Remember the story of “The Philosopher’s stone?” In a nut shell it was an alchemical substance capable of turning worthless metals into gold. Today, much like those of yore, central bankers across the globe are engaging in that never-ending quest for the ability to turn the worthless – into the precious.
And to the ill-informed it seems they have indeed achieved it. That is, as long as you wrap it in the same cloth as found in “The Emperor’s New Clothes.” For if not – the naked truth becomes appalling clear. And it ain’t pretty.
Case in point: Brexit? What Brexit? To those not actively involved in European politics, or the needing to understand the fallout – It’s like it never happened.
However, if you want to take absurdity “up to 11” I propose you’ll hear something along these lines in the coming days from some next in rotation fund manager, economist, or Ivory Tower alchemist at large.. Ready?
“Brexit showed the market was just waiting for a market clearing catalyst to vault higher. With earnings season set to begin, the Fed. now on hold indefinitely for 2016, the ECB at the ready with its own “whatever it takes,” employment growth continuing and at near statistical full employment, stocks appear reasonably priced to extend their gains well above current levels.” Rinse, repeat.
That said, here’s what I’m more than sure you won’t hear: Brexit triggers an upheaval to the entire European Union dynamic where its certainty in remaining solvent, let alone standing past 2016 is now an open question. Further details for possible upheavals and contagion effects are currently unknown. Caution and solvency should be of the first order.
No, it’ll be more along the lines of the former with additives such as: “Employment numbers in the U.S. printed 280K plus smashing the expected 175K consensus. This proves we’re on the right track, and see – May was an outlier. Blah, blah, blah…”
Again, just for perspective: June’s 287K print is being touted “as proof” that May’s print of 38K was indeed “the outlier.”
Fair enough, however, with that 38K now being revised down by some 2/3rds to just 11K. Wouldn’t that mean the “outlier” was just proved to be even worse?
Think that last point through: 38K is revised down by so much it is within a statistic rounding error of a negative print. Now, a month later, where one is to believe the BLS (which very few do) has had a better look, as well as received more plausible and calculable statistics, has concluded the “outlier” is not to even remain the same or revised higher. No, it’s lower, and not by just a few thousand. More than two-thirds of the entire figure was jettisoned. Again, 38K (now 11K) is the “outlier?” What type of sorcery is this?
Only in the so-called “smart crowd” of statistical magicians can such a claim be made with a serious face. To anyone else – it’s laughable. However, the fool’s arguments don’t stop there. In fact – they just begin.
I was left both confounded and slack-jawed more often than not over the last week as I listened too, or read one after another financial pundit explain their thesis as to why all this bad is now good. And all of it, and I do mean, all – of – it revolves around one base case: “Gold.”
Oh no, not the gold you’re thinking of. Heaven forbid, that gold is only for “kooks” and others of that mind-set we’re told. No, the “gold” they are touting which needs to accepted and held closest to one’s heart is: equities. i.e., stocks. After all, central bankers have once again proved they have “the stone.” And as proof? Just look at equities as today’s acid test is the clarion call.
Many an index is once again at never before seen in human history highs. The obvious conclusion implied? Central bankers have the alchemy secret. So just buy, buy, buy!
And when a BTFD (buy the f’n dip) moment such as what happened once Brexit was voted on? (i.e., when there’s a legitimate concern uneasiness may morph into a complete upheaval) Buy even more! For it’s just another opportunity of a lifetime laid out on a silver platter.
At least, that’s how it’s all being peddled across the financial media, once again implying: it would be you that’s foolish not to buy their “gold.”
I listened as one “expert” tried laying out the alchemic process now being employed by central banks. He went into great detail as to how using “this test tube” and “this combination” of economic ingredients have been administered by central banks. The real issue I took with this whole chemistry lesson of current monetary policy was how naive the conclusions were. The issue for me was this…
Central bankers are concluding much of the same as this person was as evidenced by their very actions. Or, stated differently: They are convinced with every monetary “test tube” experiment that they have successfully done it – this time. Then, once the smoke clears and the fumes dissipate – so too does the illusion of any economic miracle, and all that remains is a bright shiny looking substance – which is worthless. And after each experiment the pile of worthless economic mirages vanishes much like how they were created: in a puff of smoke.
Again, this scenario being explained as to express current central bank thinking using “test tubes” as the analogy was quite telling. Forgive me for I can’t recall his name although I did conclude by how many times I heard him referred to as “Dr.” that he must be of the “in crowd.”
