoons create further potholes. One can be very right and still get completely hosed in one's expression (and timing) of the trade (just look at Corzine if you have any doubts!!). Needless to say, one should ideally approach one's positions with the same sense of detached objectivity described above. Many, however, find this challenging whether it is due to personal political bias that clouds reasoning, or the resulting delusion caused by the 24-7 talking of one's book, whatever the evolution in ummm … errrr… let's called 'objective reality'.

Rest assured, I make no claim to be better. My worst prediction - the one that haunts most, confronting me each and every day - was not a trade per-se (though there are no shortage of bad ones). Rather, it was a political-economic scenario that not only hasn't panned out, but evolved (and, continues to do so) in completely the opposite direction. This was my forecast for what I call "Peak Inequality", along with all the deterministic knock-on effects such a scenario would have upon everything from luxury goods, and trophy real estate and high-end everything-else. For a short time in 2008, I smugly felt vindicated witnessing halts in construction of premier projects, bankruptcy of uber-luxury developments and the failure of high-end props to catch a bid. As things stabilized and bounced, and embedded counter-cyclical stabilizers blew gargantuan holes in Govt fiscal income statements throughout the world, I believed that 1) markets would [wrongly in hindsight] press for austerity 2) consumption was too fragile to raise taxes generally or cut govt spending; 3)the highest inequality and lowest marginal top-decile rates in generations would be the obvious target; 4)this would occur across the DMs, and draw the line-in-the-sand for inequality; 5)For IF the authorities were to bail out and make beneficiaries of asset-owners (levered ones in particular) in a pull-out-all-the-stops attempt to reflate, I reasoned the moons would be aligned for the State to recapture a meaningful amount of this (via tax) as a quid-pro-quo for not letting the soon-to-be angry hordes do "a Romanov"; 6) This would go some way towards capping and sustainably financing a yawning fiscal gap while maintaining general consumption and employment with a more constructive balance than otherwise might occur were reflation to float top-decile boats with scant participation by the median.

It would be understatement to say I was wrong, so far was I off the proverbial mark. On the surface, Like ZHers and MISH, I committed the cardinal sin of letting my political ideals get in the way of assessing the true probabilities. I had thought that under the circumstance, political expediency and policy pragmatism would extract 'sacrifice' from, or or co-opt, the top decile beneficiaries, given the backlash against the financial sector and the levered, that would in other times prove tortuous or impossible. Saving the system, at public risk and expense, with all its attendant property rights, is, after all, useful to the beach-masters, and the old adage of 50% of a goldmine being preferable to 100% of nothing must (so I thought) ring truer during such moments.

I'd thought it would be obvious to largest asset owners, and the top-decile earners, that they had escaped by the skin of the proverbial teeth, and expected they would have been grateful (excepting Hank Greenburg), and that these people would have not reneged on their promises to the Supreme Being made as the plane was falling from the sky. Instead, they offered-up "austerity" rather than contributing, as the Koreans did in 1998, a bit of the family sailver. Mark Blyth @Brown said: "Democracy is 'asset protection for the rich'….Don't skimp on the payments!". But the incessant rise in inequality is, a sure sign, they've been skimping on the payments. This has had profound implications: delaying and muting recovery, swelling deficits unnecessarily, undermining fiscal confidence, and exacerbating political divisions and preventing pragmatic action where and when required.

While some has resulted from unabashed or calculated "smas-n-grab", globalization has laid the substrate for great windfalls for some while undermining real median incomes. This is not meant pejoratively, or suggest anything should be done to throttle the trend or pace of globalization, but rather as a statement of fact. But the strength of the current should be noted by those who argue against the ill effects of inequality on the basis of libertarian personal fortitude. Formerly domestic pursuits (entertainment) now have global audiences. Software, healthcare, and yes, asset management) often have fixed development costs and mind-boggling scalar effects producing unimaginable wealth while median wages are throttled by competitive global labour markets and technology that increasingly allows outsourcing to ever-lower cost venues. These dynamics have incredible inertia, and are lifting vast numbers out of poverty elsewhere, and are difficult to decry. But somewhere, in this process, democratic insurance payments have been missed, and responsibilities by the beneficiaries, ignored, resulting in a listing economic boat, a mis-firing distributionalengine, a drought of sorts, an entirely unnecessary and man-made creation as a result of the rules of the game as drafted.

