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Musings Report #16 4-18-15 The Financial Market Now Controls Everything
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For those who are new to the Musings reports: they are basically a glimpse into my notebook,the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
The Financial Market Now Controls Everything
In 1999, the BBC broadcast a 4-part documentary by Adam Curtis entitled The Mayfair Set (episode 1- "Who Pays Wins" 58 minutes) on the way financial markets have come to dominate not just the economy but the political process and society.
In effect, politiicans look to the markets for policy guidance, and any market turbulence now causes governments to quickly amend their policies to "rescue" the all-important markets from instability.
This is a society-wide trend that has gathered momentum since the program ran in 1999. The Global Financial Meltdown of 2008-09 cemented the dominance of markets.
It's not just banks that have become "too big to fail;" the markets themselves are now too influential and big to fail.
Curtis focuses considerable attention on the way in which seemingly "good" financial entities such as pension funds actively enabled the corporate raiders of the 1980s by purchasing the high-yield junk bonds the raiders used to finance their asset-stripping ventures.
This increasing dependence of "good" entities on players making risky bets and manipulating markets has created perverse incentives to keep the financial bubble-blowing going with government backstops and changing the rules to mask systemic leverage and risk.
The government must prop up markets, not just to insure the cash keeps flowing into political campaign coffers, but to save pension funds and the "wealth effect" that is now the sole driver of "growth" (expanding consumption) other than debt.
To maintain the illusion of growth and rising wealth, the financial markets must continually reach greater extremes (see below): extremes of debt, leverage, information asymmetry and valuations. These extremes destabilize markets, first beneath the surface and then all too visibly.
The technological advances of the past decade have enabled a host of schemes that together have the potential to destabilize the markets globally. Technology has enabled high-frequency (HFT) traders to only suffer one losing day per year, the rise of complex reverse-repo swaps/trades, huge derivative bets and shadow banking, where all the risks generated by these activities can pool up outside the view and control of regulators.
The entire economic and political structure is now dependent in one way or another on the continued expansion of financial markets.
In some ways, this spells the end of the political control of the economy, as politicians of all stripes quickly abandon their ideologies and policies and rush to "save" the markets from any turmoil, because that turmoil could destabilize not just the financial markets but the economy, pensions and ultimately the government's ability to finance its own profligate borrowing and spending.
This dependence on the markets is pushing central banks and states into ever-more extreme policies, even as the risk intrinsic to complex leveraged instruments is rising beneath the surface.
A case can be made that the technologically-enabled complexity of the shadow-banking markets is now beyond the control of the state or central bank, which leads to a sobering conclusion: the next crisis--or perhaps the one after that--will not be controllable, and destabilized markets will not be "saved" by tricks such as lowering interest rates to zero and increasing liquidity.
The structural problem with everyone and everything now depending on the speculative returns of the financial markets is a "market clearing event" that exposes phantom collateral and forces the liquidation of bad debt and excess credit is no longer allowable, lest the whole edifice crumble.
The forest which is never allowed to burn away the natural accumulation of dead branches and underbrush with a limited fire eventually catches fire anyway. The financial deadwood (of bad debt, excessive credit and leverage and phantom collateral) is now piled so high, the entire forest burns down to ashes.
This is the cost of never allowing any clearing of financial deadwood because everyone is now so dependent on financial markets that the slightest swoon threatens the entire system, "good" and "bad" entities alike, as the :"good" entities are now dependent on the "bad" players for their survival. This systemic vulnerability only increases with every "save" and every new bubble.
Summary of the Blog This Past Week
The Value of Learning To Cook 9/18/15
The Changing World of Work 5: "Human Robots" and High-Level Skills 9/17/15
The Changing World of Work 4: The "Signal" Value of Credentials Is Eroding 9/16/15
The Changing World of Work 3: "Full-Stack" Skills 9/15/15
The Changing World of Work 2: Financialization = Insecurity 9/14/15
The Changing World of Work I: America's Nine Classes 9/13/15
The "Nine Classes" entry received 86,000 reads just on Zero Hedge, plus another 14,000 on my servers...
Best Thing That Happened To Me This Week
Finished a complete rewrite of Parts 1 & 2 of my next book. I wrote a 60,000-word draft last year and had it copy-edited, and ended up setting the whole thing aside as few months ago as "not good enough."
Market Musings: Beneath the Surface, Unstable Extremes
The disconnect between the fundamentals of earnings/sales and the global stock market is widening. This is visible in all major markets, but none so clearly as the Chinese stock market (SSEC), which has soared not on the prospects of China's future expansion of sales and profits, but on the expansion of margin debt and the exodus of 'hot money' from the housing market into the stock market.
Beneath this surface euphoria for stocks, things are not stable. U. Doran passed along this sobering chart of reverse repo activity: Reverse Repos Go Parabolic: ‘Liquidity Shock’ Derivatives Melt-Down Has Begun
Even those of us who don't really understand the repo market can grasp the significance of this current spike.
If everything's stable and going great, why are there blatant bubbles arising in China and other markets, and why is the repo market looking like 2008?
The pieces are in place for a "surprise" decline of 10% or more in global stock markets. Timing the bursting bubbles is difficult, but the farther the SSEC (Shanghai Index) extends above the upper Bollinger, the greater the odds a reversal is at hand.
From Left Field
‘Gods’ edging out robots at Toyota facility (via Marvin M.)
How Factory Workers Learned to Love Their Robot Colleagues -- cute nicknames...
The Right Dose of Exercise for a Longer Life -- walking is good, punctuated by strenuous exercise, even better...
"Staggering" Student Loan Defaults On Deck: 27% Of Students Are A Month Behind On Their Payment
Someone Calculated How Many Adjunct Professors Are on Public Assistance, and the Number Is Startling -- only 25%, not bad yet...
California departments break law, game personnel system for money (via Kevin K.)
A new state audit concludes that California state departments illegally pad their budgets with millions of tax dollars earmarked for employee salaries by manipulating their payroll to make it appear they have more employees than they do. Public agencies/employees free to pillage...
Sand-nado - Beijing Battered By Blanket Of Red Dust -- looks like a science fiction nightmare...
How Do You Keep Your Kids Healthy in Smog-Choked China? -- you don't...
Repatriation Blues: Expats Struggle With the Dark Side of Coming Home (via Maoxian)-- "triangle people"
Making Your Taxes Complicated Is A Multimillion Dollar Lobbying Operation (via G.F.B.) -- it only takes a few million in lobbying to protect your $100 million captive market....
Xi Jinping’s Problems Are ‘Monumental’ (via Maoxian)'
“You should be less worried about whether China will overtake us than what we’re going to do in the U.S. Because if we do the things we need to do to get our house in order and fix our economic problems and restore our economy, we’re going to be the preeminent power for a long time. And if we don’t, we won’t.”
Inner Game of Tennis on The Reasoner Report (1970) (9:14) (via Constance B.) -- important lessons by Tim Gallwey...
"Nobody realizes that some people expend tremendous energy merely to be normal." Albert Camus
Thanks for reading--
charles |
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