Apr 232018
 April 23, 2018  Posted by at 12:46 pm Finance Tagged with: , , , , , , , , ,

René Magritte La trahison des images 1929


“[Price discovery] is the process of determining the price of an asset in the marketplace through the interactions of buyers and sellers”, says Wikipedia. Perhaps not a perfect definition, but it’ll do. They add: “The futures and options market serve all important functions of price discovery.”

What follows from this is that markets need price discovery as much as price discovery needs markets. They are two sides of the same coin. Markets are the mechanism that makes price discovery possible, and vice versa. Functioning markets, that is.

Given the interdependence between the two, we must conclude that when there is no price discovery, there are no functioning markets. And a market that doesn’t function is not a market at all. Also, if you don’t have functioning markets, you have no investors. Who’s going to spend money purchasing things they can’t determine the value of? (I know: oh, wait..)


Ergo: we must wonder why everyone in the financial world, and the media, is still talking about ‘the markets’ (stocks, bonds et al) as if they still existed. Is it because they think there still is price discovery? Or do they think that even without price discovery, you can still have functioning markets? Or is their idea that a market is still a market even if it doesn’t function?

Or is it because they once started out as ‘investors’ or finance journalists, bankers or politicians, and wouldn’t know what to call themselves now, or simply can’t be bothered to think about such trivial matters?

Doesn’t a little warning voice pop up, somewhere in the back of their minds, in the middle of a sweaty sleepless night, that says perhaps they shouldn’t get this one wrong? Because if you think about, and treat, a ‘thing’, as something that it’s not at all, don’t you run the risk of getting it awfully wrong?

A cow is not a dinner table; but both have four legs. And “Art is Art, isn’t it? Still, on the other hand, water is water. And east is east and west is west and if you take cranberries and stew them like applesauce they taste much more like prunes than rhubarb does. Now you tell me what you know”. And when you base million, billion, trillion dollar decisions, often involving other people’s money, on such misconceptions, don’t you play with fire -or worse?


This may seem like pure semantics without much practical value, but I don’t think it is. I think it’s essential. What comes to mind is René Magritte’s painting “La Trahison des Images”, better known as “Ceci n’est pas une pipe”, (The Treachery of Images – this is not a pipe). People now understand -better- what he meant, but they were plenty confused in the late 1920s when he painted it.

An image of a pipe is not a pipe. In Magritte’s words: “The famous pipe! How people reproached me for it! And yet, could you stuff my pipe? No, it’s just a representation, is it not? So if I had written on my picture ‘This is a pipe’, I’d have been lying!”.

But isn’t that what the entire financial community is doing today? Sure, they’re making money right now, but that doesn’t mean there are actual markets. They don’t have to go through “the process of determining the price of an asset in the marketplace..” I.e. they don’t have to check if the pipe is a real pipe, or just a picture of one.



What killed price discovery, and thereby markets? Central banks did. What they did post-2008 is two-fold: they bought many, many trillions in ‘assets’, mortgage-backed securities, sovereign bonds, corporate bonds, etc., often at elevated prices. It’s hard to gauge how much exactly, but it’s in the $20+ trillion range. Just so all these things wouldn’t be sold at prices markets might value them at after going through that terrible process of ‘price discovery’.

Secondly, of course, central banks yanked down interest rates. Until they arrived at ultra low interest rates (even negative ones), which have led to ultra low yields and the perception of ultra low volatility, ultra low risk, ultra low fear, which in turn contributed to ultra low savings (in which increasing household debt also plays a major role). As a consequence of which we have ultra high prices for stocks, housing, crypto(?), and I’m sure I still forget a number of causes and effects.

People wanting to buy a home are under the impression they can get “more home for their buck” because rates are so low, which in turn drives up home prices, which means the next buyers pay a lot more than they would have otherwise, and get “less home for their buck”. In the same vein, ultra-low rates allow for companies to borrow on the cheap to buy back their own stock, which leads to surging stock prices, which means ‘investors’ pay more per share.


