Hidden Forces

In this Special Episode of Hidden Forces, Demetri Kofinas speaks with Kevin Smith and Otavio Costa of Crescat Capital, in a continuation of our recent markets coverage, with a particular focus on specific indicators that could validate a bear market hypothesis. It has been difficult not to feel anxiety and trepidation while looking out across the Value-Price Continuum during the last few years. Many of us understand that our economy no longer functions as advertised. Financialization of the US economy over the past four decades has skewed the relationship between price and value in favor of price, specifically in favor of higher prices. The unprecedented support that monetary authorities provided financial intermediaries and asset holders during the last bear market has created noticeable price distortions and has raised serious questions about the usefulness of traditional indicators in assessing asset values. It is also unclear how meaningful traditional economic data like GDP and unemployment are in the face of ever-higher nominal public/private debt levels and aging populations. We have experienced three intermediate corrections during this secular bull market. Most notably, the periods between the summers of 2011 – 2012 and 2015 – 2016, which proved to be head-fakes for investors who were expecting the market to enter bear territory. With the S&P 500 and Nasdaq Composite climbing above their all-time closing highs last week, will this last year’s declines prove similarly inconsequential, leading us ever higher in an unusually prolonged bull-market? Kevin Smith and Otavio Costa make their case for why this market rally is different and how they are positioning Crescat Capital and its investors for the bear market to come. Producer & Host: Demetri Kofinas Editor & Engineer: Stylianos Nicolaou Join the conversation on Facebook, Instagram, and Twitter at @hiddenforcespod

In Episode 85 of Hidden Forces, Demetri Kofinas speaks with China expert Anne Stevenson-Yang about the imminent dangers facing global financial markets in the event of a break in the renminbi-dollar peg.  In the years leading up to the Great Financial Crisis, it was generally understood that the Chinese were artificially depressing the value of the RMB vis-à-vis the USD, in order maintain an abnormally large current account surplus that would be recycled into western financial markets in the form of government securities, equities, real estate, etc. By recycling so much of the proceeds from trade back into foreign markets, the CCP managed to maintain a lower exchange rate than it otherwise would be, were it to convert those dollars back into renminbi. In other words, China was suppressing the value of its currency. Bob Wittbrot calls this recycling process the “Boomerang Greenback.” This dynamic worked extraordinary well until the world went into recession around the time of the great financial crisis, which marked a peak in China’s current account. The CCP also met the crisis by expanding bank lending, easing credit, and fueling investment even further. In addition, by maintaining interest rates and the cost of capital well-below the rate of inflation during China’s multi-decade boom, the CCP has managed to keep households’ share of the economy at low enough levels to induce an overall high-savings rate for the country (by having less disposable income than would otherwise be expected for an economy this size, the average Chinese citizen spends less on consumption than he or she otherwise would, absent financial repression). This has been an additional shot in the arm for investment. At some point post-2008 (judging from their foreign exchange reserves, this appears to have started somewhere around the start of 2014) China went from artificially suppressing the value of its currency to artificially supporting it. Unlike a country like Thailand, however, whose currency peg famously broke under the speculative attacks of foreign investors during the 1997-98’ Asian Financial Crisis, the Chinese have managed to avoid such a scenario on account of maintaining a closed capital account (exercising tight capital controls). Coupling that with a current account surplus, the CCP has been able to obtain the hard currency it has needed in the last 5 years or so in order to buy the various inputs required to run their economy and keep the cycle going. The problem is that China generated a tremendous amount of money and credit since the GFC, in particular, and therefore risks a major devaluation in the value of the RMB should the country no longer be able to get the foreign exchange reserves it needs through a sustainable current account surplus. They are, at the moment, running a negative current account, a negative fiscal balance (of roughly 9% of GDP), their foreign exchange reserves are declining for the first time ever, while the country’s external debt has doubled in the last five years, increasing by an average of $70 billion per quarter since the beginning of 2017. More than half of this debt is short-term, which means it needs to be constantly rolled over. Up until the Fed paused it’s tightening cycle, the rising interest