Are Markets Delusional, or is This Time Truly Different?

News & Current Events Public News & Current Events
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Originally published at: https://peakprosperity.com/are-markets-delusional-or-is-this-time-truly-different/

Executive Summary

In this episode, Paul Kiker and I dive into the perplexing state of global markets, particularly the mysterious advances in the S&P and the German DAX despite troubling economic data. We explore the role of liquidity and speculation, the impact of algorithms on market behavior, and the potential for a “Minsky moment” in the U.S. debt markets.

A Minsky moment is a sudden, catastrophic collapse of asset prices that occurs after a period of economic growth and stability. It’s named after economist Hyman Minsky (1911 to 1996), who specialized in how excessive borrowing can lead to financial instability.

We also discuss the implications of economic “kayfabe,” where everyone knows the system is flawed but continues to play along.

Kayfabe: “The tacit agreement between professional wrestlers and their fans to pretend that overtly staged wrestling events, stories, characters, etc., are genuine.”

Our conversation touches on the challenges of navigating these markets, the potential for innovation if monopolies are dismantled, and the importance of being informed and adaptable in these uncertain times.

The Role of Liquidity and Speculation

Paul and I discuss the unusual market behavior, particularly the S&P’s steady advance and the German DAX’s breakout, despite poor economic indicators. It seems liquidity and speculation are driving these markets, with more buyers than sellers. This speculative phase is fueled by hope in the U.S. that monopolies will be broken up, allowing small businesses to thrive again. However, the situation in Germany remains puzzling, as their economy shows no signs of major innovation.

Algorithms and Market Behavior

We delve into how algorithms, which now drive 90% of market trades, lack the human elements of greed and fear that once influenced market behavior. These algorithms operate on historical data and operate according to prescribed routines, potentially leading to an excessive disconnect from current realities. This raises questions about the current market phase, which we suspect is in the “delusion” stage, characterized by hope and speculation without substantial backing.

Economic “Kayfabe” and the Minsky Moment

Paul Tudor Jones introduces the concept of “kayfabe,” likening the current economic state to a scripted wrestling match where everyone knows it’s fake but plays along. This raises concerns about a potential Minsky moment, where the realization of fiscal impossibilities could lead to sudden market shocks. The bond market, in particular, may not be pricing in long-term risks, prompting some to consider shorting long-term fixed income.

Key Data

  • 75-80% of all trades are by high-frequency trading firms, holding stocks for mere microseconds.
  • U.S. stocks account for 73% of the MSCI World Index, the highest single-country weighting ever recorded.
  • Federal jobs have increased significantly, with nearly 2 million added in recent years.

Predictions

  • Markets may face a Minsky moment, leading to sharp corrections if fiscal realities are acknowledged.
  • The U.S. equity cycle may end similarly to Japan’s in the late 1980s, with prolonged stagnation.

Implications

  • Retail investors are at significant risk as professionals offload shares during this speculative rally.
  • Potential inflationary impacts if tariffs are imposed on critical imports from countries like China and Russia.

Recommendations

  • Consider being cautious with long-term fixed-income investments due to potential underpricing of risks.
  • Stay informed and adaptable, as market conditions are highly uncertain and driven by speculation.
  • Explore opportunities in precious metals as a hedge against potential inflationary pressures.
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On the mouse-topia experiment you revisited late in the broadcast and how societies when unchallenged tend to fall apart…it brings to mind for me Teddy Roosevelt’s speech “The strenuous life”.
Maybe he was onto something…?

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For me it brings to mind the movie Zardoz (1974).

Men definitely need challenge/competition in our lives. Not entirely sure about women, though.

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I think there is something to needing a bit of strain/challenge in life to push against. It’s something I’ve been reflecting on lately.

I’m middle aged, basically got the house and money I need. I only need to work part time, flexibly, for myself, from home (so a great situation) - and might not even need to do that. I’ve done all I ever wanted to do work/career wise. Now I just do a bit to bring in some money.

I’m looking for a new purpose in life. I have things to do that can enjoyably fill my time. But they don’t feel like enough to be a PURPOSE. Or something worth dedicating the remaining 20-40 years of my life to. Or something worth all the work hours I have put in to be in this enviable position. It’s like I’m squandering it. Though, tbf, I am using most of my time way better than a lot of retirees do. Not like I watch tele all day. I do some voluntary work but not too full on. I don’t want another job or anything.

