World War Zirp | FT Alphaville

World War Zirp

David Rosenberg, chief economist and market strategist at Gluskin Sheff & Associates, has turned slightly bullish.

Unfortunately, this has come as an unpalatable shock to a few people.

From the Wall Street Journal this past week:

The shift has done nothing to quell the emotional response to Mr. Rosenberg’s commentary. The difference is that now he is being called a traitor by different investors—those unhappy with his more bullish stance.

“Cancel my account, and tell Dave I don’t recognize his work,” a reader wrote Mr. Rosenberg by email recently, one of the dozens of critical responses he had fielded. “He used to be the straightest shooter out there…it is too much for me to have another cheerleader.”

Mr. Rosenberg says another investor recently accused him of being a “turncoat.” The reaction has been an eye-opener for Mr. Rosenberg, who in the summer of 2012 gave his followers an early indication that he might turn more bullish with a commentary titled “Parting of the Clouds?”

I’m finding out that a lot of my loyal readers were never really interested in my analysis,” he said in an interview. “I spent over 10 years battling the reputation of being a radical permabear. Now I make a subtle shift and I’m fighting the perception that I’m a permabull,” or an analyst who maintains a positive stance in every market.

In many ways, this is the sort of story that perfectly illustrates the problem of apocalypse bias in the investment community today.

The problem emanates from the fact that those who peddled visions of doom and destruction gained disproportional credibility when the 2008 crisis struck, because they were finally seen as being right when everyone else was wrong.

What Rosenberg’s critics miss, however, is that there is a fundamental difference between being right — like a stopped clock is right twice a day — and being right for the right reasons.

For, even in 2008, it was never the case — even for one moment — that daily activities came to a standstill, that infrastructure failed or that humanity in desperation turned against each other. Utilities, infrastructure, payments, services, hospitals — almost everything that matters — continued to work uninterrupted.

Those who predicted outright apocalypse collected kudos unjustifiably due to a simple connection with ‘crisis’.

Which begs the question: what drives the ongoing belief in some quarters that outright financial apocalypse is nigh? And why is an interest in financial apocalypse so appealing and believable to so many? It’s almost as if some of these people want World War Zirp to transpire.

Is it that 2008 simply wasn’t apocalyptic enough? Did previous investments in gold, guns and Campbell soup not pay off as much as some might have hoped? Or is it simply a matter of saving face, and wishing the worst on society for “I told you so” reasons?

Either way, it’s hard to dispute that investment apocalypse-ism is taking a grip on public consciousness in a way that is beginning to resemble a form of fundamentalism, which cares little about the lives it needs to destroy to prove itself correct.

The fundamentalist nature of this doom-mongering makes it nefarious. It’s hard to reason with zealots, let alone those who — on the basis of their own investment advice — have an explicit interest in stimulating the social collapse they themselves are warning about. It is a financial millenarianism of sorts.

The irony is that the closest we ever came to outright suspension of public services was not during the dark days of 2008 but rather during the self-inflicted government shutdown of 2013, the result of a political hijacking of Congress.

Perhaps the question we should really be asking then is who stands to gain most if and when the dark ages do return upon us? And is this really the clue to what’s motivating the doom-monger rhetoric?

Those who stand to benefit, of course, are the very same people who have always thrived during periods of Darwinian adversity — a.k.a. known history — the muscle, the smarts and the divinely favoured (and relatives thereof).

No coincidence that these also happen to be the people that stand to be most disempowered (in relative terms) in an increasingly technologically abundant future.

The law-finance paradox and the issue of hierarchy

It’s then that we realise that this crisis is really all about hierarchy maintenance. And by that we mean that it’s not nominal wealth being threatened anymore, but the social positioning and influence that that wealth used to be able to acquire.

Indeed, as the pie gets bigger, what used to be a billionaire tranche needs to grow to a trillionaire tranche if the relative social importance of that particular billionaire is to be preserved. Understandably, in this context, any store of value that fails to deliver anything less than this sort of return is seen as lacking. After all, what’s the point of having a billionaire’s purchasing power if everyone increasingly has the purchasing power of a billionaire?

