House and calculator [Illustrative]..
(photo credit: INGIMAGE)
A friend of mine has a very peculiar dvar Torah that he relishes in repeating every year when the annual cycle of Torah reading comes around to Noah and the story of the flood.
Black Monday – the infamous day in October 1929 when the market crashed in New York, triggering the sequence of events and decisions that created the Great Depression – occurred on the Monday following the Shabbat on which Parshat Noah was read. So, too, did the second Black Monday of October 19, 1987, when the market registered its greatest- ever single-day loss, both in percentages and in points.
From 1929 to 1987 is 58 years, which is the gematrya (numerical equivalent of the value of the Hebrew letters) of Noah. On that day in 1987, the market fell 508 points, which, since 0 is zero, is actually 58... There may be more that I have forgotten, but you get the idea. If you like esoteric gematriyot, it’s nice fun.
But the connection between market crashes and the Noahide flood is actually clearcut. Both are fueled by excess liquidity, physical in the case of the flood and financial in the case of the markets. The big difference is that in the markets the excess liquidity generates the boom and speculative mania, and only when that liquidity is withdrawn for any reason, then the crash comes – whereas in the flood, the liquidity is the direct agent of disaster.
In any event, it is a certainty that, whereas financial liquidity has always been a key factor in the functioning, direction and very existence of markets, it has never been more central than it is today. This column has taken the view throughout the market boom since 2009 that it is an artificial event, driven by excess liquidity created by the world’s main central banks and not reflecting either macroeconomic or corporate realities.
Although this has seemed perfectly obvious all along, there are still many people – primarily those engaged in managing other people’s money – who profess to believe that “fundamentals” drive markets. These “fundamentals” come in two sorts: “economic fundamentals,” relating to macroeconomic variables such as inflation, unemployment, budget deficits, interest rates and so on; and “corporate fundamentals,” such as sales, products and, of course, profits.
In former times these fundamentals played a role, arguably a central role, in helping markets fulfill their function of “price discovery,” achieved via buyers and sellers of each asset being traded. These prices, to the extent that they were generated in a free and fair manner, provided an objective (although far from foolproof) basis for assessing the value of the entities underlying those assets – corporations, governments and countries.
Of course even in those supposedly glorious “former times,” efforts to distort prices were legion and no price was ever “true,” except by chance. But the novelty of the 21st century, and especially of the period since the Great Recession of 2008-09, is that it is now the overt and undisguised practice of central banks to systematically distort the markets, and hence their own and other economies, by deliberately generating false price signals. This is achieved by injecting liquidity into the markets on a scale and to an extent never previously imagined, let alone planned, announced and executed.
This strategy has now been in use, on and off, by key central banks for over six years. For at least the second half of that period, it has been widely accepted that the strategy has failed to achieve its declared goal – of generating a self-sustaining economic recovery in the US, Europe, Japan or the entire world. In fact, more and more analysts, even in the mainstream investment banks and houses, have adopted the view that the only possible justification for continuing the strategy, given its failure to help the real economy, is because it keeps the financial system in clover.
This view is now expressed freely and frequently, not just in antiestablishment blogs and media columns (such as this one), but has become a staple of professional analysis. As a simple, clearcut recent example, let me quote Citibank’s Matt King, a strategist who earned the respect in which he is held by, inter alia, warning about the Lehman collapse and its implications ahead of time.
The following two sentences form the central conclusion of a recent analytical piece from King. They are matter-offact, deliberately unsensational – and therefore all the more valid and important. The first is a judgment that speaks for itself: It is [liquidity injections], not fundamentals, which we would argue has been the major driver of markets for the past few years.
But the second, which merely quantifies the phenomenon that the first identified as critical, must surely blow any intelligent person off their feet: Put differently, it takes around $200 billion per quarter [of central bank-provided liquidity injections – PL] just to keep markets from selling off.www.pinchaslandau.com