Friday, February 25, 2011

Exporting Speculative Debt

You know that information has officially entered the mainstream financial world when the Wall Street Journal writes about it. George Melloan recently wrote an article entitled "The Federal Reserve is Causing Turmoil Abroad", in which he stated that the tsunami of debt-dollars unleashed via quantitative easing over the last year has caused food and energy prices to skyrocket in countries around the world. This price inflation has, in turn, chewed through the disposable incomes of those with the least income to spare, which is now a majority of the population in many countries, and has led to social and political unrest/revolution.

However, he did not use the term "debt-dollars" and, in fact, he did not even refer to debt in the article. So while it is comforting to know that some people in the mainstream financial world are finally starting to connect a few crucial dots, it it still true that these people are missing the bigger picture those dots comprise. The
Federal Reserve has indeed printed money and helped drive up commodity prices throughout the global economy, but none of this price inflation is achieved without its trusty sidekicks, the major investment banks (hedge funds), and their weapon of choice, leverage.

This dynamic represents the tail end of one that has existed for several decades, where financial consumers in both developed and developing economies had artificially increased demand for dollar-denominated commodities such as crude oil, wheat and corn. While most of these consumers no longer have access to any credit and are struggling to pay off debts, the major banks have virtually unlimited access to free credit from central banks. This credit is used to speculate on stocks, bonds and commodities for short-term profits, just as it had been previously used to speculate on real estate. In this sense, the Fed is not "exporting inflation" as the WSJ article argues, it is exporting speculative debt.

Some may argue that this distinction is a technical one, and that inflation is all too real for those Egyptians or Tunisians who have had to struggle with rising food/energy prices that they can barely afford. This argument simultaneously contains and misses the fact that these people are only struggling with high prices because there have been no corresponding increases in their incomes and revenues, or decreases in their obligations. That fact exposes the true nature of the exported "inflation" in these countries - it's all speculative sizzle and no steak. The American people have to look no further than their own real estate market to see where this trend is headed.

Zero Hedge reports that total margin debt used by hedge funds to purchase equities peaked at $290B in January 2011, while total free cash is at its lowest level since July 2007 [1], and it would be safe to assume that a similar dynamic exists in the commodities sector as well. Investors have been using pure leverage to speculate on asset prices, rather than debt-free cash, and this process, like any other pyramid scheme, is always self-limiting. When prices do not cooperatively continue their exponential escalation to infinity, we can expect all of those margin calls to force a panicked sell-off across all asset classes.

While it is impossible to predict exactly when such an event will occur, it is almost a near certainty that it will. Dr. Steve Keen, a notable Australian economist, has even gone so far as to dynamically model this financial process. His model demonstrates how speculative financial investment in a pure credit economy will inevitably lead to a severe recession/depression once the speculative debt levels overwhelm the productive capacity of the economy. [2]. Despite what they would like us to believe, central banks such as the Fed are not immune to this dynamic and there will soon come a time when quantitative easing is politically impossible and/or financially impotent.

Already, the Fed's "QE Lite" program of monetizing mortgage-backed securities and agency debt has dramatically slowed down as rates have started to climb. Excess reserved held by the investment banks with the Fed increased by $73B in the past week, which means that the risk mentality is subsiding and less money is being used for speculation. Sales of new single-family homes shot down almost 13% last month, and 2010 Q4 GDP was "unexpectedly" revised all the way down to 2.8% from 3.2%. [3], [4]. As economic data continues to disappoint, leveraged speculation will become increasingly anathema to American investment banks sucking at the teet of the Fed.

The connection between the Fed, commodity price increases and social turmoil may have entered the mainstream dialogue, but it is exactly when the mainstream recognizes a financial trend that it soon reverses. Investors amassed on one side of a trade will be forced to quickly shift to the other side, and the "inflation" exported by the Fed will be revealed to be just another speculative romp crafted for the benefit of those who made out like bandits during the last one. As The Automatic Earth has repeatedly stressed, however, a deflationary price collapse will make necessary commodities even less affordable for the average person, due to a dramatic reduction in private revenues and public benefits. So while the superficial financial trend may change, the social turmoil will continue on, and next time Egypt's revolution may not be so "peaceful".

