I haven’t really written about
finance since April of this year, and given recent fluctuations in what people
persist in calling the markets, maybe it’s time. Then again, nothing has
changed since that article in April entitled This Is Not A Market.
I was right then, and I still am.
[..]
markets need price discovery as much as price discovery needs markets. They are
two sides of the same coin. Markets are the mechanism that makes price
discovery possible, and vice versa. Functioning markets, that is. Given the
interdependence between the two, we must conclude that when there is no price
discovery, there are no functioning markets. And a market that doesn’t function
is not a market at all.
[..]
we must wonder why everyone in the financial world, and the media, is still
talking about ‘the markets’ (stocks, bonds et al) as if they still existed. Is
it because they think there still is price discovery? Or do they think that even
without price discovery, you can still have functioning markets? Or is their
idea that a market is still a market even if it doesn’t function?
But
perhaps that is confusing, and confusion in and of itself doesn’t lead to
better understanding. So maybe I should call what there is out there today
‘zombie markets’. It doesn’t really make much difference. What murdered
functioning markets is intervention by central banks, in alleged attempts to
save those same markets. Cue your favorite horror movie.
Now Jerome
Powell and the Fed he inherited are apparently trying to undo the misery
Greenspan, Bernanke and Yellen before him wrought upon the economic system, and
people, cue Trump, get into fights about that one. All the while still handing
the Fed, the ECB, the BoJ, much more power than they should ever have been
granted.
And you
won’t get actual markets back until that power is wrestled from their cold dead
zombie fingers. Even then, the damage will be hard to oversee, and it will take
decades. The bankers and investors their free and easy trillions were bestowed
upon will be just fine, thank you, but everyone else will definitely not be.
Central
banks don’t serve societies, they serve banks. They fool everyone, politicians
first of all, into believing that societies automatically do well if only the
demands of banks are met first, and as obviously stupid as that sounds, nary a
squeak of protest can be heard. Least of all from ‘market participants’ who
have done nothing for the better part of this millennium except feast at the
teat of main street largesse.
In the past few days we’ve had
both -stock- market rallies and plunges of 5% or so, and people have started to
realize that is not normal, and it scares them. So you get Tyler posting
DataTrek’s Nicolas Colas saying “Healthy” Markets Don’t Rally
1,086 Points On The Dow. Well, he’s kinda right, but there
hasn’t been a healthy market in 10+ years, and he’s missed that last bit. Like
most people have who work in those so-called ‘markets’.
Here’s
why Colas is right, but doesn’t understand why. Price discovery is the flipside
of the coin that is a functional market, because it allows for people to see
why something is valued at the level it is, by a large(r) number of
participants. Take that away and it is obvious that violent price swings may
start occurring as soon as the comforting money teat stutters, or even just
threatens to do so; a rumor is enough.
In
physics terms, price discovery, and therefore markets themselves -provided
they’re ‘healthy’ and ‘functioning’- delivers negative feedback to the system,
i.e. it injects self-correcting measures. Take away price discovery, in other
words kill the market, and you get positive feedback, where -simplified-
changes tend to lead to ever bigger changes until something breaks.
Also,
different markets, like stocks, bonds, housing, will keep a check on each
other, so nothing will reach insane valuations. If they tend to, people stop
buying and will shift their money somewhere else. But when everything has an
insane value, how would people know what’s insane anymore, and where could they
shift that is not insane?
It
doesn’t matter much for ‘market participants’, or ‘investors’ as they prefer to
label themselves, they shift trillions around on a daily basis just to justify
their paychecks, but for mom and pop it’s a whole different story. In between
the two you have pension funds, whose rapid forced move from AAA assets to risk
will strangle mom and pop’s old-age plans no matter what.
People
inevitably talk about the chances of a recession happening, but maybe they
should first ask what exactly a recession, or a bear market, is or means when
it occurs in a zombie (or just plain dead) market.
If
asset ‘values’ have increased by 50% because central banks and companies
themselves have bought stocks, it would seem logical that a 10% drop doesn’t
have the same meaning as it would in a marketplace where no such manipulation
has taken place. Maybe a 50% drop would make more sense then.
The
inevitable future is that people are going to get tired of borrowing as soon as
it becomes too expensive, hence unattractive, to do so. Central banks can still
do more QE, and keep rates low for longer, but that’s not an infinity and
beyond move. It a simple question of the longer it lasts the higher will be the
price that has to be paid. One more, one last, simple question: who’s going to
pay? We all know, don’t we?
