September 7, 2015 – Making Sense from No Sense
The piece below was sent from Brian.
You may want to read it first then back to my comments.
I agree almost in general with the author, especially this quote:
“Contemporary finance” and EM just don’t mix.”
I do not agree with his statements about “printing money” or monetary inflation.
Those were explained in different terms by Armstrong I posted in the last days noting differences between “inflation and liquidity.”
The bottom-line is NOT WHETHER THE PAST IS UNWINDING, but how fast–that’s the key, really.
I’ve pointed this out for years if you have been reading me for that long…I’ve parroted and tried to make sense by showing everyone the rock candy mountain model I discovered a few years ago that really no one of any following has explained like I did in my short video:
The problem with most prognostication is “timing in the short-term” because that’s the thinking that is dominant and people want guidance now, not in general over time.
I’m afraid I can’t do much better than show you trends because the ONLY THING THATS TRUE, is the market and you don’t know what or who is right until the market tells you and that hasn’t happened yet;)
What caused me to write was the quote above:
“Contemporary finance” and EM just don’t mix.”
[EM stands for Emerging Market.]
I felt that everyone could benefit from a lesson straight from “ValuDYNANICS”.*
The reason that contemporary finance doesn’t work in EM is the lack of appropriate values density.
EM are busily acquiring density (quantity) and frequency (quality) from the meme scape.
Contemporary Finance (CF) is built on a system of trust which emerged out of density and frequency “levels” at DQ-BLUE.
CF as noted by the contributing author occurs contemporarily–assuming a values parallel–in ER-ORANGE.
EM have values density and frequency in AN-beige, BO-PURPLE and CP-Red, (note the use of capitalization to denote exiting, nodal and entering systems depicted by their density and frequency).
Here’s the bottom-line just in case you’ve hung around this long:
Each level of values has its own finance needs, density and frequency. IF YOU PRETEND that you can mix and match them under load, you are going to get what you got, VUCA: volatility, uncertainty, complexity and ambuguity.
Now there are 1000 ways to explain what’s happening around the world but it’s quite simple.
You have mismatched scaffolding with inappropriate cues, support and scaffolding for the density and frequency of the underlying level of values…and when you put LOAD on the scaffolding: the tension, weight and volume of transactions created by load will reduce the successful transaction load to the level of density and frequency that can hold the load.
IF you built your systems through inappropriate density and frequency and failed to understand the amount of cues, support and scaffolding required under load, then you get CRUSHING results.
*ValuDYNANICS is part of LeaderWARE(tm) and is available for study online.
From my friend Bob Swan who is an economist and sends good stuff. I liked this, even though I only understood about half of it.
Too often it’s as if I’m analyzing an altogether different world than conventional analysts. My strong preference is to be viewed as an adept and determined analyst, as opposed to some wacko extremist. I have always tried to distinguish my analysis from the “lunatic fringe.”
It’s my overarching thesis that the world is in the waning days of a historic multi-decade experiment in unfettered finance. As I have posited over the years, international finance has for too long been effectively operating without constraints on either the quantity or the quality of Credit issued. From the perspective of unsound finance on a globalized basis, this period has been unique. History, however, is replete with isolated episodes of booms fueled by bouts of unsound money and Credit – monetary fiascos inevitably ending in disaster. I see discomforting confirmation that the current historic global monetary fiasco’s disaster phase is now unfolding. It is within this context that readers should view recent market instability.
It’s been 25 years of analyzing U.S. finance and the great U.S. Credit Bubble. When it comes to sustaining the Credit boom, at this point we’ve seen the most extraordinary measures along with about every trick in the book. When the banking system was left severely impaired from late-eighties excess, the Greenspan Fed surreptitiously nurtured non-bank Credit expansion. There was the unprecedented GSE boom, recklessly fomented by explicit and implied Washington backing. We’ve witnessed unprecedented growth in “Wall Street finance” – securitizations and sophisticated financial instruments and vehicles. There was the explosion in hedge funds and leveraged speculation. And, of course, there’s the tangled derivatives world that ballooned to an unfathomable hundreds of Trillions. Our central bank has championed it all.
Importantly, the promotion of “market-based” finance dictated a subtle yet profound change in policymaking. A functioning New Age financial structure required that the Federal Reserve backstop the securities markets. And especially in a derivatives marketplace dominated by “dynamic hedging” (i.e. buying or selling securities to hedge market “insurance” written), the Fed was compelled to guarantee “liquid and continuous” markets. This changed just about everything.