Sunday, February 20, 2011

The Dictated Psychology of Network Society

"Lions and tigers used to be kings of the jungle and then one day they wound up in zoos - I suspect we're on the same track." - Josh Harris

I recently wrote two brief articles outlining the psychology of irrational financial decisions made by individuals in developed societies, or "fish", and their disproportionately negative reactions to financial loss (as opposed to financial gain). The analogy to "fish" in poker was used to highlight the general mass psychology underlying a decades-long credit bubble and persistently stubborn expectations of never-ending growth, while the second concept of "myopic loss aversion" illustrated the frightening scale of systemic frustration and displeasure most likely to result from the bubble's implosion. Yet, both of these concepts seem to beg a more profound question about the underlying psychological states they reflect:

Why do individuals in the developed world find it so difficult to, first, understand that these psychological states exist and, second, take some degree of personal control over them before it's too late to make a difference?

The general answer to this question may be simple, but its supporting framework is anything but and requires a sharp detour through the looking glass, away from our personal perspectives and into the arena of systemic, "big picture" analysis. The thought patterns and reactions associated with financial investment and loss may occur within the minds of specific individuals, but they are broadly structured and re-enforced by the human systems in which these individuals exist (economic, social, cultural, political). These evolved systems exhibit an emergent psychology that may not necessarily manifest itself within the minds of isolated individuals, or even small groups.

In that sense, we are living in an environment where the traits most critical for maintaining a healthy financial psychology, one detached from desires to "win every pot" or "chase every loss" and capable of emotionally handling short-term loss, are nowhere to be found. These traits include patience, discipline and self-confidence, and more specifically, an ability to sacrifice personal pleasure or egoistic pride in the short-term for long-term stability and prosperity. Those values may resonate with first-world, middle-class citizens in the abstract or in a work of fiction, but practically we are no more familiar with them than we are with ideals of loyalty, selflessness and courage.

Every aspect of our lives, from our days as young children playing games in elementary school to those as young professionals investing money in an asset market, has been conditioned on the premise that faster is not only better, but it is absolutely necessary for any degree of material success. We cannot afford to have patience or discipline, because we will miss out on all of the phenomenal returns casually tossed forth from the new hot thing in the technology sector or the new guaranteed play in the commodity space. Objective research and analysis is tolerated only to the extent that it does not stray too far from the conventional wisdom - growth and greed are always good.

If, somehow, we do actually lose a bit of money in our speculative investments, then we surely cannot afford to let that prevent us from watching our favorite daily line-up of mindless 30-minute prime time television shows, as they comfortably numb the pain of our loss. As long as we can hold on to our investment assets for dear life while the markets chaotically gyrate upwards, they will eventually regain their former value and it will be as if nothing ever happened in the first place. There is no apparent sensible reason for the average financial consumer to acquire and maintain discipline in their financial decisions, when investors with no such discipline continually stack their hands on top of their fists and watch truck loads of money materialize in the space between.

If your goal is to become materially wealthy and successful in a matter of months or years, then you had better not fold any potential winners. No, you must listen to a few short clips on CNBC, in which Jim Cramer spouts off buy/sell recommendations at madhouse velocity, and then immediately turn your money over to a brokerage firm which can allocate it (- commissions) towards the recommended equities and high-yield bonds. Personally, I recommend sub-prime mortgage-backed securities, because even though they may walk, talk, act and smell like human excrement, they have been officially rated AAA. If you get "scared" and end up selling these assets to cut your losses, then you will no longer be a loser on a piece of paper, but an officially-confirmed one in real life.