rates coupled with new tariffs on Chinese goods were creating a pincer-like effect on China’s economy and on its ability to maintain its peg, forcing it to fund more of its dollar needs through borrowing at ever higher interest rates. China cannot maintain a credible peg between the RMB and the USD when its money supply is growing, by some calculations at more than 10x that of the United States over the last 10 years. This is a fundamental problem of accounting. If China were completely self-sufficient – if it had access to sufficient energy, food, base metals, etc. within its own borders – then its inability to obtain dollars would not be an issue. The problem is that it is desperately short these commodities as inputs for its manufacturing and domestic consumption. The recent drop in the price of oil helped them out a bit, but it has been rising again, just as China’s oil imports are surging. The recently surpassed the United States as the world’s largest crude importer. For a nation with dwindling foreign exchange reserves, this is not a good trend. And, it isn’t even clear what the real FOREX numbers are in China. Official foreign exchange reserve put that number at $3.2 Trillion, but US treasury tick data shows that China owns a little bit less than $1.2 trillion in US Treasuries, which according to some people, suggests that their overall FOREX position is closer to $2 Trillion. Meanwhile, the U.S. trade deficit fell to $49.4 billion in February, the lowest level since June 2018, and well below what economists had expected. A 20.2% drop in imports from China was the main driver behind the nearly 3.4% improvement in the trade deficit in February, data from the Commerce Department showed. The trade deficit has narrowed for two straight months now. There seems to be a growing sense of awareness among many in China that all is not well with the country’s capital account. We have seen numbers suggesting that illicit capital has been flowing out of China (whether we are talking about precious stones, Bitcoins, or other means available to the wealthier citizens of China) in noticeably higher amounts since the mini-devaluation in August 2015. This is consistent with what we often see in countries ahead of a devaluation, default, or some other financial disturbance. Do China’s wealthy know something we don’t? Producer & Host: Demetri Kofinas Editor & Engineer: Stylianos Nicolaou Join the conversation on Facebook, Instagram, and Twitter at @hiddenforcespod

In Episode 84 of Hidden Forces, Demetri Kofinas speaks with celebrated author Johann Hari about his book “Lost Connections” and the silent epidemic of depression and anxiety that is pervading our society and burdening the lives of so many people. Lost Connections begins as a chronicling of Johann’s search for answers to the causes of his own depression, but becomes an investigation into the reasons for its increasing prevalence in the lives of others. In the introduction to the book, Johann tells us that some one in five U.S. adults is taking at least one drug for a psychiatric problem and that nearly one in four middle-aged women in the United States is taking antidepressants at any given time. Addictions to legal and illegal drugs are now so widespread that the life expectancy of white men is declining for the first time in the entire peacetime history of the United States, and these statistics are not exclusive to Americans. When scientists test the water supply of Western countries, they always find it laced with antidepressants, because so many people are taking and excreting them that they simply can’t be filtered out of the water we drink every day. We are literally, as Johann writes, awash in these drugs and we have come to accept that a huge number of the people all around us are so distressed that they feel they need to take a powerful chemical every day just to keep themselves together. This is an extremely sensitive issue because so many people suffer under the burden of depression, but unlike other disabilities, this one is particularly difficult to talk about. No one wants to be seen as a downer or weak, even though more people are starting to understand that depression is not a sign of weakness. But what is it a sign of? Certainly, there are people in this world who are predisposed towards various forms of mental illness, including severe, sometimes debilitating depression. However, it is difficult to comprehend how the epidemic – the rising rates of depression and anxiety – can be explained in biological terms and treated in pharmacological ways. Johann Hari would say that this epidemic is not a malfunction caused by a biological deficiency. He would say that they are the natural response to a deficiency in how we live. This point, in particular, resonates. The Indian philosopher Krishnamurti, famously said that “It is no measure of health to be well adjusted to a profoundly sick society.” On the surface, things have never been better. This is literally the best time to be alive in all of human history by almost any metric, and yet, if you look between the cracks you find people struggling. Some of them are depressed, others are just