It’s a Mad, Mad, Mad, Mad World—or, at least, it’s a Mad Economy

QEs 1, 2 & 3 didn’t really work in the US. QE in Japan hasn’t worked. Now, the European Central Bank wants to try QE in the EU.  Good luck with that, hmm? [courtesy Google Images]

QEs 1, 2 & 3 didn’t really work in the US. QE in Japan hasn’t worked. Now, the European Central Bank wants to try QE in the EU. Good luck with that, hmm?
[courtesy Google Images]

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”.

Written by: ALFRED ADASK continue at ADASK’S LAW

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