The seven signals that Wily Coyotes can’t see

Institutional selling, AI confusions, US Fed nerves, firing monetary blanks, Gold, banking crises and euro anarchy

On the US Dow index over the last few months, major institutional investors have been selling at a rate barely seen 1929. They’re being advised by investment strategists to ditch quoted shares in favour of  buying private equity (PE). The general view among management firms and institutions themselves is that all stock markets are now horrendously overvalued. As regular readers will know, this is a view I share.

Last week I predicted that algorithmic robots ‘can only adapt to circumstances of which they are already aware: when something hitherto unknown happens, they will simply carry on as if nothing was wrong’. This is now increasingly obviously what is happening: US observer Parag Thatte delares (and he has the charts to prove it) that ‘whereas discretionary investors have been cutting equity positioning as growth has slowed [see para above]…. systematic strategy allocations [robot algorithm positions] have been marching higher’.

A market index based on robotic AI and greedy directorial buybacks is going to have a Wily Coyote moment. We won’t have to wait long for it.

Yet there remains online a body of committed cynics and apologists who insist that “the élite” will always find a way round the inevitable collapse. The mistake they make is to assume that monetary fiddle-bollocks can disguise everything, that more fake data can be produced at the drop of a hat, that push will never come to shove, and that reality can be kept at bay forever.

This is to misunderstand the difference between fiat money as a normally convenient form of exchange, and mass consumers deciding sooner or later not to use money to buy stuff, because they are acutely aware of being poorer.

The Fed itself inadvertantly gave notice of this reality last week. New York Fed President John Williams created something of a bunfight when he publicly opined that the Fed needs to drop back to the Zirp range (0-0.25%) now if a hugely damaging recession is to be avoided. He went further (which wasn’t entirely smart of him) and strongly suggested that normalisation of rates is inconceivable, and that situation is unlikely to change any time soon. 

The markets jumped on the news, because the markets are themselves too dense to grasp that there are real people out there beond the Sherman McCoy community. Fed doves backtracked very quickly, because they know only too well that, the more stock markets bear no relation at all to economic performance, the more money will leave the bourses in favour of stuff.

One such stuff is Gold, and this too is already well under way. Predictably, the Fed Reserve banks have been shorting the shiny metal, as the last thing they want is a flight to safety before they can grab it all for themselves by artificial manipulation downwards…..prior to stuffing their balance sheets with it, and then revaluing its price upwards.

But the global desire for gold has deeper pockets than even the Fed: precious metals generally are booming, and gold in particular is up nearly 12% since 2019 dawned. Williams’ comments suggest that the Fed’s box of MMT tricks is empty. Oh dear.

But not as empty as Mario Draghi’s ECB: its gold reserves are now among the lowest in the world. Later today, the UK will crown a staunchly eurosceptic Prime Minister with a whole new set of demands. The Italian and Spanish governments are watching events with keen interest, as are the Catalans, Poles, Austrians and Hungarians. Good luck with all that, Madame Lagarde.

It has now been officially admitted that Deutsche Bank faces exposed derivative positions totalling €47 trillion. In the UK, The Lloyds banking group (including the HBOS lead lifeboat as a consequence of the 2008 collapse) is suffering regular account ‘glitches’, freezing hundreds of thousands of customers out of their bank accounts unable to withdraw funds. A glitch is bankspeak for a problem unrelated to technology – viz, chickens coming home to roost:

It looks like Philip Hammond is jumping ship at exactly the right moment. And bear in mind, all of this Tsunami of doodoo will be blamed on Brexit.

Bon courage, mes enfants.