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Compare the banking landscape today with that of 10 years ago, and it’s hard to miss the changes. Lenders typically hold more capital and are much less reliant on unstable wholesale funding than they were before the crisis. Regulators are generally warier of mounting risks in the financial system — whether these come from consumer debt or derivatives exchanged over the counter.

Yet the right question to ask is not what’s changed, but if these regulatory transformations have been sufficient. In at least three areas — the right level of bank capital, the use of risk weights, and structural reforms — many economists fear the financial system remains exceedingly vulnerable to shocks.

The largest gap between academics and practitioners is probably on the level of capital. As Sir John Vickers, a professor of economics at Oxford who presided over Britain’s Independent Banking Commission (IBC), noted in a recent speech, regulators are now accepting a level of leverage which is still around 25 or 30 times a bank’s core capital. Many outside economists believe a bank should only hold assets worth six to 10 times their key funds, if not less. “So one group or the other, if not both, would appear to be wrong by a large margin, on a policy question of deep importance,” Sir John noted.

Of course, most advocates of higher capital requirements don’t believe banks should get to the new ratio overnight. Lenders would do so by shedding assets rather than raising new capital, with dramatic impacts on the economy. But the question matters since regulators appear increasingly comfortable with the ambition of the existing rules and don’t want to go further. Vickers refers to the case of the Bank of England, which last year decided not to ask Britain’s largest lenders to raise significantly more capital over time, as it felt satisfied, among other things, with their plans for orderly resolution. It is hard to escape the feeling that some central bankers have become complacent over the level of risk they are willing to tolerate.

A related matter is our assessment of bank risk. At a conference held last week by the Centre for Economic Policy Research (CEPR), Tamim Bayoumi of the International Monetary Fund showed how the Basel Committee’s decision in 1996 to allow banks to use internal models for their valuation of risks radically changed the behavior of lenders, especially in Europe. Before 1996, banks with a higher ratio of risk-weighted assets to capital were also those with a higher leverage ratio. After that year, the relation between the two broke. Most likely, banks learned to game the system and pile up on assets simply by tweaking their risk models.

There is no guarantee that simpler leverage ratios can avoid a new financial crisis. After all, banks may simply hold on to their riskier assets and shed less remunerative but safer loans. The Basel Committee is introducing a simple leverage ratio as a backstop measure to internal risk models. Yet that doesn’t justify the prominence regulators continue to give to an approach which has shown manifest weaknesses during the crisis. Risk-weights, as the financial crisis made plain, can be pro-cyclical; risk falls when the level of an asset goes up and vice versa. The result is that not only are we asking banks to hold too little capital, but we are also underestimating how problematic their exposures really are.

The fear, therefore, is that sooner rather than later, governments may again be called upon to rescue a troubled bank. And here lies the third dangerous similarity with the pre-crisis world: Many Western countries have proven unable to separate investment banking from commercial lending. As a result, even if governments only wanted to keep the latter going, in many cases they will be forced to rescue everything, as it is impossible to split the two.

The worst offender is undoubtedly the European Union. In 2012, Erkki Liikanen, the Governor of the Bank of Finland, produced a reportrecommending, among other things, the separation of trading activity within universal banks. Five years on, the EU has failed to follow up on his suggestion in any meaningful manner, leaving mega-banks such as BNP Paribas and Deutsche Bank unchecked.

The U.K. and the U.S. have undoubtedly moved further in this respect. Britain is pressing ahead with the recommendations issued in the IBC’s report, including building a ring-fence between investment and commercial banks when they are in the same institution. In the U.S., the Dodd-Frank act has led to the imposition of the so-called Volcker rule, prohibiting banks from engaging in proprietary trading under certain circumstances. Yet, at least in the U.S., the administration is now considering a dilution of these measures, which could turn the clock closer to the pre-crisis years.