The human brain is a highly efficient machine (not to be confused with rational), and it will not adapt itself to incentives that simply do not exist. Policymakers and authority figures at every level of society would not have dared to incentivize values of patience or short-term sacrifice, because these traits did not help maintain the financial system of perpetual growth which effortlessly kept them in power. They immediately recognized the new financial reality that was rapidly spreading like cancer throughout much of the world, and they jumped on board before it left them behind. Our world had been defined by networked systems of material and intellectual production that communicate information within and between themselves at break-neck speed - our minds could not help but thoroughly condition themselves to desperately try and keep pace. That is, at least, until the "lactic acid" builds up and it's no longer physically possible for them to do so.

Josh Harris, a notorious pioneer of the Internet Age, ran a surprisingly little-known experiment in Manhattan at the end of the 1990s, ironically called "Quiet: We Live in Public". It consisted of 100 artists living in a basement "hotel" that was outfitted with pod rooms, and it lasted for one month before being shut down on the first day of the new millennium. The hotel offered "free" food, drinks and entertainment for the duration of a person's stay, but it charged an extremely hefty price in return. Each pod contained a video camera and monitor system that was networked to those in every other pod, so that each person could observe what any other person was doing when he/she was no longer in one of the communal areas. The artists could not eat, shower, sleep, use the bathroom or engage in sexual activity without someone potentially watching them do it.

Harris designed the experiment to showcase the Orwellian future he envisioned for our technocratic network society, and the ways in which people will react to this new reality. As one may expect, many of the self-proclaimed "open-minded" artists, who initially jumped at the opportunity to "live in public", quickly devolved into little more than territorial animals. The situation would have most likely resulted in deadly violence if it had not been stopped by the police and fire department, especially since the hotel contained a shooting range and a cadre of guns. It was not really the loss of privacy that spurred this rapid social deterioration, but the loss of any meaningful control over one's ability to remain private. Harris himself had a partial "mental breakdown" after he continued the panoptic experiment for six more months with his girlfriend in their loft apartment.

"Quiet" has become both symbolic and a literal representation of developed societies, where people lack any control over the material conditions of their existence and relations with others. The ability to control such conditions was almost always illusory, but the illusion had worked extremely well for many years. Now, our expectations of privacy have exponentially diminished since the turn of the millennium, just as Harris predicted, but so have our expectations of financial stability and prosperity. Networked computers determine just how quickly our private lives become discrete packets of public information, and our financial portfolios become electronic heaps of worthless rubble. We "volunteered" to participate in this grand experiment, allured by promises of cheap food (energy) and unique entertainment, and so we will follow its dictated psychology to the bittersweet end, when it is finally shut down and our minds are left with scattered memories of a dark and regrettable time in the collective history of mankind.

*For a detailed look into Josh Harris' "Quiet" experiment and other aspects of his life, I highly recommend the award-winning documentary, We Live in Public.

Tuesday, February 15, 2011

The Short Story of How We Lose

A curious thing happened to a middle-aged Frenchman in Monte Carlo last year. He had unexpectedly received a year-end bonus of €10,000 from his employer, and decided to visit Le Grand Casino for a weekend, where he could relax and gamble with his new found wealth. Since his wife and daughters were visiting his stepmother that weekend, he would be able to focus entirely on making some money. His first night was judiciously spent at the Roulette tables, where his sharp instincts and calculated patience presumably allowed him to double his allotted wealth in just five hours. It was an excellent night for the man, who was now €10,000 richer, and he spent the next afternoon lounging in a cabana at the hotel's pool.

That night, the man locked away the initial €10,000 in his room's safe and took the rest back down to the casino floor, where he quickly locked up a seat at his favorite Roulette table from the night before. His playing strategy remained the same as always - place a minimum bet on two out of three columns, switching one column each time he won a bet, and sitting out one roll each time he lost - no deviations from the strategy whatsoever. After a series of wild fluctuations in his bankroll, the man was left with only two more bets, and he decided to place them both on black. The tiny steel ball deftly rolled around the wheel for several revolutions and tensely bounced between a few numbered slots before finally choosing to settle on number 21 - red.

