People Minimize Debt

This note was originally published at 8am on June 21, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Unlike neoclassical macro theory, which assumes that private-sector corporations are always maximizing profits, it assumes that some companies may respond to daunting balance sheet damage by minimizing debt.”

-Richard Koo

 

I’m in the middle of reading Richard Koo’s revised edition of “The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession.” The aforementioned quote summarizes Koo’s thoughts on what he coined in another book as a “Balance Sheet Recession.”

 

This morning, ahead of this Greek confidence vote, I want to do a little extending and pretending of my own with Koo’s conclusions – you know, just to get the intellectual juices going.

 

Let’s pretend for a moment that the American Consumer is Koo’s “private-sector corporation.” Then, let’s extend ourselves into the fictional land of nod and go as far as to assume that people, instead of companies, minimize debt when you scare the hell out of them.

 

I know, I know. This Mucker guy is coming up with some radical economic theory over here on the east side of Yale’s campus. But, seriously, I didn’t need to get into this academic institution to be told how to think.

 

Lessons from The Greek Gong Show: America needs to re-think, re-learn, and re-consider what makes this economy tick. It’s not that complicated. First, we need to stop what we are doing and get back to the basics of human behavior.

 

Behaviorally, if you want to scare the hell out of people, just fear-monger about “Great Depressions.” That’s Bernanke’s bailiwick. That’s why Washington loves him. That’s why he was appointed by a modern day Republican and cheered on by a modern day Democrat.

 

Modern day Western economics are partisan. Both Republicans and Democrats pin their hopes on Keynesian economists. Hope, alas, is not a long-term risk management process. Both Bush and Obama had to learn this lesson the hard way. Bernanke’s “confusion” and “frustration” with the economy is finally breeding contempt.

 

As Koo appropriately notes in the Preface of his 2009 Edition of “The Holy Grail of Macroeconomics”, “I realized that no constructive discussion could occur until I proved that some of the “lessons” from the Great Depression that underpin their views are themselves wrong.”

 

Koo’s realization is an extension of Nasim Taleb’s idea of a “Narrative Fallacy ( “The Black Swan”, 2007), where Taleb alludes to humans having a propensity to build stories around facts.

 

The fact of the matter is, and I’ll say this for a 3rd time this morning, when you scare the hell out of them, People Minimize Debt.

 

Again, people are different than countries – particularly socialist ones. Only a moron would look to solving his or her solvency problems by Piling More Debt Upon Debt, like Greece, Japan, and America have.

 

Back to this morning’s reality show of extend and pretend, here’s what the Fiat Fool in Chief of Greece had to say this morning ahead of the Greek confidence vote:

 

“We are determined as a country, as a government, to be on track with the program, to move forward, to do what is necessary, in order to put our country into a fiscally much more viable position.”

 

Seriously. This guy is serious about maximizing debt until he blows his country’s balance sheet, bond, and stock markets to smithereens.

 

Global Markets are obviously very nervous about lying Greek politicians. Never mind what the Greek stock and bond markets do today. Don’t forget that the Greek stock market was down -35.6% in 2010 and has crashed, again, down another -27% since rallying to lower-high in February 2011. Markets discount future events.

 

What got us here is something I have been writing about since 2007. What is going to get us out of it isn’t doing more of what’s imploding the Greek, Portuguese, and Irish markets – Politicians Maximizing Debt.

 

In the meantime, the entire world is watching and Global Growth Is Slowing. This is largely a function of people being afraid. In the real world, confidence matters.

 

That’s why US demand for mortgages, stocks, and commodity exposure is falling. That’s why US stock market volumes have been bone dry on this 3-day rally to lower-highs. It’s the Debt Maximization Experiment of the Keynesians, stupid.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1532-1548 (we remain long GLD), $91.29-97.63 (we remain on the other side of the Goldman Oil Bulls), and 1259-1291 (we have no position, but a bearish bias at the top end of the 1291 range).

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

People Minimize Debt - Chart of the Day

 

People Minimize Debt - Virtual Portfolio


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