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Paranoid Bull @paranoidbull
, 26 tweets, 4 min read Read on Twitter
It is nearly impossible to understand what is happening in the markets right now without going back at least to the fall of 2008.
There was a moment that fall that a very difficult decision had to be made:

To let the banks fail and with it the entire System and to suffer the consequences.


To bail it out and try to minimize the carnage by propping up the System.
The decision to choose the latter was very popular at the time - I agreed with it back then after much consternation.
Both political parties agreed.

It became adopted without much resistance and then we were off to the races.
As the System began to recover, it became clear than previous limitations of Central Bank policy had been tossed aside at that moment, so as hiccups arose, the line was pressed further. QE, Twist, anything to keep markets rising and the economic “recovery” in motion.
Now of course the Europeans followed our lead when they hit some bumps and later Japan and Europe crossed the final barrier of “negative bounds” and even bought junk bonds and in Japan’s case, equities.
All of this had the effect of lifting asset prices and stimulating economic growth in the US and somewhat outside (woot! China! - they benefitted the most of all, what a strategic coup, but I digress)...
But the Reason we have to go back to the ‘08 moment can help to highlight why the System is breaking now.
What happened at that time was basically a form of Political Capture:

The Rich Asset Owners (on Wall Street and elsewhere) along with Big Business convinced both the Red and Blue to prop up the System at all costs.
This decision: to prop it up by increasing asset values and keeping these giant companies in power and in place had lasting consequences.
The Rich got richer as their Assets increased in value.

Big Businesses got Bigger as they consolidated and Captured even more power.

Profit Margins hit peaks, as the powerful businesses squeezed as much as they could out of the Economy and the System.
Meanwhile, the Central Banks were emboldened to pursue market inflation at all costs: with complete abandon and disregard for the consequences.

They pushed the markets to such extremes that European and Japanese Real Money has nowhere to hide but in U.S. tech stocks.
The lever for this manipulation was primarily Sovereign Credit which ultimately is tied to governments - or Political Risk.

So what happened is they propped up the Captured System by *underpricing* Political Risk.
What is the major Political Risk that was underpriced Globally during this last decade?

Well: it is a direct response to the Captured Political Parties who bailed out the System for the Powerful and Rich - Populism.
In other words:

Even though the Central Banks have been powerful enough to prop up markets and the Rich have gotten Richer and the Big Businesses have hit Peak Margins, the People have been building their response.

The Risk of Populsism has Arisen.
As a direct consequence of the decision of the Powerful to ignore all risks and prop up the System at all costs, they forced a response:

Populism is the natural Political Risk that was underpriced by their Greed.
Populism is what drove Greece, Brexit, President Trump and now Italy.

It is driving the trade war, which is ultimately inflation and margin compression.

It is driving the pending fight between Italy and Germany which could cause a Systemic Collapse.
Global Populism was underpriced as a long term consequence of the Myopic decision to bail the System out in 2008.

But today it seems obvious:

Of course the powerful would crush the people and the Captured Red and Blue political parties would play along.
As long as the markets kept going up, companies kept “growing” and the rich kept getting richer, nobody cared about the consequences of that decision.

Until now.

It is far too late.
The crazy thing is that the Delusionists are so Captured by the System that they can’t even see that they are complicit in it and have helped to cause it.
Idiots like @paulkrugman is just one of so many who are so deluded they can’t even see what they helped to create.
It is easier to see in places like Italy where the Germans crushed the Italians and the rich in the North played along for awhile until now (and Lega!).

But this is Global.

And it all goes back to that decision in 2008.
Ultimately, as The Unwind continues and we have a collapse - it is coming don’t you worry. It will be extremely disorienting because people won’t understand.

They don’t understand that it is already happening.

The repricing of Political Risk is highly unintuitive.
Take the U.S.

How could it be possible that a completely vertical front end of the curve coinciding with the most volatile and disruptive presidency ever isn’t Political Risk being reproved?

(Triggered “macro experts” in 3,2,1...)
What is coming for Global Sovereign Credit Markets is going to take everyone by surprise even though it shouldn’t.

We have already seen the warning shots in Italy. We see where this is going.

Populism has only just begun to unfold.
The gist of this is simple:

Risk exists.

In 2008, it peaked and people didn’t want to take the pain so it was delayed.

But the Risk didn’t go away:

It was transferred to Government Balance Sheets and then massively underpriced.
Shifting Risk to government balance sheets and then underpricing the Political Risk associated with that move IS the Systemic Risk this Cycle.

Political Risk has arisen.

Systemic Risk will emerge.

And there is nothing that can be done to stop it.
Cycles Matter.
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