Numbers of the S&P 500 and its peers across the world are still being reported, but what do they really represent? Other than what central banks and financial institutions have bought and sold? There’s no way of knowing. If you buy a stock, or a bond, or a home, you no longer have a means of finding out what they are truly worth.

Their value is determined by central banks printing debt out of thin air, not by what it has cost to build a home, or by what a company has added to its value through hard work or investment in labor, knowledge or infrastructure. These things have been rendered meaningless.

Central banks determine what anything is worth. The problem is, that is a trap. And your money risks being stuck in that trap. Because you’re not getting any return on your savings, you want to ‘invest’ in something, anything, that will get you that return. And the only guidance you have left is what central banks purchase. That is a much poorer guidance than an actual market place. The one thing you can be sure of is that you’re paying more for ‘assets’ -probably much more- than you would have had central banks remained on the sidelines.

The Fed may (officially?) have quit purchasing ‘assets’, but the Bank of Japan and ECB took over with a vengeance (oh, to be a fly on the wall at the BIS); in Q1 2017 the latter two bought over $1 trillion in paper. The Bank of Japan has effectively become its nation’s bondmarket. The European Central Bank is not far behind that role in Europe.

And the ‘market’, or rather the 2-dimensional picture of a market, depends only on what they do. The one remaining question then is when will this end? Some say it can go on forever, or, you know, till these policies have restored growth and confidence. But can, will, anyone have confidence in a market that doesn’t function? Martin Armstrong recently addressed the issue:


The Central Bank Crisis on the Immediate Horizon

While the majority keep bashing the Federal Reserve, other central banks seem to escape any criticism. The European Central Bank under Mario Draghi has engaged in what history will call the Great Monetary Experiment of the 21st Century – the daring experiment of negative interest rates. A look behind the scenes reveals that this experiment has been not just a failure, it has undermined the entire global economic structure.

We are looking at pension funds being driven into insolvency as the traditional asset allocation model of 60% equity 40% bonds has failed to secure the future with negative interest rates. Then, the ECB has exceeded 40% ownership of Eurozone government debt. The ECB realizes it can not only sell any of its holdings ever again, it cannot even refuse to reinvest what it has already bought when those bonds expire. The Fed has announced it will not reinvest anything.

Draghi is trapped. He cannot stop buying government debt for if he does, interest rates will soar. He cannot escape this crisis and it is not going to end nicely. When this policy collapses, forced by the free markets (no bid), CONFIDENCE will collapse rapidly. Once people no longer believe the central banks can control anything, the end has arrived. We will be looking at the time at the WEC. We will be answering the question – Can a central bank actually fail?


So where do you go from here? Everything you -think you- know about markets is potentially useless and doesn’t apply to what you see before you today. There are many voices who talk about similarities and comparisons with what happened to markets for instance in 1987, but what’s the value of that?

Back then, to all intents, constructions, and purposes, markets were functioning. There was price discovery. There were some ‘novel’ instruments, such as portfolio insurance, that you could argue influenced markets, but nothing on the scale or depth of what we see today with high-frequency trading, robots, Kurodas and Draghis.

The temptation is obvious, and large, to compare today’s financial world with that of any point in the past that seems to fit, even if not perfectly. But the lack of price discovery means any such comparisons must of necessity be way off the mark; you cannot stuff that 2-D pipe.

The BIS-designed unity in central bank policies is under threat, as Armstrong indicates. The Fed has moved towards quantitative tightening, not investing or even re-investing, and raising rates, but it doesn’t look like the ECB will be able to follow that change of direction. It can’t stop ‘investing’ because it has become too big a player. The Bank of Japan appears to be in that same bind.

Central bankers jumped into the markets to save them (or so goes the narrative), but they will instead end up killing them. In fact, they killed them the minute they entered the fray. Markets can’t survive without price discovery, and vice versa. The moment it becomes clear that Draghi MUST keep buying sovereign debt from countries with failing economies, the game is up.


All those trillions created by central banks, and the even much bigger amounts conjured up by the creation of loans by commercial banks, will have to be eradicated from the system before markets and price discovery can return. And return they will. There are lots of things wrong with our economic and financial machinery, but functioning markets are not wrong.