When judging the shape of financial regulation after a crisis, we often hear the industry view that the new requirements have been overly burdensome. There is however another, equally plausible take: that we have not gone nearly far enough in shoring up the banking system. Trade-offs are always difficult to assess, but if this more conservative assessment is right, it is a terrifying prospect.


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There’s a decent chance that Facebook CEO Mark Zuckerberg will see this story. It’s relevant to his interests and nominally about him and the media and advertising industries his company has managed to upend and dominate. So the odds that it will appear in his Facebook News Feed are reasonably good. And should that happen, Zuckerberg might wince at this story’s headline or roll his eyes in frustration at its thesis. He might even cringe at the idea that others might see it on Facebook as well. And some almost certainly will. Because if Facebook works as designed, there’s a chance this article will also be routed or shared to their News Feeds. And there’s little the Facebook CEO can do to stop it, because he’s not really in charge of his platform — the algorithms are.

This has been true for some time now, but it’s been spotlit in recent months following a steady drumbeat of reports about Facebook as a channel for fake news and propaganda and, more recently, the company’s admission that it sold roughly $100,000 worth of ads to a Russian troll farm in 2016. The gist of the coverage follows a familiar narrative for Facebook since Trump’s surprise presidential win: that social networks as vast and pervasive as Facebook are among the most important engines of social power, with unprecedented and unchecked influence. It’s part of a Big Tech political backlash that’s gained considerable currency in recent months — enough that the big platforms like Facebook are scrambling to avoid regulation and bracing themselves for congressional testimony.

Should Zuckerberg or Twitter CEO Jack Dorsey be summoned to Congress and peppered with questions about the inner workings of their companies, they may well be ill-equipped to answer them. Because while they might be in control of the broader operations of their respective companies, they do not appear to be fully in control of the automated algorithmic systems calibrated to drive engagement on Facebook and Twitter. And they have demonstrably proven that they lacked the foresight to imagine and understand the now clear real-world repercussions of those systems — fake news, propaganda, and dark targeted advertising linked to foreign interference in a US presidential election.

Among tech industry critics, every advancement from Alexa to AlphaGo to autonomous vehicles is winkingly dubbed as a harbinger of a dystopian future powered by artificial intelligence. Tech moguls like Tesla and SpaceX founder Elon Musk and futurists like Stephen Hawking warn against nightmarish scenarios that vary from the destruction of the human raceto the more likely threat that our lives will be subject to the whims of advanced algorithms that we’ve been happily feeding with our increasingly personal data. In 2014, Musk remarked that artificial intelligence is “potentially more dangerous than nukes” and warned that humanity might someday become a “biological boot loader for digital superintelligence.”

But if you look around, some of that dystopian algorithmic future has already arrived. Complex technological systems orchestrate many — if not most — of the consequential decisions in your life. We entrust our romantic lives to apps and algorithms — chances are you know somebody who’s swiped right or matched with a stranger and then slept with, dated, or married them. A portion of our daily contact with our friends and families is moderated via automated feeds painstakingly tailored to our interests. To navigate our cities, we’re jumping into cars with strangers assigned to us via robot dispatchers and sent down the quickest route to our destination based on algorithmic analysis of traffic patterns. Our fortunes are won and lost as the result of financial markets largely dictated by networks of high-frequency trading algorithms. Meanwhile, the always-learning AI-powered technology behind our search engines and our newsfeeds quietly shapes and reshapes the information we discover and even how we perceive it. And there’s mounting evidence that suggests it might even be capable of influencing the outcome of our elections.

Put another way, the algorithms increasingly appear to have more power to shape lives than the people who designed and maintain them. This shouldn’t come as a surprise, if only because Big Tech’s founders have been saying it for years now — in fact, it’s their favorite excuse — “we’re just a technology company” or “we’re only the platform.” And though it’s a convenient cop-out for the unintended consequences of their own creations, it’s also — from the perspectives of technological complexity and scale — kind of true. Facebook and Google and Twitter designed their systems, and they tweak them rigorously. But because the platforms themselves — the technological processes that inform decisions for billions of people every second of the day — are largely automated, they’re enormously difficult to monitor.

