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When Authorities "Own" The Market, The System Breaks Down: Here's Why
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Central planning asset purchases aimed at propping up prices destroy the essential price discovery needed by private investors.
Panicked by the possibility of declines that undermine the official narrative that all is well, authorities the world over are purchasing assets like stocks, bonds and mortgages directly. Central banks are explicitly taking on the role of buyers of last resort on the theory that if they place a bid under the market to arrest any decline, private buyers will re-enter the market once they detect that the risk of a drop has dissipated.
The idea is that once private buyers flood back into the market, central banks can unload the assets they bought to stem the panic. In this view, the market is not based on fundamentals such as revenues, profits and price-earnings ratios--it's all about confidence. If central banks restore confidence by reversing any drop with massive buying, this central-planning manipulation will restore the confidence of private investors.
When this restoration of confidence has been accomplished, private buyers will happily buy the central banks' stocks, bonds and mortgages. The central banks' portfolios of assets will shrink and the central banks will once again have "dry powder" to buy assets the next time markets falter.
This sounds reasonable in the abstract, but it doesn't work in the New Normal economy central banks have created. Let's consider a simple example to see why.
Let's start by recalling that prices are set on the margin, i.e. the last view shares, bonds or homes bought/sold. In a neighborhood of 100 houses, the price of each home is based on the last few sales which become the comparables appraisers use to establish the fair market value of all the nearby properties.
As the risk-on investment mindset switches to risk-off, house prices start declining. If the last home sold for $400,000, the next seller will expect at least $400,000. But since the mood has changed and risk has re-emerged, buyers are suddenly scarce. Homes listed for $400,000 don't sell. Eventually a house sells for $350,000 because the seller just needed to get out.
Suddenly, the value of the other 99 homes is in question. Home prices are sticky, meaning sellers refuse to believe the value of their home has declined. So listings of homes asking $399,000 pile up while potential buyers are wondering if $350,000 is a bit rich and perhaps $340,000 is the "real value."
Then two houses sell for $325,000. Maybe it was a divorce, or a transfer to another state. For whatever reason, the sellers needed out.
As few as 5 home sales revalues the entire neighborhood. Price is set on the margin.
As prices plummet, authorities decide to prop up valuations by directly buying homes. The next five homes are bought by authorities at full asking price.
The authorities expect new private buyers to come in and buy the next batch of homes, but the bubble-mindset of prices are only going up has switched to the fear-mindset of let's wait, prices are falling--and one of us might lose our jobs.
Now the authorities are trapped by their policy of central planning distortion of price discovery: since sellers sense prices are being manipulated (or the news that authorities are buying houses to prop up the market leaked out), they don't trust the price accurately reflects market valuations.
Pretty soon, authorities own 20 houses. Private buyers have vanished, and sellers are realizing it might be their last best chance to sell for $325,000, because if authorities stop buying homes, the price could revert to pre-bubble valuations--at $250,000 or even less.
At $325,000, the homes are poor investments for investors. With property taxes and junk fees soaring while rents are stagnating as layoffs increase, there is no way to make money buying a house for $325,000 once appreciation is no longer a sure thing.
The moment authorities stop buying, the price of the next house sold will be substantially lower as prices re-set to historical norms. This repricing to $250,000 saddles the authorities with immense losses, as they now own 25% of all the homes bought at $325,000 each.
By propping up the price, the authorities have injected false information into the market, and as a result, nobody can trust that current prices are real. If the price of the home might drop $50,000 next year when authorities finally stop buying, why buy now?
With prices distorted and trust lost, where can private investors put their money? Certainly not into houses that might drop in value once authorities cease being buyers of last resort.
In effect, central planning asset purchases aimed at propping up prices destroy the essential price discovery needed by private investors. With authorities buying assets, investors have no place to put their money that isn't exposed to sudden policy changes by authorities.
With investment information and feedback now distorted, private investment dries up, leaving productivity and growth stagnant.
In system language, the markets are now tightly bound to central planning policies: any change in policy has an immediate and potentially disastrous effect on the values of assets.
This is why buying assets to prop up prices is a one-way street: once you distort markets to prop up prices, you destroy information, independent price discovery and trust-- all the essentials of a market.
What authorities have created is a facsimile of a market. It looks like a market on the surface, but only gamblers and fools risk capital in markets based on false information.
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Print money....throw it at the market...what's the problem?
they lend it out and charge interest on it ...
Central planning must be destroyed
Yes, The Soviet must be Dismantled!
Built back up in the US.....after we were sure it really didn't work.
Our 60's hippies aren't very bright.....but somehow they got control.
It's not a market if your on both sides of the trade and all the "get rich quick" crowd is ran by con-artists from bottom to top, starting with the FED. It doesn't matter how much money you can print if all your doing is buying magic beans.....
