Friday, March 18, 2016

The BIGGER Short

O.K.  I admit it.  I was putting off watching The Big Short for a bunch of reasons.  The first was simple.  I was talking about the House of Cards financial risk before the “discovery” of the mortgage crisis portrayed in the film.  In fact, when I met with the Richmond Federal Reserve in 1999, I pointed out that I had better visibility on intangible asset liens in commercial lending than banks had on pooled mortgages.  The President of the Richmond Fed at the time agreed with me!  While the protagonists in The Big Short were running around in 2005 and 2006 placing their bets against the market collapse, I was trying to wake people up to what was coming.  To the fact that President George W. Bush’s “patriotic” plea for Americans to over-consume and use their home equity as an ATM in the wake of September 11, 2001 was a horrible idea that blended short-term consumer debt dynamics with long-term real estate debt guaranteeing structural collapse.  To the fact that rating agencies admitted to not having any mechanism to measure the veracity of over 80% of the credit assets of the economy.  To the fact that the U.S. economy was built on plagiarized and illegitimate intellectual property.  To the fact that rating agencies were churning out ratings to sell products to investors and derelict in their fiduciary duty to measure risk.  And, when the dust settled, the public lost well over $5 trillion. 

The second reason was a bit more complicated.  There’s an even bigger certainty on the horizon and we’re either hypnotized or near-euthanized so much that we’re pretending not to see it.  Setting aside the nearly $19 trillion in national debt in the U.S. alone, there’s about $11 trillion in illiquid government associated financial products that are coming due over the next few years – social security, school loans, packaged mortgages, and depository insurance – products that are owned by retirees, ordinary citizens, and institutions and that will be subject to actual or manipulated default.  According to the Social Security Administration’s own numbers, the safety net for aging and disabled Americans vanishes around 2035 and that is assuming that benefits shrink by over 12% in 2017 and premiums rise by the same amount or more!  Where the GFC of 2007-2008 was a shock felt round the world, the current U.S. economic chasm is close to six times greater than the GFC.  This is NOT my estimate.  These are publicly available statistics.  And we’re pretending that the only news worth discussing is the theater between a xenophobic cartoon and a moral chameleon. 
"I believe that banking institutions are more dangerous to our liberties than standing armies.  If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property - until their children wake-up homeless on the continent their fathers conquered." Thomas Jefferson, 1802
See, my problem with The Big Short has nothing to do with the superb writing, acting, directing and production.  It is elegant and brilliant.  My problem is that we’ve become so accustomed to the stories of being lied to and robbed that we have seen it as entertainment rather than tyranny.  And while I’ve just come from Papua New Guinea where I’m repeatedly warned of government corruption, I look at an American economy that willfully lies to the public, willfully and negligently defrauds its citizens and it is this America that deigns to judge the corruption lubricated by U.S. and Australian dollars and Chinese yuan!  We pretend that trillions of dollars of losses and bailouts are just the price of doing business but we neglect the fact that each of those losses comes at the price of life, liberty and the pursuit of happiness among the rank and file.  Slow bleedings, to be sure, but the body is already anemic and a financial plague is just around the corner. 

Together with the remarkable producer and director of the internationally acclaimed Future Dreaming, I have commenced work on a new film that seeks to preempt the “who could have seen it coming?” refrains that reverberated around the empty shell of what used to be Bear Stearns and Lehman Brothers at the end of the past decade.  In the film I discuss the architecture of an economic system that is built on explicit ignorance to the all-in-consequence of our industrial and consumer behaviors and the fact that such systems have only been able to be propped up by intermittent, horribly violent military contrivances resulting in the deaths of millions.  Who could have seen this coming?  Well, once again, Thomas Jefferson stated that “…it is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world.” 

Watching The Big Short reminded me that we’ve got an even more vexing challenge.  In the film, there is an effort to acknowledge that the celebrations surrounding winning the bet against the American economy were occasionally tempered with the sober knowledge that economic hardship would put people out of work, would expand homelessness and poverty, would lead some to suicide, and would have generational effects that will be slow in their evolution.  The fiduciary “obligation” that the fund managers had to maximize investor returns led the anonymous wealthy to curse the prognostication of fraud before the collapse and then dismissively cash in on their spoils with no regard for the lives that they’d cost after the fact.  At no point does it dawn on someone that a >400% profit may mean that the public was as robbed by the opportunist short investor as they were by the Federal Reserve and Treasury Ponzi scheme.  And this leads me to my own paradox.