Facebook acknowledged this in its response to a ProPublica report this month that showed the company allowed advertisers to target users with anti-Semitic keywords. According to the report, Facebook’s anti-Semitic categories “were created by an algorithm rather than by people.”

And Zuckerberg suggested similar difficulties in monitoring just this week while addressing Facebook’s role in protecting elections. “Now, I’m not going to sit here and tell you we’re going to catch all bad content in our system,” he explained during a Facebook Live session last Thursday. “I wish I could tell you we’re going to be able to stop all interference, but that wouldn’t be realistic.” Beneath Zuckerberg’s video, a steady stream of commenters remarked on his speech. Some offered heart emojis of support. Others mocked his demeanor and delivery. Some accused him of treason. He was powerless to stop it.


Facebook’s response to accusations about its role in the 2016 election since Nov. 9 bears this out, most notably Zuckerberg’s public comments immediately following the election that the claim that fake news influenced the US presidential election was “a pretty crazy idea.” In April, when Facebook released a white paper detailing the results of its investigation into fake news on its platform during the election, the company insisted it did not know the identity of the malicious actors using its network. And after recent revelations that Facebook had discovered Russian ads on its platform, the company maintained that as of April 2017, it was unaware of any Russian involvement. “When asked we said there was no evidence of Russian ads. That was true at the time,” Facebook told Mashable earlier this month.

Some critics of Facebook speak about the company’s leadership almost like an authoritarian government — a sovereign entity with virtually unchecked power and domineering ambition. So much so, in fact, that Zuckerberg is now frequently mentioned as a possible presidential candidate despite his public denials. But perhaps a better comparison might be the United Nations — a group of individuals endowed with the almost impossible responsibility of policing a network of interconnected autonomous powers. Just take Zuckerberg’s statement this week, in which he sounded strikingly like an embattled secretary-general: “It is a new challenge for internet communities to deal with nation-states attempting to subvert elections. But if that’s what we must do, we are committed to rising to the occasion,” he said.

“I wish I could tell you we’re going to be able to stop all interference, but that wouldn’t be realistic” isn’t just a carefully hedged pledge to do better, it’s a tacit admission that the effort to do better may well be undermined by a system of algorithms and processes that the company doesn’t fully understand or control at scale. Add to this Facebook’s mission as a business — drive user growth; drive user engagement; monetize that growth and engagement; innovate in a ferociously competitive industry; oh, and uphold ideals of community and free speech — and you have a balance that’s seemingly impossible to maintain.

Facebook’s power and influence are vast, and the past year has shown that true understanding of the company’s reach and application is difficult; as CJR’s Pete Vernon wrote this week, “What other CEO can claim, with a straight face, the power to ‘proactively…strengthen the democratic process?’” But perhaps “power” is the wrong word to describe Zuckerberg’s — and other tech moguls’ — position. In reality, it feels more like a responsibility. At the New York Times, Kevin Roose described it as Facebook’s Frankenstein problem — the company created a monster it can’t control. And in terms of responsibility, the metaphor is almost too perfect. After all, people always forget that Dr. Frankenstein was the creator, not the monster.

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Bought RAS today. Commercial real estate. Provides 11% yield to the common stock.

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Yale economics professor Robert Shiller won the Nobel prize for his work on bubbles. He wrote a seminal book on speculative manias, Irrational Exuberance, a deep analysis of the dramas over the centuries when otherwise sane people drove prices for tulips, stocks, and houses to inexplicable heights.

Shiller developed some of the tools that are considered vital for taking a sober look at markets. He helped create indexes for measuring real estate prices and his stock market valuation indicator, the cyclically adjusted price-earnings ratio, or CAPE ratio, is seen as one of the best forecasting models for stock returns.

