By Gregory Mannarino, TradersChoice.net
For YEARS we have been witnessing an ever-increasing gap between any kind of reality, the stock market, and just about everything else. It’s always the same story, which also without exception always ends the same way- very badly.
Let’s get started with this.
What is “the job” of the stock market? Simple: TO ESTABLISH FAIR VALUE.
In a real market there are buyers and sellers who agree to buy and or sell an asset at a particular price, and this mechanism establishes a fair market value. Today this mechanism of finding fair value in the market, which is the backbone of how a free and fair market is supposed to work, has been totally removed.
Today it’s central banks who collectively run and manage the entire world economy, the markets, and the financial system itself. Central banks have created an environment where they have become a “third player” in every single two-party buyer/seller transaction.
Central banks have done this, become a third player in every single transaction, via manipulation of the value of the currency/devaluing it, and by vastly expanding the debt. Not only does the manipulation of currencies and expanding debt affect transactions in the market arena, but it also affects every single transaction that you personally make.
When you purchase goods or services of any kind, be it food, clothing, paying your utility bills, etc., a central bank is involved in the transaction. A central bank is not only involved in every single transaction that you make simply because the currency which you use in your transactions just happens to be central bank issued notes, but also because of currency value depreciation and debt expansion.
What are the consequences of currency value depreciation and debt expansion? INFLATION.
Going beyond the obvious.
Collectively central banks have kept bond yields/rates artificially low for well over a decade. Central banks have kept rates low by issuing, and then buying back, via a revolving door mechanism multiple trillions of dollars’ worth of debt. And although central banks have been, for many months, raising rates, there remains no resemblance whatsoever of any kind of fair value for debt.
Central banks keeping rates artificially manipulated to the downside for well over a decade now is not only massively inflationary, but it also creates enormous price distortions throughout the spectrum of asset classes.
Artificially suppressed rates creates something called “malinvestment.”
Malinvestment is the direct result of easy money/low-cost credit. With malinvestment cash makes its way into assets that it has no business going into. The two main results of malinvestment are stock market and real estate bubbles, and in today’s environment these could be defined as HYPER-bubbles.
Malinvestment also creates inverse bubbles.
An inverse bubble is the gross undervaluing of a particular asset or asset class. As an example of inverse bubble(s) one could look at physical gold and silver. Inverse bubbles are created by malinvestment.
Stock market/real estate bubbles/price action distortions/malinvestment are not sustainable in perpetuity, and eventually reality does set in. Reality leads to stock market crashes, housing crashes, economic depressions, and war.