More Government, Less Wages

Wages and salaries as a proportion of GDP in blue, contrasted with government expenditure as a proportion of GDP in red:

Yes; correlation does not prove causation. Yes; there are lots and lots and lots of other factors involved — the end of Bretton Woods, globalisation, deindustrialisation, the birth of the computer and the internet, financialisation, the United States’ growth into a global imperial power and more recently the beginnings of a decline.

But whatever the exact causality this does not make happy reading for those who lean toward the idea that more government involvement in the economy translates to a bigger share of the pie for the working class.

Quite the opposite — while wages have just hit an all-time low, corporate profits have just hit an all-time high:

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The Real Testosterone Junkies

I especially enjoy reading things that I disagree with, and that challenge my own beliefs. Strong ideas are made stronger, and weak ideas dissolve in the spotlight of scrutiny. People who are unhappy to read criticisms of their own ideas are opening the floodgates to ignorance and dogmatism. Yet sometimes my own open-minded contrarianism leads me to something unbelievably shitty.

According to Noah Smith:

Zero Hedge is a financial news website. The writers all write under the pseudonym of “Tyler Durden”, Brad Pitt’s character from Fight Club. Each post comes with a little black and white icon of Brad Pitt’s head. On Zero Hedge you can read news, rumors, facts, figures, off-the-cuff analysis, and political screeds (usually anti-Obama, anti-government, and pro-hard money). On the sidebars, you can click on ads for online brokerages, gold collectibles, and The Economist.

The site is a big fat hoax. And if you read it for anything other than amusement, you’re almost certainly a big fat sucker.

That’s a bold claim! Why do I make this claim? Well, in one sense, all financial news is a hoax. Financial news, by definition, is public information — if you’ve read it, you can bet that thousands of other people have too. That means that if the market is anywhere close to being efficient, any information in any article you read will already have been incorporated into the price of financial assets. Reading or watching public information should not, in theory, give you any “alpha”.

If the writers of Zero Hedge really knew some information that could allow them to beat the market,why in God’s name would they tell it to you? If they had half a brain, they’d just keep the info to themselves, trade on it, and make a profit! Maybe then, after they had made their profit, they’d release the news to the public (and collect ad revenue), but by then the news would be worthless. Financial news sites, you should realize, are not in the business of giving you insider tips out of the goodness of their hearts.

As you might expect, it’s not hard to look back at Zero Hedge’s predictions and see that a large number of them are junk. For example, here’s a bunch of posts from 2009 predicting imminent hyperinflation. Hope you didn’t make any trades based on that bit of wisdom!

So how does Zero Hedge get away with this hoax? Barber & Odean (2001) give a big hint. Tyler Durden, whose name and image grace every Zero Hedge Post, is a symbol of masculinity. More specifically, he is a nerd’s imagined vision of what a really masculine nerd would be like. In Fight Club, Durden says: “All the ways you wish you could be, that’s me. I look like you wanna look, I fuck like you wanna fuck, I am smart, capable, and most importantly, I am free in all the ways that you are not.”

In other words, you are a young smart (i.e. nerdy) guy sitting at your computer with rivers of testosterone coursing through your veins. And now here comes Tyler Durden, your generation’s Platonic ideal of pure masculinity, telling you that Real Men Take Risks. At the top of the site, there is a Tyler Durden quote: “On a long enough timeline the survival rate for everyone drops to zero.” In other words, gamble. Bet that you’re the smart guy and not the sucker. Because hey, you’re going to die anyway, so there’s no use hedging your bets. Zero hedge, right?

I wouldn’t be surprised if “Tyler Durden” were actually a bunch of behavioral finance grad students, snickering behind their hands at everyone who takes their site seriously.

This is what passes for financial analysis today? Let’s ignore the obvious fact that Zero Hedge has never pretended to offer investment advice. We should take all financial news with a large grain of salt (anyone who has read the latest uber-bailout rumours out of Europe should know that). Anyone who bases their trading activity on blindly following the pronouncements of one site, or one trader deserves to lose their coat. Blindly following a messiah-figure or (even worse) the herd is a surefire recipe for disaster.

But Smith has got his facts wrong. While there has been no hyperinflation, those who traded their hunch and bought gold — pretty much the archetypal Zero Hedge trade — have not done badly. Here’s the price of gold — contrasted against the S&P500 — since Zero Hedge was born in January 2009:

Drawing a meaty profit and significantly outperforming the S&P500 is hardly what you’d expect from a “big fat hoax”. Certainly, you’d have made a loss, not a meaty profit, from betting with Bernanke’s pronouncement that subprime was “contained”.

Smith is spinning loose psychoanalysis spiced with conspiracy theories and schoolboy misunderstandings in order to generate pageviews. He obviously hasn’t read Zero Hedge enough to realise that “on a long enough timeline the survival rate for everyone drops to zero” reflects the reality that calamities and resets happen, and that — given the level of mess, corruption and perversity in finance today — a systemic reset could be just around the corner. And the last thing i would want to do in the face of a systemic reset — or any kind of large-scale financial calamity (a la 2008) — is gamble. The smart thing is to hunker down and robustify, by minimising exposures to all forms of connective risk and financial fragility . Zero Hedge is not about having no hedges and gambling as recklessly as possible; it is about having hedges against the system going to zero. 

