The Big Unfair


Against the Rules, a Michael Lewis Podcast

Podcasts are booming and during my version of exercise I get through my fair share. It’s healthy multi-tasking.

A favourite author of mine is Michael Lewis. He has an easy reading delivery and dives into topics I enjoy. Liar’s Poker was instantly relatable to me, maybe because I too was bond trading in the 80’s and know how well he captured those days. Flash Boys, The Big Short, The Blind Side, Moneyball, The Fifth Risk – all terrific reads.

So I was keen to hear out his series, Against the Rules, a conversation about fairness, society’s referees, judges and whistle-blowers. Why is it “Ref you Suck” chants have only increased while in reality refereeing in basketball has only improved? How does that $100mm buyer of da Vinci art know he’s getting the real thing? Does everyone know trading networks compete with fiber optic speed to take a fraction of a penny on the millions of weekly stock trades?

Fairness feels like especially poignant conversation these days and Michael Lewis is smart to tap into it, offering several thought provoking samples. We can all relate to and or take issue with some of life’s rulebooks. So I highly recommend the series and await season two. It’s relatable, I learned a few things, and its’ delivered in Michael Lewis good form.

So, what’s SO unfair?

It got me thinking about fairness and referees. With news coming at us through our smart phones like a firehose, the information age seems to be also delivering a palpable angst, a world fatigued at times by streams heavy with injustice.

It’s easy to point at this Trump presidency as a recent cause for this. Regardless of what partisan side you sit you have to admit this US political cycle has turned norms upside down and he’s oddly loved or despised for it. What of the refereeing and fairness that got him there, or keeps him there?

The world’s most important democracy has been on trial, literally. It’s been 24/7 of Trump’s past, his controversial win and questionable team, investigations, obstruction, indictments, whistle blowers, lie counts, fake news, hush money, diversions, and ethics violations. He yells “hoax”, and hand picks his personal AG to referee away his legal troubles. Testing laws and ignoring subpoenas at every turn in realtime is a draining daily reality show. Both sides are yelling “ref you suck” at the news, at each other, maybe even unsure who to yell it at anymore. Both sides claiming injustice.

However the chaos plays out, remember that he got there because 50mm people looked past his shady past and the normally disqualifying episodes of moral malfeasance. They knew what they were getting and voted for him anyway. They didn’t want the Republican establishment. “Drain the swamp”, even though branded by Trump, is realistically a bipartisan sentiment. There are reasons why voters wanted disruption, or were drawn to harder rights, lefts or the unorthodox. Trump’s win maybe represented a symptom of something bigger.

Ironically, he appealed to both the many of those left behind during this recent decade’s economy, and to the wealthy corporate class, wanting their wealth protected and maybe a tax cut too. Two very different voters, wouldn’t you say?

The Big Unfair

So I couldn’t resist, here’s my take at a Big Unfair, something contributing to a symptom like Trump and a more radical voter’s edge.

There are these refs in society, appointed, not elected, and they make up the rules to a game so big, they impact everyone everywhere. They answer to no one. Not only do they make up their rules as they go, they flat out experiment with no proven understanding of the consequences they unleash onto society. They are Central Bankers and they referee your money and your banks and your economy. They referee the conditions behind those who feel left behind and those very wealthy. They are arguably the most powerful people on earth.

And, they are suppose to be boring. A world that doesn’t know their names or care is a better place. Boring means everything under their watch is under control, as folks on the street should expect would be. Instead today we have a global financial system that clings to their every word.

Ultimately they enable debt and by manipulating the price of money they affect the price of everything. The consequences they intend always bring unintended consequences. And yes, even scale injustice. Anyone deeply involved in finance or economics gets this, or understand iterations of this. But really, how much do regular folks on the street understand of the dynamics of what has really transpired these last few decades? How fair are these referees?

h/t IIF

An army of economic PHDs might argue attacking these refs just projects iconoclastic nonsense, that these are institutions of prudence only doing their best to guard the system, that they are the sober adults, the doctors in the room providing the medicine when their economic babies get sick. Since dabbling in metaphors, I’d reply that they are the arsonists fighting economic fires and social tensions of their own making.

