The Name of The Game IV - Redux
Pre QE and still prescient...
The Phases of The Game
Phase 1: Taking risk means investing in economic activity that builds a self-sustaining economic base. Domestic activities such as manufacturing of tangible goods, and investment in educational, health care infrastructure and scientific research are examples.
Taking precedence, the first three rules of the game (greed, costs and gravity) lead to risk aversion (Refer to Part I for the rules). Through global labor arbitrage, money gravitates to labor at the margin.
Risk aversion also directs capital towards money shuffling activities. Outsourcing, mortgage lending, derivatives, financial instruments, rate swaps and Forex Arbitrage are all examples.
Phase 2: The 5th rule (synergism) leads to asset hyperinflation. The price of assets escalates. Stocks, bonds, commodities and real estate are examples.
In the case of manias, prices go parabolic, the lemmings jump in with both feet, valuations detach from economic reality, rationalizations abound for why valuations are reasonable and the trend will continue.
As the cycle plays out, the asset markets get overvalued and there is “little value to be had” (quoting Warren Buffet from his last stockholders meeting minutes).
Phase 3: The sum of the parts, are greater than the whole. Assets are overvalued, but economies of scale can still be achieved. Mergers, acquisitions stock buybacks and layoffs ensue. Phase 3 is the two-minute warning.
Phase 4: What goes up, must come down. This is the end of the current set, devaluation of asset markets is about to begin. One by one, the stock, commodities, bond and real estate markets all play through their end cycles.
During all four phases, as the markets get churned one by one, the weak hands get shaken out. The money must gravitate somewhere; it just can't sit idly in cash. The money gravitates to a “safe” haven.
This is the catchall and this is where the players have been quietly making money all along by manipulating Forex arbitrage. What is safe? Why take high risk with falling equities, emerging market or junk corporate debt? What could be safer than the bonds of the fiat currency issuer?
After the bond market has had a lengthy party, at the start of Phase 4, the bureau of information reports that the economy is doing well, prices are increasing, commodities stagflation (which occurred by plan over phase 2, 3 & 4), or organic inflation must be dealt with.
Rumor abounds that the central bank will be raising interest rates at the short end of the spectrum, and this would cause long end rates to rise as well.
At this point of the game, the slightest hint of interest rate or energy cost increases, a margin squeeze (de-accelerating corporate profits) or of domestic or global economic slowdown; results in a flight to “safety” in mass.
Money gravitates from risky assets to safer havens. Bare in mind, the above events are by design and well coordinated by the players of the game. This process is called spooking the herd.
Only after the en mass flight to safety, when the money is locked into premium priced, lower ROI treasuries will the players allow rates to rise at the long end. As long rates go up, the premium price paid for the lower rate bonds goes down, because the new bonds pay a higher rate.
What was thought to be a safe haven, is anything but. After the herd is spooked into the stalls, the hammer drops.
The player’s modus operandi during all four phases: take profits from money shuffling and the sector run up. Quietly rotate out of the sector to be churned down. Rotate into a sector to be churned up.
At the agreed upon time, the players pull up stakes and leave the lemmings holding the bag. This allows the game to be reset and run again on the next cycle, albeit at an increased level.
In Part Five we will discuss Forex Arbitrage, Increased Levels and Revaluation.
The Phases of The Game
Phase 1: Taking risk means investing in economic activity that builds a self-sustaining economic base. Domestic activities such as manufacturing of tangible goods, and investment in educational, health care infrastructure and scientific research are examples.
Taking precedence, the first three rules of the game (greed, costs and gravity) lead to risk aversion (Refer to Part I for the rules). Through global labor arbitrage, money gravitates to labor at the margin.
Risk aversion also directs capital towards money shuffling activities. Outsourcing, mortgage lending, derivatives, financial instruments, rate swaps and Forex Arbitrage are all examples.
Phase 2: The 5th rule (synergism) leads to asset hyperinflation. The price of assets escalates. Stocks, bonds, commodities and real estate are examples.
In the case of manias, prices go parabolic, the lemmings jump in with both feet, valuations detach from economic reality, rationalizations abound for why valuations are reasonable and the trend will continue.
As the cycle plays out, the asset markets get overvalued and there is “little value to be had” (quoting Warren Buffet from his last stockholders meeting minutes).
Phase 3: The sum of the parts, are greater than the whole. Assets are overvalued, but economies of scale can still be achieved. Mergers, acquisitions stock buybacks and layoffs ensue. Phase 3 is the two-minute warning.
Phase 4: What goes up, must come down. This is the end of the current set, devaluation of asset markets is about to begin. One by one, the stock, commodities, bond and real estate markets all play through their end cycles.
During all four phases, as the markets get churned one by one, the weak hands get shaken out. The money must gravitate somewhere; it just can't sit idly in cash. The money gravitates to a “safe” haven.
This is the catchall and this is where the players have been quietly making money all along by manipulating Forex arbitrage. What is safe? Why take high risk with falling equities, emerging market or junk corporate debt? What could be safer than the bonds of the fiat currency issuer?
After the bond market has had a lengthy party, at the start of Phase 4, the bureau of information reports that the economy is doing well, prices are increasing, commodities stagflation (which occurred by plan over phase 2, 3 & 4), or organic inflation must be dealt with.
Rumor abounds that the central bank will be raising interest rates at the short end of the spectrum, and this would cause long end rates to rise as well.
At this point of the game, the slightest hint of interest rate or energy cost increases, a margin squeeze (de-accelerating corporate profits) or of domestic or global economic slowdown; results in a flight to “safety” in mass.
Money gravitates from risky assets to safer havens. Bare in mind, the above events are by design and well coordinated by the players of the game. This process is called spooking the herd.
Only after the en mass flight to safety, when the money is locked into premium priced, lower ROI treasuries will the players allow rates to rise at the long end. As long rates go up, the premium price paid for the lower rate bonds goes down, because the new bonds pay a higher rate.
What was thought to be a safe haven, is anything but. After the herd is spooked into the stalls, the hammer drops.
The player’s modus operandi during all four phases: take profits from money shuffling and the sector run up. Quietly rotate out of the sector to be churned down. Rotate into a sector to be churned up.
At the agreed upon time, the players pull up stakes and leave the lemmings holding the bag. This allows the game to be reset and run again on the next cycle, albeit at an increased level.
In Part Five we will discuss Forex Arbitrage, Increased Levels and Revaluation.
Comments