But anyway, I was watching Band of Brothers again lately and reflecting a little that a war forces people to all pull together towards a common goal and gives everyone purpose. eg in the UK, everyone was involved. Even old men manning AA guns or Home Guard. I suspect a number of people felt a bit lost when they had been “all in” for 5 years and then it ended. Especially in the UK where there wasn’t a lot to celebrate economically - not for another generation and even then. In terms of recent events, we all had the covid tyranny and “war powers lite” inflicted on us. We all “got involved” to some degree and in one way or another - even if it was research, resisting and prepping. Then it gradually fizzled out and people are spat out at the end into a world of a worse workplace and society than before and higher prices. It’s like…Huuuuuuuh. (big sigh).

But, I digress a bit. A war would be the way of resetting and destroying the financial system, old norms, expectations and imposing/forcing (and there is a lot of force under war powers, like we have not seen in our lifetimes) some sort of cohesion in an increasingly fractured society - then, of course, rebuilding it in the way that the powers would like it to be. Fracture it, totally break it, then build it back.

But I half wonder that, while very few would cheer on or enjoy a war, I wonder if many people would quietly/deep down enjoy feeling as though they have a proper purpose. I think a lot of people don’t. Many work pointless jobs (and deep down they know it) and have increasingly lonely lives of quiet despair - that mountains of cheap imported plastic tat don’t make up for. I don’t think I’m the only one feeling a bit meh. I just have more time to ruminate on it now and no real limitations on doing what I want - but I still don’t know what to do. If anything, all these options make it harder.

Sorry - bit of a self indulgent rant in the main and not aimed at you.

The TLDR without the self indulgence is there is something to having a challenge and having the feeling of a real purpose. In the absence of many people finding their own purpose and fulfilment, I wonder how many would find these things under a wartime economy - which I am sure we will see at some point and in one way or another. I certainly can’t see how the west changes course and things all end well.

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Great presentation. Caused me to wonder about the graph of the % of the US contribution to the world MSCI Index. Is it a measure of cash/investment seeking safe haven from WWIII by money fleeing to the greatest perceived “safety” in the world? Scared European and Asian money (investors) may be buying the dips in the S&P500? Could this screen shot be more of a a war fear index than irrational exuberance? Just wondering?

image

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That’s some good introspection there Rob - and I wonder similar things often.
I travel and run into a variety of people, I find myself wondering (often) how many of these folks have seen life even twenty miles from where they were born?
And I don’t think it’s many.
It seems to render a compartmentalized view of reality for them, they can read about current events or see them on the news, but they have no mental framework of understanding of any meaning beyond their own world, and it’s a problem when we all have to think and act to larger challenges.
We need numbers and I don’t see that we get there with narrow understanding.
I recall a curious experience from 35 years ago when I went back to school for a hot minute.
Sitting in a massive auditorium of 800 students in a sociology class - on the first day - the professor asked a history based question (like) “who bombed pearl harbor in WWII”? (I don’t remember exactly, but it was an obvious question that would have been common knowledge for anyone my age).
90% of the class didn’t know!
These were kids only 12 years younger than me at the time.
I had an immediate sinking feeling that our whole society was f*cked.
That was pivotal (recent) history and way too many of our younger generation simply didn’t know, or even have an idea that they should know.
How much of that can be attributed to the education system, and how much to personal disinterest I don’t know, but at some level there was no curiosity with a lot of people about who they were or where they came from.
Maybe that ties into the “lives of quiet despair” you reference, I wonder if they did it to themselves, or was it designed into their education?
I (we all) need them to be better than that if we are going to mount any kind of large scale reform to the current system, and I don’t see that happening based on the folks I run into on a regular basis.

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No manufactured war needed to find purpose.

Maybe this link could help you. Regardless if you’re religious or not, these people are the real deal. And maybe you’ll find more than you expected or even hoped for.

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Your discussions on the markets are a real sanity check. Still I don’t know whether to give up on puts or double down. Don’t judge pls :smile: I know I’m playing with fire

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Lynn : One can find some strength when you’re at your bleakest moments, - If you open yourself up to new choices…

Alan : Lynn, I’m not coming to your Baptist church! They always get people when they’re down.

