Speculative Premium - And Why The Markets Will CRASH

Speculative Premium – And Why The Markets Will CRASH

Courtesy of Karl Denninger at The Market Ticker 

Yes, I said CRASH, and I meant it.

Why?

“Events” like this:

SINGAPORE/CAIRO, March 1 (Reuters) – Copper is likely to
climb when trading starts on Monday, lifted by uncertainty over
supply after the world’s top copper producer Chile was pounded
by a massive earthquake, analysts said over the weekend.

The front-month contract opened up more than 8%.

This, despite the fact that the earthquake was hundreds of miles away from the mines in Chile and there was zero damage to them.  Some were offline for a few hours due to power failures, but none suffered any physical or structural damage, nor did their export points and the transportation network between the two.

So why did price spike more than 8% even though all this was known by the market before it re-opened for trading?

No part of the markets are trading on fundamental values, nor on forward business expectations.  They are instead trading as “hot money” repositories where speculators rotate in and out of various instruments literally on a minute-by-minute basis.

This is how crashes happen.

When there is no fundamental value underlying a market there is no floor on price.  Price then becomes one thing and one thing only – the number at which you can find another sucker to take your position from you.

This is how tulip bulbs went nuts in Holland, it is how houses went nuts in California in 2005, it is how tech stocks went nuts in 1999 and it is how oil went nuts in 2008.

But now literally everything has gone this way.

Take European national debt.  We now know that Italy, for example, was cooking their books as early as 1995.  This means that bond buyers overpaid for their bonds and took less coupon than they should have.  This should have resulted in an immediate destruction in the value of those bonds when discovered, but it did not. 

Why? 

Because there was still a bigger fool.

Tech stocks were the same thing in 1999.  These “companies” claimed the global GDP some 100 times over between the IPO-issuers in 1998 and 1999.  This, of course, is impossible.  Yet people kept buying even though mathematically 99% of them had to lose all their money.  Ultimately, they did exactly that.

Oil went to $150 in 2008 even though demand was cratering.  It then collapsed to under $40.  It is now double that, even though we have a record supply on hand, to the point that tankers are sitting around full of crude…

Read the original story at Phil’s Stock World