The world financial system according to Alice in Wonderland
Yes, I am still writing about the world’s financial system and I’m following the classic story analogy I developed in my last post. It occurred to me the other day when I scanned the articles I had compiled to background this blog that there was a common element. All the commentators and the world’s financial leaders were using words, phrases and interpretations to explain, justify or comment on why none of their efforts at promoting growth were working.
They were all using the same words, phrases and acronyms but they were interpreting them differently. As Humpty Dumpty said. ‘When I use a word it means just what I want it I choose it to mean – neither more nor less.’
Alice’s response: ‘ The question is, whether you CAN make words mean so many different things.’
Humpty Dumpty replied: ‘The question is whether which is to be master – that’s all.’
In Australia, we’ve had 28 quarters of consecutive growth. So, technically, we’re not in recession. Humpty Dumpty would say we’re having an ‘un recession,’ like and un birthday. Paul Keating would say we should be having a recession because we need to have one, and the Australian population are still in their bubble of complacency in the full knowledge that our federal government has a one seat majority and larger group of independents and is seriously hamstrung in its efforts to stop the spending, slow down the deficit . . . get Australian’s to live within their means.
Actually, they’re the best at making a word/phrase mean something completely different. Global downturn means ‘more government support’ in Australia; Stagflation means ‘let’s grab what we can for our group and dud others’ (aka rent-seeking – which is a national past-time); restructuring the tax system means ‘make someone else pay more tax while my ‘group’ pays less.
Getting back to the global financial system.
Vesna Poljak wrote an interesting piece a few weeks back where she quoted bond fund manager Vimal Gor (he sounds important and I want to give credit where it’s due). Vesna wrote:
‘Gor has likened the incredible concentration of power within the financial markets to something out of the Matrix and a nod to Elon Musk’s theory that we are living in a computer simulation.’
'Everyone tells me that the world I live in and the markets I position in are capitalist and democratic, but then why does it feel so much like a dictatorship where unelected people control everything?’
Good question Vimal? Humpty Dumpty knows the answer. Because the words democratic and capitalist don’t mean what YOU think they mean. They are words used by the central banks to divert attention from the fact they are not capitalist or democratic. (They never were, but now they’re the world’s money machine of last resort that everyone has come to rely on they’re in the spotlight).
When I read this article I actually thought, ‘I get the Matrix and Musk link.’ My son has just transferred to a physics degree at university and our fortnightly dinners at his local Japanese restaurant are an ‘opportunity’ for me to learn about the event horizon and how quantum computing works, among other things. It turns out that banks want physics graduates . . . I wonder why?
What most of the world is missing, and it’s not by accident, is that there are two groups of people in the world right now. Those trying to manage the great stagnation (central banks and international financial qangos) and those making truck loads out of it (alternative funds managers, ATs, private equity, family offices etc).
And who are they?
1. The people who head up the Central Banks of the world. I say the people because the institution of the central bank has completely neutered the fact that the Central bank…any institution, company…is run be people. People like you and me. ‘The Central Bank’ still has, just, this …ring to it. Bollocks. It’s just a bunch of people trying to work out what comes next.
2. International financial groups.
Now, this is where the fun starts. There are so many international financial, accounting, oversight, legal, blah blah blah orgaisations that most banks around the world can’t keep up with it all. I know about Basel I, II, III but most of my peer group think I am talking about the organic garden I have and the basil I grow that they use to make pesto.
And then you have the IMF, World Bank, ECB, each country’s Reserve Banks and so on.
3. Alternative funds managers
Just what are these? They are not people who are supporting LGBTI people. Alternative fund manager in the finance world is a company that find seriously rich people who don’t now what to do with their money and convince them that that they can manage it better, and mostly they can. And, if you've got lots of money this is a great option (although some of the fees they charge are abit over the top).
It’s not such a great option when the world is experiencing stagflation…think about it like this. It’s like a balloon that you’ve blown with a slow leak. At first it looks great (think TARP, QE bail-out . . .), but you end up with limp piece of rubber (the world economy in stagflation).