As Shiller sees it, “big things happen if someone invents the right story and promulgates it.” Quartz spoke with him about some of the frothiest assets today, from bitcoin to tech stocks. The conversation was edited and condensed for clarity.

Quartz: What are the best examples now of irrational exuberance or speculative bubbles?

Shiller: The best example right now is bitcoin. And I think that has to do with the motivating quality of the bitcoin story. And I’ve seen it in my students at Yale. You start talking about bitcoin and they’re excited! And I think, what’s so exciting? You have to think like humanities people. What is this bitcoin story?

It starts with Satoshi Nakamoto—remember him? The mysterious figure who may or may not be real. He’s never been found. That has a nice mystery quality to it. And then he has this clever idea about encryption and blockchain and public ledgers, and somehow the idea is so powerful that governments can’t even stop it. You can’t regulate this. It kind of fits in with the angst of this time in history.

If you look at the third edition of Irrational Exuberance, I’m arguing that there’s a fundamental deep angst of our digitization and computers, that people wonder what their place is in this new world. What’s it going to be like in 10, 20, or 30 years, and will I have a job? Will I have anything?

Somehow bitcoin fits into that and it gives a sense of empowerment: I understand what’s happening! I can speculate and I can be rich from understanding this! That kind of is a solution to the fundamental angst.

So I’m trying to deconstruct the bitcoin story. Big things happen if someone invents the right story and promulgates it.

So is bitcoin a bubble, or the biggest bubble?

I don’t know how to quantify that. But I have a sense that something is exciting to you. Another thing that is exciting to people now is Donald J. Trump. You may have heard of this guy.

It’s just amazing how he dominates and I think he has a genius at recognizing stories and listening to his audience and understanding what drives them.

He too is related to this fundamental angst that we have about where are we in this digitized society—international and digitized. And it’s that angst that he spoke to, and he presented a story that involves you, the voter, as a success in this new world, and that’s why the Trump story was so popular.

There really are idea epidemics.

Something you’ve written about is the role of media in speculative bubbles. In the past, you didn’t seem convinced that the internet has boosted the media’s ability to do that. Has that changed?

The big thing that happened wasn’t the internet. It was the printing press, Gutenberg in the 1400s. It didn’t really get going until the 1600s. It was then that we started seeing bubbles.

The problem with things going viral is that there has to be some transmission that’s adequate to the job. You can still go viral without newspapers, but it’s harder. There were celebrities and international stars, like Homer, who wrote the Iliad and the Odyssey. He did that by traveling from town and town and reciting his books. And it worked! He’s still going, long after he died.

Things have always gone viral, it’s the nature of civilization, but it got stronger with the printing press, much stronger. And then around the 1600s they invented the idea of weekly newspapers that told you what happened this week. And that really went like wildfire. People loved newspapers.

The internet takes it to another dimension. But I have a sense it’s not as important as the printing press.

Hasn’t the internet democratized information? Someone can promote their views widely without getting buy-in from editors or other gatekeepers? That’s what Trump has done with Twitter.

One really important thing that’s happened is that reputations don’t seem to matter as much at this point in history. Maybe it will come back. You have news media that have developed their reputation for honesty and integrity. And something that’s gone viral is a conspiracy theory that the news media, the mainstream media, are in a conspiracy, and it’s embellished in crazy ways like the Rothschilds or George Soros, or somebody, are in a conspiracy to destroy America and have bought the media and are controlling them. Those are the extreme, crazy forms of the narrative.

But there’s also a more general narrative that liberals are somehow soft and can’t handle reality. This is another narrative.

You’re asking about bubbles. These are the stories that drive the bubble. Trump speaks to these things, and he seems to be saying things that nobody else will say but maybe you’re thinking.

He also legitimizes wealth. It wasn’t that long ago that we held rich people in contempt. We have a billionaire president, and he’s kind of welcoming: You can be rich, too. The Trump story helps inflate all kinds of bubbles, not just bitcoin. I think there are aspects of a housing bubble, and a stock market bubble right now.