The man quietly finished his glass of red wine, shuffled up to his room and lay awake in bed. He couldn't help feeling extremely frustrated about the events of that evening. Frustrated with the insidious game of roulette, with his own careless betting decisions, with his "bad luck", with the other players who had won, with the man spinning the little steel ball, with the tiny ball itself. He kept replaying the spins in his mind, fantasizing about the money he would still have in his pocket if he had just made a few different decisions. What especially haunted him was the would-be expression on his wife's face when he unexpectedly brought home €20,000. The €10,000 bonus would surely lift her into a state of pleasant surprise, but the man speculated that, if he had managed to double that bonus in just two short days at the casino, her pleasant surprise would be magnified ten-fold into a state of blushing pride .

On his journey back home the next day, the man began to realize just how strange his lingering feelings from the night before were. After all, he was exactly even from gambling at the end of his trip, and had actually been comped for a night's stay at the hotel and a few meals. He had even expected to lose a bit of money going into the trip, since Roulette laid players some of the worst odds in the Casino. The man reflected on the fact that his brief excitement from winning €10,000 on the first night had paled in comparison to his prolonged dismay from losing that same €10,000 on the second night. It was indeed a curious psychology that continued to puzzle the curious man, so he decided to do some Internet research when he arrived home. Hopefully, he thought, a new and more fundamental understanding of this psychology would finally put his mind at ease.

It didn't take too many Google searches before the man came across the concept of "myopic loss aversion", which explains that people are significantly more likely to experience pain or displeasure from losing a monetary amount than excitement or pleasure from winning that same amount, especially when they frequently evaluate financial outcomes. This disproportional dynamic is obviously powerful when it involves money that one can barely afford to lose, but it also forcefully applies to losses that may be small relative to an individual's bankroll. Even the multi-millionaire corporate executive who drops fifty grand gambling at a Vegas poker table will be beating himself up soon after, despite the fact that he will most likely make  multiples of that by the end of the year (or at least he believes that he will).

Many of us may be familiar with the painful/shameful process of losing significant sums of money invested in the "wrong" place at the "wrong" time, but it is much more difficult to imagine the negative reactions produced when an entire economy of millions is serving up losses which, in a few short years, will threaten to wipe out all of the financial gains accumulated over decades. After the most potent "winning streak" in human history, the majority of American society has been blindsided by equally potent losses, which continue to mount and show no signs of abatement:
  • It is estimated by Zillow that average home prices in the US have declined ~27% from their peak in June 2007, effectively destroying $9.8 trillion  worth of homeowner's equity (in an economy worth ~$14 trillion). [1]
  • About 15.7 million homeowners have negative home equity (owe more on home than it is worth), representing a whopping 27% of all mortgaged single-family homes. Joseph Stiglitz infers that these trends will lead to a total of about 9 million people losing their homes through foreclosure between 2008-2011. [2].
  • According to officially under-stated statistics, the unemployment rate jumped from 5% in 2008 to ~9.6% in 2011, and the U-6 number puts it at ~16.5%. [3]. The official rate is only that "low" because millions of people have given up looking for jobs over the past few years (magically removing them from the official labor force), and millions of other people with part-time, low-paying jobs are counted as employed (26% of new private-sector hires are temporary [4]).
  • Between 2006 and mid-2008, Americans had lost about 22% of total retirement assets or $2.3 trillion, and $2.5 trillion in savings and investment assets. [5]. Although a decent amount of this value has been recovered during 2009-10, it has mostly gone to a significantly smaller percentage of people who have held on to such assets and has only been achieved on the backs of taxpayers, who now owe interest on an additional $4 trillion+ in public debt (plus a few more trillion if we include the GSEs). [6]. When the markets crash again, that public debt will be money completely wasted for a large majority of Americans, if it is not considered to be already.
  • Credit card defaults hit a near-record rate of 11.4% in 2010, more than double the rate in 2007, and the average late fee had risen almost 10% from $25.90 in 2008 to $28.19. [7].
  • Public employees face at least a $2.5 trillion state pension shortfall mostly accumulated since 2008, and the gap can only be made up through drastic cuts to pension benefits, layoffs and cuts to public services for all other citizens. [8].
  • Profits of most small businesses (unincorporated organizations such as partnerships and sole proprietorships) have fallen 5% in the last two years. [9], [10]. These businesses employ over half of all private sector employees and have created 64% of net new jobs over the last 15 years. [11].

