The financialization of the end of the world

For those who are fans of cartoons from The New Yorker magazine and consistent readers of this blog, you might be able to guess my two favorite cartoons. In the first one, a man in a coat and tie stands at a podium and tells his unseen audience the following: "And so, while the end-of-the-world scenario will be rife with unimaginable horrors, we believe that the pre-end period will be filled with unprecedented opportunities for profit."

In the second, a man in a tattered suit sits cross-legged near a campfire with three children listening to him intently as he says this: "Yes, the planet got destroyed. But for a beautiful moment in time we created a lot of value for shareholders."

Now, in the you-can't-make-this-stuff-up category, financial writer Paul Farrell used the caption from the first cartoon in a 2015 piece for MarketWatch entitled: "Your No. 1 end-of-the-world investing strategy." The subheading is: "How to pick stocks for the near term when long-term trends say collapse is near." The subhead actually seems like it might be another caption from a New Yorker cartoon (or possibly one from The Onion). Why exactly would you invest in stocks—as opposed to seeds of food crops and sturdy garden implements—"when long-term trends say collapse is near"? But I'll put that down to bad headline writing.

In Farrell's defense, he frequently used his column in MarketWatch to warn his readers of the coming collapse of modern civilization if we don't change our ways. He was obliged to give investment advice, of course, because that's what the column was for.

Few other investment gurus are as intellectually honest as Farrell. Among prominent investment managers, only Jeremy Grantham comes close to understanding the scope of the challenges we face. Grantham wrote a piece in 2013 called "The Race of Our Lives" that outlines the myriad challenges humans face. He starts with a discussion of the fall of civilizations. (He updated his views in 2018.)

One would think that the coronavirus pandemic would allow for some sober reflection among those in the financial community as the pandemic-induced crash of the economy and the markets has called into question the stability of practically all the arrangements of modern civilization. Instead, the focus is on how stock markets could be back at or near all-times highs at the beginning of what is arguably the next Great Depression.

The New Yorker cartoons linked above appropriately characterize the madness that grips late-stage civilizations as their pillars begin to fall. Instead of attempting to adapt to new realities, every attempt is made to maintain the current fragile system. The trillions of dollars pumped into the world financial system by central banks and governments in the wake of the pandemic have done little except stoke renewed financial bubbles in practically all financial markets (and thereby bailed out the mostly wealthy owners of financial assets).

The disconnect is hard to miss. The latest reading of the U.S. Federal Reserve Bank of Atlanta's GDPNow indicator, which is frequently updated as new data becomes available, now predicts that U.S. GDP will contract by 45.5 percent in the current quarter. (The number is annualized and seasonally adjusted.)

Even so the NASDAQ Composite Index hit a new all-time high earlier this month just three months after the recent trough reached during the crash. The S&P 500 is now very close to a new all-time high. Neither development makes sense in the middle of the worst economic downturn since the Great Depression. For comparison, it took more than two years for the NASDAQ Composite from the bottom in 2009 during the Great Financial Crisis to regain its 2007 highs. It took the S&P 500 more than four years.

Of course, the financialization of everything continues. Vaccine makers are in line for government funds. Naturally, it takes money to develop a vaccine. But drug makers aren't in the business of keeping people healthy. They are in the business of making money. In the United States at least they are helped by the fact that they aren't liable if their vaccine kills or injuries someone. And, executives in one money-losing pharmaceutical firm cashed in stock right after their company goosed the shares significantly higher with a very preliminary announcement about the company's coronavirus vaccine research.

When it comes to real estate, it used to be that people bought it for income and as a store of value. Now firms buy real estate mostly with borrowed money and try to make gains mostly through property price appreciation. Often the real estate loans are packaged into securities that are sold and resold as part of the giant Wall Street and worldwide financial casino.

One of the surest signs of the financialization of everything and the growing disconnect of finance from reality is the credit default swap (CDS). The CDS is essentially insurance for loans and bonds. The buyer pays the seller a premium every month. If the instrument insured defaults, the seller provides a predetermined payment to reimburse the CDS buyer. Now here's the weird thing: An investor doesn't even have to own the loan or bond to insure it. It's like me taking out an insurance policy on your home against fire when I have no ownership or interest in the home. In fact, I have every incentive to make sure your house burns down. Do you see any problem with that?

For normal insurance, the buyer must have an insurable interest. Typically, this means the buyer must actually own the thing he or she is insuring. The CDS, on the other hand, is an ideal instrument for those who want to bring on a financial end-of-the-world scenario. The buyers have every reason to want the economy to go down the drain as their payments may be 10 or even 20 times their initial investment.

Many wealthy people fear and even believe an end-of-the-world scenario is possible or probable. Some think they can hole up in luxury bunkers until the dust clears. But what if, when the dust clears, their wealth is gone and the financial world they used to inhabit has vanished.

Perhaps they will sit around campfires telling their grandchildren about the old days when finance was king and the real economy of goods and services was just a place where rubes got their daily bread—while, of course, simultaneously handing over an outsized portion to the rich.

Kurt Cobb is a freelance writer and communications consultant who writes frequently about energy and environment. His work has appeared in The Christian Science Monitor, Resilience, Common Dreams, Naked Capitalism, Le Monde Diplomatique, Oilprice.com, OilVoice, TalkMarkets, Investing.com, Business Insider and many other places. He is the author of an oil-themed novel entitled Prelude and has a widely followed blog called Resource Insights. He is currently a fellow of the Arthur Morgan Institute for Community Solutions. He can be contacted at kurtcobb2001@yahoo.com.