The ringing of the opening bell on Wall Street is the signal for the world’s largest market to start another day of wheeling and dealing.
It’s also the call for the world’s central bankers to put down their worry beads and chant their daily affirmation; ‘buy the dip, buy the dip, buy the friggin’ dip’.
Some days the market listens, other days the plea falls on deaf ears.
Last night the market ignored it and the Dow fell 1%.
The world — not the universe — is far more concerned with oil.
The fortunes or misfortunes of oil has put the market on a slippery slope.
Iran barely controlled its laughter at the Saudis announcement of an oil production ‘freeze’. It the oil price down 5%.
That was enough to put the skids under Wall Street.
While oil companies may produce black goo, at present they are bleeding red ink…and lots of it.
The lower the oil price, the greater the losses. And the more imminent the much feared defaults become.
It was never meant to be this way. Low interest rates and QE were meant to rekindle world growth.
And they did for a while, but it was an illusion.
It was growth for growth’s sake.
Executives, with eyes firmly focused on their next bonus and not the company’s future, could not believe their good luck. They had yield hungry investors throwing money at any modestly yielding offer they took to the market place (courtesy of their friendly investment banker). How good was this?
Drill a new well? No worries. Build another mine? Absolutely. Buy a loss making IT company? Done deal. A bond offering to payout higher dividends? What a splendid idea.
All this ‘bigger fool’ activity would have made the father of the pyramid scheme — Charles Ponzi — a very proud man.
As financial blogger Charles Hugh Smith wrote recently, ‘If zero interest rates fixed what’s broken, we’d be in Paradise’.
I wonder where negative interest rates would take us?
Zero interest rates were an enabler of fantasy.
People with big dreams and little capital could make their dreams come true…with other people’s money.
This flurry of cheaply funded activity to build things, created the illusion of economic activity.
While this easy-money-go-round was in its full flight of fantasy, lenders were being paid. Everyone was happy. In fact they were so happy they were willing to lend even more money (at lower rates) to the smooth talking, over-promising, quick buck artists.
Apparently it was going to be a case of ‘build it and they will come’. The consumer obviously didn’t get the memo. Or if they did, they weren’t that interested.
All this actually created was a much harsher reality. We have a world that can produce an enormous amount of stuff, but without the corresponding demand.
The irony is that a good chunk of those investors who piled into this junk are going to be oh so much poorer when it’s all over, they’ll even have even less money to buy things. Which in turn only tightens the screws on marginal producers.
Central bankers saying economy is growing strongly; Wall Street debt peddlers’ reassuring words; and Company CEOs’ grand plans. Believing these bozos is going to turn out to be the investors’ biggest folly.
Last week the Nils Anderson, CEO of Maersk Group (owner of the Maersk Line — the world’s largest shipping container operator) told the Financial Times ‘It is worse than in 2008. The oil price is as low as its lowest point in 2008-09 and has stayed there for a long time and doesn’t look like going up soon. Freight rates are lower.’
Some of that cheap money went into building more ships as well. Makes sense doesn’t it? More things being made means more transportation. That’s one side of the equation. But what if nobody really wants what’s being made — or at least not in the quantities being produced?
We haven’t even had an official crisis yet and trading conditions are ‘worse than in 2008’ as Anderson says.
What’s it going to be like when the real action starts?
This realisation probably explains why the offices at The Fed have recently been sound proofed.
The chants of ‘Buy the dip. Buy the dip. Buy the friggin’ dip’ must be growing louder.
Keeping asset prices afloat while everything else around you sinks, is the last hope and prayer of the master illusionists.
‘If only there was more cheap money,’ they think, ‘we would be in economic nirvana and the “wealth effect” may finally work.’
If you put your ear closely to the Fed’s non-sound proof door you’ll hear, ‘Why isn’t our marvellous theory working? Our computer models showed us that making the top 1% richer than the rest of the planet was the fire starter the economy needed.’
The wealth effect was a fire starter alright, but not the fire they wanted. Investors threw trillions of dollars of paper money onto an unlit bonfire.
Zero interest rates did not deliver paradise, they took us to the edge of hell.
Oil is the accelerant that will fuel the asset bonfire.
‘Buy the dip. Buy the dip. Buy the friggin’ dip.’ It worked well when investors believed the Fed could maintain a safe perimeter around markets…away from the fire sales that were happening in the real economy.
The fuse has been lit.
The market as a whole has not yet gone up in smoke. It is smouldering.
There is still time to head for the exit before the bonfire of the central banker vanities really does burn the equity house down. To find out more go here.
When the mainstream chant switches to ‘Abandon ship. Abandon ship. Abandon the friggin’ ship’, you’ll know it’s too late.
For The Daily Reckoning