There are many other losses that have befallen the American people over the last few years on top of those listed above, and recently they have also seen the costs of necessities increase. The real interest burden of private and public debt continues to weigh heavily on businesses, consumers, patients, students and civil servants. State welfare programs such as unemployment insurance, food stamps, Section 8 and Medicaid provide temporary crutches to dull the searing pain, but it is clear that these programs only continue to exist on recklessly borrowed time and will be selectively restricted to the American people in short order. The federal retirement program of Social Security, on which many retired Americans have come to rely on, is at the brink of insolvency (the difference between outlays and receipts for the SSA in 2010 was $76 billion [12]), and Medicare isn't looking too much better.

American politicians and officials are promising their constituents that this value lost will be recovered, but most of them remember too many broken promises to find any comfort in hollow words. When structural shortages of oil imports become a factor, Americans will have systematically lost not only their financial investments, but their entire way of life and lofty perspectives of reality. Sooner rather than later, we will be forced to fully experience the penetrating anguish and regret associated with unprecedented loss, as the tiny steel ball ceases to bounce around and settles in its pre-determined slot. It is at this time which we will realize that there is only a thinly-veiled political fiction separating us from the furiously desperate protesters in the crowded streets of the Middle East.

Tuesday, February 8, 2011

A Glimpse Into the Stubborn Psychology of Fish

"Poker may be a branch of psychological warfare, an art form or indeed a way of life – but it is also merely a game, in which money is simply the means of keeping score." - Anthony Holden

For those unfamiliar with the game of poker, it is essentially a game where players attempt to win money from other players at their table by having the best five-card hand at showdown or by betting their opponents off of the best hand. The most popular form of poker is Texas Hold Em', in which each player is dealt two "hole cards" followed by a round of betting, then a three-card "flop" followed with another round of betting, a one-card "turn" with betting, and finally a one-card "river" with the last round of betting. Each player can, but is not required to, use one or both of their hole cards, and must use 3-5 cards on the board, to construct their best possible five-card hand (from best to worst - straight flush, four of a kind, full house, flush, straight, three of a kind, two-pair, pair, high card).

What makes poker a profitable venture for "solid" players, unlike blackjack, craps or roulette, is their opportunity to capitalize on the mental mistakes of other players, by accurately "reading" the opponent's potential range of hole cards in any given hand (mostly from betting patterns and style of play), and accurately calculating the "pot odds" they are being laid (money that must be put in on the present and future betting rounds as a percentage of money that could be won from the pot). The pot odds calculation allows the solid player to determine the best course of action (bet, call, raise, fold) by comparing it to the equity his/her hand carries against the opponent's range.

Any course of action offering positive expected value (pot odds > odds of breaking even against opponent's range) should be taken, and ideally the single course of action offering maximum EV is the one that will be chosen. It is not easy to precisely determine the expected value of any given decision, especially when your facing a new opponent, but the toughest part of playing a solid game is remaining disciplined, unemotional and objective throughout an entire hours or days-long session . The solid player can never let the play or words of weaker opponents introduce any elements of self-doubt into his mind, since this fundamental uncertainty will eventually snowball into a situation where the once-solid player no longer has any reason to believe that he/she is playing any better than the rest of the table.

The opponents every solid player wants to find at his/her table are called "fish" (aka "calling stations"), because they play a large range of hands before the flop and tend to call large bets (as a % of the pot) after the flop with weak hands (high card, single pair) or draws (to a straight or flush). These players are typically very passive, meaning they almost always prefer to just call with their hands (weak and strong) rather than raise, making them an ideal opponent. When you make a decent five-card hand, you keep betting it for value against the fish, and if the fish raises your bet, then you fold everything but the strongest hands.