To their defense, economics has had to negotiate some major global trends – demographics, globalization, a revolution in technology, and the burdens of their own work, ever growing debt. America has also been at war for better part of two decades and untold trillions. But the ongoing solutions at every crisis have been the same, policy that encourages more debt.

The major crossroad into scale injustice was the Great Financial Crisis a decade ago, when their system cracked. These refs watched and did nothing as their banking systems went wild with speculation. After it did collapse and freeze, and a year after unpopular government bailouts and interest rates pounded down to essentially zero, Wall St paid itself it’s second highest bonus season ever.

Quantitative Easing became financial lexicon. And then QE went from an unprecedented emergency episode, to becoming a daily tool. In a sign of even deepened free market manipulation, today Europe and Japan even use this tool to buy public company stocks and bonds.

A decade later, central banks have refereed the global game of finance and themselves into becoming global asset managers, not their deemed purview, arguably socializing what was once capitalism’s free markets. It is now an age of their market distortion. They put asset prices, the cart that holds your stocks or bonds or home, in front of the economic growth horse under a view that the cart will somehow push the horse.

Income disparity and the wealth trap

But US stock markets are at all time highs and this is the longest US expansion in history? There’s full employment! What could be wrong with that? Well, it is the weakest recovery on record too, and requires ever bubblier asset prices and more and more debt to sustain.

It stands to reason those with most of the assets benefit the most from such policies. Despite tepid denials to such consequences, a recent data release by none other than the Federal Reserve itself shows that over the last 30 years America’s top 1% are $21T richer and the bottom 50% are $0.9T poorer. Ben Bernanke’s wealth affecting QE only exacerbated the trend.

QE is the biggest redistribution of wealth from the middle class and the poor to the rich ever. – Stanley Druckenmiller 2013

Such phenomenon could come to sway a political vote or two, either with those that have the wealth and want to protect it or by those that don’t? And so America elected Trump, the self-labeled ‘king of debt’, barking about bringing back lost jobs while cutting taxes for the wealthiest and cheering on a stock market and economy he himself labelled a “big fat ugly bubble” months before elected.

Relative to the size of the economy, the US stock market has rarely been valued so high.

h/t gurufocus.com
h/t visual capitalist

Roughly, out of US QE programs, $4T of treasury bonds and mortgage-backed securities were purchased, corporate America ended up borrowing $4T in bond markets and spent $4T buying back stock. While this isn’t a direct mechanism, there is definitely a linkage here that directly contributes to the income disparity story. We are left with a bubbly stock market and record corporate debt, especially of the lesser quality kind, and record US government debt.

h/t Deloitte

Central bank interest rate repression hurts savers and forces everyone to take more risk. Is that prudent refereeing? How do pension funds needing 6-8% returns to fund themselves make it happen when interest rates are sub 2-3%? They are forced to take more risk. Is forcing grandma to speculate in tech stocks really the fair solution to her income woes?

Affordability in real estate markets is really central bank terminology for one’s capacity to take on ever more debt to chase rising home prices under the auspice that rates are so low because there is no inflation. Read that again. Is forcing greater mortgage burden on society with such low rates prudent? Especially in an income disparaged world? How can these refs ever normalize interest rates without this debt pile they’ve nurtured getting severely damaged?

h/t Bloomberg

So the Big Unfair leaves us stuck in bubble economics and policies these refs can’t escape. So much so, some rightfully question the very nature of money and savings. So much so, new experiments like crypto-currencies emerge, as a means to escape the system. And of course, more attention is paid to that long standing refugee of more prudent banking times – gold.

There have been select countries exercising currency controls, also know as controlling the local financial ability to leave. There’s been talk of eliminating cash, a digitization that would disable your ability to put all your money under your mattress to leave the banking system. There’s talk of MMT, Modern Monetary Theory, a form of QE but for the people, or for government spending. There’s talk of debt jubilee, or foregiveness. Free stuff. All this makes one wonder, once the referees socialized markets, is future economic and political life destined to follow?