Are your feelings on the stock market based on the CAPE ratio?

The CAPE ratio is just one indicator I’m particularly known for. I have another indicator you can find on my website that not many people pay attention to. Since 1989 I’ve been doing questionnaire surveys of both individual and institutional investors. I’ve been doing this a long time without getting much notice for it. But I believe in it, somewhat, though I don’t think it answers everything.

I have something I call a valuation confidence index. I don’t have it really up to date because it’s only a six-month moving average based on small surveys. Maybe I should expand my size.

But valuation confidence is at the lowest it’s been since around 2000. In other words, people think the market is highly valued. They don’t have to look at CAPE. People think it. I know that. Both individual and institutional investors. We are in a time of mistrust of the market.

The only time mistrust of the market was lower since 1989 was in 2000. So around 2000, the peak of the dot-com bubble. It seems like the mindset is somewhat similar to the dot-com mindset. And that brings us to the FANGs [Facebook, Amazon, Netflix, and Google], as well. High-tech companies are probably more exciting, as they were in 2000.

The year 2000 was kind of like 1849. That was the gold rush. It really created a viral explosion of men going out west in 1849 looking for gold. Now is the time, you can’t wait until 1850! You have to do it now! It was the same thing in 1999 or thereabouts, when stories of some internet companies were coming out and people said, you know, this is the future, these guys are going to take over.

Usually these stories have an element of truth to them, but the question is how fast is it going to happen, and what’s a realistic view for investors. And they got ahead of themselves with the dot-com bubble.

We’re maybe doing that again with the FANGs.

Is low volatility a bubble, of sorts?

Well volatility is very low, both actual and projected in the VIX. So, why is that?

Some people say it’s because of central bank accommodation.

I tend to think of it as something that reflects the quality of the narrative, which is not encouraging a lot of trading activity now. I’m guessing—I can’t tell you why it’s low.

One thing I emphasized in my book Irrational Exuberance is attention is capricious. There’s a social basis for attention. We all focus our attention in the same way. Like we’re all watching Donald J. Trump. When Houston floods, well that’s got our attention. But part of the story has to be what Donald J. Trump said about it.

Somehow the attention is elsewhere than day-to-day motions of the stock market. It could suddenly change.

I remember in October 1987. That was the biggest one-day stock market drop ever. How did I hear about it? I was teaching my lecture in the morning. I noticed that one or two students were listening to transistor radios. Finally one of them raised his hand and said, “Do you know what’s going on? There’s a historic stock market crash.” That’s how you hear about it. It suddenly grabs people’s attention. And it’s just not there right now.

Monetary policy has entered a new regime. The only historical precedent for when interest rates were low for anything like this long was in the 1930s, the Great Depression, and how did that end? It ended with World War II.

It doesn’t tell you what’s going to happen now. Why are long-term interest rates so low? It’s a big thing. It’s been trending down since 1982. There’s been a downtrend around the world in long-term real interest rates.

And it’s nothing particularly to do with the financial crisis. News media like to tie things in with already popular narratives. The natural instinct of a newspaper reporter is to tie it back to that, but it’s been going on longer than that.

I don’t have any unique insight into why interest rates have gone down. But I know they’re vulnerable to changing narratives.

Have you by any chance looked at initial coin offerings?

No, what is an initial coin offering?

It’s like using a crypto token, not bitcoin itself but the blockchain architecture, and issuing these virtual encrypted tokens almost like shares, even though they say they’re not shares.

How is it different from bitcoin?

It’s somewhat like crowdfunding. Say you’ve started a bar, and you want to fund it by issuing these tokens. A token is worth one beer, but your bar will only ever serve a set number of beers. If people think it will be a really hot bar, the value of the tokens trades for up to $100 or $200. People are raising hundreds of millions of dollars this way, with pretty thin business plans.