Things run off the rails when governments and central banks start interfering, not when markets are allowed to function. But it’s long turned into a giant game of whack-a-mole, in which economists and other know-it-betters are forced to plug one hole by digging another, and so forth.

The best we can hope for is some sort of controlled demolition, but the knowledge and intelligence required to make that happen don’t appear to be available. The political climate certainly isn’t either. A politician who campaigns on “let’s take this sucker down slowly” will always lose out to one who claims to know not only how to save it, but to let it bloat even more.

The Draghis of the world will continue to believe they are in control until they are not. At first, some people will start taking out their money while it’s still there, and then after that the rest will trample over each other in a bloody stampede on the way to the exits trying to save what’s left. After the first $100 trillion is gone, we’ll be able to survey the terrain, but by then we won’t, because we’ll be too busy trying to save ourselves.

And I know you’ve heard this before, and I know central banks bought us 10 years of respite. But it was all fake, it was all just a picture of a pipe. They had to pile on insane amounts of debt on your heads, kill off your pension systems and make markets a meaningless term, to achieve that respite.

They had to kill the markets to create the illusion that there still were markets. With the implied promise that they would be able to get out when they had ‘restored growth’.

But you can’t buy growth. And yet that is the only trick they have up their sleeves, and the only thing the emperor is wearing. Next up: a rabbit and a hat. And a pipe. And then the lights go out and someone shouts “FIRE!”.





Home Forums This is Not a Market

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    René Magritte La trahison des images 1929   “[Price discovery] is the process of determining the price of an asset in the marketplace through the
    [See the full post at: This is Not a Market]

    V. Arnold

    Ilargi; that was just awesome; you took down the whole thing; which isn’t even a thing; but a no-thing…
    My alter ego, buried in a Pioneer cemetery, well more than 100 years ago, in Portland, Oregon, named Thayer Dowd, would say this:
    Everything you know is crap.
    Everything you think is crap.
    Everything you have been taught is crap.
    Everything you say is crap.
    And everything you believe is crap…
    Thayer Dowd
    I would add; anything you do know; you discovered yourself…


    Off topic

    Important topological properties include connectedness and compactness.


    A most astute observation and elucidation of the state of affairs we find ourselves in. Yesterday being gone, and tomorrow being blind, about all we can do is try and stay clear of the tracks upon which this Central Planning train is speeding towards the cliff. As Tverberg put it, “An economy is a self organizing structure.” Something that, to remain efficient (functional), can’t be tweaked or meddled with. Parasitical power has nearly killed it’s host. When there is no more blood to draw, the parasite falls off. That’s when things will get messy. Might be prudent to have something shiny to carry with us over that bridge to the “Other Side,” when the time comes to cross it?


    “…central banks bought us 10 years of respite. But it was all fake…”

    And AE loyalists have long understood this and that the inevitable marking to market will be disproportionately severe the longer the charade continues. Severe deflation, defaults on sovereign debt, record interest rates on long bonds and demise of central/global banks are all just over the horizon. Freedom from debt and security/liquidity of saved after tax principal will be essential for individual economic salvation.

    Dr. D

    An excellent article, more concise than I could do it for certain.

    What do you have with a central bank intervening in everything, the whole economy? Soviet-style central planning. And that will work for a while, on the order created from capitalism (here meaning free action), until the whole thing becomes so out of order, prices, incentives so upside down, that it doesn’t.

    And what do we have with the Fannie Mae or similar agencies owning all the houses, via mortgage bonds? Soviet-style government ownership of the land.

    What do we have with bailouts, protected corporate winners and ma-n-pa unprotected losers? Soviet-style central planning and ownership of Capital.

    What do we have with Dept of Education mandates right through student loans? Government provided education, with the addition, as Obama said, to work for the state in repayment.

    What do we have with farm loans, subsidies, protection of ADM and John Deere? Soviet-style central planning of food collectives, long since eliminating the family farm.

