August 10, 2022

A New Construct

What a week back from Switzerland.

We lost historian David McCullough and singer Olivia Newton-John. Meme stocks went berserk anew.

And speaking of berserk, after juicing Demand till inflation surpassed 9%, the Senate ratified a giant Supply-side bill that’ll ramp the cost and production of goods just as everybody is out of money.

The bill also erects a multitude of new offices and sends thither swarms of agents to harass our people and eat out their substance.  No wait, that was Thomas Jefferson writing in the Declaration of Independence about the Crown.

Oh, and the FBI demonstrated that nobody is secure in their persons, property and effects from unreasonable search and seizure.

Just another week in the USA. And everybody wants to know:  Is the bottom in for stocks? 

Did you laugh?  I did.  It’s a curious juxtaposition.

Illustration 17689963 © Ashdesign | Dreamstime.com

And maybe none of that is as consequential as a Wall Street Journal opinion (subscription required) by Johns Hopkins Professor Steve Hanke, global authority on currencies.

Wait, Quast. You’re not going to talk about money.

I’ll bring it back to stocks, which are denominated in dollars.

Strange but true, the US dollar will inevitably rise versus other currencies, no matter what economic buffoonery issues like effluvia from government. The dollar, euro and Swiss franc are at parity.  Professor Hanke notes that eight countries have seen their currencies lose 65% or more of their purchasing power.

Why? As the dollar rises, other global banks sell dollars to weaken it. And then they run out of dollars to sell. And their currencies devalue.

The Fed creates dollars by buying government debt, which lowers interest rates. To reverse that course, the Fed sells debt for dollars. Which makes the dollar stronger.

There’s no way out – like that Kevin Costner movie from 1987. 

I’ve said that what will happen after our long experiment in creating money – much like stock is created out of thin air in the US market – is our currency model will fail.

Well, Steve Hanke has now proposed a new one because the current one is at risk.  He’s the creator of most of the currency boards – ways to peg currencies – operative around the planet.  He knows money.  This is no shrill jester in the court.

He says the dollar/euro currency pair should stay in a range.  The Fed and the European Central Bank should buy and sell each other’s currencies to keep it around $1.30 to the euro.

Whoa.

The USA has enjoyed a massive monetary advantage. We alone create currency without having to buy or sell anybody else’s.

The Federal Reserve can whipsaw other currencies while propagating the external belief our resources are endless and the internal capacity to live beyond our means.

Professor Hanke is saying it needs to end. That the only way to constrain US government profligacy is to limit the dollars it can produce – by pegging it to the euro.

What’s this got to do with a bottom for stocks?  A big monetary guy is writing about the end of our monetary regime. Maybe we should be concerned about that?

Which brings us to stocks.

Meme Stocks are repeating microcosms of the lifecycle of currencies. They soar and crash. Value isn’t determined by economic activity but by currency supplies – shares.

And the supply is artificial, like dollars.

How? The US stock market is a “continuous auction” of tiny trades. Brokers by rule stand ready to buy or sell even when no one else is buying or selling. 

To make that happen, the SEC exempts brokers from legal constraints on “naked shorting” – loaning stocks without locating them.

That latter is illegal for you and me.  But for broker-dealers, creating stock to fill buy or sell orders is part of the job the SEC has given them, keeping the artifice of the continuous auction going and bloating and cratering Meme names.

Realize, “continuous auction” is an oxymoron. An auction by definition is a periodic aggregation of buy/sell interest, not a continuous one. So the market depends on artificial – nonexistent – supply to function.

The flip side is, without it you wouldn’t be able to buy or sell stocks at times. There just wouldn’t be any.  Of course, that’s how we understand supply and demand (you can’t buy a house if there aren’t any).

Money works the same way. Central banks create artificial supplies to foster unnatural outcomes disconnected from economics. Stuff soars, and collapses, but over a long arc.

Meme stocks do all of that in months, weeks, days. They surge on artificial supply and then collapse. We measure the market’s Supply and Demand for both companies and investors, so we can predict and observe the behavior.

The money?  Well, Dr. Hanke has fired the first warning volley. 

The market? It’s on a slow arc away from Momentum again, the data say.

Share this article:
Facebook
Twitter
LinkedIn

More posts

dreamstime m 99921172
April 10, 2024

You wonder what’s going to happen next. I mean, look around.  The South Carolina women ran ruthlessly through everyone, capping a 38-0 season with the...

dreamstime l 27136185
April 3, 2024

Is impending volatility predictable?  Sherlock Holmes would not tell Watson it’s elementary, that’s for sure.  But there is a tale behind the tape. Permit me...

dreamstime m 105967603
March 27, 2024

Vanguard founder Jack Bogle said to own the averages. Index funds.  That seed germinated into a tree that filled the investment world. Look at Blackrock....

dreamstime m 6563143
March 20, 2024

I was walking up Steamboat Springs’s Emerald Mountain with my friend Charlie last week and he said, “Trading volatility is like trading air.”  Charlie was...

dreamstime m 5149030
March 13, 2024

My wife Karen is reading Peter Attia’s book, Outlive, which is like reading it myself. I get the benefit of Karen as filter for tidbits...

dreamstime m 66699772
March 6, 2024

What the…? Everything was awesome. Monday. Then yesterday, stocks toppled like a thawed corpse in Nederland (inside joke, there). No obvious reason. Some said it was...