Yeah, that’s a classic bubble. I’ll have to read about that. There are a lot of cryptocurrencies but they don’t have as good a story as bitcoin. Maybe there’s a new narrative. Maybe this is a more viral story.

You’re making me think about writing something about this. You have my thinking going.

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James Ledbetter, the editor of Inc. magazine, recently published a weird and wonderful book, One Nation Under Gold: How One Precious Metal Has Dominated the American Imagination For Four Centuries. The gold standard is one of my areas of persistent interest. I have published around a million words touching on it here at and elsewhere. So, I read it avidly and with great pleasure.

More to the point, two campaign-trail comments show that Donald Trump is, at least, a strong sympathizer with the gold standard. The gold standard may yet come to matter. If so, getting it right will be crucial. And One Nation Under Gold will be a real asset in getting it right.

Ledbetter’s book is, for the most part, extraordinarily good on the history, politics, and culture. On the policy side, not so much. He cannot be blamed for reporting the conventional wisdom and missing the real, mostly behind-the-scenes, policy tick-tock. That is a minor blemish on a great book. He also shows flashes of occasional brilliance on the policy side.

The book is wildly entertaining as well as informative. It consequently drew wide attention in the mass media, with significant exposure by the New YorkerNPRFortuneQuartz, the Wall Street Journal, and elsewhere. Deservedly so.

Why “weird and wonderful?” Mostly, Ledbetter is a first-rate reporter with a nose for unearthing great stories. He delivers great and often outré stories in abundance.

Steve Forbes, a great and eloquent gold standard champion, says half in jest and whole in earnest that if you get stuck between two chatty bores on a transcontinental flight just offer to explain monetary policy to them. They will promptly dive into their In Flight magazines. Ledbetter is never boring and also displays a comely ambivalence toward the gold standard, sometimes dismissing it as antiquated and fringe while more than occasionally throwing out hints of admiration or at least fascination.

You likely will be fascinated. I was.

One Nation Under Gold does not have the depth and granularity of Liaquat Ahamed’s Pulitzer Prize winning monetary history Lords of Finance: The Bankers Who Broke the WorldLords of Finance is the best extant history of the decline and fall of the gold standard. That said, Ledbetter has written a delightful book, one that succeeds in capturing, among other things, much of the loopiness that has undeservedly tarnished the reputation of the true gold standard.

One Nation Under Gold really commences with the early beginnings of America. (It is not quite clear to which “fourth” century its subtitle refers.) He commences with a complaint by one George Washington in 1779 as to how the issuance of paper money caused him great financial injury. Washington had more indictments of paper money than that, as did almost all of the other Founders.

Ledbetter: “It is almost impossible to overstate the dislike that most of the Founding Fathers, and indeed most of the American ruling class, had for paper money in the late eighteenth and early nineteenth century. The currencies issued by most states depreciated to the point of being worthless.” That depreciation left an indelible impression.

Madison devoted the second paragraph of Federalist 44 to indicting paper money:

The extension of the prohibition to bills of credit must give pleasure to every citizen, in proportion to his love of justice and his knowledge of the true springs of public prosperity. The loss which America has sustained since the peace, from the pestilent effects of paper money on the necessary confidence between man and man, on the necessary confidence in the public councils, on the industry and morals of the people, and on the character of republican government, constitutes an enormous debt against the States chargeable with this unadvised measure, which must long remain unsatisfied; or rather an accumulation of guilt, which can be expiated no otherwise than by a voluntary sacrifice on the altar of justice, of the power which has been the instrument of it.

In consequence, the writers of the Constitution explicitly, in Article 1 Section 10, stripped all monetary powers from the States. The reference therein to gold and silver Coin merely meant that the States were doubly-forbidden from printing paper money. (It worked.)

Later on in the book, Ledbetter archly observes that “[President Lyndon] Johnson’s desperate gold strategy proved once again that when America needs to choose between its wars, it’s sense of foreign supremacy, economic well-being, and gold-backed currency, it’s gold that always gives way.”  This is somewhat astute but not entirely correct.