If one use the Lord of the Manor, as an analogy, he would have had the property rights over his domain, but in exchange, would assumed responsibilities and obligations both up and down the food chain. He would support (albeit with a lower-case 's') those below during bad times, and would have fiscal obligations to the that above (not meaning god for the avoidance of doubt), and if required, raise men for armed conflict. Failing on either account might very well threaten the property rights granted, or worse, his life. They were not inalienable, despite his position. Today, the same metaphorical "Lord", has all the rights, and they are inalienable, but none of the responsibilities outside a modicum of fiscal contribution to the State which can, with effective counsel, be minimized to great extent. His properties are, excepting rights of Eminent Domain, fully enclosed in the medieval sense. The Modern State, over time, has assumed many of the responsibilities, with the provision of a social safety net, and a tax rate that can be raise or lowered according to the requirements of public finance. That is, until recently, it seems, with the War on the State, a war on what remains a social work-in-progress that is "government", one which at its extreme in the USA is seemingly stuck in a Mondale-esque deer-in-the-headlights inability to adjust (or even reform) the rates (and structure) of tax to meet the obligations and responsibilities of the State to her people. The Grover Norquists, if nothing else, have succeeded in framing the popular political-economic debate such that it is believed [in that parallel universe that exists in parts of the nation] that austerity is divinely good, that hyperinflation is around the corner, that the state should barely exist, and shouldn't have a strong sense of the public interest. And we can witness the result: no new taxes, less progressively on existing taxes, starved public investment, unnecessarily higher unemployment and lower wages, hardship, and an incessant rise in inequality that most economists believe is inimical to growth and a well-balanced economy. Few desire sharing their income - whether rich or poor. And few would choose to shoulder responsibilities, if they could be avoided. But we, and the economy upon which we depend, and/or thrive, all share fates and fortunes that are inexorably tied, that if not demand, then certainly benefit from civic responsibilities (mostly economic in modernity) that are not transmutably-minimalist, but should remain flexible so as to respond more pragmatically.

Yea, I got it wrong, which I wish wasn't the case. But I do not regret my lost investment opportunities. Rather I fret about the future threat property rights, of lawlessness, of the lost economic potential, of the diminished social mobility, and of the resulting coarseness and divisiveness that stems from all these negative pressures.


Anonymous said...

very good post, but you may have posted before hearing that Corzine's son committed suicide.

You may want to take the reference to him out of the post so as not to appear cruel.

Anonymous said...

I am not piling on, but while I share a general perception that there likely have to be some adjustment and "peak inequality" at some point, I am confused about the rest of your interpretation.

Forgive me for not finding references, but these are my impressions:

- While top marginal rates have not increased in the US, total share of tax revenue from the top quintile has significantly increased over this post-2000 inequality trend

- Since WWII, top marginal rates have varied from 90% to the twenties, but tax revenues are unresponsive to the rate and stay around 20% of GDP. Not even clear you can get more revenue that way - the only proven way is overall increasing GDP growth.

- Government spending is designed to do very particular things, none of which - other than a small percentage of spending on welfare programs - are designed to do anything about inequality at all. To put it simply, the government is not an inequality reducing machine, therefore giving it more money does not necessarily help (or hurt.)

Rich said...

