THE SATURDAY ESSAY: the role of conservative madness in the markets

hogarthtitleDon’t tell the boffins, but matter can be created after all. What’s more, doing so ensures that confidence will not be destroyed.  The Slog offers a Dummies’ guide to the mathematics  of conjuring something from nothing.

A couple of days ago, the Bank of England did nothing. I don’t mean that everyone turned up for work and played backgammon. I mean the Bank kept both the interest rate and QE programme level completely unchanged: the rate stayed at 0.5% (almost nothing in the first place) and the level at £375bn (untold riches to you and me, but the efficacy equivalent of trying to revive a dead rhino by fanning it with a stickleback).

So with everything at close to nothing, the Bank did nothing; and within 27 minutes, the FTSE had risen 0.1%.

A proposed future role for central banks

Extrapolate that market rise forward for a given day, and the market would rise 1.6%.  If a central bank can raise the capital available to business that much by doing nothing, two hypotheses land on the surface of the brain like two giant Salmon being slapped onto a fishmonger’s counter:

  1. We do not need central banks.
  2. Central banks should do nothing more often.

While myself having huge sympathy with the idea of abolishing central banks, experience teaches me that if there’s one thing markets truly cannot handle, it’s sudden change. Being nothing more than an aggregate of driven neurotics, financial markets are at their most comfortable when what they know is being reinforced by adding a little more of it bit by bit. This I term conservative madness.

The term is supported by research showing that 50% of traders say they want more today of what they felt good about yesterday, and 50% say they want more tomorrow of what made them feel good today.  This goes quite some way to explaining why, since late 2009, the stock markets have reached record heights on a diet of terrible business performance and intractable unemployment. For markets do indeed decide – in the manner of a person who is conservatively deranged.

The benefits of being cautiously insane

That may seem like an oxymoron to the layman, but to we experts who always know what we’re doing, nothing that directionalises stuff satisfactorily is considered contradictory. Man can only learn by making mistakes: and if you look at the track record of experts, you’ll see why they must therefore know better than anyone else. It’s why things like jobless recoveries, expansive austerity, universally netted derivatives and billion dollar tulips all represent dreams made reality on the world’s bourses. We winners always observe the principle of leaving the market to decide for itself: that’s how we make money: by always leaving the market just before it decides.

This is the point: remain conservative for too long, and in time every policy will become mad. The markets would rather spend a year edging towards a bungey-jump off Everest than suddenly remember they forgot to attach the elastic.

So a situation involving no central banks is just asking for trouble. Nobody actively trading today can remember life without central banks. Most of them can’t even remember life without apps. So unless you want the worst financial meltdown in history tomorrow, if only to get the damn thing out of the way, don’t abolish central banks. It’s what the world needs, without question: but no psychiatrist ever got rich telling clients what they need to do. Shrinks become richly distinguished by suggesting what the clients want – which is to come back tomorrow for another opportunity to talk about themselves at $250 an hour.

Doing nothing is a core value of neoliberalism

The second hypothesis, however, looks more attractive the more one thinks about it. Examine what happens when the financial market movers and shakers go on vacation. I’ll tell you in two words: “nothing bad”. George wants to show his boss Fred that there is a point to his existence, and that he can be left running the shop. So George (and everyone else in the financial district) do nothing during their bosses’ Summer holidays.

Low volumes do not occur in August because a million Freds are on holiday, they occur because four million Georges do nothing for which they can be blamed by Fred on his return.

This is simply another reason why the bourses of the world always display symptoms of conservative madness. When faced with new ideas, they react cautiously. Once shown such ideas can make them big bucks, however, nothing can dissuade them from more of the same.

Let me explain this further with the use of a much longer Time continuum. If in 1947 somebody launches an investment idea that is simple – like, for the sake of argument, the derivative contract – it won’t be until around 2004 that enough people have adopted and suggested enough improvements to the idea to make it absolutely “do-not-approach-this-person-without-police-back-up” criminally insane.

