Fatorexia & Cognitive Dissonance

My wife tells me I am suffering from Fatorexia an affliction where I look in the mirror and see this buff well built guy, like the one in the picture (oops sorry that is not a man) but at the end of the day I am actually overweight by 5 – 10 kg’s, that is me on the right.

A few months ago I started pushing myself at the gym and I can physically feel the increase in my strength, as well as see a notable growth in the size of my muscles. What is interesting is that I cannot seem to see that I am carrying a few extra kilo’s in fat. Why is that?

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There is a psychological term for this condition called cognitive dissonance. What the human mind does when confronted with something that contradicts ones original belief is to completely dismiss the new information. However, the mind is so powerful that if ones original belief is so strong, it can influence the person experiencing this dissonance to transform the negative information into a positive belief. So in my case I see the growth in muscle, and anything contradictory to that is magically transformed. What my wife is seeing as fat I am seeing as mass/bulk all positive for a bodybuilder (by the way it wasn’t only my wife, my son was pretty vocal about the bulge as well).

So what made me see the light? I am not sure exactly but on my recent holiday to Melbourne I caught a glimpse of myself in a very unflattering mirror which completely shattered my illusion. I use dramatic language here as I believe there is no way to come to your senses gently, one needs to be confronted in order to see the “true” light refracted in its essence.

I use this analogy to describe a similar cognitive dissonance the global economic world is currently experiencing, with Europe being amongst the most deluded.

In John Mauldin’s latest weekly he shows a number of sovereign bond yields. Let me start this section by saying that if you want to deposit your cash in a Swiss bank denominated in francs you can expect to pay the bank -0.75% per annum. Yes you put money on deposit and you don’t earn interest you pay interest. Let us look in the chart below a little further out on the yield curve, oh boy Swiss bonds have a negative yield for the next 10yrs. We have German bond yields negative for 6yrs and the French and Netherlands 4yrs.

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To me this is DEFLATION and an ill wind is in the air. To me the world of finance is suffering from a serious dose of cognitive dissonance. It is all out there on everyone’s Bloomberg screen or the latest IMF data release or whichever investment bank you receive your daily poison from.

Just like the emperor eventually realized he had no clothes on, we will soon realize we cannot live in a world where there is no incentive to invest in sovereign government debt, and the only bid propping up these artificial egregious prices is the central banks buying, mandated by the governments issuing the debt.

Last weeks SNB “unpegging”, may just have been the shock we needed to see that with all the risk on governments balance sheets we cannot effectively price risky assets (read: stocks, corporate debt, property, etc) off a benchmark that is not truly reflecting any risk.

I am now officially issuing a warning of beware; the seeds of instability in the system as Hyman Minsky writes is now in motion and we should expect the unexpected and one thing I can promise is that it is a lot worse than a few kilo’s of schmaltz.

Inflation

I thought it would be interesting to see where we are with inflation in China, as I think it gives a clue to the robustness of the economic growth in the system. I think it is pretty clear to see that inflation is falling pretty sharply. This may explain why the Chinese central bank was so eager to cut rates last week. Yes I may be speaking my own book here but it sure feels like deflation could well become the inevitable beast that central bankers have fought so hard to slay.

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I took a look at how “Deflation” is trending on Google and it is only now starting to gain some traction again. This is a perfect setup for a perfect storm.

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Finally I think it is prudent to see if that perennial deflationary economy Japan is building up any inflation. Well what do you know it sure is and I think that is a good thing as it is the only chance it ever has of repaying the massive government debt it has on its balance sheet.

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