Global Equity Shock as “Captured” System Starts to Crack
This week has seen some market volatility (see VIX Chart) reminiscent of the functioning market from days of old. The markets are spooked, bad news is overtaking good news and bearish views are becoming vogue. We are seeing a titanic battle taking place between the various bull and bear camps and they are starting to unleash some serious firepower.
The sleepy volumes of late have ticked up appreciably, and small investors are shifting in their seats nervously. The secret that no one really wants to admit (especially while they are making money) is that the recent stock market rally is a gargantous fraud. It has very shaky foundations indeed, propped up on pillars of monetary jelly. At its core is a massive money creation machine which is utterly unaccountable and unelected and a very select credit distribution system.
Market Volatility Index – 1989 to October 9, 2014 (Thomson Reuters)
You have heard the arguments regarding growing mountains of debt, the risk of inflation and stagflation, overvalued stock markets, property markets, massive derivative positions etc etc etc.
Perhaps you have become a little desensitized to these risks, because the party still seems to be going on, and no one is panicking. Yes we have had a few bumps in the economic road to date but they have been explained away. But far more has happened on your watch then you may be aware and it might all becoming to a head very, very shortly.
What has happened is that the entire capital market complex has become “managed” and captured by a few very powerful institutions. What this means is that we have moved from a market based global economy – which matches buyer against seller in an efficient price discovery mechanism, to a planned global economy, where intervention is the norm and the views of those in leveraged command matter more.
The markets are, and have been for the past 10 to 15 years, transfixed on the policy decisions of the U.S. Federal Reserve Bank, and all other global central banks are transfixed on the policy decisions of the Federal Reserve too. The power that this one institution has been given is staggering. They can, without any recourse, to elected officials, initiate policy that can send the global economy into a tailspin. Their policies can push millions if not billions of Emerging Economy citizens into destitution or transform them from impoverished to empowered.
The market gyrations we are seeing this week are multi-faceted. At their heart is a game of chicken between what the markets say they need and what the Federal Reserve is willing to give them. It all comes down to the terms by which credit is released and managed and how productive those in receipt of money can be with the credit.
There is also another battle being waged, those that wish to print money to stimulate and those that wish to manage government expenditures in order to balance the fiscal books. The market assumptions regarding Germany and its economy are being found to be false, the growth assumptions for the global economy are being found to be false, these falsehoods are now being priced into expected returns, and as such current valuations are being seen as being shaky.
Many commentators believe that the central banks and regulators have become captive to political and specific industry interests, we would agree. What is even more troubling is the degree to which the markets themselves have become centralised in their outlook. For example, In the last number of years an enormous amount of the world’s capital market asset basis is increasingly be managed by ONE single company and or directed by the services provided by Blackrock’s “Alladin” system. Indeed The Economist magazine believes that “Alladin” monitors and supports upwards of 30,000 investment portfolios and assists in the direction of over 17 Trillion dollars in assets. That is 7% of the worlds total. This is sheer lunacy.
What if the Federal Reserve makes a bad call, what if the Alladin misses it, what then?
Too much power vested in two few is a recipe for disaster. Truly we have put a fox in charge of our hen house.
Gold has started to grab attention as concerned money seeks a safe haven. Interestingly over the last 10 years gold has risen in most currencies and far outperformed the equity markets.