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Monday, October 28, 2013

All highlights are mine.

All times ET.

Joan McCullough, East Shore Partners, 1-212-226-1223 Trading: 1-800-222-8723 Okay, so you already know that Japan has given themselves the go ahead to print til it hurts. This is on the heels of revelations from the ECB that excess liquidity on their turf has fallen into the skimpy zone, pushing up the price of money and generally irritating Draghi et al. Natch, this pesky detail has given rise to speculation that the ECB will, like the Bank of Japan, cut loose with more juice. Drama surrounding all of which, kiddies, is heightened as the FED meeting starts tomorrow (theyre all 2-dayers now). Last I read, the geniuses who dominate our information sources have decreed a nothin done on tapering until March. Which new twist on uncertainty ... has the major commodities between a rock and a hard place, i.e., gyrating aimlessly as their usual slammers and jammers try to discern ... whether to schmitt or go blind. Truly, there is nothin new under the sun, is there? Gone ... at the moment ... is talk that the rest of the world would just love to ditch the greenback as reserve currency. As in a fit of told you so ... ha, ha, ha ... the buck has emerged on the top of the forex dung heap once again. Timing, of course, remains everything. As Treasury will auction $98 bil of 2s, 5s and 7s this week, confirming that they have big brass ones, eh? You bet. Whew. Stocks, confused, have backed off some. Which is no surprise as the behavior fits the profile. Huh? Right. New highs. Back off. Head-fake the crowd. Make another new high. Back off again. Another head fake. Lather. Rinse. Adjust the envelope. Repeat. Ad nauseam. So screw that malarkey. Heres what were gonna talk about today: The normalization of deviance. This is an essay which has been a long time comin, believe me. Thoughts about it started way back when the FED first crossed the lines of legitimacy. Your call as to which zany program they instituted during the crisis did it for you. And if the answer is none of the above, then we can go directly to the money-printing operation and pin the tail on that abomination.

Of course, to this day, they deny that they actually print money, willing to point out to any jackwagon who will listen, that once they use a middleman such as a primary broker, voila, they havent printed so much as one, lousy sou. Ballocks. Anyhow, as mentioned on more than one occasion in this space, the whispering of the word monetization used to be enough to bring tears to the eyes of grown men. Indeed, it was one of those things, like incest for example, that was a totally taboo subject. Particularly when ladies were present. But somehow over the last several years, the taboo restriction was lifted. And it became an approved subject for polite ... and serious ... business conversation. Right up there with P/E ratios and ROE, talk of central banks ... in developed economies no less ... became a recognized, public topic of conversation. And then it graduated to becoming ... the hallmark of US monetary policy. OMAB. Of course, there was an attempt to euphemize this action. So we picked Quantitative Easing and the Europeans picked LTROs. Does a rose by any other name smell as sweet? You bet it does, Sherlock. No sweat. In short, over the years, it has vexed this writer no end how something so diabolic could become the accepted norm. Now I have to digress here a moment and admit that it was not only printing money that got my goat and forced me to think this through. Rather, the whole syndrome plaguing our once-great nation had me baffled. In terms of our seemingly willing acceptance of the sweeping changes ... the Affordable Care Act is paramount at the moment ... being wrought by our leadership in Washington, DC. All of which initiatives have been carefully engineered to put us firmly on the road to serfdom, turning us into a centrally-planned economy, recasting us in the footsteps of the failed European social model. To this despicable litany of marching orders, we offer no resistance. And I wanna know WHY. Could we be so simple as to be silenced by talk of what? Of DOW 20,000? 30,000? 100,000? Charles Krauthammer has my utmost respect. The brilliance of his mind is evident but what is so startling about him is that hes ... never fresh out of brilliance. Hes like a bottomless pit of laser-like, precise thinking, IMHO. In his new book, Things That Matter, he criticizes the folly of the House taking on the repeal of Obamacare. For which he has been branded a RINO by some. The upshot to his position is that it was folly to take on the Affordable Care Act by simple virtue of the fact that the GOP does