While agreeing with the thrust of your comments, I have a few thoughts:
- I’ve read an article that pointed out that perhaps 20% of the people in the US had been in the top strata of income for some portion of their working lives. Optimism being the cruel, taunting master that it is, that makes it very difficult for the EX one percent to support higher taxes on the wealthy, as they will surely get back to their former state of economic grace!
- There is a winner-take –all phenomenon that occurs when integrated markets and societies all want to read Harry Potter, making Ms. Rowling very wealthy and beggaring the remaining authors. This likely won’t change.
- A recent article mentioned that now that colleges are 51% populated by women, that college grads are far more likely to marry other college grads rather than their local high-school educated (and poorer) female. This reduces economic mobility for poorer females.
- Having just completed my US taxes, I can assure you that in 2013 rates have gone UP significantly. My tax rate overall went from ~ 15% to ~ 22.5%. New additions to the tax burden include a 3.8 % Medicare tax on high levels of investment income, tax rates have risen, Sch. A personal exemptions are reduced by 20% for higher income taxpayers, and there also is a phaseout of personal exemptions to zero for higher income people. I am perfectly OK with higher taxes, as the rates for the last few years were stupidly low for investment income, but this problem has been addressed.

Anonymous said...

As most economists, you do not follow the money. When 800 familes control over 45 percent of the income of the United States, you do not have an economy. You develop entrenched crony capitalism.

The "political parties" and the "MSM' are simply sideshows. They don't 'control anything. They do what the bosses say.

The Koch Brothers alone own 10 to 15 states. They have them passing silly laws to prove that they control them.

Art Pope owns North Carolina. Even having a "state government" is a joke and a total waste of time of money and energy in that state. Art hasn't got a title but he owns North Carolina, lock, stock and barrel.

You have to step up and see who has the money and the control because it definitely isn't whomever you have been believing it is.

Watching the Fed or the stock market is a total waste of time. It is a rigged game for the rich to park their money in while they get ready to loot all of the pensions, savings and property of the Americans.

Look at where the real big frightening money is.

Bill Gates, Warren Buffet and Mark Zuckerberg are not your friends.

Diptherio said...

- While top marginal rates have not increased in the US, total share of tax revenue from the top quintile has significantly increased over this post-2000 inequality trend

Which is what you would expect if wealth is being concentrated at the very top and consequently squeezing everyone else's income.

- Since WWII, top marginal rates have varied from 90% to the twenties, but tax revenues are unresponsive to the rate and stay around 20% of GDP. Not even clear you can get more revenue that way - the only proven way is overall increasing GDP growth.

What?!? Taxes (supposedly) fund government spending and gov't spending increases GDP (at a more than 1:1 rate, according to recent findings). So if a higher top-tax rate doesn't lead to an increase in gov't revenues as a percentage of GDP, it is because GDP has experienced nominal growth equalling the nominal increase in tax revenue from the higher rate.

Increasing the top rate and not increasing the relative share of income that taxes are eating up, just goes to show that increasing taxes on the rich is not a destructive idea.

"Cassandra" said...

Yes, the amount paid in tax by the top quintile has increased. This is because the top quintile (and mostly the top 0.01 percent) has been capturing more income.

About increasing government revenue - while nifty, this is not what I see as the main aim. The main aim of government is stability (and hopefully justice, with a dash of "not purposefully ruining happiness" thrown in at the last minute).
Thus, in the name of stability it is better to remove some money from the economy by removing it from those with more capital, as they are thus less able to capture the government, and then driving it over a cliff.

This depressing pattern - of a clique taking control over a government, doing a medium-to-shitty job over a short to medium time, and then refusing to change when the world demands it.
If I were to make a prediction, I would say that the rise of Asia, coupled with less energy availability and global warming are poised to smack around any nation that is as gratuitously internationally connected as the US is.

As to your third point: while we disagree how much government spending actually impacts inequality (e.g. hellooooo Medicare! Ooh, food stamps! Military spending that - partially and inefficiently - funds jobs! Public education! Highways! Public transportation!), my main point is that you don't have to make a case for government spending - you just have to make a case for removing money from those with lots of it in order to get reduced inequality.