Recent estimates put total global debt at $248 trillion, over 3x global GDP. Here’s a list of country debt. To the degree that debt is borrowing from tomorrow to pay for today, pulling potential future spending and growth into the present, it means that debt is headwind for tomorrow’s growth, not necessarily a foundation for making asset prices more expensive today. The elusive ‘escape velocity’, or notion that economic growth could overtake debt growth, hasn’t come to pass.

An element behind this Big Unfair is also in the inflation targeting central banks use as justification for their actions. In essence, what they are telling you is increasing your cost of your living is their way to manage the uncontrollable debt growth they encouraged. Aren’t some of the dividends of cost savings falling out of today’s technological revolution a good thing for society?

Economic cycles are a part of life and a natural way for a reset. They cleanse a sytem of excesses that inevitably build up during the good times, ultimately leaving it healthier longer term. They come at a cost. But in fighting every slowdown without limits to their intervention, do central banks maybe just defer the pain of the inevitable? Can they really ref away the economic cycle? In so doing they sustain companies that are inefficient, or create industry conditions crowded with over-investment. They call this misallocation of capital and what it translates to is raising the risk of even greater severity in any eventual inevitable downturn. They call these Zombie companies, and central banks openly admit this as unintended consequense of their policies over the last 20 yrs. Again, not a foundation for more expensive asset prices is it?

The Moral Code

Free markets are self-policing. Zombie companies maybe should be allowed to fail, to cleanse the system, rather than remain propped up by referees.

Relatedly, free markets normally price debt to reflect the amount borrowed and the perceived ability to pay it back. A properly functioning market requests a higher return for the added risk of ever more new debt, especially if a borrower’s circumstance deteriorate. It’s the moral code behind the credit function in society, by which a lender gets compensated for risk. Its the price of money at work and the pricing of risk and return. This is a basic simple tenant behind banking and credit creation and finance math.

There is something very wrong when much lesser sovereign credits ratings like Greece, Italy and Spain, even Japan, can borrow in bond markets much cheaper than higher credits can. If credit ratings don’t matter and are no longer part of the credit function process, why do we even still have them?

And maybe the most aggregious example of the Big Unfair of central bank market distortion, pushing past the zero bound with negative interest rate policies (NIRP).

The lender pays the borrower for the priviledge of lending, essentially turning assets into liabilities. Instead of compensation for risk, the lendor sees a portion of his capital essentially confiscated. Other than stone faced central banker justification for this insanity, I’ve heard of no one, investment professional or academic, who thinks this distortion of the credit function is a rational sustainable idea.

Yet here we be. Today over $14T of debt trades with a negative yield, almost a trillion of which is corporate. The referees somehow believe a policy of administered losses and penalizing lenders will save the world from all the debt they’ve helped create. The moral code and social contract of banking and credit destroyed by the very referees put in place to protect it.

Recently the Federal Reserve changed some wording in their heavily scrutinized statements that suggests they too might be preparing for the possibility of negative rates in the US one day. That should frighten everyone.

Summing up, in 2 decades we’ve had a tech bubble, a real estate/credit bubble followed up by this everything bubble. The refs have only enabled more debt, run out room to cut rates and out of ability to raise them, they’ve even turned lending into confiscation, and promoted income disparity everywhere along the way. This can’t be politically or economically sustainable, and yet they in fact continue to double down on this path.

The financial industry has a knack for using the most recent history to project the future and today I think it’s numbed into a passive state by all these central bank machinations. A decade stuck in emergency policy has raised an entire generation of money managers and traders who know nothing but the refs calling all assets higher. Even though these asset prices have seperated from economic reality, the accepted narrative is that the refs can’t afford to lose control of their game, so they won’t. Which means the world can’t reset and is forced to survive on taking more risk. The refs have steered us into a very dangerous endgame trap. The Big Unfair.

So who are we all going to yell at? Since we don’t vote for them, what will we be voting for? Harder rights or harder lefts? Or perhaps another sympton and something more unorthodox?

And for Michael Lewis, I am noting a stream of conciousness – from Liar’s Poker to The Big Short, the metaphor behind football’s Blind Side to the disruptions of The Fifth Risk, to Against the Rules – what will his next book be?