The gold standard is part of the infrastructure of equitable prosperity (nationally and internationally). It is not a suicide pact and not designed to constrain economic growth. Rather the opposite. And yes, the gold standard, always, is an early casualty of war. If in the existential extremity of war the gold standard must be temporarily sacrificed for reasons of war finance … so be it.

The Founders were pragmatists. In the Constitutional Convention of 1787 the framers stripped the federal government of the explicit power to issue the hated paper money. (The language, and power, removed from Article I Section 8, clause 2 was “and emit bills,” which meant to issue scrip, currency not defined by and convertible to gold.) Yet in that debate George Mason, for example, “observed that the late war [of Independence] could not have been carried on, had such a prohibition existed.”

For this and other reasons no direct prohibition on the federal government’s issuing paper money was placed in the Constitution. The power was withheld but not forbidden, leaving a little wiggle room. To criticize the gold standard as vulnerable to the demands of war is myopic.

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In writing my latest Thoughts from the Frontline, I reached out to my contacts looking for an uber-bull—someone utterly convinced that the market is on solid ground, with good evidence for their view.

Fortunately, a good friend who must remain nameless shared with me an August 4 slide deck from Krishna Memani, Chief Investment Officer of Oppenheimer Funds.

The current bull market is the second longest and has the third-highest gain. It will be the longest stock bull market of the modern era if it can last another two years or so.

However, he thinks the present bull market will continue for another year.

Here’s Memani:

For some investors, the sheer age of this cycle is enough to cause consternation. Yet there is nothing magical about the passage of time. As we have said time and again, bull markets do not die of old age. Like people, bull markets ultimately die when the system can no longer fight off maladies. In order for the cycle to end there needs to be a catalyst—either a major policy mistake or a significant economic disruption in one of the world’s major economies. In our view, neither appears to be in the offing.

15 Events That Could Be a Catalyst for the Next Recession

He goes on to list 15 specific events he thinks would be necessary to make him abandon his bullish position. (Comments in parentheses and italics are mine.)

1. Global growth would have had to decelerate. It is not.

(European growth is actually picking up. Germany blinked on financing Italian bank debt, and the markets now have more confidence that Draghi can do whatever it takes.)

2. Wages and inflation would have had to rise. They are not.

3. The Fed would have planned to tighten monetary policy significantly. It is not.

(They should have been raising rates four years ago. It is too late in the cycle now. They may raise rates once more, but the paltry amount of “quantitative tightening” they are likely to do is not going to amount to much. In fact, if for some reason they decided to go further with rate hike and enter a tightening cycle, their monetary policy error would probably trigger a recession and a deep bear market. I think they realize that—or at least I hope they do.)

4. The ECB would have to tighten policy substantially. It will likely not.

(Draghi will go through the motions, though he knows he is limited in what he can actually do – unless for some unexpected reason Europe takes off to the upside. And while Eastern Europe is actually doing that, “Old Europe” is not.)

5. Credit growth would have had to be surging. It is not.

(Credit growth is generally picking up but not surging. And most of the credit growth is in government debt.)

6. Corporate animal spirits would have been taking off. They are not.

(That is basically true for most public corporations. There are a number of private companies and smaller businesses that are pretty optimistic.)

7. Equities would have had to be expensive relative to bonds. They are not.

8. FAANG stocks would have had to be at extreme valuations. They are not.

(I don’t think I buy this one.)

9. Investors would have had to be euphoric about equities. They are not.

10. The current cyclical rally within the secular bull would have had to be old and stretched. It is not.

(Not buying this one either.)

11. High-yield spreads would have to be widening. They are not.

(I pay attention to high-yield spreads, a classic warning sign of a turn in market behavior. Are they at dangerous levels? Damn, Skippy, I cannot believe some of the bonds that are being sold out in the marketplace. Not that I can’t believe the sellers are willing to take the money—you’d have to be an idiot not to take free money with no strings attached. I just don’t understand why major institutions are buying this nonsense.)

