Intangibles

There are many intangible threats looming outside the realm of pure economics that could be contributing elements impacting Kondratieff Wave super cycles.

 It was noted in the first icon section that one of the hallmark features of a Kondratieff Winter is the buildup of sinister forces that are religious in nature. Today we face such 		      Black Swan - recession, kondratieff wave, kondratieff cycle, nikolai kondratieff, super cycles, long wave, long wave theory, Elliot Wave, economic cycles, bear market, Great Depression, Ben Bernanke, stock market crash, dollar hegemony
conflicts on multiple fronts- the “war on terror” against radical Islamic fundamentalism and other conflicts over resources, human rights, and the nuclear capability of rogue terror cells that provide a backdrop of systemic conflict that permeates more than ever before. While these threats are noted and perceived intangibles, we choose instead to explore the impact of more subtle threats hiding in plain sight.

One example may be the extended period we have endured economic expansion without meaningful suffering. The more we think economic growth is guaranteed and that risk and uncertainty are receding, the more we act in ways that raise risk. Such has been the case for years and cannot continue unabated. The recent meltdown in the mortgage CDO market is a fine example of how an entire set of market participants can ignore distressed credits clearly visible with modest diligence. The perverse altruism suggests that we are deviating from the optimal condition needed to forestall damage in spite of the resiliency exhibited by the economy to 9-11, higher oil prices, corporate scandals, and runaway deficits, etc. In this vacuum, the rarer the event, the less we know about its odds or its magnitude.  This suggests that what would result would have implications not fully understood by the current consensus and thus prove more difficult to anticipate and mitigate.

Such was the case in 1998 in the debacle of the Long Term Capital hedge fund that was forced into liquidation after only a brief history. It was doomed by the inability of its financial models to account for unprecedented events in the market or react to the market because of the lack of a precedent to attune the model and failed despite being run by a group of the most seasoned and talented financial managers on Wall Street. What does this say about future extraneous shocks to the market? Should we be surprised if current models are no better suited for damage control than they were for Long Term? Today’s capital markets are far more leveraged and interdependent and thus more susceptible to systemic shocks. To date they have not suffered such a capitulation, but have they really ever been tested since? The articles below each speak to these subtle forces not so visible yet nonetheless crucial to gaining a more complete assessment of the risks we could face from our own greed, complacency, ignorance, and beliefs of infallibility.

  1. The Black Swan - Investorsinsight.com columnist John Mauldin provides a splendid insight into the concept of the “black swan” that we cannot or refuse to see. Its thesis offers that our world is really governed by the unknown and the extreme yet we are steadfast in our desire to analyze and consider only that which falls within the curve of our expectations of what is known and has happened. Furthermore, it reminds us, the paradigm shift rate is doubling each twenty-five years making it ever more difficult to forecast or rationalize within the current spectrum since more and more change is packed in a smaller time frame. Under this scenario, it seems more likely for unprecedented events to occur. Call it the curse of Moore ’s Law if you wish.  Pretty powerful stuff here, and instinctively it sure seems right on.

  1. Death of VaR Evoked as Risk-Taking Vim Meets Taleb's Black Swan - This article links the present sub-prime write-down fiasco to the fabled Black Swan notion of the failure to account for rare and transforming market events. Otherwise, how else can nearly the entire bunch of the most educated and market savvy market strategists on Wall Street  all miss the same thing so badly when all the risk was hiding in plain sight? Because the Black Swan was always there if anyone had bothered to look.

  2. The Catch-22 of Economics - A brief Business Week article in September 2007 laments the prevalent wishful thinking mode evident today and castigates common perceptions regarding how we account for risk. It fosters a novel notion- people perversely subvert prosperity by taking it for granted and that prosperity destabilizes itself from within.

  3. The Federal Reserve, Moral Hazard, Corporate Welfare and Double Standards - This article outlines the moral hazard argument against Fed rate cuts and rails against the free market speculators clamoring for Fed bailouts. Moral hazard certainly qualifies as an intangible threat to a Kondratieff Winter because ultimately it is poor behavior by market participants that create the accumulation of systemic excesses that need to be purged.  

  4. Prosperity Today at the Cost of Tomorrow’s Growth - Ed McCarthy at www.prudentbear.com comments on about the myth of the “goldilocks” pundits such as Larry Kudlow embrace in the face of results that belie that wish. He puts forth that the rest of the world does not share our worldview on a number of matters and our self-righteous belief in our invincibility could blind us to the truth. Sure of our infallibility, we are more likely to exhibit behavior sure to exacerbate conditions already dangerous.

  5. Averting Catastrophe: When the Leaders are the problem - I firmly believe that the emerging Kondratieff Winter could have been marginalized to some extent if our leaders in government and business were not so concerned for their own welfare. Cover thy ass as long been the reigning mentality in Washington and accounts much for the problems we face today. This mindset obfuscates problems during the phase in which they are manageable and thus hinders the remedy once they are exposed. This dilemma is marvelously chronicled in the an the piece below by none other than Daniel Ellsberg, the turncoat who released the Pentagon Papers to the media in 1971 exposing the lies and subterfuge of our government in the Vietnam War. He is an excellent authority on the vicissitudes of such a mindset, and one brave enough to risk his life and reputation exposing the foibles of government policy on important matters. Read on to witness the paralysis of internal conflicts he felt during the years preceding his outing and explore his rationalization for the outing. Hopefully, some of our own officials in a similar position will read this and react in the same honorable manner as did Dr. Ellsberg. We would all benefit with more people like Dr. Ellsberg around Washington these days.