The Market Is Always Right
Published in Les Econoclastes
(France) on 26 February 2016
by Olivier Delamarche (link to original)
This sentence is uttered many times, and yet it still doesn’t mean anything other than to reveal the intellectual vacuity of the financial world.
The best example of this occurs during periods when the bond and share markets simultaneously diverge. They cannot both be right.
When the oil market started to plummet, financial analysts rushed to explain that this was a good thing — nay — an excellent opportunity for oil-importing countries. Producing countries might suffer a bit, but in general it was good news for everyone!
Oil even became a planet, an “aligned planet.” These economists and hedge fund managers are really tough guys, to the point where they turned into astronomers. In some ways, they even mutated from astronomers to astrologers!
And then, boom, the markets plummeted.
All the way back at the beginning of the downward trend, I was explaining the ins and outs of this downturn.
First, similar to other price decreases in raw materials, this decline indicates a sharp downturn in demand, and ergo for the global economy, where I see recession in several zones.
Second, it heavily hurts companies directly or indirectly linked to U.S. shale oil, or generally speaking, for any oil with high extraction cost.
Third, it bankrupts emerging market economies whose economic model depends on oil exports.
Fourth, there are less petrodollars irrigating the system.
Fifth, the nonexistent impact on household consumption, since the savings made on oil expenditures are re-allocated somewhere else. Essentially, the matter at hand is not "more available money."
This is not an exhaustive list of undesirable consequences (it goes on!), but I will stop here.
Today, some of these negative aspects have been taken into account by the markets.
Thus, why do markets keep on declining for every oil price decrease, and vice-versa?
Mostly because of the equation loaded into the trading computer programs:
C = WTI (the price of U.S. oil, to simplify)
d = Day
if Cd-Cd-1 < 0, sell shares, or — simply put — oil decrease = share price decline
if Cd-Cd-1 > 0, buy shares, or, oil increase = share price increase*
Great mechanics!
How wise they are!
Joking aside, I am not insinuating that an oil price decrease is a good thing. But if I accept the narrative of expert economic commentators, the more oil prices decrease, the more beneficial it is for (household) consumption!
Moreover, it adds to inflation that encourages major financial players to ease their monetary policy — which is good for the markets.
Thus, share prices should go up when oil goes down.
However, on the contrary, when oil prices go up it is not the result of a sudden increase in demand, but of rumors whispered between OPEC countries, which lead to index prices going up arbitrarily, far removed from any economic reality.
If I put on my economic expert shoes, oil price increases hinder consumption and increase inflation, thus making a central bank intervention less likely. This would prompt me to sell and exert downward pressure on equity markets.
Nevertheless, they go up! Why?
Simply because trading algorithms have not been updated!
In reality, the consequences of a bullish market are worse than this.
For argument’s sake, if oil prices recover by 20 percent — that is $6 more —presuming an OPEC agreement, the problems would lead to stagflation.
A price increase would be observed in the CPI (inflation), which would blow out the 2 percent target.
Federal Reserve Chair Janet Yellen and her board are cornered between growth deceleration, a likely recession, and a Consumer Price Index that is above target. If she reneges on the 2 percent inflation target that she herself implemented, it will further damage her remaining credibility; if she raises interest rates with the current level of national debt, and in the middle of a recession, the market will implode.
The computer geniuses should urgently update their trading algorithms:
Cd-Cd-1 < 0 = buy shares, or, if oil prices decrease = buy the market
Cd-Cd-1 > 0 = sell shares, or, if oil prices increase = sell the market
They can buy or sell regardless of the price of oil, since index valorizations are too high. But that's another story…
*Editor's Note: These formulae are accurately translated.
The best example of this occurs during periods when the bond and share markets simultaneously diverge. They cannot both be right.
When the oil market started to plummet, financial analysts rushed to explain that this was a good thing — nay — an excellent opportunity for oil-importing countries. Producing countries might suffer a bit, but in general it was good news for everyone!
Oil even became a planet, an “aligned planet.” These economists and hedge fund managers are really tough guys, to the point where they turned into astronomers. In some ways, they even mutated from astronomers to astrologers!
And then, boom, the markets plummeted.
All the way back at the beginning of the downward trend, I was explaining the ins and outs of this downturn.
First, similar to other price decreases in raw materials, this decline indicates a sharp downturn in demand, and ergo for the global economy, where I see recession in several zones.
Second, it heavily hurts companies directly or indirectly linked to U.S. shale oil, or generally speaking, for any oil with high extraction cost.
Third, it bankrupts emerging market economies whose economic model depends on oil exports.
Fourth, there are less petrodollars irrigating the system.
Fifth, the nonexistent impact on household consumption, since the savings made on oil expenditures are re-allocated somewhere else. Essentially, the matter at hand is not "more available money."
This is not an exhaustive list of undesirable consequences (it goes on!), but I will stop here.
Today, some of these negative aspects have been taken into account by the markets.
Thus, why do markets keep on declining for every oil price decrease, and vice-versa?
Mostly because of the equation loaded into the trading computer programs:
C = WTI (the price of U.S. oil, to simplify)
d = Day
if Cd-Cd-1 < 0, sell shares, or — simply put — oil decrease = share price decline
if Cd-Cd-1 > 0, buy shares, or, oil increase = share price increase*
Great mechanics!
How wise they are!
Joking aside, I am not insinuating that an oil price decrease is a good thing. But if I accept the narrative of expert economic commentators, the more oil prices decrease, the more beneficial it is for (household) consumption!
Moreover, it adds to inflation that encourages major financial players to ease their monetary policy — which is good for the markets.
Thus, share prices should go up when oil goes down.
However, on the contrary, when oil prices go up it is not the result of a sudden increase in demand, but of rumors whispered between OPEC countries, which lead to index prices going up arbitrarily, far removed from any economic reality.
If I put on my economic expert shoes, oil price increases hinder consumption and increase inflation, thus making a central bank intervention less likely. This would prompt me to sell and exert downward pressure on equity markets.
Nevertheless, they go up! Why?
Simply because trading algorithms have not been updated!
In reality, the consequences of a bullish market are worse than this.
For argument’s sake, if oil prices recover by 20 percent — that is $6 more —presuming an OPEC agreement, the problems would lead to stagflation.
A price increase would be observed in the CPI (inflation), which would blow out the 2 percent target.
Federal Reserve Chair Janet Yellen and her board are cornered between growth deceleration, a likely recession, and a Consumer Price Index that is above target. If she reneges on the 2 percent inflation target that she herself implemented, it will further damage her remaining credibility; if she raises interest rates with the current level of national debt, and in the middle of a recession, the market will implode.
The computer geniuses should urgently update their trading algorithms:
Cd-Cd-1 < 0 = buy shares, or, if oil prices decrease = buy the market
Cd-Cd-1 > 0 = sell shares, or, if oil prices increase = sell the market
They can buy or sell regardless of the price of oil, since index valorizations are too high. But that's another story…
*Editor's Note: These formulae are accurately translated.
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