12. The classic signs of excess would have had to be evident. They are not.

(Kind of, sort of, but we are really beginning to stretch the point.)

13. China’s credit binge would have had to threaten the global financial system. It does not.

(Xi has somehow managed to push off the credit crisis, at least for the rest of this year, until after the five-year Congress. Rather amazing.)

14. Global trade would have had to be weakening. It is not.

15. The US dollar would have had to be strengthening. It is not.

That’s quite a list. Seeing it with the charts and Memani’s comments makes it even more compelling. To pick just one for closer scrutiny, let’s consider #7.

Are Equities Expensive Relative to Bonds?

That’s a good question because it really matters to big, long-term investors like pension funds.

Pension fund managers need to meet certain return targets, and they want to put the odds on their side. Treasury bonds offer certainty—presuming the US government doesn’t default. (Ask me about that again in October.)

Stocks may offer higher returns but more variation.

Memani explains this relationship by looking at earnings yield. That’s the inverse of the P/E ratio.

Essentially, it’s the percentage of each dollar invested in a stock that comes back as profits. Some gets distributed via dividends, buybacks, etc., and some is retained.

If you think there’s a stock mania today akin to the euphoria of the late 1990s, you’ll find no support in this ratio. Back then, bonds were dirt cheap compared to stock market earnings yield.

Now we have the reverse: stocks are cheap compared to bonds.

This is one of the most convincing bullish arguments I see now.

I remember the late ’90s very well. I called the top about three years early, never dreaming we could see a year like 1999. That will always be my mania benchmark—and today we are not even remotely near it. I don’t remember thinking much about bonds back then. No one else was, either.

But buying them would have turned out much better than buying stocks in 1997–99.


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This rather misses the point: gold is protection against government induced inflation etc. If the dollar or whatever implodes, gold/silver are money.

Having waited patiently for the “any-minute-now” moment, gold investors are taking comfort from the recent rise in price in response to geopolitical tensions. Yet the responsiveness of gold, as well as the overall price, appears weaker than would have been expected from historically based models — and for understandable reasons. The precious metal’s status as a haven has been eroded by the influence of unconventional monetary policy and the growth of markets for cryptocurrencies.

Gold prices rose almost 1 percent on Tuesday morning as part of the risk aversion triggered by yet another brazen North Korean missile launch over Japan, together with uncertainty as to how the U.S. may respond. But trading below $1,330, the overall response of gold prices to the last few months of heightened geopolitical risks has been relatively muted, particularly as the 10-year Treasury bond, another traditional haven, saw its yield trade down to below 2.10 percent that same morning.

Two immediate reasons come to mind, one related to several assets and the other more specifically to gold.

First, and as I have discussed in several Bloomberg View articles, the prolonged pursuit of unconventional measures by central banks has helped meaningfully decouple asset prices from underlying fundamentals. In such circumstances, historically based models will tend to overestimate the reaction of asset prices to heightened geopolitical tensions — including the fall in risk assets such as equities, or the rise in gold.

Second, a portion of the traditional buyer interest in gold has been diverted to the growing markets for cryptocurrencies, which are also benefiting from a general increase in demand. As such, the returns to investors there have been significantly greater, sucking in even more funds.

The message for investors in both gold and multi-asset-class portfolios is clear.

While continuing to play a role in diversified market exposures, gold is less of a risk mitigator and asset-class diversifier, for now. Luckily for investors, the need has also been less pronounced, given that ample market liquidity has boosted returns, repressed volatility, and distorted correlations in their favor. But this is not to say that gold’s traditional role will not be re-established down the road. After all, central banks are in the later stages of reliance on unconventional monetary measures and, given this year’s spectacular price appreciation, cryptocurrencies are more vulnerable to unsettling air pockets.