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Musings Report #29 7-18-15 The Slippery Slope of Manipulation
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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 Slippery Slope of Manipulation
I had an interesting conversation about the temptations and downsides of manipulating/ controlling markets with Adam Taggart of PeakProsperity.com this week.
Adam noted that the decision to prop up markets is akin to many other "binary" decisions, where the initial decision to proceed irreversibly leads to destructive consequences, despite the initial euphoria.
It's much easier to take that first step onto the slippery slide than it is to stop the downward momentum and claw your way back up the slippery slope.
The central illusion of such slippery slopes is that "I can quit any time." This is of course what addicts claim, but the reality is getting the monkey of addiction off your back is much harder once you've gone down that path.
Manipulating markets is a slippery slope, too. Once central bankers start "managing expectations" with carefully scripted announcements, then how can they ever stop managing expectations? In effect, their interventions via behavior modification have trained market participants to expect central banks to guide the market ever higher with happy talk and reassurances.
If central bankers ceased this sort of management of expectations, participants wouldn't know how to respond, i.e. what do we do now?
The other illusion of slippery slopes is the power to manipulate/control markets is enduring and good. Once central bankers unleash promises such as "we'll do whatever it takes" and the market leaps in response, the pressure to use that power to combat future downturns builds.
In effect, central bankers are now imprisoned by the success of their expectation management. If the markets sag and the central bankers don't intervene with "whatever it takes" reassurances, the markets could slip into chaos.
If verbal reassurances no longer have the desired effect, then central bankers move down the spectrum of manipulation to direct purchases of bonds (QE), mortgages and stocks to prop up markets.
If this direct buying is perceived as sending the wrong signal, i.e. transparent intervention is viewed as a desperate act of central planning, then the buying is done through proxies.
The ante is effortlessly raised on this slippery slope. If one form of manipulation fails, then the central planners must move to the next level of intervention, lest the perception of their power and control deteriorate.
History shows that authorities will close markets or resort to similar sledgehammer controls if lesser doses of manipulation fail. Thus China's manipulations of its stock market--near-parodies of central planning such as criminalizing negative comments about stocks--are simply a few notches down the slippery slope from buying bonds and mortgages and issuing endless reassurances that stocks are not overvalued, etc.
How can any central planner resist the temptation to intervene to stop a slide in markets? The power is at their fingertips--why resist using this great and good power to save the day?
The slippery slope leads to destruction for several reasons. The doses of intervention need to maintain the high/bubble tend to rise over time, as the returns on intervention diminish. Markets habituate to each new form of manipulation, and when those no longer move the needle, then authorities must ramp up the intervention.
This eventually leads to an intervention failing to stop a market slide, and this is the equivalent of toxic shock: once markets realize central planners' manipulations are failing, the only rational response is to sell and get out.
Since the market participants have been trained to act as a herd in response to cues from central planners, the herd will turn with very little resistance.
Manipulation that seems to reflect great power is actually fragile: the ultimate source of the central planners' power is the participants' belief in their power, omnipotence and sagacity. If belief in their absolute power to move markets fades, there is no way back up the slippery slope to an unmanipulated market. The addict dies of the overdose intended to relieve the agony of withdrawal.
Summary of the Blog This Past Week
Thank Goodness Everything's Fixed 7/17/15
Greece and the Problem of Correcting Trade/Productivity Imbalances 7/16/15
When Capitalism Turns to Cannibalism 7/15/15
Diminishing Returns on Central-Planning Policy Extremes = 2016 Crash 7/14/15
Greece and the End of the Euroland Fantasy 7/13/15
Best Thing That Happened To Me This Week
The Iranian deal defuses a tremendous amount of counter-productive demonizing. This is one of those rare diplomatic accords that is a plus for the world and the region. Is the agreement perfect? No. Is it better than no deal? Yes.
Market Musings: Gold
I try not to get attached to any position or asset class. If the opportunity is going long stocks, I'll go long. If stocks look ready for a swoon, I'll take a small short position. I look at commodities, precious metals, currencies, bonds, oil, natty gas--all the major markets. We can never know where the next opportunity might arise.
Gold is of interest because it arouses such intense emotional attachments, and because it is clearly of interest to those intervening in markets to maintain the status quo.
Setting aside the issue of intervention, some observers feel gold is heading for $1050 or even $850. Others feel it is building a base around $1100 to $1150.
Glancing at a weekly chart, we see how a previous "bounce or die" level around $1175 was touched three times and then failed, leading to a decline to the $1130 area in late 2014. Gold is now retesting that low.
In general, a double bottom is a good base; a triple-bottom often fails, as occurred in 2013/14.
If this level fails, the case for $1050 improves. If it holds, perhaps gold has established a durable bottom.
Should risk-on assets such as stocks fall apart in September-October, perhaps risk-off assets such as gold will once again be favored. The multi-year downtrend in gold has yet to be broken, but given the multi-year rally in risk-on assets, this is not surprising.
From Left Field
“I found myself turning into an idiot!”: David Graeber explains the life-sapping reality of bureaucratic life
Countering Progressives' Assault on Suburbia -- since when is density an assault on suburbia?
This Leadership Paradox Has Us Pecking at Each Other
Scientists have discovered that living near trees is good for your health -- any plant life soothes the soul....
Greece’s solidarity movement: ‘it’s a whole new model – and it’s working’
Citizen-run health clinics, food centres, kitchens and legal aid hubs have sprung up to fill the gaps left by austerity – and now look set to play a bigger role under a Syriza government -- decentralized, relocalized solutions
'The Fourth Reich': What Some Europeans See When They Look at Germany --fair or not, it's the perception of many...
Poverty is big business today -- straight talk about the poverty business that benefits the few at the expense of the many...
Shrinking in Real Time: Cheap orbiting cameras and big-data software reveal hidden secrets of life down below -- this technology will make it hard for states to claim strong growth when the actual economic activity is monitored from space...
THE DATA OR THE HUNCH? -- the role of intuition in the era of Big Data...
Amazon is killing my sex life: The tech boom in Seattle is bringing in droves of successful, straight single guys -- all of them insufferable
Charles Darwin Would Be Ashamed of 'Social Darwinism'
Resilience Is Futile: How Well-Meaning Nonprofits Perpetuate Poverty -- another scathing indictment of bourgeois poverty-pimping...
"The illiterate of the 21st century will not be those who cannot read and write, but those who cannot learn, unlearn and relearn." Alvin Toffler
Thanks for reading--
charles |
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