(^28) Opinion
MoneyWeek 8October 2021 moneyweek.com
Supplyshocks,risingpricesand labour shortagesare in
thenews.Analystsblamespecific factors, rangingfrom
thestrengthofthe economic reboundtoBrexit.The
likelyreality,however,isthatthe phenomenawesee are
connectedand interconnected with socialand political
developments.The financial system’s interactionwith
theeconomyformsacomplex,evolvingsystem,which
consists of amultifaceted webofrelationships andforces
with “emergent properties”,meaning that theresultof
theseinteractions canbegreater than thesumof their
parts. It is very difficult,ifnot impossible, to understand
all theseinteractions andpredict theirconsequences.
This isparticularly true whenthe systemhasbeen
subject to massive interventions, such as thoseseen
over thepasttwoyears:lockdowns,businessesbeing
supportedand governmentspayingpeoplenot to work,
huge publicdeficits, andunprecedentedcentral-bank
interferenceinmarkets.The economyand financial
markets areatanextremedisequilibrium.
Oneofthe simplest andstarkest measures of this
disequilibriumisthe ratioofasset values to incomes. A
keygauge of thisrelationshipisthe ratiooftotal personal
wealth to GDP, theriseinwhich hasbeenextraordinary.
Forthe US,the ratioofwealthtoGDPis 6.23,having
risenalmostverticallysince thecoronaviruscrisisbegan.
Up to1995 therelativelystable long-termaverag efor
this ratiowas 3.6. Theincreasein wealth hasexceeded
theincreasein GDPtoanunprecedenteddegree. The
UKis similar.
Ablip in asteepupwardtrajectory
Yetonachartofthisratio,the Covid-19panicappears
as barely ablipinits remarkable ascent.Inhis 1988
book,TheAlchemy of Finance,GeorgeSoros explained
histheoryof“reflexivit y”.Itpositsthatmarketprices
aredeterminedbyinvestors’beliefsand expectations,
andthatthese prices then in turnhaveanimpacton
the“fundamentals” –which then affect investors’
perceptions in what canbeaself-reinforcingcycle.This
perspective wassubject to thecriticismthatcentral
bankscouldbe acountervailing force; they control
short-terminterest ratesand have astronginfluenceon
marketliquidity.But thecentral banksthemselveshave
nowbecomecaptive to themarkets.
In thebookTheRiseofCarry,Jamie Lee,
KevinColdiron andIpresentthe case that the
drivingforceinmarkets todayis“carry”,the
suppressionoffinancialvolatility.Central bankshave
actedtounderwritemarketprices, creating aperception
that risk assets,suchasequities, aremuchlessrisky.
This hasparticularlybenefittedwealthy asset holders.
TheS&P500standsatthe centre of this volatility
suppression. This isbecauseofthe dominant role of
theUSFederalReserve andofthe dollar as afunding
currency forgloballeverage.
More broadly, this idea of carrycan be related
to power. If thereare largewealthand power
imbalances in society, then thepolitical forces driving
volatility suppressionwill be stronger.Volatility
suppressioncan be directlyequated to concentrationof
power, andbyextensionto less freedomin society. In
totalitarianstatesthereis less naturalvolatility than in
Effortstop reve nt marketsadjus ting have ledtoadangerous
social an dfinancialdisequilibriu m, says TimLee
afreesociety.Byimplication,the artificialsuppression
of volatility will graduallyleadtoasociety becoming
less free –again,often viaprocessesthatare difficult
to understand.
This canraise questionsabout theactions taken
by governments in response to coronavirus. Is it
possible, forinstance,thatthe extrememeasuressuch
as lockdownswere partly duetothe need to prevent
financialmarkets imploding(by directing all the
liquiditycreated by centralbanks to theasset markets as
opposedto therealeconomy)? This couldbetrue, even
though no individual involved in thesedecisions really
understoodthisclearly.
What does all thishavetodowiththe stockmarket
today? Theideas inTheRiseofCarrysuggestthat
becausetheS&P 500 andtheFedstandatthecentre
of theregimeofvolatility suppression, andvolatility
suppressionisamanifestation of concentrationof
wealth andpower,thenthe S&P500 continuing to
rise constitutesacurtailingoffreedoms. It is easy to
seehowthiscouldbe relatedtothe growth of Big
Tech (which dominatesthe S&P500)and the
surveillance state.
Anotherconclusionisthatcrashes have to happen.
Theremust be occasional spikes in volatility as leverage
becomestoo high andthereareepisodesofforced
unwindingofleverage.Eachcrash leadstoever-greater
intervention by theauthorities.
“The system”will findwaystojustifythese
increasing interventions. Apart from health crises, in the
future, othercandidatescouldincludeclimate change,
aglobal cyberattackorshortages of food.Various types
of rationingare likely.The endresultwill inevitably be a
furtheralignmentofthe interestsofthe very wealthy, big
corporations andgovernments.
Only inflation canend this cycle becauseitconstrains
theactions of governments andcentral banks. But
inflationisbad forfinancialmarkets.Therefore, being
bullish on theS&P500overthe long termmeans
believingthatindividualfreedomswill be further
curtailed.But it also meansaccepting that cra shes
will happen occasionally–cra shes that will require
increasingly enormous centralbankand government
action to reverse.
TimLee is aco-authorofThe Rise of Carry: The
DangerousConsequences of Volatility Suppression
andthe NewFinancialOrder of Decaying Growth and
RecurringCrisis(McGrawHill2020, £24.99)
©G
etty
Images
Cent ralbanks
must carrythe can
“Theartificial
suppression
of volatility
will gradually
lead to a
society
becoming
lessfree”
Wereextrememeasuressuchaslockdownsusedtoprevent
assetpricesfromplummeting?
antfer
(Antfer)
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