4. ATs (algorithmic trading)
I’m not even sure this is an acronym but I am sure that if you're a human trying to trade in the market you’re stuffed and you should stop now. AT’s trade by the millisecond. You might say they are driven by ‘quant’ and you have deeper and better insight and you might be right. But with 80% of the trades in any market done by a computer…there’s a small space for you. More critically, there’s no space for a stockbroker. There’s also no space for the personal trader, you’re pretty much stuffed too. And I haven’t even touched on dark pools. As a swimmer and scuba diver I thought they had something to do with water. Nup. It really means people want to hide something (a trade) in a dark place (aka somewhere most people don't know it's going on). So much for an informed market.
So, who is really calling the shots and what shots are they calling?
This is where Humpty Dumpty comes into his own channelled through some contemporary commentators and experts. To quote a number of these people . . . and I in no way mean to infer they are Humpty Dumpty-like.
‘There is no winding back the clock to the pre-crisis world of central banking’.
‘After the GFC central banks too primary responsibility for marco economic policy. With that came a change in how they interacted with the markets.’ Mohamed E Erian
OK. The central banks are calling the shots. Just what shots are they calling? To quote Paul Sheard Chief Global Economist for Standard & Poors in New York, it actually is Humpty Dumpty. He said:
‘Negative interest rates are an Alice in Wonderland concept. It seems to defy normal logic.’
Paul should know. He was working for Lehman Bros when it filed for bankruptcy in 2008 causing a near 5000 point collapse in the Dow Jones and started this whole post-GFC, QE, debt orgy.
Carl Ichan agrees. ‘The US share market faces a day of reckoning.’
I thought we’d had enough of these (days of reckoning that is) already. Isn’t there a film about this? But it seems not. Maybe I got confused with Independence Day.
‘The US share market is way over-valued at 20 times the S&P…and I’ll tell you why: a lot of it is the result of zero interest rates. The Federal Reserves hold on interest rates gave a green light to push asset prices even higher.’
Right. The central banks are in charge.
The shots they have fired are QE and now they can’t or don’t know what to do with the consequence – debt. In addition, a new breed of investor has been created, one that will borrow to buy anything. As a business historian I’ve seen this before . . . most recently in the period leading up to 2008, but there are numerous examples. Getting further into debt to increase wealth is not a new idea, far from it. But the world’s central banks, private equity, hedge funds and Australians are borrowing like its going out of fashion . . . and no one can defy gravity. Humpty Dumpty couldn’t.
Just where are we with debt?
Bad loans post the US sub prime collapse totalled $1 trillion. Now bad loans are at $3 trillion. Global debt is now $200 trillion, it was $140 trillion pre-GFC.
Debt, QE, TARP, stress-testing, negative interest rates, debt-to-GDP ratios and all other words and phrases mean just what they are supposed to mean. They might be good, they might be bad, they might be, well, something.
The reality is they all mean that those unelected people trying to solve the problem of stalled productivity growth and changing demographics through monetary policy and amassing more debt, don't actually know what to do and what they mean any more. It’s a scary thought but they’re just people like all of us, and mostly people who talk in words we don’t really know the meaning of.
As a reminder:
Humpty Dumpty said. ‘When I use a word it means just what I want it I choose it to mean – neither more nor less.’
Alice’s response: ‘The question is, whether you CAN make words mean so many different things.’
Humpty Dumpty replied: ‘The question is whether which is to be master – that’s all.’
I actually think Glenn Stevens, the outgoing head of the Reserve Bank of Australia, has mastered the art of meaning what he says. In his out-going interview he noted the following:
- Low interest rates are losing their effectiveness as households are already saddled with heavy debt burdens. (The ‘Bunnings test’ described by him…that is, that households probably haven’t gone out and spent more in stores because of QE);
- Rising government debt is a concern, about 40% of GDP for Australia, but gross household debt is three times larger, about 125% of GDP (that is Australians are debt junkies. I’d say they are delusional and complacent.
- We are now in a world of much lower investment returns. (Yes, and read into this people willing to take higher risks to find higher returns);
Currency wars are undeniable.Humpty Dumpty sat on a wall (and it was such a narrow wall that Alice was quite wondered how he could keep his balance.).
Humpty Dumpty had a great fall.
Maybe, the word debt actually means denial. Debt is easy, it means no-one has to face up to reality; markets, reserve banks, countries, political leaders, states, individuals.
Alice was in wonderland. We’re in the real world and most people don’t have magical shoes as much as many people would like to think so. (That said I have a pair of red shoes that I call my 'Alice in Wonderland' shoes).