Central planning must be destroyed
... and replaced with the philosophy and foundation of the "Natural Law"
"The Market for Liberty" - PDF file.
"Government is a coersive monopoly which has assumed power over and certain responsibilities for every human being within the geographical area which it claims as it's own. A coersive monopoly is an institution maintained by the threat and/or use of physical force; the institution of force to prohibit competetors from enteing it's field of endeavor. A coercive monopoly may also use force to compel “customer loyalty” as for example, a “Protection Racket”". pg. 32
"If men aren't free to trade in any non-coercive way which their interests dictate, they aren't free at all. Men who aren't free are, to some degree, slaves. Without freedom of the market, no other "freedom" is meaningful. For this reason, the conflict between freedom and slavery focuses on the free market and it's only effective opponent, the government". pg 31
Deposits are piling up and true economic demand generating loan activity is virtually stagnant. Companies are only borrowing in order to buy their own shares and stuff the pockets of selected insiders and large shareholders. Further, the banks are going to make out like bandits on the FF increase(s). And, whatever remnant of John Q that is still lucky enough to have a job and a few $$ still tucked away is going to get crushed under the jack-boot of central planning and Hitlery. Hedge accordingly, this ride is going to get a whole lot bumpier over the next 5-10 years.
It's not a problem, until it's a problem, then you have a problem.
This post is soooooooo gay! Private investors are thoroughly enjoying the implicit gubmint stock "market" guarantees. Most of these dickwads actually think they are earning these boffo returns. They have no interest in returning to price discovery and the chance of losing money.
When has the "market" ever been free of authorities? There has never been a market ( of significant size) w/o authority. Government is the hand maiden of the market. Those with the ( ultimate) authority tend to profit the most, having all of those inherit advantages. Maybe that's why it always breaks eventually? Or the personality profile, of those who want and end up with market authority, may have something to do with it.
They have no interest because they are highly invested as well as vested into it via social security checks, medicare, and such. They bought into it and believe that the central planners should keep them safe, they paid their share into SS you know. Now it and most everything else is broke, and they want the younger ones who can't get social security until 69 years old to pay the way for their reckless disregard for the children and grandchildren of the country via staggering debts that can't possibly be paid back.
Exactly. 'They' are what I call PINKO FASCIST COMMIES. They are, after-all, profiting from this Managed financial economy as well as aiding and abetting the enemy: The Central Banks and Governments. These so-called private investors think they are cute; unaware when TSHTF they all have bullseyes on their backs...
The land of the free has been propping up markets since the PPT was founded in January 1988.
And attacking gold since 1971.
The last honest Fed chairman explains:
Paul Volcker: Gold Was the Enemy
“Gold was the enemy to me because that was a speculative vehicle while I was trying to hold the system together. [The speculators] were on the other side.”
Then and now, the gold price is viewed as the inverse price of the confidence in the system. If gold is high, it usually means something is amiss. In Volcker’s time, the high inflation and budget deficits of the 70s propelled gold from a low of $35 before 1970 to a high of $668 in 1980.
http://www.theepochtimes.com/n3/1299447-paul-volcker-gold-was-the-enemy/
If gold is the enemy.....double digit interest rates must be the solution.
Do it....I double dog dare you....it worked so well the last time.
A lot of you weren't even alive when they tried that.....trust me.....it sucked.
We could actually afford that then......not so much now.
US debt and unfunded liabilities have increased from $60 trillion in 2003 to $210 trillion in 2014. That increase could buy all the gold and silver bullion in this world every 59 days (2 billion ounces of gold and 1 billion ounces of silver).
That is why gold and silver are the enemy
Kotlikoff goes on to illustrate that the fiscal gap is increasing at an alarming rate and that delay makes our problem much worse. In 2003, just a little more than a decade ago, the fiscal gap was $60 trillion. But by last year it had catapulted to $210 trillion. The fiscal gap may not continue increasing as rapidly as it has over the past decade, but with each passing year - as Congress and the President do their best to avoid action - our hole grows deeper by substantial amounts.
http://www.brookings.edu/research/opinions/2015/04/08-federal-debt-worse...
(B for IS Board Meeting)
Men, too many people are getting the idea that PMs have value! We know they are the highest form of money! We should control all PMs except for some coin collectors and jewelry buyers!
(Hands all slapping the table. Hear! Hear!)
We must come up with an ingenious plot to scare the serfs away from PMs!!
(Hear! Hear!)
Our Guest Speaker has some ideas! The Hon. John Corzine!
(Cheers)
It's time to be Men, not Mice! We must have the balls to nakedly short the markets! Am I not walking free? Soon, we shall Rule the World!!
(Hands slapping table. Yea!!)
