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As global markets gyrate wildly, with “euphoric” gains one day and equally depressing falls the next, one wonders what investors are smoking as they go long and short in their positions. Moreover, this zig-zag behaviour of global markets reminds us of a “Drunkards Walk” where investors are unsure about their movements, let alone able to predict what comes next. Indeed, for a layperson, global markets resemble junkies, with each “sugar high” in the form of favourable economic and financial data making indices soar and each bit of downbeat statistics making them fall harder. So, in effect, this is the New Normal where the description of an “Everything is Weird” Economy by The Atlantic Magazine is an apt metaphor for global markets these days.
How did we come to this? To start with, global markets have been this way since President Nixon “abandoned” the Gold Standard, thereby “delinking” the United States Dollar from underlying assets and making it “free-floating”. Effectively, what this meant was that the USD was not “pegged” to physical assets and could be “conjured out of thin air”, leading to “funny money” created out of nothing flooding global markets. Concomitantly, the Neoliberal policies meant near Zero Interest Rates, thereby rewarding speculation over job-creating investments, making investors flock to global markets, lured as they were by the unrealistically high returns compared to other investment options. The result is now here for all to see as the “wild” movements of markets are akin to The Great Derangement.
Why is It Important Now? While the “junkie-like” movements of global markets have been with us for a while, it has suddenly taken on a more ominous turn as first Populism, then the Pandemic, and now Putin have all “shocked” global markets out of their “stupor”. The prospect of a “bottomless” downturn looming due to high commodity prices, skyrocketing inflation, and Central Banks raising rates has converged into a “perfect storm” of historic proportions. Indeed, global markets were on steroids all this while and with the “taper and tighten” policies of the Fed and other Central Banks, this is the long overdue “moment of reckoning” for Investors worldwide. Of course, the smart lot has hedged against this eventuality, as almost “every economist and their dog” have warned the investor community for some years now about it.
What can be Done? While the Utopian ideal would be a return to “asset-backed” currencies, the more realistic choice here would be to let global markets find their “true value” and “correct themselves” of the decades of excesses of free market capitalism. Moreover, it would be prudent for Central Banks to not intervene much either in defending currencies or propping up global markets and instead follow through on the “race to bottom” strategies currently employed by investors. While this would entail considerable “pain” for all, and more so for the common person in the short term, this “creative destruction”, much like the Dotcom bubble burst in the 2000s, would then lead us to more “value-creating” global markets. Indeed, the deflating Unicorns, the crashing Cryptos, and the “cooling” property markets a la Evergrande should be welcomed if not for anything other than to force a “moment of truth” for the TikTok generation.
In a way, Investors also need to be reminded that the 3Ps mentioned earlier have caused a setback to globalization, thereby pulling down indices, fattened as they were by the free flow of capital across borders. Notably, China’s draconian Zero Covid lockdowns and Xi’s attempt at “immortality” have brought about a drastic reappraisal of how much global markets have depended on China propping up supply chains underpinning global trade until the pandemic struck. As clogged supply chains lead to price inflation and widespread joblessness leads to weak demand, the result is Stagflation, or stagnation with high inflation, an exceptionally “unpalatable” scenario for investors, long used to gorging on easy money and feasting on “unprecedented” global prosperity. In a way, the Pandemic and Putin have brought investors to their “senses” and global markets to their knees, thereby causing deaddiction from copious liquidity and inducing “withdrawal” symptoms leading to “junkie-like” market movements and the indices behaving like Drunkards.
Last, if and when the “dust settles”, global markets should not return to the “good old days”, and the present “crisis” must catalyze a change in the way we order economies and societies. Already the “dawn” of the Digital Age and the “sunset” of the Smokestack era have been reshaping work and life, and so, we must embrace the changes and let “sanity” return to global markets. As the cliche goes, never let a good crisis go waste, and so must be with the current one roiling global markets. To conclude, with the global markets on edge and investors nervously scanning their terminals for the next trigger, it is time we revamped and restructured the way they are run and, hopefully, ensure more equitable and compassionate outcomes for all, not the few.
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