Contemporary finance is viable only so long as players can operate in highly liquid securities markets where price adjustments remain relatively contained. This is not the natural state of how markets function. The bullish premise of readily insurable/hedgeable market risks rests upon those having written protection being able to effectively off-load risk onto markets that trade freely without large price gaps/dislocations. And, sure enough, perceptions of liquid and continuous markets do create their own reality (Soros’ reflexivity). Sudden fear of market illiquidity and dislocation leads to financial crashes.
U.S. policymaking and finance changed profoundly after the “tech” Bubble collapse. Larger market intrusions and bailouts gave way to Federal Reserve talk of “helicopter money” and the “government printing press” necessary to fight the scourge of deflation. Mortgage finance proved a powerful expedient. In hindsight, 2002 was the fateful origin of both the historic mortgage finance Bubble along with “do whatever it takes” central banking. The global policy response to the 2008 Bubble collapse unleashed Contemporary Finance’s Bubble Dynamics throughout the world – China and EM in particular.
There are myriad serious issues associated with New Age finance and policymaking going global. The bullish consensus view holds that China and EM adoption of Western finance has been integral to these economies’ natural and beneficial advancement. Having evolved to the point of active participants in “globalization,” literally several billion individuals have the opportunity to prosper from and promote global free-market Capitalism. Such superficial analysis disregards this Credit and market cycles’ momentous developments.
The analysis is exceptionally complex – and has been so for a while now. The confluence of sophisticated finance, esoteric leverage, the highly speculative nature of market activity and the prominent role of government market manipulation has created an extremely convoluted backdrop. Still, a root cause of current troubles can be boiled down to a more manageable issue: “Contemporary finance” and EM just don’t mix. Seductively, the two appeared almost wonderfully compatible – but that ended with the boom phase. For starters, the notion of “liquid and continuous” markets is pure fantasy when it comes to “developing” economies and financial systems. As always, “money” gushes in and rushes out of EM. Submerged in destabilizing finance, EM financial, economic and political systems become, as always, overwhelmed and dysfunctional. And as always is the case, the greater the boom the more destabilizing the bust.
In general, reckless “money” printing has over years produced a massive pool of destabilizing global speculative finance. Simplistically, egregious monetary inflation (along with zero return on savings) ensured that there was way too much “money” chasing too few risk assets. Every successful trade attracted too much company. Successful strategies spurred a proliferation of copycats and massive inflows. Strong markets were flooded with finance. Perceived robust economies were overrun. Popular regions were completely inundated. To be sure, the post-crisis “Global Reflation Trade” amounted to history’s greatest international flow of speculative finance. Dreadfully, now comes The Unwind.
From individual trades, to themes to strategic asset-class and regional market allocations, speculative “hot money” flows have reversed course. Global deleveraging and de-risking has commenced. The fallacy of “liquid and continuous” markets is being exposed. Faith that global central bankers have things under control has begun to wane. And for the vast majority in the markets it remains business as usual. Another buying opportunity.
Whether on the basis of an individual trade or a popular theme, boom-time success ensured that contemporary (trend-following and performance-chasing) market dynamics spurred speculative excess and associated structural impairment. They also ensured latent Crowded Trade fragilities (notably illiquid and discontinuous “risk off” markets).
Crowded Trade Dynamics ensure that a rush for the exits has folks getting trampled. Previous relationships break down and time-tested strategies flail. “Genius” fails. When the Crowd decides it wants out, the market turns bereft of buyers willing and able to take the other side of the trade. And the longer the previous success of a trade, theme or strategy the larger The Crowd – and the more destabilizing The Unwind. Previous performance and track records will offer little predictive value. Models (i.e. “risk parity” and VAR!) will now work to deceive and confound.
Today, a Crowd of “money” is rushing to exit EM. The Crowd seeks to vacate a faltering Chinese Bubble. “Money” wants out of Crowded global leveraged “carry trades.” In summary, the global government finance Bubble has been pierced with profound consequences. Of course there will be aggressive policy responses. I just fear we’ve reached The Unwind phase where throwing more liquidity at the problem only exacerbates instability. Sure, the ECB and BOJ could increase QE – in the process only further stoking king dollar at the expense of faltering energy, commodities, EM and China. And the Fed could restart it program of buying U.S. securities. Bolstering U.S. markets could also come at the expense of faltering Bubbles around the globe.
