The Great Derangement Is Here! How Markets “Divorced” Themselves From Economic Fundamentals!

The Great Derangement
Photo by Daniel Lloyd Blunk-Fernández on Unsplash

The Great Derangement is here! Markets are increasingly “divorced” from the underlying economic realities, and the popular explanation for this is that traders are now in what is known as a “Drunkard’s Walk”, where there is a “euphoric” bull rally one day, followed by an equally “dire” bear crash. So, how to make sense of this Great Derangement? For one, Economics 101 teaches us that free markets are self-sustaining and self-correcting entities, driven by the “invisible hand” (Adam Smith’s characterization of how markets equilibrate after each boom and bust). However, I contend that markets are no longer “free”, and the “invisible hand” has been “rocked” so much and so many times by those who “game” them, and so, economic theory does not hold in this Great Derangement.

How did we come to this?

Decades of neoliberalism where the Central Bank opened the “spigots” of liquidity and led to a flood of “easy money” have corrupted the workings of almost all economic entities, and more so, the markets where the rich and the powerful tend to “play”. Moreover, as we have seen with each “recession”, bailouts are the norm, even with the risk of “moral hazard” hanging over the system. Apart from this, markets are simply not being “allowed” to run their course and self-correct themselves. When speculation yields more returns than investments in so-called productive assets, then “everyone and their dog” would want to flock to them, lured by higher returns on their money than anything else in town.

So, what is new?

As the Global Economy confronts the spectre of inflation, Central Banks worldwide are now in a “taper and tighten”, thereby withdrawing the “fuel” that made markets run on “steroids” all this while. Of course, again, economic theory holds that asset values should drop when liquidity is squeezed out. However, we are witnessing the opposite, where more money is flooding the markets, though the “taper tantrums” is playing out in the Emerging Markets, especially in Asia. As the Global Economy is so intertwined and integrated with the “free” movement of capital, traders are dumping the former in favour of the Western and, more so, the US markets. Of course, both the Dow and the S&P 500 are gyrating wildly, belying the tenet mentioned above. I call this the Great Derangement, where “nothing makes sense” even to the most seasoned traders.

What happens next?

Anybody’s guess! However, we have a few pointers about whether a recession is imminent as the Q2 GDP came negatively, marking the second quarter of contraction. However, much like in 2008, we are in “denial” about whether we have entered bear territory. Moreover, even the expectation of “stagflation” is belied by robust labour market data, though inflation remains stubbornly high. On the other hand, while consumer confidence is down, wage growth is high, which again turns economic theory on its head. No wonder The Atlantic Magazine called this “The Everything Is Weird” Economy, and I concur with this assessment. Even the bond markets, where the US Treasuries have long been considered the “safest” and “all-weather friends” of traders, have been on a “wild ride”, thanks to the slow but steady end of the QE or the Quantitative Easing, where the Federal Reserve “propped up” the US Economy by buying bonds in Trillions of Dollars.

When will The Great Derangement End?

Hard to say! As long the markets are not allowed to be “free”, it would be “socialism for the rich” and “capitalism for the poor”. More so, when the Dollar is not backed by “assets” like Gold and is “created out of thin air”, much like the Oracles of yore, who used to conjure objects out of nothing. Though it seemed as though the Pandemic and Putin could have prompted a Great Reset”, chances of it are fading, as can be seen in the “race to bottom” moves of the West against the Rest! Maybe, it is time the latter “ganged up” against the former as Xi and Putin are attempting and catalyse a New Economic Order. Though India is officially “neutral”, Modi has enough “skin in the game” to side with the Rest. Already there are talks of “moving away” from the Dollar as the Reserve Currency, and using national currencies in bilateral, and for that matter, multilateral trade. Until these arrangements persist and produce results, The Great Derangement will likely be with us for a long time.







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