Financial Cold War

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As we crossed the finish line last week into the longest bull market in human history, a question that has been on my mind for years came bubbling to the surface again: if this is so easy, why didn’t the governments of the world do it before? In other words, since it’s been proved quite clearly that central bankers can prop up equity markets around the world, as well as public sentiment, why did it take them so long to figure it out?

Were they really that dim? Why would the governments, and all the self-interested individuals which comprise them, put themselves through the financial horrors of 2007/2008, the crash of 1987, the Internet bubble collapse of 2000, or the grinding equities-are-dead market that lasted the entire 1970s? It doesn’t make any sense.

However, I’ve been fleshing out something that I think might provide an answer to the question by way of a surprisingly strong analogy. During this “Everything Bubble”, conjured up by Mario Draghi, Ben Bernanke, Haruhiko Kuroda, and Zhou Xiaochuan, the idea of “mutually assured destruction” keeps springing to mind. M.A.D. is defined as “a form of Nash equilibrium in which, once armed, neither side has any incentive to initiate a conflict or to disarm.” As a child of the cold war myself, I probably have this M.A.D. analog deeply planted, but as I thought about it more deeply, I was astonished how cleanly it explains our new financial world.

To explain this analogy, I’ll lay out the players involved:

The Pre-Atomic World: In the case of military conflict, there were obviously countless wars throughout the centuries. In the financial world, there were likewise countless periods of booms and busts. The mass of humanity in both the military and financial worlds tended to engage locally, and there certainly was no overarching global “hand” over either of these worlds.

Knowledge Development: Necessity is the mother of invention. In the case of war, the global conflict of World War II prompted the U.S. (as well as, although not as far along, Germany and Russia) to explore the creation of atomic weapons. The necessity in the financial world was brought on by the financial crisis that unfolded in 2007 and 2008. In each of these cases, the accumulation of knowledge and cooperation had reached a level that didn’t exist in the past, and a new form of “technology” was formed.

The Will To Use It: Once you have something in hand that’s supposed to solve your problem, but it’s never been used before, what do you do? Particularly since using it requires risks both known and unknown? Remember, during the first test of the atomic bomb in New Mexico, the scientists weren’t altogether sure that the chain reaction wasn’t going to destroy the entire planet. Henry Paulson and Ben Bernanke didn’t know if unleashing TARP and massive central bank intervention would create hyperinflation or a new panic. Yet in both cases, the responsible parties unleashed what they had created and anxiously awaited the result.

Success: In both cases, the new “thing” created did, in fact, work. A couple of A-bombs dropped on Japan put an instant end to a war that had taken millions of lives and years to fight. The financial “bomb” that Paulson and Bernanke launched stopped the crisis at 666 on the S&P 500, and here we are today about 350% higher (to say nothing of stocks which are up 10,000% or more). So the creation proved itself effective, and when something like that happens, the creators are going to get a LOT of power. I’ll say it again………those behind the new thing are going to get a massive amount of power and leeway they never enjoyed before, because the terrified masses that had been holding their breath to see how things would turn out finally breathe a sigh of relief and pledge their everlasting fealty to the creators of the new “thing.”

Copycats: Of course, the world at large has witnessed the success, and they want to benefit too. So atomic technology spread to Russia, England, France, Pakistan, India, and China. And financial “technology”, knowledge, and, most of all, the willingness and political power to deploy it, spread around the globe.

The Arms Race: So, over the course of years, all sides kept up with everyone else. Thousands and thousands of nuclear weapons are made. Trillions and trillions of dollars in new “money” get manufactured and deployed. Each party is nervously watching all the other parties. The world is totally changed, and the shape and behavior of the world is forever mutated.

The Bulls/General Public: What was the mass majority of the public like with respect to the cold war? How did everyday citizens react? Well, they just accepted that This Is How Things Have To Be now. Deep down, they knew from a moral standpoint that the situation was wrong, and from a risk standpoint, they knew that the situation was actually quite insane. It isn’t sensible for the entirety of humanity to be pointing weapons at one another that would snuff everything out. It isn’t sensible that the entirety of the financial world has made itself dependent on countless trillions of dollars of artificial credit to foment the illusion of stability and prosperity. At some level, 99% of people know this, and they just live with it. After all, what are ya gonna do, huh?

The Bears/Prepper Lunatics: Of course, there’s always going to be a small faction that doesn’t want to go along for the ride. They not only see the insanity, but they want to try to do something about it to protect themselves and their families. In the cold war, a tiny number of people made preparing for Doomsday a lifestyle for themselves. They had bunkers, stockpiled rations, stockpiled guns and ammunition, precious metals, water filtration, and so on. Whatever they felt would improve their chances of surviving in a post-apocalyptic world. And for the financial globe, a tiny number of people stacked up their gold coins, read alternative media religiously, and not only avoided riding the “wave” of AMZN, NFLX, and NVDA, but, quite the contrary, bet against them since, naturally, what was happening was lunacy. And you want to know something? Both the preppers and the bears wound up looking like stupid, idiotic morons. Why? Because in the cold war, there WAS no doomsday, and the normal members of the public were right to shrug their shoulders and the doomsday prepper freaks looked like tinfoil-hat wearing freaks. Same with finance. Who would you rather be today? Someone who threw their lot in with AMZN and made himself rich, or someone who yelled about it every step of the way and wound up with nothing, except the very special feeling of looking like a complete asshole?

Now, of course, neither situation is “over.” The world still has thousands of nuclear weapons pointing everywhere, although tensions aren’t anything like they were in 1980. And the world still has trillions of dollars in debt piled up, although financial tensions aren’t like they were in 2010.

But the Cassandras are still out there saying, “You just wait. You’ll see. I’ll be right, and you’ll be dead.” And, believe me, as more-or-less a permabear myself, I can understand this mentality, but let’s face it, both the doomsday freaks and the permabears have been ceaselessly wrong for the duration. The ONLY thing that’s going to change either situation is going to be an error (“Whoops! We didn’t mean to deploy that missile!”) or a deliberate decision by a given party to say “Screw it. The damage will be worth it.”

For instance, China could, in a single day, unleash holy hell on the financial world by announcing they are selling all their U.S. holdings in the next 72 hours and will no longer be providing their own equity markets with any support. But they are no sooner going to do that than they are going to launch an unprovoked missile attack. Because M.A.D. is still in place, whether you are talking about dollars or destruction.