not control the Senate as well. Thus it was an impossibility which should not have been attempted. As the failure was certain. As was the negative fall-out which resulted. I get that viewpoint 100%. Nevertheless, I cannot quite get to the same spin. Possibly this is because I am plagued by the notion that expressing the courage of ones own convictions still has merit. Despite any resulting loss of political capital. And thats why many of us could never make it in politics! Geez. Seriously though, that kind of altruism used to be considered a virtue, as a matter of fact. Do you remember Profiles in Courage by JFK? Good. Then go back and re-read the story of Edmund G. Ross. Who bucked his party, casting the swing vote which saved Andrew Jackson from impeachment ... and which he knew would end his political life. (He lost his seat in the next election.) And see how you size that up against Krauthammers assessment of folly. Myself, I see that a case can be made either way. As what is politically pragmatic does not always align with personal standards! Which makes this exercise that much more difficult to present. So humor me as we digress, noting that the last straw prompting me to venture into these dark recesses was prompted by Fridays highly-publicized comments by the CIO of Cumberland Advisors who was evidently irked by Rand Pauls curve-ball aimed at the Yellen nomination. Paraphrasing, Mr. Kotok suggested that attempts to derail the Yellen nomination kicked every man, woman investor, 401-k owner, IRA owner, businessman, borrower, in the gut. Adding something along the lines of the FED needing consistent policy so we ought to get off their backs. Mention of a disservice to America and a the risk of screwing up the economic recovery was also part of the message. (For a verbatim version, heres one of the many links out there to the video clip: ) I watched it and Im sure that you did as well. And I marveled at the gusto with which it was delivered. But what really stuck with me was the insistence in particular that we shouldnt look to be disruptive in a transitional period in which we now find ourselves. Really? The take-away I got from that ... and this is me talkin only ... is that we should be content to let the games continue. And so I take another leap and assume then that whether or not you want the games to continue ... depends heavily on your opinion of what the games are. Which, human nature being what it is, usually can be boiled down to this question: Qui bono? Right. Qui bono or who benefits from the current games? And if you want to take the word games and interchange it with FED policy as the former is heavily biased , then be my guest. Here, Ill do it for you: Who benefits from current FED policy?

Bingo. Youve gone outside the box again, Skeezix. Because you evidently asked the same second question that I did. Which is: Who is harmed by current FED policy? (And should we be equally concerned about that aspect as well?) And in weighing the pros and cons, there is more than a handful of us who have determined that QE and all that goes with it ... is destructive, not constructive. And therefore to pursue the same or similar m.o. by inviting the transition to a Yellen FED ... is the wrong way to go. If you need one glaring reason, well make it a poser: How do you screw up the likes of the economic recovery that has been underway since 2009? Which brings us back to the Krauthammer argument. As follows: Since we, like a certain GOP faction, have nowhere near the clout to stop what we view as the hurtling towards extinction ... do we rock the boat? Or do we sacrifice personal conviction with a view towards maintaining stability/fluidity/composure while the transition is underway? When we know darn well where this freight train is headed? From Bernanke to Yellen. ... When I was a third-year medical student, I was observing what turned into a very difficult surgery. About 2 hours into it and after experiencing a series of frustrations, the surgeon inadvertently touched the tip of the instrument he was using to his plastic face mask. Instead of his requesting or being offered a sterile replacement, he just froze for a few seconds while everyone else in the operating room stared at him. The surgeon then continued operating. Five minutes later he did it again and still no one did anything. I was very puzzled, but when I asked one of the nurses about it after the operation, she said, Oh, no big deal. Well just load the patient with antibiotics and hell do fine. And, in fact, that is what happened; the patient recovered nicely. ... OMAB. A royal screw-up in the OR. Nobody said boo. The surgeon did it again. And again, silence. The remedy was simply to load the victim patient up with antibiotics. (And if you cant make the correlation with what has gone on in this country, then just do yourself a favor and hit the delete button. Sheesh.) This dangerous behavior was acceptable because ... simply because they got away with it. Over time, things like this become normalized. What I believe has confronted us is a sweeping environment where we normalize preposterously unacceptable behavior/conditions to the point where out radar/barometer is so wildly skewed ... that we get to the tragic point ... where I fear we have already arrived as a nation ... where we can no longer judge what is acceptable and what is not.

The mechanism is totally broken. Check. So the m.o. continues to multiply like a bad virus. Check. Lets digress further. And expand this essay to include the basis of the housing implosion. I want to g back there and talk about the failure of our regulators. Why revisit such old hat? Because the regulators were derelict in their duties back then. And we are now repeating the same baloney again. Under pretty much the same regulators. And I wanna know WHY. I think this is all part and parcel of the normalization of deviance. Very much related. So that it has been dubbed supervisor bias. Let me give you an example of this which I can recall like it was yesterday. Thats how awful the situation was. Rewind to circa 1995. A foreign stock which traded by appointment only. The sales/trader who covered the account had to go home for some reason. That was me. So I passed the order to the sales/trader who sat at my right elbow. The market-maker of this stock sat directly across from us, down a half-step in a pit. Long story, short: The trader took vicious advantage of the elbow guy, ripping the client a new pie-hole in quick order. The magnitude of the client abuse was eye-popping. Elbow guy was oblivious/innocent. The client found out. The schmitt hit the fan. They pulled the wire; they had the ability to pay huge which made it all the more serious a situation. I got called in the next day. And was asked Do you think theyll ever trade with us again? I stifled a laugh. Upshot: elbow guy took the full blame from our supervisor. Was excoriated. (And held in low regard by this supervisor until the day he left the Firm.) What happened to the trader/bandit? Absolutely nothin. Heres the reasoning: The trader was just tryin to turn a buck for the house. And by this time, there were no holds barred. That is how the morality of the desk had deteriorated over time. To where the supervisor exhibited bias towards one employees actions over anothers. In so-doing, he set the stage for further deterioration of the standards of the entire desk. I am sure that this bit of normalization of deviance began with one, little transgression. Maybe somebody nicked an eighth or a quarter ... and got a wink and a nod. Which over time ... our internal radar being skewed by the normalization of unacceptable behavior ... became quite the acceptable way to do business/treat clients. PS the skank supervisor retired eventually, reportedly with $millions. So that in and of itself is another justification for the normalization of deviance. Which off the top of my head, I feel

