Global financial markets seem increasingly disconnected from
I’ve spent 35 years in finance, and much of the market activity I’m watching just doesn’t make sense any more. Am I panicking? No: I am trying to understand what’s going on. Sitting at the back of my mind is an old trading mantra: The market has but one objective; to inflict the maximum amount of pain on the maximum number of participants.
That global stock markets keep hitting new highs while central banks are on the verge of easing rates seems an obvious contradiction. Yet markets don’t seem in the least concerned. Investors are buying stocks and shares on the basis that central banks will continue to push prices higher, not that a slowing global economy might cause prices to fall. No one seems particularly bothered about the disconnect between central banks, which think economies need to be supported against global uncertainty, trade war risks and recession, and stock markets, which are telling us things have never been so good. That’s a danger signal.
Dig down and it soon becomes clear that global financial assets (bonds and shares) and markets have become utterly distorted and delinked from the real economy. Financial assets are storing the inflation that quantitative easing and other monetary experimentation (like central banks buying bonds and stocks) have created. These actions have spawned a host of unintended consequences – such as companies overleveraging themselves in debt markets to propel their stock higher through share buy-backs, which ultimately boost senior executive bonuses, making the rich richer and driving up income inequality.