    We’re already there, my friends, need I add the media, the initiative for universal *government* health care?

    And what will we have with a Universal basic Income? The final piece of the Soviet system: From each according to his ability, to each according to his need.

    And we all saw how that worked out.

    Everybody’s talking about the last war, about Socialism, Capitalism, Freedom. Get over it people: we lost. But since Soviet style systems are both violently oppressive, and complete economic failures, the question is what to do now.


    “…central banks bought us 10 years of respite. But it was all fake…”

    If the banks had not done what they did, would we be back to “before”?
    The last 10 years of life has left me 10 years older and wiser.
    Before, it was fake, it was la-la-land


    ” …And the ‘market’, or rather the 2-dimensional picture of a market, depends only on what they do….”


    It’s funny, this also as a reply to anticlimactic’s comment on today’s Debt Rattle, that the traditional (“Old”) media, BBC, NYT et al, are trying to defend themselves from new media by 1) attacking the latter and 2) attempting to define the premise upon which any discussion can take place. Skripal, Douma etc. You can’t suggest it wasn’t Russia in either case. It’s more like: do Russians only encourage Assad to gas people, or do they make him eat babies too?

    These media are old, and that’s what they look like when doing these things. But what choice do they have? They’re trusted sources, that’s their meal ticket.

    It feels like eons since I wrote it, I truly don’t remember, but I did say at one point that they have one choice only if they wish to remain viable in the social media era: be brutally truthful, unforgiveably so. If they don’t go that route, they’re done. Because anyone can lie, we don’t need BBC or WaPo for that.

    As much as I despise Facebook, if only for killing the Automatic Earth’s account without any notice or explanation, either before or after the fact, I got to say this about social media: they’re changing the media landscape so much it won’t be recognizable anymore soon.

    And given my feelings about the anti-Trump echo chamber, I guess it should perhaps be clear that I think that is a good thing.

    Diogenes Shrugged

    Hear, hear. Nailed it, Ilargi, as only you seem to be able to do.

    I sometimes wonder if Ilargi might have finally run out of good things to say, and then he once again comes up with something like this. AE is unique, providing front row seats to viewing the grail. I’m surprised more people don’t come here. I’m surprised a ZeroHedge article gets several pages of comments while we enjoy a sense of small community here. Pinch me.

    Anyway, right or wrong, just know that what I’ve written below was written in earnest.

    Central banks are the world’s governments by default simply because they impose and enforce their debt-based money systems on nearly everybody. What we’re otherwise accustomed to calling “governments” are really just the muscle protecting central bankers from ropes on lamp posts. All else is theater.

    Why do our political “governments” endorse and protect the central banking debt-based money scam? Because they can spend so much money they they don’t actually have. It enables them to cut taxes and increase spending even when they’re in hock up to the tops of their ears. Consumers are content to remain oblivious to central bank dangers for similar reasons.

    In my flights of fancy, I envision a world where only one money supply exists, a worldwide money supply entirely beyond the reach of bankers and anybody else wanting to tamper with it. A money supply that derives its utility by serving as an instrument of freely-determined bid & ask, and that derives its value by serving as a perfectly predictable store of value. Remarkably, it just so happens that this turns out to be the promise of Bitcoin, possibly as soon as a half-decade from now. Fact is, if Bitcoin doesn’t fulfill that promise, nothing else ever will. If Bitcoin fails, Orwell’s vision of boots stamping on faces will almost certainly serve as the financial model for mankind “forever.”

    Bitcoin utilizes blockchain technology alike all cryptos, but differs from all but a tiny few by being decentralized — that is, permanently and securely out of anybody’s unilateral control. Transaction middle men are eliminated, as well. It facilitates peer-to-peer transactions, and in the post-central-banking world will serve as a stable store of savings. Centralized cryptocurrencies are all just as manipulable as central bank fiats. Speculate with them if you like, but the word “blockchain” does NOT in any way imply decentralization.