comfortable correlating with the relentless ascent of the stock market. And an understanding of those who rail against what they perceive is the interference with this ascent. Do you copy? Ill bet you do! So with that digression we learn how the normalization of deviance multiplies itself, noting that it was the pondering of the regulators who were derelict in their duties as much now as they were then ... which brought about the topic of supervisor bias. And the part that supervisor bias plays in the normalization of deviance. You know how it went down, right? I am certain that the regulators were conscious of the fact that the hot dogs had us all ... every man, woman and child ... skatin on very thin ice. But offered no objection. Because the hot dogs were makin hay. And by extension, an economic boom. Temporarily as it turned out. Yet as soon as the US taxpayer was rousted from sleep and forced to clear the decks of the financials by taking on those losses within the confines of his own yoke ... were the financials free to ... free to do it all over again. With the same supervisor bias as before. Some see any attempt to interrupt this chain of command and the highly predictable, resulting chain of events ... as a threat to the transition and by extension, to the economic recovery. Which has possibly been confused with the ascent of the stock market. Others view it as supervisory bias which reinforces the diabolic nature of the normalization of deviance. Your call. I will only add this, noting that it is yet another example referencing the medical industry. But feel that this is extremely appropriate given the normalization of deviance factor which has been, IMHO, key in the ability of the Administration to foist the Affordable Care Act on this country. Check it out: ... an expert witness involved an anesthesiologists turning off a ventilator at the request of a surgeon who wanted to take an x-ray of the patients abdomen (Banja, 2005, pp. 87-101). The ventilator was to be off for only a few seconds, but the anesthesiologist forgot to turn it back on, or thought he turned it back on but had not. The patient was without oxygen for a long enough time to cause her to experience global anoxia, which plunged her into a vegetative state. She never recovered, was disconnected from artificial ventilation 9 days later, and then died 2 days after that. It was later discovered that the anesthesia alarms and monitoring equipment in the operating room had been deliberately programmed to a suspend indefinite mode such that the

anesthesiologist was not alerted to the ventilator problem. Tragically, the very instrumentality that was in place to prevent such a horror was disabled, possibly because the operating room staff found the constant beeping irritating and annoying. ... Making an analogy surely hits home on many levels, doesnt it? You bet. The bottomline of this essay? Whenever there is deviation from what have been established over a long time as appropriate practices or protocols ... in todays essay, that protocol is the avoidance of monetization of the debt by respectable central banks ... we ought to be prepared to view this these deviations which then become normalized ... as harbingers of inevitable, massive devastation. ... Mega disasters such as Chernobyl, Three Mile Island, Bhopal, and the ill-fated Challenger and Columbia space missions all witnessed system flaws and protocol violations that antedated the disasters by years (Gerstein, 2008; Perrow, 1999; Predmore, 2006; Reason, 1999). For example, NASA knewfor at least 5 years priorabout the rocket booster O-ring failures that led to the Challenger disaster. Debris shedding from the external fuel tank, which damaged the wing of the space shuttle Columbia and caused the vessel to break apart on its atmospheric reentry, had been a recognized design flaw for 20 years; indeed, debris shedding had occurred on every space shuttle flight (Predmore, 2006). The catastrophe at Bhopal, Indiawhere more than 2,500 people were killed and more than 200,000 were injuredwas preceded by six prior accidents that witnessed no safety improvements, a continued and heavy reliance on inexperienced operators, ignored inspectors warnings, and malfunctioning equipment (Reason, 1999). ... We can further easily make a case that the normalization of deviance can be seen in areas such as medicine ... and business ... and borrowing ... and investing and in the governance of a oncegreat nation ... we can also take it right on down to a story about a dysfunctional family. Where one spouse, for example, normalizes the unacceptable behavior of the other, how this foments over time. To where the children are prone to repeat this behavior later in life, having been guided by supervisor bias. Indeed, current FED policy IMHO is a recipe for disaster. It should not be viewed as acceptable at any level. And needs to be changed. Even if this means that the stock market will respond viscerally. And 401-k holders, investors, borrowers and the economic recovery wont like it. Normalization of deviance is facilitated when we continue to exercise bad behavior ... because we get away with it. One day, we wont get away with it. And who can gauge the size of the disaster we will face at that point? Its likely to make Three Mile Island look like a box of chocolates.

And thats what this essay is all about. Soap box away. As I now retreat to read the tea leaves of the economic data. Later.
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