:wink:

No, but seriously - thank you for the suggestion.
As it goes, I looked into joining the local volunteer fire service but I could see that it wouldn’t work out for various reasons.

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Not trading advice. Just an observation:

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image880×796 123 KB

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@cmartenson chris you like German info
This sounds bad!

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Thanks for sharing.
Retired 12 years
So an idea that has given me something to push against.
Besides the last 3 years building some fabulous sustainable ( if i must say so myself gardens) gardens i got lucky on something.
As a David Morgan subscriber i latched on to a couple speculations he wrote about in detail in 2017. One, well i do think it will be first stock of mine to actually go to zero lol. The other a gold and silver backed crypto for 7 years i have been active in. Steady Investing got me invited to management zooms and gave me a voice.
I did it to keep up with crypto enough to be relevent and not fall even further behind on technology: mobile wallet, digit exchanges, digital real world assets, now trading just started, pretty soon credit card to save store spend PMs, the ability to stake and earn return on the gold silver digital assets
Everyday now at 1030 i get on a 30min team call ( panama, Argentina, Belgium, canada, france - smart guys building a 360 PM eco system) to listen and say something if i want

We often only get lucky if we put something into the topic - i had no idea moving to country 3 years ago i would have the neat set “homestead” i do or that this crypto project would be this important to me. 7 years ago i expected i would just watch $$ grow. well it did not turn out that way but now some really exciting tech and interest as it ready to accomplish my hopes for generational wealth to care for 3 disabled people.

Wish me luck! Lod3.fi

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I often remember how poky-man cards were all the rage. They had no real value, and people traded them to higher and higher costs, justifying their “value”. At some point, it will collapse to real value, not the trading “value”. I have literally expected this to happen over a decade ago. As you have repeatedly said, 2008 should have righted that ship, but it didn’t.

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If Paul is interested in AI and tyranny, he might like to watch this - start at 49:36. 10 minute segment.

This partly relates to neurolink. Something for Musk fans/optimists about the new US government to consider re what tech might be pursued in the US over the next 4 years.

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I don’t think becoming a CryptoBro or the patsy of a bunch of CryptoBros will fill the gap in my life, but thank you for your suggestion. I think.

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You and Paul ask:Where is all the liquidity coming from? OK, liquidity is available “money”, is it not. Bitcoin adds money to the system, does it not? As Bitcoin goes up in dollar value, it adds that much more liquidity to the system, doesn’t it. The M-series of monetary aggrigates just measure US dollars. Other countries use the same methodology. This methodology ASSUMES that the currency is a fixed measure of value. If it did not, the M-series would respond to inflation and it does not. The M-series does not measure cyber currencies flooding into circulation. Today there are dozens of cyber currencies all of which are being used to buy and sell but are not counted except to come up with the GDP. Bottom line is that the M-series worked up until the arrival of cyber currencies. This means the Central Banks have lost control of the money supply. Please tell me I am wrong.

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I am the opposite, I need 50 lifetimes to do what I want to do. I have a good job but need to work.

Luckily I moved beyond my previous mechanical materialist view of life and opened up to more. There is a lot of spirituality and religion to explore, and I’m currently diving into cryptids (sasquatch etc.) Life on planet earth is amazing. And there would be no end to what I could do to help protect it and the environment, if I had the time.

Plus figuring out the economic system and how all the levers of control in the world work.

Theres so much out there to pursue, I couldn’t do a fraction of what I want to.

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I think in general you use fiat through a tier 1 exchange buy a crypto you wish to then use to enter the crypto world where you can then buy sell trade in wallets or other exchanges not using fiat
While the various crypto might be valued in fiat many most are not backed by anything. But as the nothings go up in value until someone wants to off ramp back to fiat not exactly sure how that increases M?

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I was agreeing with you - it can be fun interesting keep brain engaged etc by intentionally or stumbling into some endevor or hobby as my example has for me

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Yep. I think some of Trump’s instincts on cutting regulation could help take dead weight out when this happens, but it will still suck.

My big concern with Trump is he thinks we can “grow” so the current debt doesn’t matter. I heard Bezos say the same thing at a recent event. More GDP means debt is a smaller %. Sorry, but getting a higher-paying job because you have a debt problem is not a good long term solution.

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