Mid Year Musings : Engineering A Perfect Market At A Price

My son deceived me into borrowing Season 1 and 2 of the Game of Thrones before I realised that they were both rated M18 and bordered very closely, to my limited understanding, on the boundaries of pornography.

Nonetheless, the graphic depictions of cruelty, gore  and political intrigue could possibly be lifted from history books around the world from medieval Europe to China. I recall reading about the Chinese empress who pickled her political rivals in vats of acid and Italian nobility who were all well versed in the art of poison.

This brings us to Why Nations Fail – The Origins of Power, Prosperity And Poverty. The authors conclude that prosperity cannot be engineered even through authoritarian growth. History is peppered with failed experiences.

Authoritarian is all we know now in the marketplace. Much as we like to think that we are still in control, the truth is that central bank forces have managed to engineer a perfect market at this moment.

Consider this.

1. Almost every major stock index is up on the year except for Nikkei and CSI 300. In places like Argentina, it is up 50%.


2. Almost every major bond has rallied this year except for US and UK 2 year notes and of course in Russia, Ukraine and South Africa.

Global 10Y Yields

3. Almost every commodity class has rallied this year except for wheat, cotton, iron ore and a few others.


4. Inflation is decelerating around the world in most developed markets, which some dispute as temporary, but is of sufficient concern to central banks like the ECB who have embarked on negative interest rates to shore up prices.

global cpi


5. GDP is mixed bag with optimism reserved for the future as the reports we are reading would have it. Afterall, we cannot be allowed to feel bleak on the strides central banks are willing to take to make sure that the economy and employment peaks.

global gdp

We have reached an epitome of perfection with across the board rallies and the economy under climate control.

This has come at a price with swelling central bank balance sheets and increasing risks to sustainability of the rally. Countries’ debt loads are soaring, with the exception of Norway, Bangladesh, Philippines and India (Vietnam to a small extent).


Debts have to be repaid and we know the easiest way is to inflate the debt away because 1 dollar today is worth half tomorrow. https://tradehaven.net/market/code-red-red-alert-its-all-red-borrowing-without-repaying/

Debt occurs for 3 reasons, according to the Minsky’s Financial Instability Hypothesis :
1. to generate additional profits to pay off the loan (hedge)
2. to roll over loans (speculative)
3. to make capital gains (Ponzi)


We can conclude that we are presently in a delicate moment of perfection in the marketplace. An authoritarian marketplace that is controlled by central banks’ actions. Central banks who are struggling under a mountain of debt themselves who are the same central banks who are holding a lot of their own debt as well.

The days ahead will be rocky with central banks breaking ranks with their banker, the Bank of International Settlements, disagreeing on monetary policy as the market goes on to price earlier rate hikes that is causing bond market disruptions. Not much point selling bonds when the central bank is holding on to most of them.

I yelped for a correction earlier on but turned bullish on the markets in the last quarter when it became clear that asset prices will be propped. It is only as painful as realising that markets function on a belief system that is under authoritarian control.

And how far can belief systems defy reality ? is evident in this chart below of the S&P against 10Y yields in my favourite Jaws of Death pattern.


We have the US earnings season up starting tomorrow with Alcoa and Hertz, banks coming up next week along with the rest of the field, all between 15-18 July.

It would be the best time to take a pause as we sit back to admire the work of perfection the market has become.