It has been amazing to witness the expansion of Credit default swap (CDS) markets to all crevices of international finance. To see China’s “shadow banking” assets balloon to $5 Trillion has been nothing short of astonishing. Then there is the explosion of largely unregulated Credit insurance throughout Chinese debt markets – and EM generally. I find it incredible that Brazil’s central bank would write $100 billion of currency swaps (offering buyers protection against devaluation). Throughout it all, there’s been an overriding certitude that policymakers will retain control. Unwavering faith in concerted QE infinity, as necessary. The fallacy of liquid and continuous markets persisted so much longer than I ever imagined.
I feel I have a decent understanding of how the Fed and global central bankers reflated the system after the 2008 collapse of the mortgage finance Bubble. The Federal Reserve collapsed interest-rates to zero, while expanding its holdings (Fed Credit) about $1 Trillion. Importantly, the Fed was able to incite a mortgage refinance boom, where hundreds of billions of suspect “private-label” mortgages were transformed into (money-like) GSE-backed securities (becoming suitable for Fed purchase). The Fed backstopped the securities broker/dealer industry, the big banks and money funds. Washington backed Fannie, Freddie and the FHLB, along with major derivative players such as AIG. The Fed injected unprecedented amounts of liquidity into securities markets, more than content to devalue the dollar. Importantly, with the benefit of international reserve currency status and debt denominated almost exclusively in dollars, U.S. currency devaluation appeared relatively painless.
These days I really struggle envisaging how global policymakers reflate after the multi-dimensional collapse of the global government finance Bubble. We’re already witness to China’s deepening struggles. Stimulus over the past year worked primarily to inflate a destabilizing stock market Bubble that has gone bust. They (again) were forced to backtrack from currency devaluation. Acute fragilities associated both with massive financial outflows and enormous amounts of foreign currency-denominated debt were too intense. Markets are skeptical of Chinese official signals that the renminbi will be held stable against the dollar. Market players instead seem to be interpreting China’s efforts to stabilize their currency as actually raising the probability for future abrupt policy measures (significant devaluation and capital controls) or perhaps a highly destabilizing uncontrolled breakdown in the peg to the U.S. dollar.
And as China this week imposed onerous conditions on some currency derivative trading/hedging, it’s now clear that Chinese officials support contemporary market-based finance only when it assists their chosen policy course. How long will Chinese officials tolerate spending international reserves to allow “money” to exit China at top dollar?
September 3 – Financial Times (Henny Sender and Robin Wigglesworth): “Lee Cooperman, the founder of Omega Advisors, has joined the growing chorus of investors blaming last week’s stock market sell-off — and his own poor performance in August — on esoteric but increasingly influential trading strategies pioneered by hedge funds like Bridgewater. In a letter to investors…, Mr Cooperman and his partner Steven Einhorn said fundamental factors such as China’s ructions and uncertainty over the US interest rate outlook ‘cannot fully explain the magnitude and velocity of the decline in equity markets last month’… ‘These technical factors can push the market away from fundamentals,’ Marko Kolanovic, a senior JPMorgan strategist, noted in a widely circulated report last week. ‘The obvious risk is if these technical flows outsize fundamental buyers. In the current environment of low liquidity, they may cause a market crash such as the one we saw on [August 24]. These investors are selling equities and will negatively impact the market over coming days and weeks.’”
I wholeheartedly agree with the statement “technical factors can push the market away from fundamentals.” Indeed, that’s been the case now for going on seven years. A confluence of unprecedented monetary inflation, interest-rate manipulation, government deficits and leveraged speculation inflated a historic divergence between securities markets Bubbles and underlying fundamentals. The global Bubble is now faltering. Risk aversion is taking hold. De-leveraging is accelerating.
The yen jumped 2.2% this week. Japanese stocks were hit for 7%. The Brazilian real sank 7.3%. The South African rand dropped 4.2%. The Turkish lira dropped another 2.9% and the Russian ruble sank 5.0%. China sovereign CDS surged, pulling Asian CDS higher throughout. The Hang Seng China H-Financials Index sank another 7.4% this week, having now declined 39% from June highs. From my vantage point, market action points to serious unfolding financial dislocation in China. It also would appear that a large swath of the leveraged speculating community is facing some real difficulty.
