My unpublished (100,000 word) book “The Financial Jigsaw”, is being serialised here weekly in 100 Issues by Peter J Underwood, author
As we have ended this Chapter on the EU it is worth noting that the current turmoil in the markets is going to impact the Eurozone severely in the coming months. This article is worth reading as it gives a clear focus on events looming in the coming New Year:
https://www.goldmoney.com/research/goldmoney-insights/the-arrival-of-the-credit-crisis
“It is easy to conclude [that] the EU, and the Eurozone in particular, is a financial and systemic time-bomb waiting to happen.” This completes the final part of the EU Chapter; here is the link to last week: Issue 33
In this Chapter about Markets we move on to examine another vital piece of our jigsaw. There are so many different markets and they all operate in their own way, so we will look at the most regular and popular ones. There is a belief now that ‘true markets’ don’t actually exist anymore because the central banks have interfered so much with their false economic indicators, like QE, NIRP and ZIRP, that true ‘price discovery’ can no longer happen. The net result is that funds are diverted from efficient projects to unprofitable ones because managers have no true reference for expected returns. In this scenario corporations rely on life-support from the central banks and become ‘zombies’, unable to survive the markets on their own.
CHAPTER 7
Markets
“Interest is the difference in the valuation of present goods and future goods; it is the discount in the valuation of future goods as against that of present goods.”
Ludwig von Mises: “Planning for Freedom”
Everything is determined, the beginning as well as the end, by forces over which we have no control. It is determined for the insect as well as the star. human beings, vegetables, or cosmic dust, we all dance to a mysterious tune, intoned in the distance by an invisible piper.
Albert Einstein
“Everything is determined, the beginning as well as the end, by forces over which we have no control….. intoned in the distance by an invisible piper”. Albert Einstein was not referring to markets, although he may well have been, since the quote is quite prescient because markets do seem to act as if an ‘invisible hand’ is controlling their unpredictable gyrations.
Most of the previous Chapters have touched on the subject of markets in one form or another. So far we have been building our jigsaw from the middle outward but now it is time to fit in the ‘edge’ pieces and these ‘market’ ones are many and varied, framing the picture and putting the centre ones into context.
Markets are central to all economies and are really “where the economic rubber meets the global road.” The smooth functioning of markets is crucial for the financial wellbeing of every economy and all markets rely on a degree of trust between the parties.
There can be no trust if there is no truth; how can we trust people who lie to us? We know that the ruling elite and their political slaves, through their ‘captured’ media, issue one self-serving justification after another purely for their own selfish ends. We all know this to be true but are reluctant to challenge these obvious distortions for the risk of losing our own small advantage in one way or another.
How can we trust institutions, whose credibility now rests on the continuation of untruths that are so embedded in our financial sectors and the political state that their collapse will bring down the entire edifice of perpetual debt? America in particular has shifted from truths, founded in their constitution, to self-serving distortion reducing belief and trust to deception and manipulation. This spiritual and moral decline will not end well and it is incumbent on each and everyone one of us to guard our heritage against this onslaught of hubris and calumny.
Example of a simple free market
Many years ago, when I was at junior school, at some point cigarette cards were the ‘in thing’. They were sought after at great expense in time and effort and became highly desirable, as well as a medium of exchange or barter; yet they had no intrinsic value much like our monetary system today.
These cards came in various shapes, sizes and colours; some being rarely found others were all too common and of little ‘value’. There was no authority dictating to the children what the “price” for any of the cards should be, yet they worked it out all by themselves.
Deals were struck in the playground to obtain the most valuable cards and the rare ones could be exchanged for many of the common ones or other useful gadgets and toys. Competitions would take place by flicking the cards against a wall and attempting to ‘cover’ others which would secure a ‘win’ for the player. Risks were taken with the more valuable cards to obtain better ‘returns’ when a win took place.