That’s
where the Fed is now. You can let interest rates rise, as Powell et al are
indicating they want to do, but that will cut off debt growth, and since debt
is exclusively what keeps the economy going, it will cut into economic growth
as well. Or you can keep interest rates low (and lower), but then people have
less and less idea of the actual value of assets, which can, and eventually necessarily
will, cause people to flee from these assets.
Powell’s
rate hikes schedule looks nice from a normalizing point of view, and g-d knows
what normal is anymore, but it would massacre the zombie markets the Fed itself
created when it decided to kill the actual markets. You can get back to normal,
but only if the Fed retreats into the Eccles Building and stays there until
2050 or so (or is abolished).
They
won’t, the banks whose interests they protect will soon be in far too dire
straits, and bailouts have become much harder to come by since 2008. It’ll be a
long time before markets actually function again, and we won’t get there
without a world of pain. Which will be felt by those who never participated in
the so-called markets to begin with. Beware of yellow vests.
To top
off the perversity of zombie markets, one more thing. Zombie markets build
overcapacity. One of the best things price discovery brings to an economy is
that it lets zombies die, that bankrupt companies and bankrupt ideas go the way
of the dodo.
That,
again, is negative feedback. Take that away, as low rates and free money do,
and you end up with positive feedback, which makes zombies appear alive, and
distorts the valuation of everything.
Most of
what the ‘popular’ financial press discusses is about stocks, what the Dow and
S&P have done for the day. But the bond markets are much bigger. So what
are we to think when the two are completely out of sync -and whack-?
Oh
well, those are just ‘the markets’, and we already know that they are living
dead. Where that may be less obvious, if only because nobody wants it to be
true, is in housing markets. Which, though this is being kept from you with
much effort, are what’s keeping the entire US, and most of Europe’s, economies
going. And guess what?
The Fed
and Draghi have just about hit the max on home prices (check 2019 for the
sequel). Prices have gotten too high, Jay Powell wants higher interest rates,
Draghi can’t be left too far behind him because EU money would all flow to the
US, and it’s all well on its way to inevitability.
And
anyway, the only thing that’s being achieved with ever higher home prices is
ever more debt for the people who buy them, and who will all be on the hook if
those prices are subject to the negative feedback loops healthy markets must be
subject too, or else.
The
only parties who have profited from rising home prices are the banks who dole
out the mortgages and the zombie economy that relies on them creating the money
society runs on that way. We have all come to rely on a bunch of zombies to
keep ourselves from debt slavery, and no, zombies are not actually alive. Nor
are the financial markets, and the economies, that prop them up.
Among
the first things in 2019 you will see enormous amounts of junk rated debt
getting rated ever -and faster- lower , and the pace at which ever more debt
that is not yet junk, downgraded to(wards) junk, accelerating. It looks like
the zombies can never totally take over, but that is little comfort to those
neck deep in debt even before we start falling.
And as
for the ‘players’, the economic model will allow again for them to shove the
losses of their braindead ventures onto the destiny of those with ever lower
paying jobs, who if they’re lucky enough to be young enough, start their
careers in those jobs with ever higher student debts.
You’d
think that at some point they should be happy they were never sufficiently
credit-worthy to afford one of the grossly overpriced properties that are swung
like so many carrots before their eyes, but that’s not how the system works.
The system will always find a way to keep pushing them deeper into the
financial swamp somehow.
The
last remaining growth industry our societies have left is inequality, and
that’s what our central banks and governments are all betting on to keep Jack
Sparrow’s Flying Dutchman afloat for a while longer. Where the poor get
squeezed more so the 1% or 10% get to look good a little longer.
But in
the end it’s all zombies all the way down, like the turtles, and some
equivalent of the yellow vests will pop up in unexpected places. My prediction
for next year.
It doesn’t look to me that a
year from now we’ll see 2019 as a particular peaceful year, not at all like
2018. I called it from Chaos to Mayhem earlier,
and I’m sticking with that. We’re done borrowing from the future, it’s getting
time to pay back those loans from that future.
And
that ain’t going to happen when there are no functioning markets; after all,
how does anyone know what to pay back when the only thing they do know is
everything is way overvalued? How wrong can I be when I say debts will only be
paid back at fair value?
2019,
guys, big year.