Among all the mindless blather served up by the talking heads of bubblevision is the recurrent claim that “its all priced in.” That is, there is no danger of a serious market correction because anything which might imply trouble ahead — such as weak domestic growth, stalling world trade or Grexit — is already embodied in stock market prices.
Yep, those soaring averages are already fully risk-adjusted!
So, the “oxi” that came screaming unexpectedly out of Greece Sunday evening will undoubtedly be explained away before the New York Stock Exchange closes on Monday. Nothing to see here, it will be argued. Today’s plunge is just another opportunity for those who get it to “buy the dip.”
And they might well be right in the very short run. But this time the outbreak of volatility is different. This time, the dip buyers will be carried out on their shields.
Myth of Price Discovery
The whole priced-in meme presumes that nothing has really changed in the financial markets during the past three decades. The latter is still just the timeless machinery of capitalist price discovery at work.
Traders and investors in their tens-of-thousands are purportedly diligently engaged in sifting, sorting, dissecting and discounting the massive, continuous flows of incoming information that bears on future corporate profits and the present value thereof.
That presumption is dead wrong.
The age of Keynesian central banking has destroyed all the essential elements upon which vibrant, honest price discovery depends. These include:
- Short sellers that ensure disciplined two-way markets
- Carry costs that are high enough to discourage rampant leveraged speculation
- Money-market uncertainty that is palpable enough to inhibit massive yield curve arbitrage
- Option costs that are burdensome enough to deny fast money gamblers access to cheap downside portfolio insurance
- Flexible, mobilized interest rates that enable imbalances of supply and demand for investable funds to be decisively cleared
Not one of these conditions exists. The shorts are dead, money-markets interest rates are pegged and frozen, downside puts are practically free and carry trade gambling is biblical in extent and magnitude.
A vibrant market of atomized competition in the gathering and assessment of information relevant to the honest pricing of financial assets has been replaced by what amounts to caribou soccer. That is, the game that six-year-old boys and girls play when they chase the soccer ball around the field in one concentrated, squealing pack.
The soccer ball in this instance, alas, is the central banks. Until Sunday the herd of speculators was in full rampage chasing the liquidity, word clouds and promises of free money and market “puts” with blind, unflinching confidence.
The only thing in this utterly broken “market” which was really priced-in, therefore, was an unshakeable confidence that any disturbance to the upward march of asset prices would be quickly, decisively and reliably countermanded by central bank action.
But now an altogether different kind of disturbance has erupted. It is one that does not emanate from short-term “price action” of the market or an unexpected macroeconomic hiccup or lend itself to another central bank hat trick.
Instead, the Greferendum amounts to a giant fracture in the apparatus of state power on which the entire rotten regime of financialization is anchored. That is, falsified financial prices, massive, fraudulent monetization of the public debt and egregious and continuous bailouts of private speculator losses, mistakes and reckless gambling sprees.
Europe's Desperate Gasps
What has transpired in a relative heartbeat is that one of the four central banks of the world that matter is suddenly on the ropes. In the hours and days ahead, the European Central Bank will be battered by desperate actions emanating from Athens, as it struggles with a violent meltdown of its banking and payments system. It will be simultaneously stymied and paralyzed by an outbreak of public confusion, contention and recrimination among the politicians and apparatchiks who run the machinery of the eurozone and ECB superstate.
Yes, the Federal Reserve will reconfirm its hundreds of billions of dollar swap lines with the ECB, and the Bank of Japan and the Peoples Printing Press of China will redouble efforts to prop up their own faltering stock markets and to contain the “contagion” emanating from the eurozone.
But this time there is a decent chance that even the concerted central banks of the world will not be able to contain the panic. That’s because the blind confidence of the caribou soccer players will be sorely tested by the possibility that the ECB will be exposed as impotent in the face of a cascading crisis in the euro debt markets.
Key Indicators to Watch
Here are the tells. If the Syriza government has any sense it will nationalize the Greek banking system immediately; replace the head of the Greek central bank with a pliant ally; refuse to heed any ECB call for collection of the dubious collateral that stands behind its $120 billion in emergency liquidity assistance and other advances; and print 10-euro notes until the plates on the Greek central bank’s printing presses literally melt down.
If the Greeks seize their banking system and monetary machinery from their ECB suzerains in this manner — out of desperate need to stop the asphyxiation of their economy — those actions will trigger, in turn, pandemonium in the bond markets of Portugal, Ireland, Italy, Greece and Spain (PIIGS). From there it would be only a short step to an existential crisis in Frankfurt and unprecedented, fractious conflict between Berlin, Paris, Rome and Madrid.
Exposing the Naked Truth
Either all of the eurozone governments fall in line almost instantly in favor of a massive up-sizing of the ECB's bond-buying campaign to stop the run on peripheral bond markets, or the Draghi “whatever it takes” miracle will be obliterated in a selling stampede that will expose the naked truth.
Namely, that the whole thing since mid-2012 was a front-runner's con job in which the ECB temporarily rented speculator balance sheets in order to prime the PIIGS bond-buying pump and to lure the infinitely stupid and gullible managers of bank, insurance and mutual fund portfolios into loading up on the drastically overvalued public debt of the eurozone’s fiscal cripples.
Needless to say, there is likely to emerge a flurry of leaks and trial balloons from the desperate precincts of Brussels, Berlin and Frankfurt. These will be designed to encourage the Greeks to leave their banking system hostage to “cooperation” with their paymasters, and to persuade traders that Draghi has been greenlighted to buy up the PIIGS debt hand-over-fist — and to do so without regard to the pro rata capital key under which the current program is straight-jacketed.
But that assumes that the Germans, Dutch and Finns capitulate to an open-ended and frenzied bond-buying campaign that would make Japan’s current madness look tame by comparison.
Yet if they do, it's only a matter of time before the euro goes into a terminal tail-spin. And if they don’t, collapsing euro debt prices will infect the entire global bond market in a tidal wave of contagion.
Either way, it's not priced in. That’s been the real stupid trade all along.
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