The best feature of a true fish is that he/she never learns or adapts to an opponent's style of play. They will keep calling you with weak hands even when you only show down "monsters" at the table, because they are only concerned with their own cards and they always assume you are holding even weaker than they are. There are not many real-life players who fit exactly into this idealized style of play, but there are many who generally harbor its underlying psychology - one of permanent and irrational belief in an ability to win a hand, despite any mounting evidence to the contrary. They cannot possibly conceive of folding, because that means giving up any chance of winning, slim as it may be, and also giving up any money already invested in the pot. A quick example of the typical thought-process a fish undertakes in a hand:

So you were first to act pre-flop and raised to 3x the big blind? Well I have a pretty-looking 9Ton the button, so I call to see a flop.

So you bet 3/4ths the pot on a 5 59 flop? Well, I have top pair and a backdoor flush draw, so I call.

So you again bet 3/4ths the pot after the turn produced the 2? Well, my draw has vanished but I still have top pair, so I will call again.

So you fired a third large round at the pot after the river brings the 5, representing a big pair such as AA or KK?? Well I don't really care what you are representing or actually thinking, because I have a full house, so I call!!
The fish never stop to think what your strong bets out of position imply about your hand, especially given the fact that you most likely know that they are fish. If the fish do stop to think about these factors, then they most likely dismiss the thought before it has any chance to settle, since it would be too disruptive to their goal of never folding a potential winner. While the solid players are constantly engaged in several different layers of critical psychoanalysis, the fish are forever stuck in a one-track mindset. This linear form of thinking should sound eerily familiar to the collective psychology that has traditionally encompassed millions of people in the developed world, and continues to do so currently. 

After all, poker is essentially a simplified representation of financial investment in a capitalist society, and the fish are the reckless "speculators" in the broadest sense of that term, which includes most people who adhere to mainstream beliefs about "proper" lifestyle choices in their society. Those of us who are aware of the deeper and more comprehensive trends in our socioeconomic system are the solid players in the poker game of life, and the facts/data that support these trends are our bets. The broad socioeconomic trends that we are currently experiencing in the developed world are pretty clear and straightforward (leaving aside the critical issues of peak oil and climate change):

The financial model of growth in the developed world has run its course and financial assets will be significantly reduced in value over the next few years.

Systematic deleveraging will lead to persistently high unemployment and widespread poverty.

Societal institutions or systems that rely on financial stability will continue to deteriorate at an accelerating pace (education, healthcare, etc.).

States running large fiscal deficits to support their private economies will quickly slide into insolvency and default on ambitious promises to their citizens.

Housing, food and energy will become unaffordable for millions of people as wealth in the form of revenues, investments and savings is rapidly destroyed, and short-term speculative plays in the commodity space fueled by central bank liquidity will only make this dynamic worse.

Political institutions or systems that have exercised power during the unprecedented financial boom will come under an equally unprecedented societal pressure and will most likely be overhauled or completely dismantled.
Over the last few years, our bets have become larger and more powerful in every way imaginable, yet the fish keep calling and expecting to see a bluff. When the stock market took a nosedive in late 2008 as a result of the sub-prime housing meltdown, the fish were initially flustered by such a strong bet against financial stability in the developed world. However, they quickly shrugged it off and regained their hard-headed "business as usual" mentality, continuing to pour more of their speculative money into the pot (stocks, real estate, bonds, consumer goods, etc.).

When sovereign debt issues emerged from the Eurozone and Greek could no longer roll over its debt at anything close to a reasonable rate of interest, the fish began clamoring to make sense of such a strong bet against the fiscal solvency of states in the developed world. Of course, the bet was quickly dismissed as a pathetic attempt to sell prophecies of "doom and gloom", and the fish kept insisting that Greece was an isolated incident in an otherwise stable and prosperous region. Now that the contagion has spread to other European countries such as Spain, Portugal, Ireland and Italy, the fish almost unbelievably continue to dismiss the trend as a slight road bump on the EU's path to greater wealth and prosperity.

