Covering Your Shorts

When a late-cycle compression breaks down, it's time to cover your shorts.

Despite counter-cyclical measures, what we are experiencing now is a classical, deflationary trend. While the effect is classical, it is neo-classically indicated. Signals are mixed and contrary. Up is down and down is up economically; and politically, left is right and right is left....

Assessing the risk is confounding and the late-cycle compression (classically turning debt into liquidated equity) breaks down--it stagflates. Pressure mounts both politically and economically to resolve the liquidity crisis with signals that clearly indicate assets have been liquidated to the fullest extent. (Monetary policy makes that assessment more difficult, stagflating the risk proportion, turning equity into debt leveraged to support its rising value--the big short position identified in the previous article--rather than debt into equity, or growth. Although the growth that occurs is retraced from negative growth that turns equity into capital and capital into wealth, causing political risk, the redistribution reduces the risk.) Those signals (that indicate economic growth and reduced political risk), contrary as they may appear to be, are currently presenting.

What do falling oil prices indicate, for example, or what does it mean when Berkshire Hathaway buys its shares back?

A falling oil price is bullish, despite the analytical sentiment, and a Buffet buyback indicates he is covering his shorts (positioning to be long). Risk analysts, however, will paint these stochastic events as negative, but it is a false negative. The falling price of oil, for example, will be attributed to money-flow measures rather than supply-demand. While the causal assessment (which directs the risk) is partially true, its present value is falsely negative. The risk assessment is "twisted" not because it randomly walks into a benefit here and detriment there, but because it is being directed (positioned) to counter-party a massive, accumulated risk proportion.

Yes, correctly assessed, rising prices are causally attributable to the flow of money. That money, however, is over-consolidated and flows to direct prices (position the counter party) at will.

When money flow is predicting prices, instead of prices (supply-demand) predicting money flow, the risk proportion is post-hoc. Signals are twisted into a maelstrom of positive and negative probabilities that are not a measure of fundamental attributes, but the probability a party can be stuck with the risk while expecting reward (which measures the retributive value of the risk proportion and predicts the probability it will go fully gamma).

Assessing the risk becomes a game of conflicting signals, and the reward a psychology of failed expectations. The market is full of surprises, which puts valuations at an exceptional premium. Long or short, depending on whether an investor can figure out what signals warrant taking a long or short position, the reward is high, but so are the losses, and politically we are fully engaged in questioning whether the market legitimately decides who the winners and losers are (when the risk goes fully gamma).

Realizing a fully gamma proportion is when the shorts will cover long. The signals, while still mixed and contrary, will indicate a "decisive" turn. Risk will be redirected (a distribution will occur) to avoid probable loss in the gamma dimension where the risk of loss (the risk coefficient with the accumulated reward) is fully assumed in priority.

Re-"direction" of the risk (deliberate--political--avoidance of fully assumed loss) indicates an elitist, not a pluralist, analytical model. The signals, too, can be fully expected to decisively fit that model. There is no uncertainty here. The risk is decisively positioned (stagflated) to conserve the value accumulated: either we allow its maximum consolidation (don't raise marginal tax rates) or we suffer slow, if any growth. The choice, by the way, is a false dichotomy since both are deflationary.

Deflation does not cure deflation, it accumulates risk until it collapses into civil unrest. That's why, after two world wars and the practical utility of capitalism seriously in question, we use neo-classical measures.

Risk can be extended, turning equity into debt with easy money, but not indefinitely.

Slow but sure, we are conditioned to take the risk (the market can wait longer than you have money). Confounded by confusing counter measures designed to appear risk averse, we are temporally conditioned for false positives (like tax cuts for the rich cause economic growth). Eventually, the expectation fails (the system is really risk prone) and in order to not be classically positioned to take the risk it is necessary, both individually and collectively, to read the neo-classical signs, contrary and confounding as they are.

If you recall, last summer, this web site expostulated that expecting higher oil prices to signal recovery is a false positive. At that time, risk analysts postulated higher prices indicate economic recovery (increased demand) while demand was really declining.

No, Ivy-League analysts are not stupid, but they are bent on driving false indicators to position investors to take the bate and consume the accumulated risk. The mis-call on oil prices, despite all the rhetoric to convince us that the capital is not purposely managed to effect a zero-sum game, was, and still is, a deliberate, knowing deceit--a fraud perpetrated to derive reward by positioning investors to take the risk.

Instead of recovery, we are still flirting with a strong, deflationary trend. Instead of emerging from recession, the late-cycle compression has predictably broken down under pressure from oil prices deliberately driven higher by an accumulation that by itself drives demand lower. So, not only do we have the accumulation driving the recession, but higher oil prices driving it as well. The signals cannot be more negative, and cutting the budget deficit does not fix, but exacerbates, the problem.

Higher oil prices did not predict recovery. Instead, it predicted a deepening recessionary trend, and if we are wondering why the economy is so messed up, deliberate deceit by the so-called best-and-the-brightest (without negative sanction) is why. While these captains of industry and finance are highly skilled and intelligent, they lack the moral intelligence required for leadership. Since moral intelligence is an attribute a free market favors (honesty and integrity being attributes we tend to naturally select if we have a choice), the free market is skillfully reduced to achieve so-called, large-scale efficiencies that a free market supposedly cannot provide (and since the efficiencies are really intended to deprive, we end up relying on government to provide).

These captains, who supposedly lower costs to invest in innovative means to add both quantity and quality, have consolidated the marketplace so much that they can cause detriment to make a profit with impunity. Morality is but a function of demonstrating raw power with the victims relying on a free-market mechanism that is deliberately disabled by consolidation of its value (the value of self-determination). When Ron Paul says we are not being self-reliant, it is not because we do not want to be, it is because the mechanism to do it has been disabled, deliberately!

Notice that conservatives like Senator Paul do not identify consolidation of industry and markets to be the cause of any problems. Instead they focus on the effects. It is the size of government, they say, not the size of the corporate, that reduces the liberty to sanction (exercise moral power) in the marketplace.

While Ron Paul, for example, says he is a libertarian and has studied economics, he comes up with what is an easily recognizable error of fundamental attribution that effectively crushes the liberty (the political power) to economically sanction in the marketplace. When big government is reduced (reducing regulatory authority, for example) what remains is big business unreduced (the cause of the problem). It is a fallacy, post hoc, to argue government causes the loss of liberty it is empowered to ensure in priority.

Conservatives generally postulate a fallacy of attribution with the confidence of intellectual honesty. The effect, however, is to perpetuate the problem their philosophy of risk management (self-determination diminished by liberal pursuit of economy-of-scale efficiencies) proposes to solve. Considering the benefit derived, it is hard to claim the error is not intentional. The system is riddled with errors--up is down and down is up. Signals are "twisted." It literally takes a degree in political economy to make sense of it all.