overwhelmed, grieving, or lonely. It isn’t just people in poverty who are struggling. This is a society-wide phenomenon. We see it in our politics, but we also see it in our culture. What do we value in our societies today? Who are the heroes that we idolize? If an alien species were to visit earth, what would be the appeal we would make to save our lives? It’s not a coincidence that there has been an outpouring of interest in questions of ethics, moral philosophy, and epistemology. What are we to infer from the resurgent public curiosity in psychedelics if not that they may hold the key to revelation – the revelation of some elemental truth about life that we seem to have forgotten in our haste to remake the world and ourselves along some artificially manufactured, commercially sanitized avatar of a human life. Joseph Campbell, the great mythological scholar and mystic once said, “I don't believe people are looking for the meaning of life as much as they are looking for the experience of being alive.” Could this epidemic be a reflection of our struggle to fulfill the demands of a culture whose values are no longer compatible with the needs of a human life? As Johann Hari writes in the final paragraphs of his book, while addressing his younger self, “You aren’t a machine with broken parts. You are an animal whose needs are not being met. You are not suffering from a chemical imbalance in your brain. You are suffering from a social and spiritual imbalance in how we live. This pain is not your enemy, however much it hurts, and Jesus, I know how much it hurts. It’s your ally – leading you away from a wasted life and pointing the way towards a more fulfilling one. You can try and muffle that signal or you can let it guide you, away from the things that are hurting and draining you, and towards the things that will meet your true needs.” Those of you who are regular listeners to this show know that we’ve devoted more time and attention to the subject of life – it’s properties, its merits, and how we come to know and understand it – as we move into a new paradigm of human experience at the frontier of technological futurism. No one knows exactly where this is all going. We are all still figuring it out, but it seems that this is an important piece of that puzzle. There are limits to human adaptability, and we should be careful not to accept explanations simply because they come wrapped in a story of scientific certainty or commercial authority. People aren’t machines. Your life matters. Your pain matters. Listen to it. It may have something important to teach. Producer & Host: Demetri Kofinas Editor & Engineer: Stylianos Nicolaou Join the conversation on Facebook, Instagram, and Twitter at @hiddenforcespod

In Episode 83 of Hidden Forces, Demetri Kofinas speaks with Raghuram Rajan, about the future of capitalism and the global economy amid rising rates of populism and disintegration in the global order. Raghu Rajan was named by Euromoney magazine as Central Banker of the Year in 2014 while serving as the 23rd Governor of the Reserve Bank of India. Dr. Rajan has also held the position of Chief Economist at the IMF and is currently a professor of finance at the University of Chicago Booth School of Business. He is the author of several books, including his most recent, The Third Pillar: How Markets and the State Leave the Community Behind. In this conversation, Demetri engages Raghu on a wide range of issues, from central banking and interest rate policies to geopolitics, populism, and the systemic risks facing the global economy, including a discussion about leveraged loans, junk bonds, and emerging markets. The two talk about the demographic challenges confronting countries around the world, particularly developed nations with large unfunded liabilities and debt levels that exceed, in many cases, one-hundred percent of gross domestic product. They go into great detail about the Chinese political economy and the challenges it faces amid prospects for slower growth, while simultaneously exploring the challenges it creates for the United States amid a disintegrating global order. Demetri asks Raghuram Rajan if he thinks that the market’s confidence in central banks’ abilities to stem deflation is misplaced or if extraordinary measures, including the outright monetization of government deficits and bailouts of non-financial companies, will come into play during the next downturn. He also gets the former Governor’s opinion on Modern Monetary Theory (MMT), regulations, immigration, and how to reform education for the 21st century. Producer & Host: Demetri Kofinas Editor & Engineer: Stylianos Nicolaou Join the conversation on Facebook, Instagram, and Twitter at @hiddenforcespod

