If you've been investing or trading the markets for longer than a few months, you've probably heard of the infamous quote by John Maynard Keynes:
"Markets can remain irrational a lot longer than you and I can remain solvent."
A lot of people apply this when assets are going up but they also apply when going down. People will try to "short" bubbles, and "buy the dip" in bear markets. Usually what happens is you run out of money to cover your position as it moves further and further away from your initial entry.
However, the point of my post today is not to talk about trading or investing, but to highlight what I believe to be the hidden meaning of this famous quote. That is, the irrationality of the markets.
We like to contend that markets are irrational because they do not align with what people perceive to be happening in the real world. Proponents of efficient market hypothesis would say that the markets represent all the information that is available and therefore priced in as such. But this is where my belief's diverge.
We've seen the stock market make a V shape recovery since the big sell off and many are now saying that the stocks are no longer rational. After-all, how can they be at all time highs when the economy is doing horribly?
People don't realise that the stocks have never represented the economy. They represent the health of the international financial system. The economy on the other hand is what people do day to day. That is, shopping, eating, travelling etc.
Institutions, governments and central banks are the main drivers of liquidity in the markets. It is in their interest to know about things that the wider market do not know so they can "deploy" their money accordingly. And this is the reason that I believe the US Government already knows and is actively planning on when to release their "solution" to this pandemic mess.
Further to this, I believe that it isn't just speculators who are driving the markets to all time highs, it is the non-government level institutions; hedge funds, investment banks etc. That are privy to this information.
Large interests in markets always move in anticipation, never in reaction. Therefore, what the markets are telling me indirectly, is that sometime in the much nearer future, a wonder solution -likely a vaccine- is going to be released and Trump will use this to stage his re-election campaign on the back of saving the world from the pandemic.
The mass scaremongering of the past few months while warranted to some extent, have induced an over reaction that was perfectly designed to line the pockets of those people in power with the funds to prop the markets up for another few years.
Market capitalizations of companies are at such high levels, that they needed a much much larger money supply to sustain those levels of growth. The pandemic, and subsequent reactions world wide provided the perfect excuse to expand the money supply.
We might be "saved" from COVID in the near future, but the underlying problems of the financial system have only gotten worse. The boomers knew that the millennials would be paying their debts. It's probably not too much longer until we all start seeing evidence of this, COVID or not. Don't let these slogans trick you into believing the markets are irrational. They are VERY rational. Except it's only rational to the large interests who are in charge of where it's all going. We can tell a lot from the foot prints of the silent powers which wander and wield the markets. We just have to stop labelling everything as irrational.