This ‘market’ emerged from nothing and began to evolve as other ‘fads’ overtook the current one. This experience indicates to me the natural existence of a free market where everyone is a buyer and seller and everyone trades for whatever perceived worth the market dictates. There is also the kudos associated with being a ‘winner’ in a group which accords a ‘status’ by rising above the crowd and offers a taste of celebrity for as long as it lasts.
This behaviour is of course classic ‘herd mentality’ to which we all succumb at some time or another. In the grown-up world of global markets the motivations are no different from those early days at school. The ‘chips’ are different but the gambling spirit prevails against all reasonable odds as market players are drawn into the game and the big players try, and often succeed, at manipulating the outcomes to their mutual benefit.
When the game changed to ‘conkers’ in the autumn it wasn’t long before some players figured out that cooking them in the oven for a while made them so hard that they became undisputed winners every time; the market had been ‘manipulated’ unfairly and soon the whole game became useless and the kids moved on to other things. Perhaps the Fed has cooked the conkers for too long and the game is up? The 2019 new year should reveal some answers.
Markets can ‘made’ rather than discovered, a mind game
The point of this short story is that, just as the markets for these various games fade, in the real world the currency of the day, dollars, euro, yen or whatever will also fade into oblivion as more and more flood the market.
In the same way that nobody can foretell the next coming ‘fad’ so too are we unable to predict the coming replacement currency; nevertheless it will come all too soon and thus we should all be prepared for a wave of change by investing in the one ‘currency’ that never fails, gold which we covered earlier.
More will be discussed about winning investment strategies in Part 2 of this book but I hope this quote by: Dr Paul Krugman; Economist and Nobel Laureate illustrates the inevitability of the coming crisis: “So if we could get something that could cause the government to say, ‘Oh, never mind those budget things; let’s just spend and do a bunch of stuff.’ So my fake threat from space aliens is the other route… I’ve been proposing that.” Markets are not only ‘discovered’ by entrepreneurs and traders but can be ‘made’ artificially by unscrupulous opportunists as this sorry tale of exploitation illustrates:
Two prospectors were searching a jungle for rare-earth metals when they came upon a tribe of hunter-gathers far from civilisation. They observed that these hunters were catching monkeys and using them as currency to trade for other products between themselves and other local tribes as well as for consumption. One prospector offered to buy monkeys for $1 each, a good price for any tribesman.
The jungle was full of monkeys and the hunters had no trouble providing a good supply which the prospectors placed in cages ready for export. Soon enough the monkey population began to fall and the hunters were finding it more difficult to meet demand, and so with a limited supply, negotiated for more money. The prospectors offered $5 per monkey and the hunters went off again with increased enthusiasm.
After a while, again the hunters were finding fewer monkeys and asked for yet more money to which, in response, the offer was increased to $10 each. When all the cages were full to overflowing one prospector announced that his colleague would be taking a trip up river to the nearest market where he had a buyer for the monkeys at $25 each and would return to split the profits amongst the tribe.
A while later the remaining prospector told the tribe that he had heard from his friend that he had sold the monkeys for $50 each but there would be a delay before he returned with the money. In the meantime he had to make an important meeting with a business colleague and didn’t want the tribe to miss out on all the extra profits to be made. So he was willing to sell all the monkeys to the tribe for $25 each and they would make great profits when his friend returned. The tribe were overjoyed at this man’s generosity and quickly closed the deal, allowing the prospector to leave for his meeting.
The tribe waited and waited but the two men were never seen again! Yes, the world is full of trickery and made possible, generally, through greed or fear which drives all markets up and down according to the prevailing atmosphere and a herd instinct which it follows as trust fails and disappointment, even rage, remains.
To be continued next Saturday
Here’s a parable for you. A nation with 95% of its’ people living in cities that don’t produce food, water, energy etc had a total power failure. There were some trucks and cars with fuel but within days, masses of people had seized them and all roads became blocked. About half the people walked about 25 miles toward the country before being mugged. The moral of the story is that Macro Economics Analysis is nothing unless every modern luxury is working as designed.
Excellent parable Robert, thank you and I do agree that when the model fails, as in power failure or whatever, all bets are off.