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A "one-size-hurts-all" outcome
33
Tags: beer, bullw hip effect, com plexity, crisis, Federal Reserve, MIT, risk
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preventing crime
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davefairtex: 30 min 5 sec ago
The takeaways from the exercise are: simplify processes wherever possible, optimize visibility and
communications across the system, align incentives -- and appreciate that even with all these precautions, you'll
likely never have a perfect system. So remain vigilant for the emergence of bullwhip volatility in order to reset
things before they get out of hand.
MoveToHigherGround.yolasite.com
James Wesley Rawles: Homesteading,
Relocation & Resilience
Cker: 7 hours 38 min ago
At the Carnival.
Bud Conrad: The Bursting of the Bond
Bubble Is Now Upon Us
Arthur Robey: 13 hours 11 min ago
(Source)
The Fed gives money to banks to then lend to people. Pretty darn straightforward. What could go wrong?
Oops, but wait a minute. It turns out it's a little more complicated than that. If we dig a little deeper, we see that
the U.S. Treasury plays a role in "conduiting money" into and out of the system, and that the Fed (via the
FOMC) also interacts with corporations, in addition to banks:
(Source)
Hmmm. Okay. So there are a few more folks in the pool than we originally realized. Still, the players all fit nicely
onto a single chart. It's probably all very tightly coordinated and finely controlled, right?
But wait; each of those boxes in the above chart is actually a vast organization (or collection of organizations).
Let's look at each briefly:
(Source)
Treasury
The U.S. Treasury has more than 100,000 employees. Of course, they don't all interface with the Fed, but
multiple departments within the Treasury do.
(Source)
Member Banks
More than one third of all U.S. commercial banks are members of the Federal Reserve System. That's
thousands of banks. They are managed by the 12 Federal Reserve Banks, each of which has oversight of its
district.
(Source)
(Source)
As central banks around the world conduct the greatest monetary experiment in human history in real-time
around us, it's important to keep the Bullwhip Effect in mind. The mathematical odds that the world's many
central planners, with their manifold partners in distributing fiat liquidity, are going to have the finesse to
successfully steer their ships to safety through the shoals of inflation and deflation that threaten on either side,
are very low. And that's before taking into account the unintended consequences of their more extreme
measures.
Bottom line: If another liquidity crisis hits (which Chris is warning may be at our doorstep), the one thing we
can count on is that the response from our leaders will be ill fitting to the situation. Prepare accordingly.
~ Adam Taggart
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11 Comments
Mon, Jul 1, 2013 - 4:16pm
#1
Ken C
Status: Platinum Member (Offline)
Joined: Feb 13 2009
Posts: 753
+1
Bullwhip
Mark Cochrane
Status: Gold Member (Offline)
Joined: May 24 2011
Posts: 428
#2
+5
#3
charleshughsmith
Status: Silver Member (Offline)
Joined: Aug 15 2010
Posts: 134
+7
Excellent intro to a key topic going forward, Adam, i.e. systemic fragility. I wonder if there isn't a second-order
dynamic in play here: the Fed's forecasts are notoriously inaccurate (what housing bubble?), as are all the other govt
forecasts which never anticipate recession. What sort of faith can markets place in these forecasts? Obviously very
little, but the markets seem ever hopeful that the Fed's controls are magically better than its forecasts--meanwhile,
the efforts at control and the bogus forecasts are feeding back into each other.
Great commentary, Mark--those 500-year floods and other anomalies happening every 5 years or so add some nice
snap to the bullwhip.
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 1697
#4
+2
Chaos.
#5
yogiismyhero
Status: Silver Member (Offline)
Joined: Jun 28 2013
Posts: 173
+5
I would give it a 10. I am waiting for the dismount though as my determinant, because from the point of the release
is where all the trouble begins and OH Boy!, could the fall really be spectacular. I don't fear it so much but I am just
terribly anxious for the point where we catch our footing again. Is anything irreparably broken? We shall see.
This Bullwhip thread by Adam has me on high alert and it is painfully clear his thread is as relevant as any thread
written even though it didn't get much ink spilled from the commenters. Nice Adam. Just wait until margin calls are
demanded to rein in speculation as this perhaps gets the downward rock a really rolling. Will Gold go much
lower...We'll see. Who cares, you just gotta have it. Why? Please see Arthurs thread again. Nice Arthur. Corporate
earnings are near and forward guidance seems a bit on the negative side, and if I have learned anything, corporate
profits returning to the mean will just be plain ugly.
#6
ScottT
Status: Bronze Member (Offline)
Joined: Nov 2 2009
Posts: 28
Corporate earnings are near and forward guidance seems a bit on the negative side, and if I have
learned anything, corporate profits returning to the mean will just be plain ugly.
I work for a chemical company and for the most part our division is doing well and has been for the last five years.
After we revised our methods for passing through directly the costs of increases and decreases of our primary raw
materials to customers (all crude oil derivatives) the company realized stable and predicatable earnings and profits.
Since we are few layers removed from the retail customer those pass-through costs usually are delayed by a few
months - further cushioning the downside risks to customers. So long as we don't see a spike in the oil price from
say the current 95-100$/bbl to say 150$/bbl or more I believe we will see the economy hum along happily for awhile
yet and corporate earnings will surprise by staying about where they've been for past few years.
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 1697
#7
+2
Spells
Wiki.
Being a mathematical construct they can inhabit nSpace. Where n is any number.
Chaos is an important discovery. To me it illustrates yet another Limit to what we can comprehend. Where in Adam's
model above is Chaos hiding?
Thus endeth the tale.
davefairtex
Status: Gold Member (Online)
Joined: Sep 3 2008
Posts: 455
#8
+1
I only have visibility at the 30,000 ft level. There are two types of corporations in the data I have - financial, and
nonfinancial. Red line: Finance companies, Black line: Nonfinance companies. You can see that the finance
companies share of GDP (red line) has just gone nuts the past few decades. It is absurdly higher than normal from 1% in 1950 to 5% now. If we call 2% "normal", then 5% is 150% higher than normal.
The other companies, making "real stuff", have a slice of GDP that's definitely higher than normal; right now its 6%,
and perhaps throughout history it was around 4.5%. Perhaps that increase comes because US companies are
selling products overseas, outsourcing work, they have low US wage pressures, low interest rates - let's call it 3350% higher than normal.
#9
ScottT
Status: Bronze Member (Offline)
Joined: Nov 2 2009
Posts: 28
Financialization Follies
Thanks for sharing the data and your perspective from the 30,000 ft level as I agree this is really what is
fundamentally underpinning the macro economy. My purpose for sharing my experience at the micro level was
meant to convey that things are quite Ok for some - at the moment. Of course this can change in an instant as we
saw in 2008. Moreover as you point out the absurd financialization of the markets are serious cause for concern.
The chart presents a boringly flat red line for about 50 years then kaboom all hell breaks loose and the banker's
party has been raging ever since! Looking at this chart I would expect a "correction" seems in order for both sectors
sometime b ut the more painful and ugly one will be in the area of finance since they appear to be still a bit bloated
and not adding much value to our economy or lives.
yogiismyhero
Status: Silver Member (Offline)
Joined: Jun 28 2013
Posts: 173
http://www.hussmanfunds.com/weeklyMarketComment.html
...take a look see at the analysis of this fine Doctor. A must read every Monday. IMHO
#10
#11
Ameet
Status: Member (Offline)
Joined: Mar 18 2011
Posts: 8
+1
Thanks
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