After a rough trading session and an ominous week for global markets, I was struck by Friday evening headlines. From the Wall Street Journal: “An Investor’s Field Guild to Bottom Fishing;” “Global CEOs See Emerging Markets As Rich With Opportunity.” From CNBC: “Spike in Volatility Creates ‘Traders Paradise.” And from the Financial Times: “Wall Street Waiting for Those Buy Signals;” “Time to Buy EM Stocks, History Suggests;” “Why I’m Adding Emerging Markets Exposure Despite China Wobble;” “G20 Defies Gloom to Forecast Rise in Growth.”
There still seems little recognition of the seriousness of the unfolding global market dislocation. It’s destined to be a wrenching bear market – at best.
“I just received the following note from one of our Inner Circle members. Below the note is my response.”
FYI….for those who are doing work in this area or relates to your work or academic curiosity.
When you study emergence…your only choice is through a rear view mirror–where things are “closer than they appear!”
Progress and Poverty: An Inquiry in the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth… The Remedy
“I just received the following note from one of our Inner Circle members. Below the note is my response.”
Thought the first article related to some of the things we have talked about—our thinking process
and brain science.
You can share it with the group if you think it would be helpful.
Library of Professional Coaching
Why Transformative Coaching Takes Guts
Posted: 23 Jan 2015 09:33 AM PST
Most trained coaches know how to be supportive, encouraging and nonjudgmental. These approaches are useful but often not enough to create a new awareness. Coaching starts by building trust and rapport, but as the conversation goes deeper you might need to generate a bit of discomfort to create a breakthrough in thinking.
What happens when you challenge someone’s thinking?
In order to define who we are and make sense of the world around us, our brains develop constructs and rules that we strongly protect without much thought. In Who’s in Charge? Free Will and the Science of the Brain (Ecco, 2011), neuroscientist Michael S. Gazzaniga says we get stuck in our automatic thought-processing and fool ourselves into thinking we are right. When someone asks us why we did something, we immediately come up with an answer even if the response doesn’t make complete sense. We instantly concoct a brilliant reason for procrastinating on a task, for prioritizing reading email over a project deadline or for making life decisions based on how we will feel in the future when, in truth, we can never be sure how the circumstances will impact us emotionally.
To disturb this automatic processing, you reflect holes in your client’s logic and ask questions that reveal the fears, needs and desires keeping the constructs in place. NeuroBusiness Group founder and CEO Srinivasan S. Pillay, M.D. writes that this coaching approach is the only way to stop the automatic processing. Reflection and questions crack the force field that protects your client’s sense of reality, enabling her to explore, examine and change strongly held beliefs and behavior.
The reaction to bringing these things to light will register somewhere between slight discomfort and an emotional outpour. Momentary confusion and abrupt realizations trigger emotional reactions. The truth can hurt or at least surprise you before it sets you free.
Therefore, negative emotions can be a good sign. When your client realizes she has blocked a truth that was in her face the entire time, she may feel mortified, angry or sad. She is finally confronting her rationalizations and seeing her blind spots. For a moment, her brain does not know what to think. As Nessa Victoria Bryce writes in the July/August 2014 issue of Scientific American Mind, this pause in certainty as the brain rushes to reinterpret information is necessary for a clearer and broader understanding of the situation to emerge. In researching how coaching works in the brain for The Discomfort Zone, I found this moment of uncertainty is necessary for behavioral learning to occur. Only with this new awareness will your client willfully commit to behaving in a different way.
Know your WHY
Posted: 23 Jan 2015 07:57 AM PST
Why Know Your WHY?
Knowing Your WHY strengthens corporate culture, employee engagement and deepens connections with ideal clients, customers and investors
Discussions abound on how to fortify employee engagement. Awareness of the critical need to place employees and team members “in the right seats on the bus” has been heightened. Companies strive to create not only external raving fans, but impassioned, raving employees as well. Given recent trends and statistics, it is no surprise that organizations are placing a concerted effort on beefing up engagement.
Gallup states in their most recent State of the Workplace report that 70% of all employees are indifferent or actively disengaged, and that each “actively disengaged” employees costs an employer an average $25,000 per year. SHRM, (Society for Human Resources Management), estimates that bad hires cost up to five times their annual salary. Forbes cites an average annual turnover rate of 33%, with nine out of ten people leaving because of attitude.
