If you drop anybody into any momentous period in history, it’s really tough to perceive it at the time. It’s only when you look back on these things with the benefit of hindsight that you really see how historic they really are. But for many people right now who can forget the narrative and can forget what they're being told by various interested parties, if you can stand back far enough and take a practical look at what’s happening, I think it’s much easier to see certainly how far from normality things are today.
So believes, Grant Williams, portfolio and strategy advisor for Vulpes Investment Management, and proprietor of the economic blog Things That Make You Go Hmmm.
In this weeks' podcast, Grant and Chris discuss the growing anxiety they see among experienced investors. More and more, those who have made long, successful careers in money management are realizing that the system has morphed into a strange beast they no longer recognize, nor trust. Fear of epic, perhaps historic, dislocations in price when the current market reverses is causing more and more of the "smart money" to sell out now and seek safe harbor:
We don’t know how it will end, but something has to give. It’s a question of what it will be. Because when you start playing with the forces of nature you can suppress them for a while, but they will eventually overwhelm you. We’ve seen this constantly throughout history. I’m a big reader of and a big follower of history because I think the answers to everything lie in there somewhere if you pay attention to the signals.
So, for example, the central banks interfering with the natural price of capital by suppressing interest rates and fixing somewhere where they really shouldn’t be you at that point, have interfered with every single transaction on the face of the planet. And so if you interfere with every transaction that happens on any given day anywhere in the world you are going to get transactions that are not natural. And if they’re not natural at some point they will revert to where they ought to be and I think we’re starting to see that. We saw that in Switzerland, we saw the natural forces reassert themselves once that peg was removed, and it was incredibly violent. And it moved the idea of hyper-volatility back into the public conscious.
Imagine what happens when the Fed does the same thing and says “Hey you know what we promised you for the last six years? Well we can’t fight this thing forever. We’re out”. Imagine the volatility that’s going to unleash. And at some point, this has to happen. Sure, plenty of people can make hay while we go along and they can close their eyes to what they may instinctively know is true and they can buy the markets and they can chase the trend and they can follow these things up. But at some point, it’s going to turn around and bite them. When that happens, if you’re not prepared for it or you’re still fully invested, there will be no way out. Not in the time frame you need and not at the prices you want.
What we risk is a switch in the market, a real switch — which is something that obviously the central banks and governments of the world are desperately trying to avoid happening. When that occurs, we will see how this new world works in the opposite direction. And it’s going to work similar, except for the fact that you’re going to have a bunch of people looking to sell alongside the robots. And when markets are going up it’s very, very easy to product more stock. People can issue more shares, there’s always new stock if you want to buy it. But if instead you want to sell stock, you need a bid — and this is something people often forget: sometimes there are no bids. And where there are no bids, you can’t sell. The first bid you might see may be down 20, 30, 40%. Guess what? The robots may well start hitting those; so you’re going to see incredible dislocations in markets once the wind changes direction and markets head the other way.
A tremendous number of people talk to me about how the financial system is broken — and they mean that in the worst possible way, in that this doesn’t work anymore. And when we do get this resumption of natural forces, people are genuinely concerned about what happens at that point because what do you do with an entire financial system that doesn’t work anymore? They’re very afraid about the steps that will be taken to counteract the amount that has built up by the interference over the last six years by outside agencies that have as I said corrupted — and I use that term in the true sense of the word — that have corrupted price signals all around the world. The financial system that we’ve all grown up with and that every economics text book talks about doesn't exist anymore. This reality is not going to be obvious to everybody until it just stops working. And very, very smart people are very, very nervous about that.
Click the play button below to listen to Chris' interview with Grant Williams (54m:21s)
by johnshippen