Mohamed A. El-Erian is Chief Economic Adviser at Allianz, a multinational financial services company. He recently authored an article in Business Insider about the A.D. 2014 stock markets entitled “Traditional Factors Alone Don’t Explain This Remarkalbe Year For US Stocks”.
Mr. El-Erian observed that,
“2014 has been a remarkable year for US equities–not just in terms of the handsome return for investors (15% for the S&P) but also because of how this was delivered.
“In 2014, the S&P,
“Registered 51 record highs (that’s an average of one a week, the most since 1995);
“Never had more than three days of consecutive losses (a new record);
“Consistently decoupled from potentially damaging historical correlations with other markets, most notably government bonds and commodities; and, in the process,
“Always managed to recover quickly from sudden and scary air pockets.”
You have to admit that, when viewed from Mr. El-Erian’s perspective, last year’s US equity markets were almost as surprising as flipping a coin that came up “heads” 50 times in a row. All this “good luck” makes you wonder. It makes you want to check the coin to see if it has two “heads”.
Clearly, something strange (or even a little crazy) dominated last year’s markets.
• Egon von Grayerz (founder and managing partner of Matterhorn Asset Management based in Zurich, Switzerland) seems to agree with Mr. El-Erian. During a recent radio interview, Mr. von Grayerz said,
“Just take the Dow Jones as an example of this madness: The Dow went down 900 points in seven trading days, and in two days it went up 700 points.
“Because the Fed changed a couple of words in their outlook for the coming year. They now say they could be “patient” and stock market investors saw that as a sign of buying unlimited amounts of stocks without any regard to what’s happening in the rest of the world.”
Mr. von Grayerz is right. The US markets no longer reflect objective, economic reality. They’re being manipulated and deceived to the point of madness.
Janet Yellen said the word “patience,” and the Dow jumped 700 points to a new record high. That’s crazy.
What if Ms. Yellen (who bears a remarkable resemblance to the Fairy Godmother in Disney’s Cinderella) had said “BIbbidy-Bobbity-Boo!” or maybe, “Abra-cadabra!”–would the Dow have “magically” jumped another 1,000 or even 5,000 points?
Whatever’s going on in US markets, it’s not easily described as “rational”.
• A lot of these word choices and taboos seem silly. This article, discussing the seeming significance of Fed word choices, may seem silly.
But the point is this: What’s the value of a stock market index that can be dramatically moved up or down by a handful of words rather than fundamentals like Price to Earnings ratios? Isn’t this dependence on words evidence that the markets have become more “political” than “economic”?
Isn’t this evidence that our stock markets aren’t about the profitability of corporations so much as about the “expectations” of people who buy or sell stocks in the markets.
Today, it doesn’t much matter if a particular corporation finds a brilliant new technology or invention. What matters is the public’s “expectations” about the corporation, its invention and, most importantly, the market itself. A stock’s price will rise or fall, depending on whether or not its performance for the past quarter did, or did not, meet or exceed Wall Street’s “expectations”.
Increasingly, what’s important is not the inherent value of the investment, but the mood of the investors. The Dow Jones and S&P 500 don’t tell us about the value of the stocks they represent. They tell us about the sentiment of people and entities who invest in stocks.
The market indices don’t measure investments. They measure investors.
A stock doesn’t rise simply because the corporation is objectively profitable. It rises because of the investors’ subjective belief that the corporation has been, and will continue to be, profitable.
Insofar as that’s true, it becomes possible to manipulate stock market indices by simply focusing on investor sentiment. If investors can be made to believe that stocks are more valuable, then stocks are more valuable—regardless of any objective reality to the contrary.
It’s hard to find new technologies or efficiencies that will increase a corporation’s profitability and thereby justify an increase in the price of its stock. It’s comparatively easy, however, for government to change the public’s sentiment concerning a stock, an industry, a particular market, or even the US and global economies. They just say a few “magic” words, falsify some economic indicators, and—Presto-Changeo!—happy days are here again!
See? This economics stuff is simple. It’s all about public confidence. Public belief. Public sentiment. It’s all in your head, see? Who needs productive factories when we have economic propaganda?
All we have to do to restore economic prosperity is to make the idiots (a/k/a “voters”) believe they’re prosperous and, magically, they’ll be prosperous! We don’t have to work harder or smarter. We don’t need to find new inventions, or even keep our industries and jobs in this country. No. All we gotta do is “consume” with greater enthusiasm and abandon.
Saving our economy is simple. Just pull out the ol’ credit card, go to the mall and Shop ‘Til You Drop! By shopping enthusiastically, we demonstrate our confidence in our economy and political system. By shopping with abandon, we vote for “happy days”. The more we shop, the more confidence we inspire in others. The more other shop, the more confidence they inspire in us. Given enough confidence, we can magically go on shopping forever.
We don’t even have to work. (Work is bad; it cuts into our shopping time.) All we have to do is shop and consume and leave the work to the idiots in China or Mexico or some other third world country. And how will the idiot foreign workers be paid? Well, Barack Obama and Janet Yellen will simply print more fiat dollars and treasuries, see? We’ll give the idiot foreign workers some paper-promises-to-pay and they will love and respect us for our ability to produce promises-to-pay that can never be kept.
