Distortions in the Financial and Political Markets

Financial Markets

If you're a regular to this blog, or to some of the other blogs in the sidebar like oftwominds, then you understand that our financial system is marred by massive market distortions. The market is supposed to work as an information-processing entity that rewards smart enterprises with capital, and smart investors with profits. The investor analyzes companies and decides which, if any, he wants to fund.

In reality, things don't quite work that way. Most people invest through proxy. They give their money to a fund manager who does the legwork of poring through financial data for a multitude of ventures, trying to find those most likely to give the best return. Thus, the valuations of the various companies relative to each other have some basis in reality. But the market overall, that's another picture. Aunt Betty doesn't allocate money to the stock market based on the aggregate financial data available to her. She probably sends a fixed amount. For the vast majority of investors, the amount of money they send to market is determined by (a) their pension program, which they have no control over, (b) their 401(k) policy (most people just put in whatever their employer will match), or (c) the recommendation of a financial adviser. (I'll save you the fee; they recommend 15%.)

Most people don't invest in companies; they bet on the market. For those who do trade their own stocks, mostly they buy index funds when they see a bull market, and sell when they see a bear. [Some buy individual stocks, although not always on the best information. Aunt Betty likes her iPhone, so she buys Apple stock. She doesn't know what dividends are, or why she would want to have those.] The question for the typical investor becomes whether the market will rise or fall. Will people keep pumping money in, or will they get scared and pull out? Company valuations become a minute data point, because the amount of money coming in mostly has to do with the overall health of the economy (or its perceived health) and the monetary policy. The Fed can pump the market by lowering interest rates, or deflate it by raising them. That's a lot of power! No wonder investors watch meetings of the Fed Board in real time. The Fed also owns so many assets, some $5 trillion in toxic assets it acquired from TARP, that it can direct the market at will. They could crash the market tomorrow if they decided to dump everything. So the value of your Google stock next month has more to do with monetary policy than how Google is being run.

The gist of this is the market, previously an engine for efficiently matching investment capital with business enterprises, is now a casino that matches investment capital with monetary policy and the hope that everyone else will keep investing. Think of the difference. In the old system, if you sniffed a sweet investment, you didn't want other people knowing about it. You prefer your investment dollars to be at a premium, thus more valued by the business venture, meaning you might expect better returns, such as higher dividends. None of the FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) pay dividends. They don't need to. If you buy them you hope everyone buys them, driving the price up, because that's the only way you're going to make any money off them. The old feedback loop has been dismantled. So when will company financial data feed back into market investment? At the next crash, one presumes. The efficient processing of information is gone. Reality only feeds back into the system in intermittent, jarring, and chaotic events.

Political Markets

There are two major ways to view democracy, and probably lots of minor ways. It's a complicated thing. One way to look at it, as suggested by Jim's Blog, is that democracy is a proxy for war. Instead of drawing up sides and fighting it out on the battlefield, we simply count heads to determine who would have won, and put them in charge. Democracy circumvents the horribly self-destructive process of civil war, and everyone gets to go home to their families. We'll come back to this.

The other way to think of democracy is as a marketplace of ideas. The various entities in the nation use the methods of persuasion at their disposal to influence the populace, then we count heads to see who had the best ideas. This is why we hold our freedoms of speech and of the press in such high regard. Those are not idealistic moral judgments. They are absolutely essential to the efficient flow of information in the marketplace of ideas. Without them the market of democracy is distorted, and doomed to eventual, and painful, market corrections. There are some other requirements. The voting public must be rational and operate in good faith. The government must faithfully execute the decisions of the democratic process.

I'm sure you see where we're going with this. In all critical aspects, our democracy-as-marketplace is seriously distorted. The mainstream media is primarily propaganda, not honest journalism. Other avenues of information sharing are corrupted. Just today Twitter killed another trending hashtag damaging to the Democrats. In this one, a DNC IT staffer, who was fired 6 months ago for obvious fraud and apparent data theft, was still being paid by Debbie Wasserman-Schultz (remember, she was fired from her position as DNC chair after email leaks revealed she was throwing the election for Hillary), and was only fired after he was arrested by the FBI while trying to flee the country! But those hashtags are removed in favor of Russian conspiracy theory nonsense. Clearly the channels of communication are not conducive to pragmatic decision-making by the populace. The public is fed fiction and believe it to be objective truth.

The other aspects are failing as well. The voters need to be rational and acting in good faith. Well half of them believe the Russia conspiracy theories after 13 months with no evidence and not even a description of the alleged crime. It would seem that about half of the electorate does not satisfy the criteria of rational. And a significant number are ideologically opposed to even having a dialog with their opponents whom they see as literally Nazis. So certainly they are not acting in good faith. The other requirement, that the government faithfully abide the decisions of the people, is also violated. Half of the deep state, and nearly all the propaganda machine, are working to reject the president elected by the people. The government frequently ignores the will of the people, or adopts their preferred policies but does not act on them. Nearly everyone, from both aisles, opposed the Wall Street bailouts, and they still happened under presidents from both parties. A decade ago their was bi-partisan legislation passed to build a border wall. It never materialized. Everyone wanted banksters to be prosecuted for fraud that contributed to the 2008 financial crisis. Not one person, not even a patsy, saw jail time. And now, the Republicans own the whole federal government, largely by promising to repeal Obamacare, yet we are seeing that no meaningful repeal will happen, and maybe not even a nominal repeal. 

All the requirements for an efficient democratic market are, well, requirements. The loss of one can destroy everything. All are failing today. The prognosis for a democratic collapse is nearly the same as that for a financial crash. It's not a matter of if, but when.

Let's go back to the other perspective of democracy for a quick second; that democracy is a proxy for civil war, and awards those who would have won on the battlefield. The key requirement for this arrangement to endure is that the people who would have won the war tend to win the elections. At the very least they should not be treated as vanquished chattel. Otherwise, at some point, the would-be warriors start to think, "Gee, maybe we'd get a better deal if we just took this all over by force." Think of our situation now. The military, the police, and nearly all men who own firearms are Trump supporters. Yet he is currently under soft coup by the party populated by gender-fluid feminists and limp-wristed manlets, who want to take all the money they can grab from the former group. They can hardly be reasoned with, and eventually the right wing will realize that they can only defend themselves by physical force, not by engaging in the defunct marketplace of ideas.

The financial and democratic feedback loops in this country are wildly dysfunctional. Remember, the number one rule of economics is the markets always correct. Reality denial is not a sustainable condition. The only practical advice here is to become antifragile. Expect that there will be abrupt and chaotic market corrections in our future. If you don't yet know how you would benefit in those kinds of scenarios, then you are certainly fragile to the inevitable.