- “It will always be saved”…
- Who will save the saviors?…
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Dear reader,
It is not often that I nod my head to an editorial piece of The New York Times.
Yet today I file an exception. Ms. Kyla Scanlon, financial columnist, opining in The Grey Lady:
- The stock market has been trying to ignore the war in Iran. That’s been true over weeks of escalation and de-escalation, cease-fires, a blockade, and a blockade of a blockade (now just a U.S. blockade). Markets have barely flinched, even as crude oil prices swing wildly each day and the world’s supply chains begin to shake…
- The word to describe what is happening is “shrug”…
- The stock market has decided this available information is not relevant. That is a problem for all of us. President Trump deeply cares about the stock market, and if the stock market had been selling off, there is a good chance that this war would have been over a while ago. More broadly, the markets are showing the single lesson that the past 40 years have taught them.
“It Will Always Be Saved”
And what — Ms. Scanlon — is the single lesson that the past 40 years have taught the stock market?
- It will always be saved.
That is correct. The stock market has learned that it will always be saved. It is a lesson the present stock market has taken aboard:
- Markets are not properly pricing risk, because they really don’t have to. They have assumed that the U.S. government will not allow them to implode…
Alan Greenspan first stretched out the safety net following 1987’s “Black Monday.”
Subsequent Federal Reserve chairmen have expanded, fortified and made generally available the net.
In 2001, in 2008 and subsequent years, in 2020, the net came out.
We’ll Be Saved; Just Buy the Dip
Ms. Scanlon continues:
- The markets came to expect a form of salvation. In fact, markets expected so much support that they threw what were called “tantrums” when they didn’t get it — as in 2013’s “taper tantrum,” when Mr. Bernanke suggested (suggested) that the Fed would be buying up fewer bonds… The markets learned: They could demand rescue.
- Then Covid happened. Both Congress and the Fed deployed trillions in combined and coordinated fiscal and monetary support within weeks at breakneck speed and scale. The stock market hit all-time highs within months of the worst economic shock since the Great Depression.
- Markets inferred a guarantee. They’re running the same pattern: This is really bad, but we’ll get saved, so buy the dip.
Just so. What does a fellow do when he realizes a safety net will break his plunge?
He assumes risks he would not otherwise assume. He ventures out upon thin branches in quest of the sweetest and juiciest fruit — fruit not worth the risk absent the guarantee.
And so with Wall Street’s large institutional investors.
Heads Wall Street Wins, Tails the Taxpayer Loses
They venture upon progressively riskier speculation, secure in the knowledge that the safety net is beneath them.
If, in the pursuit of extravagant profit, they lose their footing, out where danger lies, they merely take the tumble, fold their arms, cross their ankles, puff an exquisite cigar… and await the cushioned landing.
And so all incentive channels them in the direction of increasing risk.
If their gambles turn up aces, if they profit massively, so much the better.
If their gambles turn up snake eyes, and threaten the very financial system, they are not concerned because they emerge with a whole skin.
The taxpayer who breaks their fall does not emerge with a whole skin.
He absorbs a good fleecing.
“People Need to Be Reminded More Often Than They Need to Be Instructed”
I am well aware that here I break no news. The business — the shady business — is widely understood.
I have often written about it myself.
And who is not familiar with the phrase “too big to fail?”
The present system is simply a dishonest system.
Yet as the wise English scribbler Samuel Johnson once noted:
“People need to be reminded more often than they need to be instructed.”
So today, let us be reminded.
How Safe Is the Safety Net?
Yet is today’s safety net as durable and as certain as it has been?
Or has it become overstretched through excessive use… frayed… and weakened?
Ms. Scanlon:
- The problem is that the rescue infrastructure is exhausted. The Fed is trapped. Inflationary pressures mean that rate cuts, the most powerful tool in the monetary tool kit, could risk making things worse. The Greenspan “put” is not really in the cards.
- Fiscal policy is equally constrained. U.S. debt levels have reached a point at which any new spending programs face real limits. The dollar’s role as the global reserve currency is showing cracks. Foreign holders of Treasuries are watching U.S. policy with increasing skepticism.
The lady proceeds to explain how investors believe artificial intelligence is the market’s next savior, its next safety net.
She is not convinced it is either.
Who Will Save the Saviors?
Thus the lady concludes:
- The problem isn’t just the war, or the energy crisis, or the debt levels, or the trapped Fed, or the fragility of the A.I. supply chain. It’s all of them simultaneously, potentially compounding one another, processed by a market that believes it will be saved.
“Who will guard the guardians?” is an ancient question attributed to the Roman poet Juvenal.
In the present context… if the market takes a mighty stumble… and the safety net fails to break the fall… the question on all lips may just be:
“Who will save the saviors?”
Brian Maher
for Freedom Financial News
