the failure of markets and behaviors as speculators
“All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as self-evident” – Arthur Schopenhauer philosopher
The Federal Reserve Corporation (FED) today regularly intervenes in the currency markets via swaps, open market operations. etc. with other global central banks and other market participants.
The short term interest rate is regularly set and maintained by the FED and it’s open market operations.
The FED now also openly admits buying their own debt as quantitative easing. This serves to suppress long term interest rates thus, directly influencing the long term interest rate markets, and the real estate market.
Thus, the FED today manipulates the prices of assets from currencies to real assets.
In some circles (mostly only in the corporate media where board members are also wall street executives) it is still a subject of debate whether or not the FED and the Treasury have adopted a policy of intervening in the stock market to promote stability and market confidence. From stories about the PPT, to the FED stating that they would use “any means necessary” to stabilize the economy. From huge market rebounds 5 minutes after a call from the Secretary of the Treasury to the people who profess to be doing gods work, to the CEO of trimtabs stating that he sees no other possibility than government intervention, people will still debate this topic, in the corporate media at least.
Out in the real world, “Don’t fight the FED” extends to market operations in any or all asset classes. The debate is confined only as to how much, when and who. On the floor, the only entity who isn’t aware of anonymous accounts that can make the market turn at will in Chicago are the regulators. Then again, the regulators are the graduate alumni of the people who appear to need regulating.
The debate doesn’t stop at the share markets however. Recent on the record revelations from a metals trader allege what the so called conspiracy theorists have been saying all along, that there is a conspiracy among the centrals via their member banks to manipulate the price of gold and other metals. The corporate media chose not to discuss the subject at all.
In looking at the markets as a speculator, the conclusion is that there is more than enough evidence that the FED, the Treasury and the large banks all operate with increasing influence and heavy handedness in all markets.
It has become required to stabilize an unstable system, first as an emergency measure then now as a matter of course and necessity. On the FED’s visible balance sheet there are toxic mortgages and on the invisible balance sheet it is impossible to ascertain what assets they own since they won’t say and have never been audited to force any disclosure.
A larger point, and the subject of this thought experiment is to think about the effects of managed or buffered markets on the psyche of the market participants.
The obvious reflexive idea at work here is that if the market participants believe the system is inherently stable or priced at a certain level on it’s own accord, then confidence in it would be far higher than if the participants believed that it needed intervention to keep it stable. This increased confidence could in itself affect the behavior of the markets when they are exposed to crisis or stress situations.
By reducing the interest rate to and below the real rate of increase in the cost of living, a negative savings rate discourages and even penalizes savings. It makes saving money a guaranteed loss and encourages speculative risk taking with non risk capital in search for a return.
If the market had dived during the 2008 period this could have permanently altered risk models and permissible leverage going forward. It could have reduced investor risk tolerance. It could have caused an even greater loss of confidence in the US capital markets resulting in unacceptable side effects from insolvency to failure of the entire system.
Knowing all this, is it possible that the FED or the Treasury have introduced a false sense of investor security by financing open market operations via a printing press? The implied assumption of course is that the printing press can run forever and as powerfully as necessary to fix any problem that might arise. The current FED chairman stated explicitly and now infamously that the FED could do just that by dropping money(debt) out of helicopters if necessary.
The reality however is that the printing press cannot print more debt than the capacity to finance it. We must recognize that reality in the same way that we recognize the FED and the banking system is not a goose that lays golden eggs. In spite of what the FED chairman would have you believe, it cannot fix any problem by printing any necessary quantity of money, because that is the same as increasing the debt up to and infinitely beyond it’s ability to be repaid.
Because of these facts, it is arguable that both investor psychology as well as quantitative risk models have become skewed and are now RELIANT on the previously mentioned assumptions for it’s continued existence. The implication is that if investor psyche has been manipulated or altered along with the markets, it is not a reliable indicator of future market direction or market stability. All forward looking indicators could be entirely wrong as a result of reflexive policies and it’s resultant social engineering.
The idea of markets that discount the future by a market consensus based on reliable information becomes flawed. Recognizing the markets are managed is no different than recognizing that investor psyche is also managed. One is a reflection and a reflexive view of the other.
In thinking about all of the above, the next obvious question is, how does an eventual convergence of reality (the FED cannot create an infinite amount of debt to fix any problem) with a belief in golden eggs (the belief that they can and enabled only by the illusions of manipulation) manifest itself?
The answer lies in this fact:
The amount of debt is continuously increased into a geometric progression of diminishing returns as the capacity to buy the ever increasing amount of debt moves ever smaller as a fraction of the debt required to maintain and inflate the balloon.
Thus it can be argued as it was in two possible paths with the same endpoint that we have an unstable and technically defunct system masquerading as a stable system. This current divergence can be reconciled either through asset value inflation, or through failure via mass insolvency. If it is reconciled through inflation it will appear as decay over a long period of time leading to chaos and civil instability due to a standard of living collapse. If it is reconciled through mass insolvency it will appear as a rapid onset of the same thing.
Filed under: markets
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