Almost every significant data point that has emerged during and since the events described above has either been dismissed outright or "rationalized" away. You say that new and existing home sales have sharply declined after expiration of the federal tax credit? Well, I say that doesn't matter because housing will always regain its value in due time. You say that there are millions of homes being kept off the market as shadow inventory, and more millions of homes whose legal title has been compromised by rampant banking/investor fraud? Well, I'm confident these are minor problems which can be solved with some retroactive legislation and more state subsidies to banks or homeowners.

You are claiming that the banks responsible for most of the secured lending in this country would be bankrupt if forced to mark their assets to fair market value? Well, I don't believe you because the WSJ reported that major Wall St. banks took in record revenues in 2010 and therefore rewarded themselves with record bonuses. In the mind of a fish, long-term solvency is simply not as important as winning a few pots in the short-term. There are numerous other economic/financial data points (bets) that the fish refuse to accept as an accurate representation of reality's underlying hand (re: unemployment, food stamps, pension shortfalls, stock market losses, private and public debt burdens, etc.). However, the irrational denial of fish is perhaps even more stark in the realm of sociopolitical trends.

Since early 2010, there have been many acts of politically-motivated violence across the world, ranging from individual acts and modest protests to full-blown riots and revolutions. The fish may tell you that there have "always" been people who snap and go on a killing spree, or groups that decide to protest a specific state policy, or third-world nations that spontaneously erupt in revolution, and so these events have no special systemic significance. It is true that these types of events have occurred in many places throughout the latter half of the 20th century, but they are only beginning to exhibit such strength, frequency and widespread influence after the global financial crisis.

Part of this dynamic is a reflection of how we were unable to connect the dots back then, when we were paying less attention to betting patterns and more attention to the stacks of chips sitting in front of us. The more significant factor is that systemic flaws in the global financial system have been fully exposed to the world's population, and much of this population has been forced to absorb the drastic costs of these flaws for the benefit of a few. No amount of political window-dressing by politicians, academics or pundits in a financially-dependent state can hide the ugly reality now facing its citizens.

This new reality is best evidenced by the spread of sociopolitical unrest from "peripheral" countries to the heart of our global society. Member countries of the EU are not economically or politically "insignificant" states, and their frequent protests, strikes and riots evidence a rapidly increasing frustration with both the national and regional institutions currently determining economic policy. Egypt and Saudi Arabia are not Tunisia or the Gaza Strip, and the instability of their corrupt, authoritarian political systems is fundamentally the same as that of their sponsors. Speaking of whom, the U.S., U.K., Japan and China have also witnessed their fair share of sociopolitical tumult over the last few years, and all signs point towards an intensification of this popular animosity in the near future.

In an actual poker game, the solid players derive most of their profits from the fish, so where do we find our profits in the poker game of life? It may seem counter-intuitive to say that the irrational beliefs of mainstream society have benefited us in any significant way, but there can be no doubt that we have profited. Asset prices have not collapsed yet because the fish refuse to accept reality, and this denial gives the rest of us a chance to sell what we have before realizing too many losses. Our political and social institutions remain functioning at a reasonable level, which gives us ample opportunity to physically and financially prepare for the inevitable future. The suspended reality created by the fish gives us a chance to continuously communicate our views to others, with the hope that some semblance of reason eventually gets through.

It's only when the school of fish stream towards the exits in unison that the "game" becomes wholly unprofitable for solid players. Until that tipping point arrives, our bets will continue to scream "I have a monster!" at the top of their lungs, and the fish will continue to make crying calls in stubborn disbelief. The psychology of fish always carries them from a state of comfortable wealth to one of utter destitution over time, as they incessantly chase their losses, throwing bad money after money even worse. As the total amount of capital sunk into the pot exponentially increases along with net losses, the fish find it that much more difficult to cut their losses and walk away from the game. In the long-run, however, every fish goes for broke and is simply unable to purchase any more chips to play with. The solid players are then left with a minimal or non-existent edge at their tables, as the game begins to consume itself, and that's when you know it's time to get up from your seat, exit the casino and begin the long journey back home.