In Episode 82 of Hidden Forces, Demetri Kofinas speaks with Dr. Nicholas Christakis about the evolutionary origins of ethics, morality, and a good society. A renowned sociologist and physician, Dr. Christakis was named to Time Magazine’s 2009 list of the 100 most influential people in the world. He is known for his research on social networks and on the socioeconomic, biosocial, and evolutionary determinants of behavior, health, and longevity. He directs the Human Nature Lab and is the Co-Director of the Yale Institute for Network Science, as well as the Sterling Professor of Social and Natural Science at Yale University. Listeners to this show will recall our prior episode with social psychologist Jonathan Haidt, where we discussed a 2015 incident at Yale, involving Dr. Christakis, who was accosted and berated by a horde of belligerent students for approximately two hours over the contents of an email sent by his wife, an esteemed childhood educator, in what was one of the earliest examples of a bizarre phenomenon of public shaming and moral outrage that has overtaken college campuses in recent years.    Though Demetri and Nicholas do discuss that experience, as well as this larger move to moderate or in some cases, shut down speech entirely, the episode focuses on the professor’s book, which is an exploration of the evolutionary origins of a good society. Their conversation explores the biological foundations of culture-making and the features that define the social landscape that we have evolved to create. Dr. Christakis highlights some of the profound similarities that can be seen, not just cross-culturally, but across time and space. He shares research into what is known about some of the earliest groups of hunter-gatherers, impromptu societies formed by the survivors of shipwrecks, as well as the deliberately constructed communes of 19th-century transcendentalists. Nicholas Christakis also explains the biological origins of romantic love, examines polyamorous cultures like those of the Na people of the Himalayas, and compares human societies with those of chimpanzees, elephants, and whales. This is an episode full of fascinating stories, statistics, and scientific research that weave together insights from the fields of evolutionary psychology, moral philosophy, and genetics. It is a conversation that cuts right to the heart of society’s resurgent interest in human origins, social norms, and moral values. Producer & Host: Demetri Kofinas Editor & Engineer: Stylianos Nicolaou Join the conversation on Facebook, Instagram, and Twitter at @hiddenforcespod

In Episode 81 of Hidden Forces, Demetri Kofinas speaks with Safi Bahcall, a physicist, biotech entrepreneur, and the author of “Loonshots,” a book about how to nurture the types of crazy ideas that win wars, cure diseases, and transform industries. In the early days of World War II, the Third Reich’s commander of submarines Karl Dönitz submitted a memorandum to the German Navy, advocating for a system of submarine warfare that would devastate allied supply lines, merchant vessels, and warships. For a nation with a second-rate navy, this was asymmetrical warfare at its finest. With the implementation of the plan, known as “Rudeltaktik,” allied losses began to rise rapidly, from 750,000 tons of cargo lost in 1939 to 7.8 million in 1942. Every month, U-boats were sinking ships faster than the Allies could build them, and the losses kept mounting. By early 1943, food supplies to Britain had dwindled to two-thirds of normal levels. Less than three months of commercial oil reserves remained: The British were on the verge of defeat.    At just the time when all hope seemed lost in the Battle for the Atlantic, an American physicist by the name of Alfred Loomis appointed to assemble and lead a team of the country’s best engineers and physicists, presented the Army with the first of two timely innovations. When mounted on Americas’ B-24 Liberator bombers these tiny boxes with their microwave antennas could detect the periscopes of surfaced submarines, through daytime cloud cover or fog of night. By the spring of 1943, these long-range bombers, equipped with Loomis’ microwave radar and pulsed-radio navigation were fully operational and actively patrolling the Atlantic. What ensued was a massacre.   In the month of May alone, Allied bombers operating through fog and darkness and who could now see the once invisible German submarines lighting up their oscilloscope screens, sank 41 U-boats nearly one-third of the German commander’s total operational fleet and more in one month than in any of the first three years of the war. Allied shipping losses, in 90 days, decreased by 95 percent: from 514,000 tons in March to 22,000 tons in June. The lanes to resupply Europe had been opened making way for the ground invasion at Normandy only a year later. The Allies turned what had appeared by all accounts to be an imminent loss into the first great Allied victory of the War, all because a small group of scientists working out of an anonymous building at MIT, had the crazy idea to use an unproven technology to turn a German hunting ground into a turkey shoot for the allies and their microwave configured, B-24 bombers that were busy lighting up the Atlantic.   This week, on Hidden Forces, we explore how to nurture the types of crazy ideas that win wars, cure disease, and transform industries, with our guest Safi Bahcall. Producer & Host: Demetri Kofinas Editor & Engineer: Stylianos Nicolaou Join the conversation on Facebook, Instagram, and Twitter at @hiddenforcespod

