By James H. Nolt
If you tire of debates over “fake news,” I advise you look more closely at the business press. There is still fakery there, but it can be translated. It is not entirely hot air. The reason is that wherever there is money to be made or lost, people get serious. If news is all about how you, the consumer, should feel or who is the hero or villain of the moment, expect manipulation. For clarity, follow the money.
First, a word of warning: I do not have the resources to do massive real-time data research. I have no Bloomberg terminal at my fingertips. What I do have is a “decoder ring” to interpret business news and pretty good instincts from understanding the motives and capabilities of financial institutions and investors, broadly speaking. I understand that massive resources are invested in both directions of asset price movements. This is fundamental to my concept of polarized political economy.
I have mentioned before that British economist John Maynard Keynes had an interesting concept, “culminating points,” which refers to those times when economies are on a knife edge between boom and bust. Keynes describes in his ponderous tome, A Treatise on Money, that when an economy reaches a culminating point, such as what he witnessed in October 1929, opposing bear and bull positions build up rapidly. Rival bets are being placed, but the power of bears and bulls is asymmetric. They are different sorts of animals.
The identifying elements of a culminating point are rising convictions of bears and bulls that lead to rapidly increasing commitments and leverage on both sides. For investors, the extent of commitment can often be measured by the degree of leverage. If I am not sure, I risk my own money—what I can afford to lose. If I am very sure, all in, then I borrow heavily to magnify my gains (or losses). However, the tricky part is that bulls tend to stampede in the streets; they are obvious, whereas bears are stealthier. You have to look hard and know where to look to discover their commitment.
This week I pick a single online article to show how to use this “decoder ring.” This article is useful because it concisely includes all the necessary elements to alert your attention to the right things, if you understand how to read it.
This article is typical of troves of investment advice online. It is a teaser designed to get you involved in the markets and to seek further advice from this source. So, like many such articles, it tells which stocks to buy (drug companies) and which to sell (retailers). This is the most obvious part to decode. The source, the major global bank Credit Suisse, expects that Republican deregulation of health care in the U.S. as well as similarly minded “market solutions” under the post-Brexit British Conservative Party and from the newly elected French president, Emmanuel Macron, will reduce government regulation on drug companies that restrains their monopolistic pricing power. If pharmaceutical companies are less restrained by regulation, their profits will soar. On the other hand, the older and sicker people who will pay the inflated drug or insurance costs in the U.S., where the Republicans are sure to deeply cut government subsidies and insurance regulations meant to be fair to older and sicker people, will have much less to spend at retail stores. Since older people are more likely to shop in brick-and-mortar retailers rather than the younger, internet-savvy generation, Credit Suisse expects declines among traditional retailers. Older people will be too poor or too scared to shop as much as before.
More provocative are the other hints in the Credit Suisse analysis. The Investopedia headline promoting it reads “Credit Suisse’s Market Pullback Strategy.” “Pullback” is, of course, a euphemism for stock market crash. The subhead speaks of holding pharmaceutical stocks through the expected “dips” in the overall market. One person’s “dips” are another’s drowning. Another popular euphemism for a downturn is “market correction.” At least that one concedes that prices can be incorrect, which is more than most economists and finance admit. Indeed, by many measures, stock prices now are high relative to real earnings.
The real pay dirt in this article is the bullish advice on exchange-traded funds (ETF), a.k.a. exchange-traded products (ETP). One thing Wall Street marketers are most proficient at is selling old wine in new bottles. They are constantly inventing new language to talk about the same old hustle.
ETFs are complex financial products that leverage price movements using derivatives. This is a repackaging of the same sort of derivative-based financial contracts that lured so many suckers into gambling away their retirement savings (often unwittingly) during the 2008 financial crisis. If you have not done it yet, now is the time to view the entertaining film, The Big Short, and read my review.
Although in principle derivatives can be bets in either direction, I am quite sure that most ETFs are bullish bets on the prices of various underlying assets. Any bet has two sides: the one making the bet and the one covering it. Every derivative contract also has two sides—one bearish and one bullish—on the future price of the underlying assets. Understand now one reason why I call this blog “polarizing political economy.” Just as in any bet, there must be a winner and a loser. Both sides cannot win.
The question you should always ask is: “Where is the smart money?” In Wall Street lingo, insiders are called “the smart money.” People who rig the game are the smart money. Outsiders are the suckers. By this point you are probably guessing correctly that you should NOT follow Credit Suisse’s advice. Admittedly, buying Big Pharma stocks is probably good advice. Selling retailers is probably good advice. But after giving you a couple pieces of obviously good advice, they play bait and switch and shill ETFs.
In every culminating point one problem emerges strongly: If the smart money wants to make a bearish bet, where can they find sucker money to take the opposite bullish bet? The answer is the public’s greed for ever-higher rates of return and naiveté in projecting the euphoria of a bull market out into the indefinite future. Derivatives magnify the gains using leveraged bets. But they will also magnify losses when bullish bets fail. Bullish bets will fail as soon as major creditors, which are the same large banks covering the bear side of a bull bet, curtail credit. Oh my, do I see a self-fulfilling prophecy?
When this blog series returns in a few weeks, I will explain the relationship between the bond market (which you hear too little about) and the stock market (which is covered relentlessly) to argue another reason we are nearing a culminating point: the end of a debt bubble.
James H. Nolt is a senior fellow at World Policy Institute and an adjunct associate professor at New York University.
[Photo courtesy of Sam valadi]