Opinion

Instability

In every century the same thing happens at one point or another. Society loses the plot and gets caught up in a mania, a grandiose exercise in self delusion. It can be political, it can be religious, and yes it can be economic. Sometimes these manias are confined to regions or small groups of people, sometimes they are vast in reach and impact and have global consequences. We can all think of examples. Religious? How about witch burnings? Politics? How about Nazism? Economics? How about all the manias that had fervent believers and adherents that with the hindsight of time were completely insane? The South Sea Bubble, the Tulip mania, the 1929 mania, etc. All of these bringing about vast social instability versus the previous status quo with often disastrous consequences.

And whatever we got going here is now approaching a similar frantic delusion that appears to infect everyone.

All of these manic periods have something in common: Believing in something absolutely even though it is either completely wrong or unrealistic. Seeing reality becoming untethered.

I’ve long argued that central banks aiming to be a stabilizing force are actually bringing about societal instability. Occupy Wall Street, Black Lives Matter, the storming of the Capitol, angry Trump voters, angry Democrat voters and yes even Gamestop reddit buyers may all have different causes and triggers and motivations, but they actually have one thing in common: They are angry, angry at a system that has screwed them over, a sense of deep pervasive injustice and inequality, a fissure that keeps widening with every central bank intervention program.

Think I’m kidding? Here’s John Authors via Bloomberg who sees anger as part of this picture: “The people investing today are driven by righteous anger, about generational injustice, about what they see as the corruption and unfairness of the way banks were bailed out in 2008 without having to pay legal penalties later, and about lacerating poverty and inequality. This makes it unlike any of the speculative rallies and crashes that have preceded it.”

Bitcoin? It too has positioned itself as rage against the establishment. See, it’s all part of the same thread, needle and trade.

Gamestop of course has the added benefit of seeing select billionaires enjoying fueling the flames:

The great gamification of the stock market. Anything goes:

Oh the hypocrisy of it all, if there was an organized effort to take down a stock price and aided by billionaires via their twitter feeds the SEC would be all over it & the outrage widespread, but because it’s just squeezing a short hedge fund it’s all glee & giggles.

We reach a point where nothing matters. Valuations, fundamentals, forward multiples who cares. Just create short squeezes in everything and it’s working. For now. After all the most shorted stocks are flying to the moon never mind that there are fundamental reasons as to why there are short positions in these stocks to begin with: They are shitty companies. Gamestop being one of them.

And the hallmark of any bubble: It’s infectious and it’s easy to get caught up in it. The prospect of massive wealth gains from nothing is causing millions to join the fray in the ultimate fomo trade: We can all become rich overnight.

And that’s how bubbles burst, everybody is long the same trade until it collapses. What about the systemic risks? One hedge fund blows up it’s a fun headline, multiple hedge funds blow up and it can cause a ripple of financial instability. May I remind everyone of 2008?

Yes it is temping to get caught up in a mania, but there is a fine line between responsible financial journalism and financial sensationalism and when you overtly endorse and justify such manias by throwing out the pretense of financial analysis and make everything about permanent multiple expansion based on imagined future money flows you cross that line and we see this everywhere now. That’s how manias feed on itself. The price action becomes impossible to rationalize with fundamentals and so new unrealistic narratives are invented to justify the price action.

Everybody was a genius in 2000 and the apologists will run people off the cliff counting on the fact that ultimately the Fed bails out bad calls.

These are dangerous times  both for longs and shorts as no one can know when the bubble pops and how quickly it’ll collapse on its own weight.

Every bubble has its moment of, ok maybe this is stupid, maybe this is getting too far, maybe now is the time to take some money off the table and then suddenly selling begets selling and the whole thing collapses.

I don’t know if this is the moment but it might as well be, indeed some are getting concerned at precisely this moment:

Perhaps a sign, perhaps not. We can only know in hindsight.

For now the mood is this:

Best of luck everyone.


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Categories: Opinion

18 replies »

  1. I’m not sure if it’s anger, or simply contempt, Sven. Everything’s a rigged joke, so why not treat it as such. Perhaps we’re foolish trying to make sense of it.

  2. Sven,

    You need to read the lead article here, https://www.lewrockwell.com/ for today, and please comment. The mRNA vaccine is being questioned by a number of practitioners and I would like your take on it.

    Thank you in advance for indulging me.

    Brian.

  3. Maybe today is the day. ..
    The day when capital preservation is a thing again. When financial decision are more investments driven, and less roulette playing. It might be the day when the millions losing $hundreds and hundreds losing $millions realize they’re not playing with Monopoly money. Playing spiteful stock tactics has no long term value. It’s not happening today, but this just might be a cathartic moment.

