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Hubris

hu-bris (n.) Overbearing pride or presumption, arrogance: "There is no safety in unlimited technological hubris". --McGeorge Bundy

"During his long tenure in the financial world, Friedman has watched dozens of his competitors' businesses killed by hubris born of success rather than by unsound business decisions or adverse market conditions.
--Lisa Endlich, Goldman Sachs: The Culture of Success

I personally have an unshakeable feeling that this condition, on a collective level, plays a major role in our (The United States) foreign, domestic and financial policies, and it scares the @%!* out of me. In keeping with biiwii's orientation toward the financial system, I will leave the commentary on foreign and domestic policies to others, although, given our inclination to throw dollars at every real or perceived problem, one can argue that it's all rolled up in the same ball of wax.

I enjoy playing with charts. While no professional technical analyst, I know my way around the basics and am very interested in inter-market relationships and trends. What I am seeing right now is bullish on the surface, but with creeping bearish divergences. Yet, if there is fear in the market, it is exhibited by bears actively trying to pick "the top". They are being lit up and used as kindling to ignite higher prices.

But what about the other side of the trade? What is driving the bulls? For that matter, what's driving peoples' conviction that real estate can only go up because it always does? That the Fed can cure any macro-financial ill because they always do? That Fanny Mae is not going to melt down because it never has, or that a daisy chain of debt and derivatives cannot bring down the financial system because they never have?!?

Yes, one of many elements playing a role here is our old friend, hubris. Hubie, the Hubster, the Hubrimeister, Hubo-rama. Sorry, I sometimes forget that financial commentary should be serious business. We have simply had it so good for so long that we seem to have built out the ability to comprehend that in this very same US of A, those who came before us were not always so confident. They may have had a quiet pride, as they built America over its decades and centuries of ascendance, but it certainly was not presumptive or arrogant. Toiling hard to make a living has a way of keeping a lid on such traits.

What do we have today? We expect to continue moving forward indefinitely in this righteous progression. We expect that next year's SUV will be bigger and badder than last year's. That oil will flow to us uninterrupted for decades to come because the rest of the world just loves to see us living so well. That our markets will continue upward because that's what they do and our USD will remain the world's reserve currency because we're America after all.

Unfortunately, the hubris (overbearing pride or presumption, arrogance) that has been bred into our collective mindset over these decades of progress keeps us, collectively, from seeing what is right in front of our eyes; national (government and household) debt is out of hand, the US economy overwhelmingly depends on consumption (of goods increasingly produced overseas) to keep up appearances, and our currency, our stock in trade, is increasingly being debased, as it is merely a note that represents our productive value to the rest of the world.

I believe we may be approaching an inflection point however. As with the bearish divergences creeping into many market charts, there are bearish divergences creeping into America's psyche as well. Aside from the debates about the jobs market, America's role as global policeman, and abundant domestic issues, there is one potentially incredible bearish divergence; The Fed. Interest rates are rising and the long time ally of the bond market (which has been the ally of the inflation economy, which in turn has fed the idea that assets always rise in price over time) is taking back liquidity. At least that is how it seems.

This is either an immense game of chicken, setting the stage for the Fed to announce a reversal of policy, or we've got real problems ahead. Why so gloomy about a tightening cycle? As I've mentioned previously, deflation is in my opinion a good thing, when left to its natural cycle of cleaning up the excesses of prior booms. But the level to which it has been denied and debt has been incurred on a collective scale, argues for a toxic deflation. One that will not stop until it has toppled all of the previous boom's excesses, discredited its prophets, and caused a major recalibration of the collective national psyche.

In short, the wonders of asset inflation have kept collective hubris alive and well. One would do well to at least contemplate what might happen in the absence of said inflation. For what it's worth, my view remains on the side of continued inflation; that the Fed and our policy makers will find some way to inflate against the forces of deflation and I am in the curious position of being guardedly bullish on the stock market (going strictly by the charts). But even there, when inflation and all its apparent benefits are at the expense of your national stock and trade, how long can we forestall our date with reality?

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