Either you become a trillionaire, or you make sure no-one else can step up the ladder to join you on the billionaire level.

Unfortunately for billionaires there aren’t many financial instruments that defend relative positioning to this degree. And those that do, mainly debt and property rights, increasingly depend on an exemplary and impregnable legal framework to do so.

Katharina Pistor of the Columbia University School of Law presents some interesting points about how law and finance can form a stability threatening paradox as a result.

As she explains, the paradox comes about whenever the enforcement of the law comes into conflict with market forces. So, for example, whenever the economy is faced with the choice of: defend the law and crash the system, or compromise on the law and save the system (but risk undermining the law in the long run).

As Pistor notes in her paper “A legal theory of Finance”:

Law lends credibility to financial instruments by casting the benevolent glow of coercive enforceability over them. But the actual enforcement of all legal commitments made in the past irrespective of changes in circumstances would inevitably bring down the financial system. If, however, the full force of law is relaxed or suspended to take account of such change, the credibility law lends to finance in the first place is undermined.

According to Pistor, the system usually ends up favouring the dissolution of legacy rights in the interests of the social system, because those sufficiently close to the apex of power usually realise they stand to benefit more from the relaxation or suspension of legal commitments than those on the periphery do.

The Tea Party shutdown standoff was a great example of the paradox in play. It soon became clear that while upholding the debt ceiling and risking system collapse may have made a lot of sense to those without savings, lots of gold and many guns (i.e. those the Tea Party was representing) it did not serve the interests of the Tea Party’s wealthy benefactors who had a vested interest in seeing the system survive.

This known known undermined their bargaining power from the onset.

From Pistor’s point of view, however, this sort of standoff is unlikely to be a one off. In fact, it’s to be expected whenever the law comes into direct conflict with what market forces want, and when people begin to realise they’re not necessarily as in control of things (among them social positioning and the law) as they thought they were.

The ultimate flaw in the system, on that basis, may be the law’s inflexibility and tendency to defend the claims of the wealthy on relative and hierarchy grounds rather than on an absolute basis. The law does not adapt even as the size of the economic pie changes. But in a world that is getting wealthier by the year in real terms (as in system capacity, goods, services, knowledge) that either means diverting ever more of the surplus that trillionaires can’t consume in their lifetimes to government via debt savings vehicles (expanding the debt), or destroying the excess capacity outright and making everyone poorer (system collapse).

The problem with the former is that while the move allows the rich to preserve wealth absolutely and to pass it on to unborn generations, it does little to stop wider wealth creation or distribution. Consequently, there is still an unappealing dilutive effect with respect to social positioning. The latter, on the other hand, provides the opportunity to re-set the system in favour of those who the law defends and/or those who have the skill to navigate and flourish during turmoil and times of scarcity.

Given the above, it’s understandable why the instinctive reaction of those who wish to preserve their position on the social ladder is to wish for outright system collapse.

It’s also understandable why the desire to start from scratch resonates so particularly well with the middle classes. In their eyes the law, by yielding on bailouts and debt ceilings, is already failing them, so the step to outright lawlessness is hardly a step away. All they need is enough smarts (gold!), muscle (guns!) and divine favour (the constitution!) to survive the apocalypse, and re-establish the law on their terms. And this is how the apocalypse mindset arguably comes into play.

Luckily for the markets, those in the apex of power are more likely to be aware that their wealth is symbiotically dependent on a functional and cohesive system anyway and that no man is an island. More so, that a well publicised history of conspicuous living is unlikely to do them any good in Mad Max scenario — and could even expose them to being made an example of (overthrown despot style).

Death by a thousand cuts in that context is always preferable to an outright hacking.

Also, what good is a palace if it’s positioned on a rubbish tip?

In short, if Pistor’s inclinations are correct, it’s much more likely that the law will eventually yield to market forces, and not the other way around.

Related links:
The paradox of gold commentary – FT Alphaville
Some are born solvent, some achieve solvency, and some have solvency thrust upon them – FT Alphaville
Top Bear’s Bullish Tilt Has Followers Growling - WSJ