I know that the U.S. market is well past the point of no return with respect to indebtedness and illiquid pension liabilities.  I know that hundreds of public companies – many of whom have been off-shoring assets for years – have massive liabilities for securities and financial misrepresentations.  My guess is that off-shoring has as much to do with known fraud as it does “tax efficiency”.  I know that several countries have adopted U.S. market models only to run the risk of greater instability.  Australia, for example, is drinking the Kool-Aid around venture capital and making illiquid markets part of its pension scheme without realizing that the U.S. VC model required highly nuanced tax loss harvesting, robust middle market private equity, and price collusion – none of which are suitably in place for the average Australian investor.  The ECB is pretending that the quantitative easing (read Ponzi scheme) that has failed in the U.S. will somehow have a better outcome in fractious Europe.  The oil rich Middle East is now realizing that its gilded age may be losing some of its glint with oil depressed and unlikely to rise soon.  And Pandora’s box has had some lid slippage with the Petrobras corruption allegations in Brazil.  In other words, the current system has run its course and the Bretton Woods experiment has concluded. 

And I’m not alone.  In his March 9, 2016 note entitled “Japanese Policy Failure Means Disaster for Us All”, John Mauldin details what he and others see in the near future with the “major economic disruption in Japan.”  Citing work by Mohamed El-Erian, he details the reflexive and unchartered courses being implemented by central banks which have been using classical economic theory in a market that has not fully understood the implications of demographic shifts, productivity challenges, quantitative international trading techniques and countless other anomalies.  El-Erian concludes that the, “implications go well beyond economics and finance, extending also to national politics, regional and global negotiations, and geopolitics.”  He continues, “Unless we understand the nature of the disruptive forces, including tipping points and T-junctions, we will likely fall short in our reaction functions.  And the more that happens, the greater the likelihood we could lose control of an orderly economic, financial, and political destiny – both for our generation and future ones.”  As was the case in the turns of the 19th and 20th century, these transitions are not without their opportunistic winners.  The few wealthy individuals who, in moments of crisis, can offer bailouts to governments (often to pay for wartime indebtedness) are the ones who set the tone for centuries of predatory enslavement of the general population.  Only this time, the denomination of “wealth” might be a bit tricky as the mere accumulation of debt-based currencies may in fact render the “wealth” quite ephemeral and fleeting.  While synthetic derivatives and swaps, agency debt, “risk-free” bonds, and the like may be proliferating once again like fungal spores in a rainforest, the arbiter of the impending dislocation will likely be those who have elected to secure control of resources and means of production.  A world awash in financial instruments and hedges will likely become a barren landscape when those who have been chasing amoral yield for its own sake are exposed.

So, do I take the path – like the traders in The Big Short – and bet against the fact that you’ll never read this post or understand it if you do?  Or do I work to tell a better story – one that is built on Integral Accountability where returns may not come in currencies (fiat, debt, or crypto)?  The answer is that I’m choosing humanity.  I’m investing my time, my creativity, and my efforts on getting into the trenches with those who want to be part of a human experiment that learns from the past and explicitly forgoes the predation on ignorance that was celebrated in the film.  I may wind up with a lot less money.  I may wind up with less gadgets and gizmos.  And in the end, I may underestimate the long arm of fraud and corruption that will continue to fool a public through cunning illusions.  Over the next several months, together with a great team of luminaries, we’re launching Future Dreaming: The Awakening which will be a series of gatherings around the world in which we’ll build new models of enterprise.  I’m honored to stand with amazing colleagues who have committed to go LONG humanity!  Let’s tell that story!


  1. I see living within sight of Monticello for so many years has had its influence...

  2. Any gatherings planned for Ireland/UK? Please keep me posted.

  3. Thanks Dave. I read it. I think I understand it. I think you are doing the right thing. To hell with excess material possessions. To hell with living like the rich and famous. Feel good and sleep well at night.


Thank you for your comment. I look forward to considering this in the expanding dialogue. Dave