In this Special Episode of Hidden Forces, Demetri Kofinas speaks with Ed McCabe about the latest woes plaguing Tesla after the Securities and Exchange Commission (SEC) recently alleged in a federal filing that its CEO Elon Musk, violated a settlement with the agency when he tweeted in February about the electric carmaker's 2019 production targets. Midway through the episode, the two are joined by Lawrence Fossi, known by his pen name as Montana Skeptic, and the three continue their conversation for the rest of the episode and into the overtime segment. When considering the performance of Tesla’s stock in the face of sober calculations, one cannot help but be reminded of Benjamin Graham’s famous quote: "In the short run, the market is a voting machine but in the long run it is a weighing machine.” For anyone looking to weigh the merits of Tesla’s valuation, he or she would be best served by obtaining a degree in forensic accounting. For anyone looking to understand how or why the stock has remained as high as it has while the company has been busy liquidating assets, shutting down distribution points, and restructuring operations in order to keep the electricity running, he or she will likely need to rely upon the expertise of cultural anthropologists and theologians. The immediate danger for Elon and Tesla is one of insolvency and lifeless demand. On a personal level, it was recently reported that Musk’s banker, Morgan Stanley, who likely holds most or all of his margin debt, extended itself further last December by making mortgage loans on five of Musk’s California mansions. Elon took out $61 million in mortgages: four in the Bel Air neighborhood of Los Angeles and one in the Bay Area. The loans, signed in the final days of 2018, represent about $50 million in new borrowing. Considering Tesla’s deteriorating financial position in the face of cratering demand, massive mismanagement, and continued disarray in its manufacturing and logistics operations, it is instructive to know that the CEO may conduct his personal finances with comparable degrees of recklessness and malpractice. If Tesla’s share price continues to decline, Musk will eventually need to post more collateral, which means approaching the Tesla board and asking it to waive its pledging limits of company stock. Assuming the board gives him the waiver and the stock continues to drop, Morgan Stanley will be forced to begin selling collateral to recoup some of the outstanding loan. This could cause the bottom to fall out very quickly, for both Tesla, as well as Elon Musk. As far as demand is concerned, the picture has gone from alarming (going off a publicly available spreadsheet that tracks VIN numbers) to downright nightmarish (the rushed slashing of the Model 3 price). Pictures of lots stacked with ownerless Model 3’s have been circulating on the Internet for months. There is also a theory that the number of Model 3’s being returned to Tesla is much higher than is being reported and that this helps to explain the persistent gap seen since September between the number of Model 3’s Tesla claims to have delivered and the number showing up as registered. The theory is that this is the result of a strategic decision on the part of Tesla to delay registering newly sold cars for 3-4 weeks in order to provide an opportunity to resell the car with a “clean” title to unsuspecting new buyers. On top of all this, Tesla’s list of executive departures continues to grow by the day with the VP of Engineering, the General Counsel, the VP of Global Recruiting, and the Chief Financial Officer among the company’s latest casualties. In short, Tesla appears to be in the midst of an informal restructuring and liquidation process being driven on the fly by a Shakespearean CEO whose personal finances and singularly large ego are so fragile that nothing seems capable of standing in his way. As always, this episode of Hidden Forces is for informational purposes only and should not be relied upon as the basis for financial decisions. All views expressed by Demetri Kofinas and podcast guests are solely their own opinions and should not be construed as financial advice. Producer & Host: Demetri Kofinas Editor & Engineer: Stylianos Nicolaou Join the conversation on Facebook, Instagram, and Twitter at @hiddenforcespod

In Episode 80 of Hidden Forces, Demetri Kofinas speaks with CTRL-labs CEO Thomas Reardon, about his company’s ground-breaking innovations in neural interface design, computational neuroscience, and machine learning that turn science fiction into reality. Thomas Reardon’s career is no less impressive than his most recent endeavor to displace the graphical user interface and revolutionize immersive computing. He is a founding Board Member of the World Wide Web Consortium and famous for having created Internet Explorer at Microsoft, which, at its peak, represented 96% of all web browsers in existence. Over one billion people on earth have used Reardon’s software to access the Web. After leaving Microsoft, Reardon decided to go back to school, receiving his undergraduate degree in Classics from Columbia, gaining fluency in Latin and Greek. He followed that up with a Ph.D. in Neuroscience split between Columbia and Duke.     