All I Want For Christmas Is An Unmanipulated Market

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Authored by Charles Hugh Smith via OfTwoMinds blog,

The irony, of course, is that only those punters who sold on the way up will escape the devastation of the collapse into a bidless “market.”

All I want for Christmas is an unmanipulated market, because manipulated markets always crash big and crash hard. Virtually every market in America is heavily manipulated by the Federal Reserve, which creates currency out of thin air to either buy assets (outright market manipulation) or distribute to financiers, banks and corporations, which then manipulate the markets with their own profiteering (stock buybacks, leveraged buyouts, derivatives, etc.).

The Fed decided long ago that the housing and stock markets were too critical as signals that all is well to remain real markets, because real markets fluctuate and on occasion crash, especially if participants are playing fast and loose with debt, leverage and speculative bets placed with zero collateral (or fake collateral, which is the same thing).

To make sure no decline could ever collapse the happy-happy euphoria of ever-rising markets, the Fed turned markets into simulations of real markets, controlled “markets” masquerading as real markets in which price and value are set by participants, not central banks and proxies of central banks.

The key characteristics of markets are price discovery and the free flow of information about prices, supply, demand, quality, cost of credit, creditworthiness of buyers, etc.

Without a free flow of information and transparent-to-all-participants bids and asks (the price being offered by buyers and sellers), the market can’t discover the price (value) of credit, goods, services, collateral, assets, etc.

Once markets have been stripped of the ability to discover price, nobody can trust the values being presented as “real” are actually based on reality. In the current simulacrum of a real market, the “price” is set by the Fed or its proxies, and there is a purposeful / profitable information asymmetry between high frequency traders and other insiders and everyone outside the inner circles who are kept in the dark while insiders skim billions in no-risk profits from the victims of this information asymmetry.

Right now market participants are euphorically confident that value no longer matters; the only thing that matters is the Fed wants stocks and housing to move higher, and they can move markets at will with their firehouse of trillions of dollars.

In other words, participants are confident the Fed is the market, but it’s no longer a market at all. This mirage market has worked splendidly for the Fed, since it continues to signal all is well by rising year after year.

But manipulated markets are a mile wide and an inch deep. Everyone thinks selling won’t happen or can’t happen because the Fed is essentially guaranteeing that “buy the dips” will reward buyers. This was precisely what happened in 2008: The Fed reckoned the system had plenty enough liquidity to absorb any selling, but the liquidity was only an inch deep; once real selling hit the “market,” it collapsed, as buyers dried up and blew away.

Manipulating markets into “signaling” mechanisms insures the eventual crash will not be stopped by applying the same manipulations that destroyed price discovery and trust. Everyone knows the price has lost connection with reality, and so every punter and algo is one second away from hitting “sell” and locking in the gains from a manipulated bubble.

The irony, of course, is that only those punters who sold on the way up will escape the devastation of the collapse into a bidless “market.”