And yet, PMs have their own intrinsic values, investment, insurance, jewelry, industry-- if you screw with PMs fair-market evaluation, you screw Everything Else Up!
Investor = someone doing what you want them to do. Speculator = someone doing something you do not want them to do.
well said! +1
Nothing to see here...
https://www.youtube.com/watch?v=5NNOrp_83RU
Come try the ring toss at the Khazar casino.
"Hey, these rings are only 180 degrees! 99% of them will fall off the pegs!"
"So?"
"The idea is that once private buyers flood back into the market, central banks can unload the assets they bought to stem the panic."
Yes, but human nature is that once they start, buyers will assume the CBs will always step in!
These CBs need to tell us if they are just going Full Soviet or if there is an exit plan, which I doubt. Almost no CBer has any experience outside of academia.
"Almost no CBer has any experience outside of academia."
True, but at this point, I'm not sure it would make a difference.
The CB's are the Matrix , they need you as battery to survive.
Totaaaalllyyyy unlike the US.
Thanks, CHS, for a description of my neighborhood over the last 5 years.
Close! I like to post, but it's WRONG, sorry. The difference is that Central Bankers can ignore reality for a very very very long time(years and decades). You, on the other hand, months, maybe a year or two.
The reality is, is that if they starve their golden goose, there will be no more golden eggs for them.
So it really is not in their best intrest to crash this thing.... that said, the greed and denial is so strong, that they may actually tip over their own system and we will have a crash that will require re-enigneering and re-denomenating.
...
Correct: socialism is a reward system for stupidity and lying.
and crony capitalism-- for lying, cheating, stealing, bribing, manipulating and killing for short term profits.
If you see a banker jump out the window, jump after, there might be to earn some.
AARRRG.... twice again
price discoveryis very important
I would even argue that socialism had failed exactly because it had no price discovery mechanism
its important that the lamb not see the knife, or it will panic and its meat will be less tender
Excellent comment!
Money must have intrinsic value.
As long as "we the people" permit "Central Banks" to create money out of thin air and then "loan" it out, we deserve the society we have today.
"Central Banks" only exist to take care of "Just Us" and the thugs who protect them.
That really is the problem in a nutshell, the manipulation of the market is creating less confidence in it.
They have this assumption that if they pump the index with stimulation, they will increase your confidence in the market.
The reality is that the market has indexes in order to gauge the real underlying risk of the said offering. IF that index is manipulated no one can really trust the indexes to know how a company is really doing.
It's like inflating a students test score to give them confidence to do better on the next test. Not only will it not help, but it will make the student lazier and less competent. This pumping of the market is the worst thing for it. It really makes you take the ponzi scheme criticism seriously. Which is why its tempting to buy physical gold, you want it in your hands and want to make sure no one can lower your digits on a balance sheet.
they not only step in to buy, they also step in to naked short sell disfavored assets. It's a double whammy
From their point of view, if they do nothing fear will grip the lemmings and they will panic and sell. Then the remaining fools will walk away seeing they are way upside-down. The banks will fail with millions of bad loans. The Fed will have to buy up those bad loans (again), rinse, repeat. They firmly believe they can do just the right amount of intervention every time...I mean, hell when you believe you are ominpotent. LMAO
Just look at those lame, leaked Fed forecasts. They don't have a clue...delay and pray. They don't what else to do. Housing bubbles create jobs, as they see it. And, yes, it will all collapse.
The manipulation is to get out of their positions and leave the suckers stuck with the loss.
The FED is the music in a game of musical chairs. Only there is very few chairs, and the guy who stops the music stops it when his buddy is in front of the chair.
Excellent analogy.
With some added twists.
Because politicans and beaucrats are not familar with a market, their interventions are driven by the connected (financial) players in the market. So, the market interventions are both evil in intent, and damaging in execution.
Because the money isn't theirs, governments intevene in markets in both volume, and in disregard for the consequencies.
And since someone has to pay for the spilled milk, the politicos wieigh debt, taxes, regulation, and inflation on the rest of the economy.
Killing the illegal Mexican's and OTM's will not work. It's going to be a shit storm trying to round them up and kick them out. What about a violent revolution and a reset? That might work.
There are too many and there shouldn't be any.
Here's another way to prove it fails, using theory:
So if deficit spending guarantees price increases and the society always increases dishonesty in social policy success measurements, then we can explain why socialism’s history is a pattern of economic failure: Corruption, oligarchy, rights abuses, fiscal decadence, and mass murder.
http://www.teapartytribune.com/2015/05/18/two-laws-that-guarantee-social...
fascism-- not "socialism"
Do you really think the Financial Sociopaths care about markets? It is just another means of getting to their goal. Create thin-air money to swap for legal titles that allows them "to own the earth in fee-simple."