CRASH2: the foundations are crumbling. Quick, let’s redecorate the attic

 This morning, a talking-head London based investment banker, discussing the likely US Fed policy on rate rises for 2016, offered the following opinion:

“I don’t think it’s the economic situation that has Yellen worried, I think it’s the markets”

Now you may read that and think ‘So, your point is….?’. My point follows.

This is the idea of ‘the markets’ – although  personally I prefer the term ‘bourse’: to raise capital so that business can invest, do research, grow, employ more people, buy raw materials at the best price and the right time, and allow investors and institutions to share in real wealth creation for the retirement plans of their clients.

In short, if the bourse in any given State doesn’t reflect the economy, it is pointless. And more specifically, if the interest rates, dividends, forecasts and stock growth are not a mirror of life at the sharp end – or can’t give investors a return – then investors and institutions have to look elsewhere….which usually increases the risk.

So here we have a talking head right at the top of his game, and more knowedgeable about this than any of us are ever likely to be; and he blithely mentions the disconnect between markets and economies as if it were an April shower – a bit of an inconvenience if you forgot your brolly, but part of life to be accepted as inevitable.

Various developments in recent decades have brought this about – rigged trackers, lies in Annual Reports, accountancy sleight of hand, over-borrowed traders making margin calls, deliberate directionalising to generate short-term profit, liquidity pools, speed-of-light platforms, complex derivatives, QE, Zirp and Nirp, and now finally – direct intervention to reverse market decisions by central banks.

Thus in 2016, one expert can say “the economy and the markets are strangers to each other, and it’s the latter Yellen’s concerned about”, and four other experts nod sagely…moving swiftly on to the Australian mining sector outlook.

Nobody says, “let’s go back to letting the bourses reflect exactly what’s happening on the ground”, or even “clearly the capital supply sector has lost the plot”. Nope, what happens is that a bunch of monetarists put on their pointy heads back at the central bank, and look at new ways to calm investors down with balm and bollocks.

It’s insane, isn’t it? Yes, it is. But it gets worse. For what we have in the century’s second decade is stimulation of the economy (through central banks) designed to increase confidence on the bourses which on their own admission have nothing to do with reality. And one of these is to drop interest rates to zero and beyond in order to make investors feel happier, and businesses/consumers to borrow…even though the price of credit has nothing to do with their reticence.

At the next level down, banks are supposed to be there to lend customer deposits to medium and smaller businesses. For several years after 2008, banks didn’t lend – in fact, RBS tried to get itself out of a hole by swindling the business borrowers it took on. Now, the money is there to lend in many regions, but entrepreneurs don’t want it at any price. Why? because they don’t trust banks, and they feel sure the economic outlook is poor: they no longer believe the balm and bollocks.

Janet Yellen is therefore in the business not of fixing the economy, but persuading a bunch of people totally unconnected to it that the economy is fixed, so they’ll buy stocks, and then that confidence will feed back into the economy….and fix it.

Imagine that you are a householder wanting to build a large extension on a house in an undesirable neighbourhood in order to work from home…even though the reason you need to work from home is that your income is dwindling and you can’t afford to rent offices.

So you ring an aunt called Janet whose husband is rich, and she persuades hubby to give you an interest-free, unsecured loan to help fund the growth of your expanding business. And because hubby needs to make his capital sweat (because nobody in their right mind wants to borrow, and the bank won’t give him any interest) he agrees.

This, we just know, is going to end in tears. But this is what Janet Yellen thinks will keep the plates spinning.

Today, she hopes, the US non farms payroll data will help her cause by ‘recording’ 200,000 new ‘jobs’. She notes that one PMI study in China ‘shows’ factory output leaping, and this will help her too.

The US jobs will not be real jobs as we understand them, and the Chinese research may well be bent – the politburo has form in this area. But let’s pretend anyway: that’ll fix the economy.