Seasick From the Stock Market

Money Wave

The Ukrainian crisis rolls on. Actually, it rolls back and forth.

In no particular order, here’s how everyone involved kept busy doing something. The US threatened sanctions against Russia and promised $1 billion in aid for Ukraine. The Germans refused to play ball against Russia over G8 membership because of their important trade ties. The Ukrainians reckon they repelled an attack on one of their warships, but aren’t sure from whom. The Russians withdrew some of their threats and said military action was a last resort. Then they launched an Intercontinental Ballistic Missile test.

Stock markets overseas decided all of this was good, except for a short-lived hiccup when the Russian missile went up. Indices across Europe and the Americas surged, and gold and oil fell. If that sounds familiar, it isn’t. It’s the opposite of what happened yesterday.

Yes, the economic laws of unintended consequences still reign supreme. After spending time as an economist at all sorts of central banks around the world, William White came to this and other realisations a few weeks ago. We’ll quote at length because part of the power in this statement is that it comes from the horse’s mouth.

The analytical underpinnings of what we [mainstream economists] do are actually pretty shaky. A reflection of that fact, is that virtually every aspect you can think of with respect to monetary policy, about best practice, has changed and changed repetitively over the course of the last 50 years. So, this stuff ain’t science.

Think about what’s happened recently. One, its completely unprecedented. People are making it up as they go along. This is hardly science – building on the pillars of the past.

Secondly, what they’ve been making up as they go along actually differs across central banks. They can’t even agree amongst themselves about what’s the best way to do things.

I’m becoming more and more convinced that all of the models we use are basically useless.

It’s surprising that we’ve had this huge crisis that the mainstream didn’t predict. It’s gone on for years, which the mainstream absolutely didn’t predict. I would have thought this was a basis for a fundamental rethink about what we used to think we believed. But that hasn’t happened.

The policies that we’ve followed – on the monetary side at least – since 2007 are just more of the same demand-stimulating policies that we’ve been following, I think, erroneously, for the last 30 years.

We’ve got the potential to do so much harm by not getting the creation of fiat credit and money right. We’ve got the capacity to do so much harm that we should be focusing much more on making sure that doesn’t happen.

So there you have it. Those in charge, the same ones who are making our stock markets go up and keeping our governments funded, have no clue what they’re doing. Their methods are flawed, their assumptions ridiculous, they don’t learn from past mistakes and may be doing more harm than good.

Even their attempts to clean up their own mess afterwards are a bit questionable. Black Knight Financial Services Data & Analytics reckons America’s mortgage origination market is in freefall once more. The last similar decline was in 2008.

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The Austrian School of Economics hasn’t got much of a mention in the Daily Reckoning recently. One of their theories explained why there would be a financial crisis because of housing policies in the early 2000s. Part of the same theory says that you can’t re-inflate a bubble that popped. Apparently the US housing market is proving them right again.

It’s been interesting watching how our fellow editors are dealing with this awkward point in the market. The news and future doesn’t look promising, but the market keeps rising.

Our answer is that stock market crashes are inherently unpredictable. Even if you follow the Austrian School, explaining why a crash must happen is very different to explaining when it might happen. Of course, there are many different ways a crash can be triggered that have little to do with economic theory. And so an investor might as well be prepared in advance, regardless of what happens. How? Something called a Security Ladder. You can find out how it plays out for investors here.


Nick Hubble+
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Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.

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