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31 July 2014

Cassandra Is Sooooooo Correct

Nihon Cassandra is more of a stock market investor than macroeconomics type. In other words, she isn't really into bonds. In her own charming words,
So long as my distribution is skewed-right, and the tail not overly kurtotic, I am sanguine.
Recently, Cassandra excoriated herself for failing to predict our current global macroeconomic malaise, specifically, the odd lack of self-preserving behavior by those who have the most to lose. I think she is being unnecessarily harsh, as she understands far better than many others do, even now.

It was a close call. From September 2007 through 2010, the masters of financialization escaped ruin by the skin of their teeth. Saving the system, at public risk and expense, was useful to asset holders, e.g. the AIG crowd, Goldman Sachs and friends, Stevie Cohen, Walmart family scions, Icahn, Einhorn, Pritzkers, Koch brothers, Larry Ellison, Larry and Sergei Google, Mark Z, Jeff Bezos, Bill and Melinda, other much less publicly known owners of nation-sized yet privately owned wealth.



Looking backward at Peak Inequality


Cassandra expected that the excesses leading up to the 2008 financial crisis, e.g. over indulgence in luxury goods, real estate and high-end everything, would be known later as "Peak Inequality". If the authorities were to bail out highly-levered asset-owners (enriching them further in some cases e.g. the notorious AIG bonuses payments), Cassandra expected that the State would promptly devise a way to recapture most of this taxpayer-funded largess.  In return, a modicum of social stability, sustained by an orderly market economy, would be assured.

In the aftermath, the Federal Reserve and fiscal policy makers would realize how fragile consumption was. They would not raise taxes nor cut government spending precipitously. Bad actors would fall from grace. Attitudes would change. All of us would feel chastened, and act accordingly.

In other words, prevent a nationwide populist revolt due to massive betrayal of public interests.

Trade recommendation for the integrity market: Sell calls


Cassandra, and I, expected that the 0.1% of the 0.1% would have been grateful. They were not. They are not now. Integrity is a market for perma-bears. Various practices associated with rapacious greed, including regulatory and legislator capture, have continued unabated. Inequality continues its incessant rise. Economic recovery is scant, yet deficits grow absurdly. Political divisiveness spreads. There is no end in sight to the public loss of confidence in,
  • elected government and
  • due process as a consistently effective means of fairly resolving disputes
Since Cassandra has clearly-stated content re-use rules, I recommend that you navigate over to her blog, and read her post directly. Focus on the final six paragraphs, and don't forget to read the comments.

* I question the usefulness of higher marginal taxes or changes to capital gains taxes. Tax laws have power over the "poorer wealthy". It does little good to raise taxes on small businessmen, physicians and others whose income is between $100,000 and $1,000,000 (net worth between $100,000 and $5,000,000). The real control of capital is concentrated among those with one or more magnitudes of order greater assets than that.

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