Here the presenter went into detail about how central banks have used an array of monetary “test tubes” containing certain economic ingredients or components, then, adding specific monetary additives, the results were in line with what the text books concluded should happen. The real issue at hand as expressed was this, “it wasn’t working beyond the walls of the test labs.” And here is precisely where (in my opinion) the rubber-hits-the-road as to prove my point in why central bankers have more results resembling a sorcerer’s apprentice than anyone in possession of a “philosopher’s stone.”
Let me illustrate using a few examples. Yes, they are extremely over-simplistic and generic, but that doesn’t mean they aren’t relevant.
The whole problem for central bankers is they view the economy (e.g., a free market capitalistic one to be precise) as something which can be dissected, as in, separated and putting its essential components into “test tubes” for both observation and manipulation. Then, reforming the amalgamation into whatever performance quantity they desire. These “test tube” manipulations, granted, do have a high rate of observable success to their manipulations in isolation. However, it’s when the whole concoction is mixed together is where expected results morph into uncontrollable monsters. Here’s an example…
Lowering interest rates stimulates an economy. (i.e., test tube 1) Higher stock prices generate “a wealth effect.” (i.e., test tube 2) The first one for the sake of simplicity let’s say uses monetary “ammonia” as its catalyst. And let’s use “bleach” for the second. Both can be isolated, both can be manipulated, and both can have a fantastic end use when it applies to the overall purpose of cleaning (i.e., the economy.) But remember that “in isolation” detail I expressed?
As some of you already understand, this is where the combination of the two (bleach and ammonia) combines to make a very toxic, and in many cases deadly mixture depending on just how large the quantity. That is – if you come into contact with it. And there lies another rub.
If you were to observe this combination only from afar and how it was performing that “cleaning” only through its resulting application via robots (i.e., HFT, algorithmic, headline reading, front running parasitic trading bots) the conclusion would be it’s doing just a bang up job of removing any past stains (i.e., crash of ’08 and such) the combination has worked spectacularly and the sum is more effective than the parts in isolation. That is: as long as you remain both afar, as well as one step removed.
Anyone who would venture in where such a brew was being unleashed would find themselves in grave peril. This is the equivalent representation of today’s capital markets: Not only does nothing make sense – everything has become engulfed in a toxic cloud of monetary witches brew. So toxic, so disorienting, so deadly to anyone who enters (i.e., try being a pension fund, insurance company, saver _______fill in the blank) your only recourse is to not breathe, or better yet, not go near the place at all.
However, if one only sees or views the “markets” remotely. Say only via a “cleaning report” i.e., ________(place your report of choice here) while pontificating on those results from afar via cameras, microphones, keyboards, etc., etc. All while those whom supply those devices do nothing more but comment on just how well of a “cleaning” process is taking place via reports that are more sanitized of bad news than a redacted pentagon paper. Then yes, things are going just splendid and steady is the course. Or, should I say, steady as the formulation.
Just don’t ask anyone to touch the thing let alone enter into the same room because they won’t, and aren’t. And the week after week of record outflows prove it to be the case.
Add the following to this latest alchemic mixture…
A referendum breaking up of the European Union (e.g., Brexit) has just taken place. So far the fallout in just the real estate sector in the course of a week has caused 8 (and counting) funds to gate investors from accessing their funds. (i.e., Want your money back? Hurry up and wait behind the gate) GDP figures across the globe are continuing to collapse. Negative interest rates are now being applied to trillions upon trillions of government debt worldwide. China is devaluing at a record pace, the more Japan tries to devalue, the stronger its currency gets. The list of concerns goes on and on like; Italian banks; Spanish banks; German banks; etc., etc.
Here in the U.S. more people are on government assistance than ever before, civil unrest as is being witnessed will inevitably dampen or curtail future retail sales aggregates. Without Non-GAAP reporting being employed ever the more creatively this earnings season is now being looked upon as “cross your fingers and pray the bars are low enough” reporting season, as opposed to “more should surprise to the upside.” And this list of potential deadly GDP affecting ingredients itself is growing ever the longer by the day.
And what is the result of such ingredients one might ask?
Unemployment reports statistically near full. The U.S. stock market is once again printing record highs. One of the largest political upheavals in modern-day history (Brexit and the disintegration of the E.U. as known) when viewed via the stock markets is not only non-existent as for relative price action, it’s now arguable to have been a catalyst for ever higher market prices. Central banker alchemy at it’s finest. Solid “gold.”
However, if you would like to perform some “acid test” as to check for its purity before buying more? Sorry – you just have to take their word for it. Just like China’s GDP projections, which, by-the-way; makes western alchemy look like child’s play.
© 2016 Mark St.Cyr