That capital markets are being manipulated is not an inflammatory statement, alas, but a reporting of public policy. Fed Chairman Bernanke explained the central bank’s current rounds of quantitative easing as directly aimed at inflating stock prices. No qualms about it. The ECB may have been less blunt and arguably more reactive when buying up European sovereign debt by the truckloads last week, but the result was not dissimilarly spectacular. Justified or not – undoubtedly well intentioned – such maneuvers may show consequences upon more than just inflated asset values. When financial patterns diverge from fundamental reality, and when markets are replaced by central authorities in a complex web of interests that are not always consistent, the basis for investment decisions, corporate strategy, even consumer behavior, will be shaken. In a capitalist system, we have been trained to think in terms of an efficient market – consciously or not, rightly or wrongly – and thought is prone to become broken when such context and definitions change. Perhaps it is not an exaggeration to suggest that we are now in the midst of general disorientation.
This notion came to mind the other day as I was watching an interview with David Stockmanon CNBC. Disappointing employment data had just been released, and Mr. Stockman was describing his analysis of the last several years of statistics, illustrating an underlying pattern that is far worse than is indicated by headline numbers. To his left, the market indices were rebounding after an earlier shock – a classic QE-2 liquidity moment – and to his right the CNBC talking heads were bouncing around in what seemed like a coffee-induced trance, marked by rapid speech and glimmering facial expressions. All of which led to a point of climax that should have been replayed on all the news channels: “I can’t explain the market,” Mr. Stockman said. “I don’t know what it is pricing today, I don’t think the market discounts anything anymore, it is purely a daytraders’ market that is trading off the Fed, trading off the headlines. One day it is manic, the next day it is depressive, and we can’t draw any conclusions.” This from a senior economist and market professional who has spent his entire career at the highest levels of capitalist decision making.
While Mr. Stockman’s statement was direct and almost unusually confessional for an investment pro, the confusion expressed may be of a similar variety as that which would cause leading economists to dispute what would normally be relatively clear subjects: inflation vs. deflation, expansion vs. contraction, and even matters of technique, such as whether QE-2 is in fact akin to money printing or not. In a different area, a respected stock analyst argued seriously that Groupon’s staggering valuation should be seen in the context of its gross (rather than net) revenue, and then it won’t seem so high. (This is a little bit like making a case that a real estate brokerage should be valued on the basis of aggregate amounts for which listed properties were sold. Absurd? Apparently not anymore.) And venture capitalists are still struggling to determine if (and why) there is a seed-stage investment bubble in the making, if (and why) there is also a late-stage bubble underway, what similarities, if any, the two ends of the barbell contain, and what this all means for the middle-stage that is still mild and murky.What all of these isolated references underscore is a scenario that surpasses any normalcy of disagreement between participants in an efficient market. In a normal scenario, market participants will disagree on outlook and opportunity, but fundamental standards of measure, basic mechanics, are taken for granted. In a normal market, participants will disagree on valuation, but will not seek to relearn basic precepts in order to substantiate foregone conclusions. These are all symptoms, rather, of an environment in which efficiency has been compromised, and a system that has put in jeopardy the very basis on which it stands: the market itself. An unintended consequence of central bank intervention, at least as profound as any financial ramifications, may be psychological in nature and for that reason more difficult to manage and correct.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.