Ironically, Smith is accusing entirely the wrong segment of the financial world of wild recklessness. While there are surely many day traders who lose their coats on the pronouncements of analysts (especially the Crameresque stock-picker — something which Zero Hedge has never done), the real danger is surely the testosterone-Red Bull-and-cocaine-fuelled TBTF trader or 21-year old PhD-wielding quant working for a bailed-out bank with an implicit taxpayer backstop on zero-interest government money. The level of moral and financial hazard is simply staggering, and of course this has bred much reckless behaviour; from the evident criminality of manipulating LIBOR, to Corzine’s destruction of MF Global (and theft of customer funds),  to the absurd market-cornering London Whale’s speculation using customer deposits, to the off-balance-sheet activities of Kweku Adoboli, to Goldman’s quote stuffing. And — I am sure, much much more — these are just some of the scams and scandals that are known; there is much more darkness beneath. Zero Hedge has been a powerful journalistic force and clearinghouse in bringing the light-of-day onto these corruptions and criminalities, something that Smith seems entirely ignorant of.

No day trader or goldbug stacking gold eagles has ever blown up the nation’s pension fund, but the protected TBTF banks funded by earth-shattering leverage and taxpayer guarantees have again and again endangered retirement funds, and lost their clients’ fortunes.

It is not unusual on Wall Street to see massively leveraged double or nothing Martingale trading strategies where traders take a position and push leverage and counter-leverage to create a favourable outcome. In theory — with unlimited funds — such an approach always wins, but in reality this approach usually ends in traders running out of counter-parties or running out of leverage, and ending up with a massive loss. It’s picking up nickels in front of a steamroller, and is of course made much easier thanks to the new and manipulable world of high-frequency trading.

It’s ironic (and jaw-dropping) that Smith castigates Zero Hedge as the home of testosterone junkie traders when in fact the vast majority of Zero Hedge writers and readers are angling for better regulation of high-frequency trading to prevent market manipulation, an end to nickels-in-front-of-steamrollers strategies (the best way is to end the taxpayer guarantees so that traders who blow up the system will reap the consequences), and the return of Glass Steagall (or similar) to keep depositors’ funds out of hyper-fragile shadow intermediation chains and the derivative casino.

The financial system is being regulated by clueless schmucks — many of whom would also castigate Zero Hedge as a “big fat hoax”, while ignoring grift and degeneracy within the financial establishment and the TBTF banks. In the face of such grotesque incompetence who can blame market participants for wanting a hedge against zero?

Does Israel Seriously Believe Iran is a Threat?

From Zero Hedge:

Israeli political sources believe that Prime Minister Benjamin Netanyahu has majority Cabinet support for Israeli military action against Iran without American approval.

Really? Is second-strike-capable 200 megaton Israel really afraid of piddly little Iran? Do they not understand that Iran cannot lay a (nuclear) finger on them, for fear of sheer nuclear obliteration?

As I noted back in January:

Even Meir Dagan, the former head of Mossad recognises that Iran is not an existential threat to Israel.

Upon leaving his post, Dagan publicly warned against Israel attacking Iran to stop it from acquiring nuclear weapons.

In his latest comments, he said that if Israel attacks Iran, it will find itself at the centre of a regional war that would endanger the state’s existence. Dagan’s intervention is dangerous for Netanyahu because it comes from the right wing of Israeli opinion rather than the left, where the prime minister would expect criticism.

Dagan has been in charge of aggressive Israeli actions abroad in recent years, that have included assassinations in Lebanon, Syria and Dubai and an air attack on a suspected nuclear reactor in Syria. He also criticised Israel’s failure to offer any initiative to resolve the conflict with the Palestinians .

The absence of any workable plan, he said, will leave Israel in a dangerous and weak situation.

This really echoes my thinking: the real threat to Israel, and America is not inaction on Iran, but excessive force. Iran poses little threat, but military intervention to effect regime change in Tehran runs the risk of huge and widespread blowback throughout the Muslim world: terrorism, guerrilla warfare, and deeper intergovernmental hostility, a breakdown of regional trade, and even a wider land war involving Eurasian nations who wish to protect Iran, including China and Russia.

For all the verbiage thrown at determining whether or not Iran is “rational”, and despite the obvious fact that there are many “rational” people like Meir Dagan in power in Israel, perhaps we should have looked more closely at the question of whether the Israeli cabinet is “rational” or not.

Does the possibility of creating a wider war not trouble them?  Did they not pay attention to the recent bellicose statements from other Eurasian states in support of Iran? Do they — unlike the Israeli public — honestly believe that a war with Iran can be won without regime change in Iran, and do they believe they have the time, the resources, and the manpower to achieve such a thing? Do they honestly believe that the United States under Obama will back-up an Israeli attack on Iran, should a larger power move to support Iran? Do they honestly believe that the rest of world will be happy to see oil prices spiking as a result of an Israeli attack? Do they honestly believe that Israeli public opinion will countenance more resources being spent on war, and less on health, housing and public services?

In light of all these problems, I find it hard to believe that Israel will hit Iran. I believe instead that Israel and America will continue their covert war against the Iranian regime and hope to foment an Arab Spring-style revolution in Iran.

But that is to assume that Netanyahu and his cabinet are rational. Maybe they want a big, dangerous and scary war that imperils the Jewish state?