There are two main emotions in the stock market — greed and fear.
A wise pro avoids them both. He looks at the situation like a doctor with a patient. No joy at the bedside when the recovery begins. No tears at the cemetery gate when it doesn’t. He just tries to figure out what is going on.
But the great mass of people in the stock market are amateurs, more like the hometown crowd at a football game than dispassionate analysts. When the team is winning…they want to be in the stadium. And they have a Fear of Missing Out when they are not.
Then, comes a losing streak…and they stay home. FOMO…no mo’.
Where we are in this season’s stock market games is unclear. There have been some big wins — Nvidia at $3.3 trillion! But recently, there have been some disheartening losses too — with investors in Nvidia losing almost a trillion dollars in three weeks.
The selloff was blamed on the Bank of Japan’s intention to raise its lending rates. In today’s news, we see it trying to correct its ‘error.’ Bloomberg:
‘BOJ Sends Dovish Signal After Rate Hike Sparked Market Meltdown
‘Bank of Japan Deputy Governor Shinichi Uchida sent a strong dovish signal in the wake of historic financial market volatility in Japan by pledging to refrain from hiking interest rates when the markets are unstable.’
Prices are just information. They tell us how much one thing is ‘worth’ compared to all the other things one might buy. Markets are always ‘unstable’ because price information changes all the time. So, there’s no particular reason for the BOJ to favour high prices over low ones…or stability over instability.
What gives?
As near as we can figure, the Primary Trend is a confluence of emotion and brainpower…policies and happenstance. If it were all a matter of policy choices, you’d think that the geniuses at central banks would have figured out how to control it by now.
But they err and stray like lost sheep. Some things just have to be experienced. You can arrange a date. You can study the dating profile…is that a recent photo, you wonder? What does she mean by ‘flexible’, you ask yourself? You can decide what restaurant to go to and which shirt to wear. But you can’t decide to fall in love. That will have to happen — or not — on its own. Likewise, the correct price of credit — the prevailing interest rate — can only be discovered, by willing buyers and sellers, canoodling together. Otherwise, it is unknown.
Wrong answers only
What should the interest rate be today? At any given moment, there is only one right answer. But the Fed’s FOMC doesn’t know what it is. And there are an infinite number of wrong answers. So, Central Banks are almost always wrong; every policy choice is an error.
The error choice is binary. One, a rate too low, encourages excess borrowing and speculating…two, a rate too high, stifles borrowing and spending. Either way, the amateurs are going to be drawn — towards FOMO…or towards FOMO NO MO’. The trend toward greed or fear — a natural part of the human condition — is thereby exaggerated.
In other words, booms and busts are normal. But the feds — claiming to moderate the business cycle by countercyclical fiscal and monetary policy choices — actually make them worse.
While the Fed’s choice of policy errors is binary, it is not random. If it were — if the Fed set its key rate too high half the time, and too low the other half — the errors would even themselves out. There may be more volatility in the credit and equity markets, but rates and prices would ultimately average out to where they ought to be.
Alas, the Fed (along with other central banks) has a strong bias towards FOMO…and against FOMO NO MO’. Owned by big banks, it is a creature of Wall Street as well as Washington. It is not ‘independent.’ Its analysts, PhDs and economists are not dispassionate. They are all members of the elites for whom the system was created and to whom it grants its favours. They stand and cheer for FOMO. And when FOMO NO MO’ comes, they cut rates to stop it.
That’s why we have $35 trillion of national debt… and Nvidia priced as though it were worth more than the entire annual output of the UK.
The ‘errors’ are harmful to most people. But they benefit some.
Since 1990, the bottom 50% of the population has gained about $46,000 each in household wealth. The top 1%, however, has gained $30 million — each. Or 680 times as much.
So, if the Fed has its way, we will have plenty of FOMO…and NO MO’ stinkin’ FOMO NO MO’.
Is that clear?
Regards,
 |
Bill Bonner,
For Fat Tail Daily