While we wait for the foreigners to finally get smart (they, too, can’t distinguish between paper-promises-to-pay and payments), we can be a nation of consumers who can “shop till we drop”.
But drop, we will.
In fact, after a couple of generations of intense “shopping,” we are now, inevitably, “dropping”.
• We’re already on the front edge of a recession and/or depression that may last for years into the future. Most people don’t believe our circumstances are so dire. But why don’t they believe? Because they believe the government’s words. What difference does it make that our national debt (paper-promises-to-pay) is so great it can never be repaid so long as Janet Yellen can say words like “patience” and thereby make fresh promises?!)
And Janet, the Fed and the government didn’t stop with oral promises. They’ve changed the formulae they use to calculate economic indicators in order to create the illusion of economic strength. They’ve outright falsified economic numbers. They’ve artificially suppressed some prices and artificially inflated others. Since A.D. 2008, they’ve issued $4 trillion in phony currency and recently guaranteed at least $300 trillion in “derivatives” (which promise we couldn’t pay/keep in less than a century).
So far, our central planers’ schemes have generally worked to create a false confidence in the public. But it’s all nothing but words. It’s not objective measurements. It’s not economics. It’s propaganda of the same sort the former Soviet Union published until it collapsed.
All that Soviet propaganda seemed so funny to Americans back in the 1990s. All the lies and bluster seemed hilarious. But, today, the same propaganda, coming from our own government seems plausible, objective and trustworthy.
Nothing funny going on in our economy, right?
Or maybe not.
In fact, the public’s confidence, based substantially on government’s lies, makes me laugh.
Reminds me of William Shakespeare’s most profound and timeless line: “Lord, what fools these mortals be!”
After all, we can’t just blame the Fed and government for lying. We’ve also got to blame the people—ourselves—for accepting lies with such relish.
As a people, we plead to our leaders to “tell us lies, tell us lies, tell us sweet, sweet lies”. And they do. And we love it. We thank ‘em for it by repeatedly reelecting our best liars to public office.
• So long as the Dow continues to rise—no matter how irrationally—we can have confidence in our government—right? If the Dow is rising, the President et al must be doing something right. Right?
And so, by hook or by crook, the Dow is made to rise with little regard for objective reality. Our government has become as political as the former Soviet Union—lots of speeches from the central planners but little or no production.
Given the market’s increasingly political objectives, the markets have become irrational. A mere word can make them jump up or down dramatically. Insofar as the markets are less about economics and more about politics, the markets have “decoupled” from reality.
Increasingly, when we go to the Dow or S&P 500, we aren’t really investing in General Motors or Apple. We’re investing in Barack Obama, Congress and even one-world government.
I have no doubt that something similar took place in the former Soviet Union before it collapsed. Although Communism claimed to be some sort of brilliant economic theory, Soviet investments were politically controlled and politically motivated by the central planners for reasons that suited the political interests of the central planners rather than the public or the general economy.
No one invested in Russian steel mills. They ultimately invested in the Politburo, Mikhail Gorbachev, and the system. That’s what “central planning” is all about: maintaining confidence in the “central planners” system rather than in the economy’s objective capacity to produce.
Investing in that non-productive “system” (rather than investing in productive businesses and corporations), eventually destroyed the Soviet Union, its national economy, and the “system” itself.
Insofar as today’s Americans invest based on a mere word or two uttered by Janet Yellen, Barack Obama or John Boehner, aren’t we investing in our non-productive political system more than in our productive corporations and economy? Can we continue to invest “politically” and still avoid a fate like that of the former Soviet Union?
• My point is that markets that move based on someone saying a particular word aren’t responding to market fundamentals. Such markets are political rather than economic. Markets that move in response to a mere word are motivated by magic or madness.
Q: Which market motivation do you think is more likely—magic or madness?
Q: Which market motivation do you think is more sustainable?
Q: Which markets do you think are more likely to crash—ones based on “magic” or ones based on “madness”?
Despite all the fun and frolic we feel when Janet Yellen says “patience,” and the Dow jumps 700 points, it’s hard to imagine a better reason for getting out of the equity markets. The markets aren’t magic.
They must be mad.
What’s the source of the madness?
Fiat currency. A debt-based monetary system that treats debt as wealth and paper-promises-to-pay as if they were payments.
If you think that debt is wealth, you’re crazy. You might not know it. Your friends might not suspect. You might be just like (almost) everyone else. But you be crazy.
At its foundation, all fiat currencies—even the US dollar—are crazy. They’re designed to defy reality. They’re intended to not only rob but even destroy the productive elements of society and simultaneously enrich and empower the indolent and non-productive. Fiat currencies may seem sane for quite a while, but sooner or later, their inherent madness can no longer be concealed and their financial world collapses into chaos.
Those who invest in the paper-promises-to-pay that we call stocks, bonds, pension funds, bank accounts and fiat dollars are crazy. Ohh, they’ll get away with it for a while. For decades. They’ll enter the paper markets and emerge with apparent profits. But, even so, they’re treating paper promises-to-pay as if they were payments. That’s as crazy as doing crack. They treat paper as if it were wealth. They don’t know the difference between an actual “payment” and a mere “promise to pay”.
But they’ll learn.
And when they do, they will howl (or sob) like madmen at the moon.