When Rigged Markets Become Unrigged
“If all you have is a hammer, everything looks like a nail.”
–Abraham Maslow
“When asset bubbles predominate, everything looks like a pin.”
–Corollary; Ross Kaplan
In over 40 years(!) watching the stock market, I’ve conservatively witnessed at least 100 dips of 5% or more (20% corrections are rarer, and secular bear markets are rarer still; depending on who you ask, there have only been two or three of the latter since 1970).
Yet the sturm und drang (anxiety) accompanying each shudder in the markets lately — and there’ve been plenty, continuing now in early 2016 — seems unprecedented.
What gives?
“Threatening the Narrative” (or at least, The Greenspan Put*)
I think there are actually three, intertwined explanations.
First, more people are exposed to stocks today.
That’s what happens after 7+ years of virtually zero interest rates: frustrated savers capitulate, and seek higher returns elsewhere.
That “elsewhere” has been stocks.
But, eventually, the frantic search for returns raises the spectre of bubbly prices, and the prospect of a major correction (or worse).
Call that explanation #2.
“In God the Fed We Trust”
But I suspect that the real kicker underlying investor anxiety at the moment is explanation #3: the fear that stocks have been strong since the 2008 Crash primarily due to unprecedented intervention (if not manipulation) by governments and monetary authorities.
The flip side of that coin?
The twin risks that central banks and other governmental actors now either waver in their commitment to support equities, or — perhaps even scarier for investors — that they remain resolute, but their policies (Zero Percent Interest Rates or “ZIRP,” Quantitative Easing, etc.) stop working.
That concern may not have taken hold in the U.S. yet, but my guess is that it certainly has in China, where trading in stocks has now been suspended twice just this week.
End of “The New Normal?”
The irony in all this, of course, is that investors who’ve been fretting about rigged markets haven’t been wrong.
It’s just that the markets have been rigged in their favor for so long now, (almost) everyone came to regard it as normal.
Unfortunately, reverting to unrigged markets — if that indeed is what we’re witnessing — might not be so easily managed (or pretty).
*Investors’ belief that The Federal Reserve (led at the time by Alan Greenspan) will do whatever’s necessary to support stock prices.