It’s hard to capture the paradigmatic nature of the innovations stemming from the work being done at CTRL-labs without seeing it for yourself. Anything that I can say is insufficient to capture the awe of watching someone type on a screen without moving his fingers, use her intentions to pick up and finely control objects in three-dimensional space or play a video game while remaining visually motionless. The implications of this technology are perhaps, rivaled only by the practical genius of its implementation. By focusing their attention on translating only the final, neuronal output of our brain’s commands as expressed through electrical impulses sent directly to our muscles, the team at CTRL-labs has managed to create a device that can capture the brain’s intentions non-invasively, through the use of a simple armband that you can wear like an article of clothing, a wristwatch, or a fancy bracelet. It’s not an exaggeration to say that this technology turns yesterday’s future into today’s reality, blowing wide-open the world of immersive computing and expanding our sense of possibility beyond our wildest imagination. Producer & Host: Demetri Kofinas Editor & Engineer: Stylianos Nicolaou Join the conversation on Facebook, Instagram, and Twitter at @hiddenforcespod

Shoshana Zuboff, Professor Emeritus at Harvard Business School and author, dives into the unsettling concept of surveillance capitalism. She discusses how personal experiences are commodified, leading to a loss of autonomy and privacy. The conversation highlights the psychological impacts of digital monitoring and the eerie control it exerts over behavior. Zuboff warns of a future dominated by data-driven absolutism, urging for societal awareness and collaboration to reclaim democratic values in an increasingly manipulative landscape.

In Episode 78 of Hidden Forces, Demetri Kofinas speaks with Matt Taibbi, a contributing editor for Rolling Stone and winner of the 2008 National Magazine Award, about his latest book, Hate, INC. Matt Taibbi is someone who truly needs no introduction. His polemical, but also highly illustrative and expository writing stands apart from his contemporaries, and the significance of his contributions, particularly to the public debate during the 2008 financial crisis cannot be understated. He served as an interpreter for what was, in his own words, “a crime story that most people mistakenly thought of as an economic story.” His attacks on those he identified as being chiefly responsible for the crisis were relentless, and in a media environment tenanted and owned by government apologists and banking sycophants, they were noticeably ruthless and unforgiving. In an article he penned in the spring of 2010 titled, “The Great American Bubble Machine,” Taibbi referred to the investment bank Goldman Sachs as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” Fortunately for Goldman Sachs, Matt Taibbi has since turned his attention towards the media itself, embarking on an ambitious project to update Edward Herman and Noam Chomsky’s Manufacturing Consent, for the 21st century, as a serialized book that he’s been releasing through sub-stack. The majority of this conversation deals with the subject of that book, which is a sort of operational manual for those looking to understand how journalists and the media shape social reality. When Manufacturing Consent was first published in 1988, the media landscape was still largely dominated by print and broadcast television. We’ve since gone through two, major technological disruptions, first with cable, and then with the Internet, both of which altered the traditional pathways through which governments and big business try to shape and control public opinion. Matt and Demetri discuss these changes at length, including the amplification of “flak” through social media, the new orthodoxies of groupthink, as well as an exploration of victimhood hierarchies as understood through Herman and Chomsky’s “worthy vs. unworthy victims” framework. Finally, Matt Taibbi and Demetri discuss the circus that is the media’s political coverage, including some amazing stories from Matt’s time on the 2016 campaign trail, as well as a scathing critique of his old buddies at Goldman Sachs, who are back in the news over their role in a scheme to defraud the Malaysian government and its citizens of billions of dollars through the use of a state-owned investment fund known as 1MDB. If you want access to this part of the conversation, as well as a transcript of the full episode along with this week’s 14-page rundown, which includes an updated outline of the propaganda model and a timeline of important events in the evolution of the news business, head over to HiddenForces.io or subscribe directly through our Patreon page at Patreon.com/hiddenforces. Subscribers instantly gain access to our entire library of content, including nearly 80 transcripts, close to 60 rundowns, and overtime segments going back to the end of December 2018. Producer & Host: Demetri Kofinas Editor & Engineer: Stylianos Nicolaou Join the conversation on Facebook, Instagram, and Twitter at @hiddenforcespod