By then, the good 1947 idea is so obviously, dangerously bad, new persons introduced to it for the first time suffer acute digestive trauma when it’s explained to them. But those already in up to their necks think it’s a great idea because first, it’s what they’ve always done; and second, from their perspective, its conversion from Edison light-bulb to Fukushima isotope has been so slow as to be imperceptible. There is a third factor, which is that, by selling it, everyone is taking home the sort of bonus most people couldn’t amass in ten lifetimes of obsequious yessing. But you see, it is a golden rule of financial markets that you never, ever call greed by its real name: it’s like saying “Macbeth” to stage actors.

Nurturing conservative madness by doing nothing

That’s why conservative madness can and does exist. After a few weeks, the raw recruits observe the obviously harmless manner in which the deranged idea enriches everyone without the Earth straying from its orbit. And so long as nobody does anything suddenly, they join in with the led balloon flying display.

Ergo sum, doing something very slowly is centrally important. That’s why it is especially fruitful for a central bank to do nothing. When everyone knows it’s obviously there to do something when things go wrong, doing nothing is a sure sign that there is nothing wrong. So most assuredly, the way ahead is to have central banks do nothing more often.

Think of a train as the parallel here, and you’ll feel better. Few puerile parallels are better at inducing false confidence. Look at what happens every time Engineer 1st Class Bernanke suggests doing something. Or indeed, anything. The wheels come off very quickly. Markets wobble, bond spikes are thrust into Ben’s borrowing aperture, and the Fed Chairman is left in no doubt that trains start by lighting a taper: after that we don’t need tapers on the train. Chairman Greenspan understood the wisdom of doing nothing when you’re driving the train: don’t use brakes, it only strains the wheels and scares the passengers. Leave the pedal in Warp 9 Cruise Control mode, and wander through the carriages smiling a lot. “See,” the passengers exclaim, “there’s the engineer: he’s doing nothing….and as jolly as a Green Giant. I told you everything was fine”.

Not that giving the folks more of nothing is easy, by the way: the skill involved in this approach becomes apparent as soon as we address the actual specifics of doing a lot of nothing.

Nothing is nothing. You can’t double nothing, there is only the gambler’s “double or nothing”….and making the markets look like gambling is a very bad idea: persuading investors that they have a future to look forward to is a serious business that should not be trivialised by the use of words like gambling, roulette, taking a punt and so on. The last thing you want to do is make a mirage look like a desperate throw of the dice. The whole point of the future in the markets is to say it’s going to be nice, but always refer to it as tomorrow.

A varietal insight about the nature of nothing

What the authorities are missing here is that there are many different types of nothing. We financiers regularly suggest all kinds of nothing: no risk, no hidden charges, no icebergs, no shit, no smoking and – if you’re Australian – no worries. The use of the ‘No + boo-word’ promise always makes people feel happier. It’s works on their mistaken belief that if bad people cheat them out of money, governments will do something about it. The entire thesis of my construct today is that it is never a good idea to do something.

I hope you can see how I’m adding serious value to the central banking role by offering up this insight on the varietal nature of nothingness: you can do nothing about a thousand different things from wealth inequity to Ozone Layer holes (Ronald Reagan won two terms by doing exactly that) but the result is still an increased sense of wellbeing among the vital minority – that is, those who must remain relaxed about the situation at all times.

Under no circumstances ever use the ‘No + hooray-word’ tactic. This is where loose-cannon liberal politicians and New York Times/Guardian commentators use phrases like ‘no hope’, ‘no strategy’, ‘no principles’ and even ‘no point’. Signor Mario Draghi’s news conferences always follow this important maxim: never tell the markets that nothing can be done. Rather, show the markets that nothing is being done. Getting that wrong is the difference between an S&P at 17,000, and a real one at 700.

By contrast, the variety of doing something also being infinite, in the past central bankers too have seemed  indecisive by doing lots of things. Never run the risk of doing something indecisively multivariate, when you have the opportunity to radiate certainty by doing nothing. Work instead on the old adage, “I haven’t a clue where to start in dealing with this problem, so I won’t”. Reiterate instead that there is no problem.

