The subject of corruption has been on my mind recently, for reasons that I cannot get into and probably never will be able to articulate, but the inspiration hardly matters. If you had asked me a week ago was “corruption” meant, I would have stated roughly what most people might, which is that it has to do with things like bribing a government official. In other words, a way to bend the rules in your favor by doing something for someone else.
My notion of corruption has broadened, or at least changed, quite a lot in the past few days. Now, I think of corruption as what is going on inside a black box. In a normal system, if “A” goes into the box, and you can expect “B” to come out, then “B’ emerges. However, if “X” emerges, there’s something foul afoot inside. It isn’t operating as expected. The innards of this hypothetical box are………….corrupted. Because the outcome does not comport with the expectation.
Such a characterization would easily include the earlier example of bribery. In a well-functioning state, people follow the rules, because the rules are there for a reason. In a corrupt state – – like, oh, let’s just say, Russia – – God only knows what comes out the other side of the box based on the initial input, because you don’t what kind of back-door dealings, favors, threats, or bribes are taking place behind the scenes.
That was, in my younger days, my error in excitedly anticipating Russia’s future when the USSR fell to pieces. I essentially “projected” the free enterprise system of the United States onto the newly liberated people of Russia, and assumed it was like the birth of a nation. My perception was that free markets had “won” and that it was the end of history and, largely, conflict, because capitalism would save us all.
Nope. Not even close. The corrupt Soviet system was simply replaced with the even-more-corrupt Russian Federation system, and what you wound up with was a handful of oligarchs (who are essentially murderous thieves) and the vast majority of the population remained mostly impoverished.
Of course, cultures tend to be persistent and deeply-rooted. Ten years from now, I would fully expect Denmark to be as NON corrupt as it is today, and likewise, I would expect Somalia to be every bit as corrupt, if not worse, as it is today. Young people growing up in a corrupt environment accept it as the norm. Ya gotta pay to play, as they say. It’s actually a real tragedy, since every human comes into this world as an innocent, but their surroundings poison them and fully prepare them for an adulthood of perpetuating the problem, even if it’s against their will.
This ties into equity markets as well, which I consider deeply corrupt compared to, let’s say, the 1970s. The corruption actually comes mostly from exogenous sources (I’m looking at you, Yellen!) but, off the top of my head, what constitutes this “corruption” is:
- Limitless corporate buybacks of one’s own stock;
- Endless bailouts by the Federal Reserve for any company or fund that has trouble;
- Trillions of dollars in asset purchases by the Fed, which flows into equities;
- The direct purchase of ETFs by the government;
- The willingness to go into debt ($33 trillion) to create the simulacrum of prosperity.
The result has been that the best strategy in a market as described here is just to keep throwing cash into stocks willy-nilly because, over time, it is virtually guaranteed to be worth a lot more. That has worked with few interruptions for the past 40 years.
It does tend to diminish the value of analysis, however. If you examined the methods from earlier times, they focused on management, products, growth, profits, the competition, and other elements of a corporate enterprise and its prospect for positive cash flow.
These days, it’s all about the “plumbing”. That is to say, the extraordinarily complex data flows pertaining to topics like Reverse Repo, Fed Assets, QE/QT, the BTFP program, and so forth. I have tried countless times to study and attempt to comprehend all of these waterworks, and I haven’t been able to get my head around it. This has caused me distress, since I figure I’m too block-headed to figure it out, but I’m comforted by the fact that I’ve read more than once that people who have been deep in the trenches with this stuff find it challenging as well. Indeed, my desire to untangle this mess is what compelled me to create Chart Lab in the first place.
So will the “black box” of the stock market ever go back to an uncorrupted “A in, B out” model as opposed to what we have now? I don’t think so. The incentives to perpetuate this curious state of affairs simply seems too high, and I’m not sure what would ever break it or compel the system the change. It’s simply too important to keep the show going.
I will say, however, that when there are bumps along the way, they are going to be increasingly swift, shocking, and violent. If you compare the Covid Crash, which took ONE MONTH from peak to trough, to the Great Financial Crisis, which took EIGHTEEN TIMES as long to play out, you can see what I mean. So when the next shock comes, it will probably be even more remarkable, and in turn, the “solution” to address it – – that is to say, the modifications to the system to make the corruption even worse, and the black box even more unpredictable – – will in turn also be that much more extreme.
