March 8, 2023

Principal Influencers

My grandparents never had a mortgage or car-payment. It’s a lesson on the stock market. 

Really, Quast?  You’re dragging your grandparents into market structure?

Photo 253969510 / Grandma Grandpa © Anton Vierietin |

Well, I’m on a NIRI Virtual Chapter panel today at noon ET about the SEC’s four gargantuan regulatory disgorgements, so yeah.  Come join! There are things to know about US capital markets.

Back to Grandma and Grandpa. I recall the rough math and I’ve shared it before, longtime readers.  As 1940s newlyweds in Hastings, NE, they paid $500 for 900 square feet of two-bedroom, one-bath new construction.

Then they moved to California. They built a 2,000-square-foot house on an acre, paying about $5,400 for the land and construction in the 1950s.

Quast, do you have a point? 

I’m getting there.  Stay with me.

They sold that house around 1980 for $54,000 and I bought one nearby in northern California in 1999 for about $370,000, selling it in 2006 for $800,000, which now doesn’t seem so much.

Five hundred dollars, to $5,400, to $54,000 to $370,000 to $800,000. It’s not all apples-to-apples, no.  But I needed a mortgage. They didn’t.

What changed? 

Our economic construct in the United States now depends on debt over savings.

How did that happen?  We stopped pooling saved money for investment and started creating money through the central bank, which buys government debt for new dollars (so the system depends on endless government debt, or prices would fall and we could afford more – but the government would go broke).

Strangely, the stock market also depends on created liquidity called short volume. Market-makers buy and sell stocks without having those stocks. The SEC not only permits it but requires it, so automated orders will fill instantly.

That’s the parallel. The economy and the stock market depend on engineered complexity rather than natural human behavior.

The 1792 Buttonwood Agreement that formed the New York Stock Exchange was two sentences. The SEC’s four December 2022 proposals are a combined 1,650 pages of new rules, on top of the 524 pages comprising Regulation National Market System and the 900 pages of the Market Data Infrastructure plan.

Don’t worry! The panel today will get to what’s vital to know.

But won’t the market and the economy ultimately return to fundamentals once the Federal Reserve successfully slows the economy to stop inflation?

Twaddle.  The economy doesn’t cause inflation. Creating money causes inflation. Our dependency on credit and the Federal Reserve is a colossal shift in the way labor and capital are deployed. The Fed is directing both (full employment, stable prices).

By the same token, a stock market with three thousand pages of rules is wildly divergent from one running on two sentences.

The principal influence defines the purpose.  Two sentences mean the customers are the purpose. Three thousand pages means the rules are the purpose.

The Federal Reserve runs the economy because the economy is existentially dependent on credit.  Members of Congress inveigh against rising interest rates for inhibiting consumption.

Don’t higher rates encourage savings and reduce dependency?

Not the point.

This is the point. The principal influence of the stock market defining its purpose is the SEC. Not investment.  The SEC’s rules so fully govern how money moves and trades that other purposes fade to insignificance.

Ironically, the act of Congress that created the SEC requires rules to promote just and equitable principles of trade, remove impediments to and perfect the mechanism of a free and open market (later the words “and a national market system” were added), and protect investors and the public interest.

Instead, the market has been transformed into an immense SEC-orchestrated fray. We see it in the data. Changes come in short, furious bursts. Over a trillion dollars of notional value in zero-days-to-expiration options now gum up the works daily. There is no asset movement connected to them. There’s no settlement date.

Does that protect investors and the public interest?

And access to credit defines the way the economy functions, so society now depends on a government bank.

Both conditions are downright weird. Orwellian. 

The economy becomes a thing to be landed, managed, governed.  The stock market becomes a factory producing a product called equities, uniformly defined, priced, traded.  

An intelligent species would set about reversing these conditions.  I’m not sure what our species will do.

But the starting point for any remedy is recognizing what’s happening.  This is a key part of the investor-relations job. We’re the experts responsible to our executives and Boards to know what sets prices. It’s not story. It’s market mechanics.

If I had my way, public companies would align with investors, combining resources to go to Washington DC and change the rules.  We need a seat at the table governing the market we depend on.

And maybe we should stop relying on credit.

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