Concern with these statistics is well founded. Again according to Gallup, it literally pays, in a big way, to be in the top 25% of “Engaged Companies.” Those that achieve this top quartile realize: 37% less turnover, 48% fewer safety incidents, 41% fewer product defects, 21% higher productivity, and my favorite: 22% higher profitability. Whether a given business or organizational leader is paternal and nurturing, or, conversely, dispassionate and bottom-line oriented, these numbers should be motivation enough. Leaders need to source, bring to their organizations, and institutionalize sure-fire ways to increase engagement.
Recently, I have been introduced to, and have become a huge proponent of, a novel approach to increasing both internal and external engagement. The “Know Your WHY” movement that is making great headway and producing consistently positive results as it spreads across the country and the globe. The secret sauce is that it is based on the way each individual in a business, organization, or team is hardwired.
I had mixed emotions about this…
to whom is the judgment left?
and how is the judgment formed, from what perspective?
I do believe that coaches should at times challenge thinking…
however, all this transformational coaching stuff is rare, because people don’t transform, they learn, grow and develop, i’m much more interested in scaffolding that process, instead of transformational work…
“I just received the following note from one of our Inner Circle members. Below the note is my response.”
You want to see a sign of narrow thinking?
Obama made a remark directed at Putin (indirectly)…
I told you before, Putin is NOT stupid, and the Russians are NOT someone to mess around with, but just like the incredible GAFFE by Obama on his “I won both of mine…” he has now thrust us into another cold war, only this time, it’s not going to be funny…
Putin will MAKE OBAMA PAY for those remarks, mark my words.
Instead of Obama modeling the solution, remaining empathetic and offering a fig leaf, he threw down a gauntlet and will now UNDO everything that has been achieved since the wall came down.
The LEGACY of Obama will be smeared with foreign policy gaffes, and I believe what will erupt will be WWIII, and we’ve seen the spark now.
YOU NEVER< NEVER put a bear in the corner, the only thing they know to do if fight.
We have single-handedly declared war on Russia through the leadership of sanctions which caused they economy to crumble.
THE ONLY THING that brought us out of a depression was a WAR…
Do you think that is an isolated circumstance?
Or is WAR FOOTING a tool that can be used to resolve depression?
If so, we are in trouble because RUSSIA IS IN DEPRESSION, and the oil “business” has helped trigger the problems.
I expect the ARCTIC to be a battleground as well as eastern Europe, all fought by proxy…
By RICK LYMAN and ANDREW E. KRAMER
Evidence is increasing that Russian troops and Russian equipment have been pouring into eastern Ukraine again
What choice do they have?
And who narrowed the choice?
Through lack of experience (a foreign policy team that doesn’t know what it’s doing) and OBAMA’s ego position.
You wanted interesting?
You got it!
Here’s the quote:
Second, we are demonstrating the power of American strength and diplomacy. We’re upholding the principle that bigger nations can’t bully the small by opposing Russian aggression and supporting Ukraine’s democracy, and reassuring our NATO allies.
Last year, as we were doing the hard work of imposing sanctions along with our allies, as we were reinforcing our presence with the frontline states, Mr. Putin’s aggression, it was suggested, was a masterful display of strategy and strength. That’s what I heard from some folks. Well, today, it is America that stands strong and united with our allies, while Russia is isolated, with its economy in tatters.
That’s how America leads: not with bluster, but with persistent, steady resolve.
THIS WAS A BAD MOVE, and shows lack of empathy for the Russian people in general, about 10 million or so are Russians on the USA, or more.
In developmental coaching, I call this modeling the problem, here’s why:
When someone models their “reasoning”…contained within that are the problems of the next or more complex levels…
So I call it modeling the problem which can be solved at a different level…
In this case, Obama and our country is making a huge error that will come back to haunt us all and the world…
it’s just a matter of time…
If Obama thinks Putin is not “so masterful” then the WORST thing he could have done…is embarrass him in front of 37.1 million watching the speech and the billion they will affect…
SUPER STRATEGIC ERROR…that shows Obama’s ego position…
When I landed…in Tacloban,
The executive jet that was blown off the runway which trued to takeoff about the pope…
Was still sitting there in the mud on the side of the runway…
Had to share this bit of irony…
Fight for peace…
I’ve always wanted to see where McArthur walked ashore in Leyte.
This was where I was going to stay to visit red beach 70th anniversary — oops!