Getting down to brass tacks on more nothing: the key role of “because”

Here’s a starter list of things central banks can do nothing about in order to say everything positive to the markets:

–         T-Bills demand

–         QE

–         Unemployment

–         Local Government insolvency

–         Small Business bankruptcy

–         The Currency value

–         Capital Flight

–         Economic flatlining

–         Falling world trade share

–         Banking firm  leveraging multiples

–         Libor rate manipulation

–         Interest rates

Now straight away there, we have twelve ways to do nothing, or one per month. Imagine the warm wealth of naval analogies as each month, the Fed Chairman says he’s doing nothing “because….”:

“Good morning ladies and gentleman, there will be no action on the national debt this month, because it’s steady as she goes, the economy’s flatlining keel has been in port for QE repairs, and so now it’s heading once more out onto a calm sea and will, with the benefit of unchanged interest rates at historically low levels, gather speed in the coming months and fight the eternal battle against drowning in inflation”.

Governments can be important too

There’s a lesson in this for national governments too…and they’re catching on fast. Thus in recent years, the West has been reassuringly hands-off in areas like:

–         Islamism

–         Sarah Palin

–         Berlin’s 1923 psychosis

–         The US debt ceiling

–         Paedophiles

–         Police corruption

–         Fracking dangers

–         Mayoral fraud

–         Premiership salaries

–         Tax accountants

–         ClubMed political extremism

–         Facebook

–         Security services surveillance

…and so forth. The results speak for themselves: a gentle apathy has settled in among the elite, and diffused down to the various electorates.

Towards a template for aggressively doing nothing

Doing nothing paves the way for an even more proactive approach:  doing nothing right and making it look like something good.

Examples of such aggressive nothingness include the use of statements from opinion-formers – some recent examples including:

–         Borrowing more to repay less is the prerequisite of a return to growth in Greece during 2014

–         Britain is turning the corner by building more houses to create more cornering opportunities

–         Emptying banks in Spain will ensure that the population will work harder to produce export growth

–         Launching a Help To Buy mortgage scheme will help people get onto the property bandwagon via the poverty of negative equity.

All of these schemes will actively achieve nothing, and further improve confidence if governments devote all their time to talking about them making everything better. For by definition, there will be no time left during which they might be tempted to do something. That continuation doing nothing will feed the voters’ sense that nothing need be done: we are out of the woods, the sun is clearly visible, it’s a new dawn, the dark night of depression is over, more normality lies ahead.

Expressing the do-nothing strategy mathematically

The truly wonderful thing about financial capitalism is that, the more varieties of nothing you produce, the better people feel about things. I express it here in the following equation which, I’m sure you’ll agree, is up there with e=mc2 for sheer simplicity of mind. Thus, if QE is constant, n = variety, d = debt, B = The Bourse and 0 = Doing Nothing, then recent market data show us:

  [n x 0] + d = d2 + [B x 2] + [n x 0]

Now given that two sides of an equation must be equal (unless you come from a deprived background) it follows that – when varietal nothing is cancelled out to equal nothing – the national debt is squared and the Bourse level doubles. Using actual US numbers from 2012 figures gives us this startling result:

$16 trillion debt = $144 trillion debt + the S&P at 17,000

or (according to the World Bank)

$170 trillion debt = $18,668 trillion capitalisation on S&P

This is a remarkable breakthrough in our understanding of Financial Relativity Theory. For not only does it show why Ben Bernanke’s varietal nothingness strategy is to ignore the national debt; it also shows just how much capital can be produced for corporations with only a tiny application of conservative QE madness.

But above all, it shows how, in normal life beyond the Bourse, the obvious thing to do is double the debt by whacking in a $170trillion QE programme, and then apply a levy on the Stock Market of 0.08% to wipe out the National Debt entirely.

And if you think that, then clearly you have learned nothing from this essay about how conservative madness is the sole basis upon which the markets can operate successfully. For the sudden radicalism outlined in that last paragraph would not only represent doing something, it would involve doing two big things very quickly. My best estimate is that, in such an eventuality, even before one applied any QE2, 98% would be wiped off the S&P’s value.

Next Time: Caring less by having nothing – why bailins represent the best way forward

Last night at The Slog: Why Russell Brand is two words short of the Answer