The Movie Star Speech

"You are the star of a movie and this is the part of the movie where you get your heart broken, where the world tests you and people treat you like shit. But it has to happen this way. Otherwise, the end of the movie, when you get everything you want, won’t feel as rewarding. There are assholes out there, but in the end, they don’t matter. Because this movie is not about them. It’s never been about them. All this time, the movie’s been about you."

Markets Over Mao

The subtitle is The Rise of Private Business in China and the author is Nicholas Lardy (2014).

The writer’s effort is to discredit the view that China’s version of capitalism is one where the state overwhelmingly dominates and administers all aspects of production and growth. His method of doing that is to highlight the general reforms in state policy that have engendered greater freedom of labor and an ability for the private entrepreneur to more easily form a business. Moreover, he points out how private enterprise now contributes a far greater share to GDP, and the fact that private companies generate higher ROEs (as compared to their state counterparts) has led to the growth of the private sector in most areas of the economy (he inundates the reader with statistics to make these points – generally, I find statistics to be boring, so if you’re really interested, you’ll have to read the book to see the minutiae). For those in the world who think that China is poised to dominate the 21st century, a lot of what he is saying should sound familiar and resonate. I don’t disagree with the basic premise.

Still, there are some countervailing points to be made. For example, in many of the major/important industries, the state continues to dominate or even hold an outright monopoly. Such as oil and telecommunications and finance. That last one is kind of important. Because even though Lardy notes that many of the private firms are so profitable that they have been able to fund themselves through retained earnings, it is significant that in a world driven by debt, that the state still dominates that sector. And if you have looked at all at the few years since this book was written, the state has opened the spigots and debt has flown at an absurd rate, preventing bad debt from being written off to the level that it probably should be – foregoing the inherent power and beauty of a market-based system. So, while Lardy is probably right in many respects, when push comes to shove so far, the state is looking to protect its existence, prioritizing that over a real shift to a market-based economy.

Chart of the Day

End of the World (More on Brexit)

As an interesting exercise, and in response to the many in the media and otherwise who are calling for Brexit to be a trigger for the end of civilization, Ian Morris at Stratfor looks at historical episodes of dark ages (as that’s what follows a breakdown in civilization), and identifies five features/causal factors that are always present:

1) Mass migration
2) Disease
3) State failure
4) Collapse of trade
5) Climate change

The presence of these factors all at once does not guarantee collapse, but they are a necessary condition. It is also worth noting that not all of them are currently present in a meaningful way. But it is an interesting list to keep in mind when analyzing the state of the world.

Narratives

Ben Hunt:

The only rational owner of a negative rate bond is a pure return seeker; there are zero income seekers holding negative rate bonds. Why is this a problem? Because income seekers will continue to own bonds even if the price goes down (for a while, anyway; at the very least, they are sticky owners). Return seekers, on the other hand, are not sticky owners at all. They will only own a bond if they think that the price is going up — meaning in this case that yields will continue to become even more negative, i.e., that there’s a greater fool (probably in the form of a Central Bank) willing to pay higher and higher prices for these income-destroying bonds — and they will sell in a heartbeat if they think this dynamic is changing.

There is, to cop a phrase from the People’s Bank of China, a massive “one-way bet” on negative rate sovereign debt today. The momentum trade has crystallized to perfection in negative rate bonds, which has grown to become a $10+ trillion (yes, that’s trillion with a T) asset class. I think it’s the most crowded trade in the world from a behavioral or investment DNA perspective, and the moment you get even a whiff of the ECB or BOJ backing down from or reaching its limit of greater foolishness, you are going to get a rush to the exit on ALL sovereign bonds that will shake global capital markets to their core. It’ll be good times till then, as it always is, and I am seeing zero signs of Central Bankers backing down from their greater foolishness. But we have once again set up the global financial system as an inverted pyramid, with a $10 trillion asset class poised on a single, solitary piece of Common Knowledge —– what everyone knows that everyone knows. In 2008, the $10 trillion asset class of residential mortgage backed securities (RMBS) was entirely based on the Common Knowledge that it was impossible to have a nationwide decline in U.S. home prices. When that Narrative failed, the entire inverted pyramid came crashing down. In 2016, the $10 trillion asset class of negative rate sovereign bonds is entirely based on the Common Knowledge that there is no limit to the greater foolishness of Central Banks. If this Narrative fails, the entire inverted pyramid will come crashing down again.

Insanity

H/t Grant Williams & Real Vision TV:

-Since September 2008, central global banks have instituted 650 rate cuts, or one every three trading days

-Currently, 27% of total global outstanding sovereign debt trades with negative interest rates

-Currently, 65% of total global outstanding sovereign debt trades with rates of 1% or lower

This can only end well...