Tagged: financial crisis

Hysteresis

You never know where you’ll hear a new vocabulary word. 

It’s not the word that matters but what it connotes.  And the context in which one hears it.  In this case, it was hedge-fund billionaire Paul Tudor Jones on CNBC Squawk Box yesterday, talking about stocks and bonds.

He said you don’t want to own them. He said, paraphrasing, there’s hysteresis at work in markets. 

Now, I think I’ve got a decent vocabulary. I read Allan Bloom’s “The Closing of the American Mind” in college and recorded roughly 32% of its entire contents as words I didn’t know.  Like palimpsest.

And I didn’t know hysteresis. It’s the delayed effect of causes. The relationship between an outcome and the history preceding it.

Illustration 27944908 © Mopic | Dreamstime.com

I guess it’s good news he didn’t say “there are no words to describe how bad things are in markets.” Warren Buffett, speaking this past weekend to the Berkshire masses gathered in Omaha, called financial markets “a gambling parlor.”

By the way, did you know Berkshire Hathaway holds no earnings call?  They just put out a Saturday press release. Hm, one wonders if we’re all confusing busy with productive.

Anyway, Mr. Buffett said he finds the amount of speculative betting “obscene.”

I’m reminded of a vignette from David Mamet’s book, Recessional. He’s in New York and observing street experts working suckers with Three Card Monte.

You know it? Somebody turns three cards up and says follow the queen, or whatever.  Then he turns them over and shuffles them.

Mamet says Three Card Monte is not a game of chance.  Not a game of skill.  It’s not a game.

And that’s the stock market. It is not a game for those setting most prices. I told traders using our quant decision-support platform that all the middlemen, the toll-takers like money managers, ETF sponsors, market-makers, brokers, exchanges, make money while investors and traders struggle.  Look at Citadel’s great April.

For intermediaries, it’s a job, and the rules and processes are well-known to them. The purpose of the stock market is to facilitate a continuous auction of everything in tiny bits. So the SEC has decreed.

That is, there must always be prices for all stocks, even if the prices are wholly disconnected from supply/demand reality.

Public companies, consider the chasm between Mr. Buffett’s statement and what you want.  You’re after shareholder value, not stimulating the “gambling parlor.”

What are you going to do to sort the one from the other? You can’t do it with “settlement data.”

Bill Gurley, guru of venture capital in Silicon Valley at Benchmark Capital tweeted that earnings multiples have always been a “hack proxy.” He said there’s a lot of what he called “unlearning” coming to the multitude too young to know a bear market.

I know looking at the numbers coming out of Robinhood and other parts of the market that retail traders have taken a drubbing by not understanding what’s happening.

The stock market functions exactly as its rules specify. It’s the system. The word “hysteresis” says the system reflects the state of its history.

And the history of the market, as with money, credit, labor, is about increasingly pervasive government control. Which means market forces lose control.

Bonds and equities are for the first time in decades falling at the same time.  The dollar is at levels one finds during crises when money rushes to it for capital-preservation. The economy doddered into a GDP decline last quarter.

We may be in a financial crisis already. We don’t see it because the credit-overextension causing it isn’t emanating from some part of the economy but from the government itself.

What about jobs, openings, strong consumer credit and balance sheets? They’re part of hysteresis, the milieu resulting from what came before it. They reflect what was stimulated into existence, not what can survive without stimulation.

I’m not saying everything is about to fall apart. The stock market could go on a tear again, although supply/demand trends need big change to make that hold.

Rather, I think the trouble is all the effort to manage outcomes. A handful of members of government, and central bankers and regulators are trying to run everything. The few are not smarter than the many. Hysteresis for any cultural experiment shows it.

Stenosis is a word describing the consequences of narrowing neural passages. Stentorian means loud, thundering.

I think hysteresis in our financial markets is breeding economic stenosis that will lead to stentorian tumult.  We best get prepared (we have the navigational data).

The Vessel

Will markets collapse?

We’re a day late this week, steering clear of election bipolarity marked by the vicissitudes of demography and the barest palimpsest of republicanism, a diaphanous echo of Madison and Jefferson and Hamilton, names people now think of as inner city high schools.

Back to markets. We’ve seen a curious change. A year ago, the top refrain from clients was: “What is our Rational Price?” For those not in the know, we calculate where active investors compete against market chaos to buy shares.

That’s not the top metric now. It’s this: “What’s your take on macro factors?” Management appears to have traded its focus on caring for trees for fearing the forest – so to speak. If so, the clever IRO will equip herself with good data.

We’ve been writing since early October about the gap between stocks and the US dollar. The dollar denominates the value of your shares. As the currency fluctuates in value, so do your shares, because they are inversely proportional.

In past decades since leaving the gold standard in 1971, those fluctuations have generally proven secondary to the intrinsic value of your businesses. But that changed in 2008. Currency variance replaced fundamentals as principal price-setter as unprecedented effort was undertaken by governments and central banks globally to refloat currencies.

Imagine currencies as the Costa Concordia, the doomed luxury liner that foundered fatally off the Tuscan coast. Suppose global forces were marshaled to place around it Leviathan generators blowing air through the ships foundered compartments at velocity sufficient to expectorate the sea and set the ship aright.

Thus steadied on air, the ship is readied for sail again, surrounded by a flotilla of mighty blowers filling the below-decks with air and keeping the sea back from fissures in the ravaged hull by sheer force. Passengers are loaded aboard for good times and relaxation and led to believe that all is again as it was. As seaworthy as ever.

That’s where we are. We are coming off the peak now of our fourth stocks-to-dollars inflationary cycle since 2008. In each case, markets have retreated at least 10%. The cycles are shortening. And despite retreat we right now retain the widest gap between the two since July 2008, right before the Financial Crisis.

Why does the pattern keep repeating? Because central banks keep juicing the blowers as the vessel wilts and founders. That’s what you saw yesterday after the election. The Euro crisis, having gone to the green room for a smoke is back center stage as it a year ago. Money – air – leaves variable securities for the dollar. As air leaves, stocks falter.

We don’t say these things to be discouraging. It is what it is. The wise and prudent IRO develops an understanding of market behavior – so the wise and prudent IRO will be cool in the IR chair and valuable to management and able to retain sanity and job security in markets depending on giant turbines.

If you’re relying on the same information you did in the past, you’re ill-prepared. We are in a different world now.

Relativity and Dollars

How do you prove relativity?

When Einstein proffered the preposterous suggestion that all motion is relative including time, people clearly had not yet seen Usain Bolt. Or what happens to stocks after options-expirations when the spread between the dollar and equity indexes is at a relative post-crisis zenith.

Let me rephrase that.

As you know if you get analytics from us, we warned more than a week ago that a reset loomed in equities. Forget the pillars on which we lean – Behavior and Sentiment. Yes, Sentiment was vastly neutral. Behavior showed weak investment and declining speculation –signs of dying demand – all the way back in mid-August.

Let’s talk about the dollar – as I’m wont to do.

There is a prevailing sense in markets that stocks are down because earnings are bad. No doubt that contributes. But it’s like saying your car stopped moving because the engine died, when a glance earlier at the fuel gauge on empty would have offered a transcendent and predictive indicator.

Stocks are down because money long ago looked a data abounding around us. From Europe clinging together through printed Euros, to steadily falling GDP indicators in the US and China, to the workforce-participation line in US employment data nose-down like it is when economies are contracting not recovering, there were signs, much the way a piercing shriek follows when you accidentally press the panic button on your car’s key fob, that stuff didn’t look great.

We know institutional money didn’t wake up yesterday, rub its eyes, and go, “Shazzam! Earnings are going to be bad!” (more…)