    Grains serve as stores of savings, too. A food merchant stockpiles wheat to last through the parts of the year it isn’t being harvested. But nobody expects a ton of stored wheat to slowly grow to a ton-and-a-half over time. The same is true for gold, as there is no “return” on physical “shiny” stored in your safe. The same is true for Bitcoin. You can’t put bitcoin in a cold wallet and expect it to accumulate interest somehow. So the expectation that dollars will grow over time in a bank savings account — that expectation indeed stems directly from a flaw in all debt-based money systems.

    And a massive flaw it is. I remember many decades ago reading articles extolling the virtues of a free market economy. In a free market economy, they said, rich families often become poor families over the generations, and poor families often become rich. And although that used to be true, it is much less true today, as the manipulation, rigging and theft in “the markets” preserves the positions of the super-rich. This deeply flawed money system is why 2% of the population is projected to soon own two-thirds of the world’s wealth. Permanently.

    Banks and their muscle men need perpetual economic growth to keep the flawed debt-money system operational. Bitcoin, however, does not need economic growth to function. Bitcoin will enable the scaling-down we Automatic-Earthers yearn for, stimulate popular rejection of leviathan governments (i.e. central banks) and their captive muscle, and enable bona fide price discovery in efficient, local economies. Local economies with full access to the entire world.

    I don’t buy Bitcoin because its dollar-price movements, properly timed, will make me richer (though admittedly, it certainly helps that it’s currently on sale). I buy Bitcoin because it represents the only hope for the future of all mankind, not just the 2%. If you think I’m “talking my book,” you don’t understand Bitcoin.



    Here in Cairns, they are building massive apartment blocks. There are cranes all over the place. The locals tell me that none of them can afford the putative prices of these apartments. They are being built for people in Sydney and Melbourne who have done well out of their property boom – and who will only use these apartments occasionally.

    I am trying to rent a place with a number of bedrooms that I will sublet – either long-term or on Airbnb. I don’t like to live alone and it would work out cheaper than me getting a place with one bedroom. I was about to sign a contract for a 3-bedroom place and when I asked them for 3 sets of keys they refused to give me three sets only one. They wanted me to ask their permission before sharing with anyone. I walked out.

    If interest rates were at all connected to the real world, there would not be all these empty houses and apartments about. There would be no construction frenzy.

    It looks like I will be forced to borrow to buy a place in order to live the way I want. Ridiculous.

    John Day

    Thanks Ilargi,

    This really hammers it out clearly.
    Also: Tom Keiley at INN World Report would like to talk to you about an interview
    His email is pretty simple, and Eleni may be contacting you about it. I’ll happily provide it for you.
    Again, BRAVO!
    (Oh, cool, my avatar image shows up now)

    Dr. D

    While many cryptos are centralized (Ripple) or have centralized flaws (Monero supernodes) it’s by no means uncommon to find fully decentralized cryptos other than Bitcoin. And that’s taking out the non-currency cryptotokens that are probably the majority now.

    Although promising, Bitcoin cannot escape the human problem: if we are corrupt, surveilling everything for power, profit, and oppression, Bitcoin will not give us a ticket of escape as it’s not anonymous and in fact will track you better than anything. If we’re not at that deep, pervasive level of Big Brother, then it will do well enough, especially with an ecosystem of competing currencies and atomic swaps making tracking and exchange-rigging harder. I still expect Bitcoin to be relegated to fewer, larger, sovereign state jobs, and the mass of daily transactions to go elsewhere — demanded by the limits of their tech — and that’s fine. As long as we have something.

    But remember, the present system was put in for freedom too, but has methodically been channelled into extraction and oppression. The Whole Bill of Rights is the same. If Bitcoin gets in with perfect tracking and we get lazy to defend freedom (again) then it will be an especially diabolical tool of oppression, worse than anything we’ve seen so far, and that’s saying something.


    “Although promising, Bitcoin cannot escape the human problem: if we are corrupt, surveilling everything for power, profit, and oppression, Bitcoin will not give us a ticket of escape as it’s not anonymous and in fact will track you better than anything.”

    Talk about essential truths. Nota bene. Eventual corruption is a certainty….it is a HUMAN monetary construct.

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