In short, stop looking at tax revenue as a way to do things (not saying that that's a bad thing per se, but...), and start looking at it as a way to take away money from people that likely would do bad things with it (like let it accumulate forever, fuel economic bubbles or influence the government).

(NB the above comment was posted Anonymously, which I accidentally deleted and resurrected via my e-mail. It thoughtfully responds to #2's canards so I don;t have to.)

Anonymous#1, for the avoidance of doubt, I wrote it before the Mr Corzine's loss. It was focused on the margin calls of his highly levered peripheral Eurozone bond trade from which he (and the firm) got no joy despite being ultimately correct.

Rich, thanks for the points highlighting the complexity of factors impacting inequality; your first one mirrors the old saw: "From shirt-sleeves to shirt-sleeves in three generations…" I agree that Winner-take-all and scale/network effects that lever earnings globally will likely not go away, but their effects appear to negatively impact the general economy of distributional balance needed to thrive. Tax Progressivity has responded in the past, and there is no reason why it cannot in the present. While such uber-beneficiaries [of scale/winner effects] might find haven physically residing in Switz, Monaco or Dubai, the outcome of the war that is beginning to be waged will, likely tilt towards fiscal authorities now that there are no more secrets...


Mason Duede said...

excellentes observations ...
la dynamique qui règne au niveau de cette économie globalisée n'est absolument pas efficace dans le sens de Pareto ... ce phénomène a améliorié l'état des "riches" tout en dégradant la situation financière des classes inférieures ... il s'agit d'une oligarchie mondialisée ... bien cordialement, M. Duede - Namur

Autolycus said...

Pardon my ignorance but what is MISH ?

"Cassandra" said...


MISH = mike shedlock, a polit-econ-equivalent blog of Art Bell @Late Night Radio = wearer of tinfoil hats

Mercury said...

You've basically just climbed on board with (another) one of ZH's key and longtime theses while complaining that they never admit they're wrong.

Not exactly a complete self-contradiction but a clashy, mismatched outfit of an argument nonetheless.

"Cassandra" said...

I assume you;re referring to the Un-Diddled post.

Anticipating precisely such snark, the following Tweet accompanied it's publishing:

I just want to emph that these are bona-fide greedy diddles, not little green men Tin Foil Hat Brigade diddles

It's also why each diddle is linked to the most reputable source, rather than "Max Keiser" or "TestosteronePit". I think your insinuation is a stretch (at best)

Mercury said...

No, I was referring to 'I Was Sooooooo Wrong' under which my comment was posted. RE: Lord of the Manor-ism as evidenced by the effects of QE, Blackstone becoming the country's largest landlord, ACA & Green cronyism and winner picking galore.

But now that you mention it I'm pretty sure ZH scooped 'Wikipedia' on LIBOR manipulation and 'Recycling Today' on copper hoarding.

Not that I get equally excited about each such circumstance mind you. For decades LIBOR had been set by conflicted parties who guard a choke point in the system...which they use to their advantage. Duh. LIBOR has tracked Fed Funds pretty tightly anyway, a rate that by definition is manipulated.

And if a government like California's sets up perverse incentives in their electricity markets, Enron should almost be applauded for playing that to their advantage.

But in any case, you're usually either right or you're wrong with these kinds of things, whether or not you're tower is made of ivory or your hat is made of tin.

Mercury said...

I was referring to 'I Was Sooooooo Wrong' actually.

neroden@gmail said...

You didn't read enough Thorstein Veblen. If you had, you would have understood the fundamental psychological behavior of the 0.1%ers -- their willingness to destroy the entire society just to cheat one more guy out of his money. Cheating one more guy out of his money is what gives them the jollies.

The fate of the Romanovs remains likely for our current elites. The fact that they don't seem to be worrying about that -- well, did you really think that they were wise? Or smart? Or engaged in long-term thinking? They're not.g