  4. Great article Sven and right on the money.

    It was Chamath Palihapitiya that was complaining about the Fed saving the market back in April 2020. He’s going after the hedge funds now to show the Fed what a shit show environment the Fed has created.

  5. Market is never at speculative peak when CNBC says so but we may be close. June is the month.
    We are close to a crash of epic proportions which is going to change this planet profoundly.

  6. hahaha

    Powell using big words now like…forceful, powerful, sizable but nothing changed.

    He’s BS’ing big time and his bluff is getting called. The billionaires will cause another market crash to get Powell to do more.

  7. PBOC warns about asset bubbles, increases repo rates, withdraws a bit of liquidity; IMF warns about asset bubbles, potential instability; Jay Powell… utters weasel words.

    GME continues its silliness (for today, anyway), US stock indexes drop 2%+ just for fun.

  8. It’s far past time for the Fed to take away the punch bowl, which they would probably do but for the fact that Jerome Powell and much of the Congress is deeply invested in equities. This corruption in America makes the stereotypical banana republics look like amateurs. Why are investors still taking the American markets seriously?

  9. This is a fundamental post.

    Financialisation, which mostly began in the 1970s, if it continues in its present form, is going to destroy human civilisation (but probably not before humans destroy most of the rest of this planet, progress on this is outstanding so far).

    What we have seen in markets lately, and increasingly over the last 20+ years, is the growing disconnect between what really matters (survival and progress of humans and the rest of their ecosystem) and the financial froth which is actually sucking the life from everything else. When I last researched this properly, about 15 years ago, the financial system had appropriated near 30% of the economic system – up from 10% 25 years earlier. I have no idea what it is now, I’m not prepared to put in the weeks of work to fathom it out. It functions like a tax on all human economic activity and, as a consequence in the present world, everything else. At some point it will eat so much that a massive reset must occur because that tax becomes too great for systems to function.

    The reset is almost certainly not imminent. There are years, possibly a decade or so, before it happens given business as usual; but unless a very different relationship between financial systems / capital and human / planetary society can be evolved, happen it must.

    When ‘paper’ money, investments, stocks etc etc, mushroomed about 300 years ago they had utility and they enabled the industrial revolution, for better or worse (mostly better would say the 90% of humans who would otherwise not be alive today). Now they and their descendents will destroy us and most life on this planet unless curbed. Sooner is better than later – for either outcome.

    • Ha! We are not alone:

      “But let’s all be forced to imagine a neoliberal market utopia where nobody does anything except day-trade in a co-ordinated fashion 24/7, in an entire economy driven entirely by asset-price manipulation, and with a central bank propping the system up with printed money when it wobbles. Ridiculous? Sure!! But that’s the financialised system we’ve built – for a lucky few. This just exposes how dysfunctional the system is.”

      https://www.zerohedge.com/markets/rabobank-what-happening-will-end-tears

      He only addresses the immediate silliness; wood and trees, lol. BTW I completely agree with Sven and many wise others: the fault is not with coordinating day traders, it is with the system that fosters it and has worked to the benefit of the richest for decades – perhaps centuries.

  10. Friday close. I really thought they would hold it above 30k DJIA and 3720 SPX, they certainly tried – but just failed. This is an important juncture, plenty of air pockets below, plenty of patterns to be in / validated. Eyes turn to the Sunday night ramp, will it hold? Today’s closing ramp didn’t. Next week could end 1 to 5% up on now, or 5 to 10% down, there’s not much middle ground.

  11. In an unrelated matter BLM, Burn, Loot, Murder, has been nominated for the Nobel Peace Prize. Wow!……………..now I know the markets have peaked and I don’t need a “shoe shine boy” to indicate to me that it’s “TIME TO ABANDON SHIP”………….she’s going down now……………AHHHHHHH!!!!!

    • Brother Terry I’m a little concerned for you. You may be right about abandoning ship but BLM nominated for something Trump was nominated as a reason? BTW careful with that axe Eugene.

  12. The narrative supporting why markets will go higher the past several years is “that the retailers still remember 2008 and are afraid to enter the market again” or “that there’s lots of cash on the sidelines”.

    Now everyone is screaming “let them (retail) buy” and “retailers remember 2008 and now getting revenge on the big guy”

    The billionaires control the media and are just orchestrating a stock market frenzy in order to get retail to buy and unload their shares to the retail crowd.

    All the shorts are out. Stop buying.

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