Published On: Sun, Jul 20th, 2014

Even ‘They’ Are Warning You


Such thinking as is done by the media-shepherded sheeple is in line with the pattern drilled in to them: How can I be ‘better’ — better-off, better-looking, better-regarded, etc. — and how can my life be made easier, more convenient and hence more successful (in the eyes of other sheeple). Unpleasant or negative things are systematically strained from the canned infotainment served up via every available channel. There remains a vague awareness that these negative phenomena exist, but every effort is made to train sheeple not to think about them — and the best way to ensure that outcome is by training them not to think at all.

The idea that if you ignore something, or deny its very existence, it will fade out of existence, is very tempting and can be – and is – applied to every area of human activity. In the financial sphere there are two phenomena that cause much anguish, namely risk and uncertainty. Libraries have been written about this pair and the problems they generate, but the starting point is the distinction between them: risk can be measured, and therefore mitigated, whereas uncertainty cannot.

Financial markets can therefore be defined as mechanisms wherein risk — of one sort or another — is measured and traded between market participants. However, if the methodology for measuring risk is systematically warped — for example, by central banks artificially keeping interest rates at extremely low levels — then the ability to assess and protect against that kind of risk is crippled.

After almost six years of institutionalized distortion, most markets have ceased to function in the way they were intended, namely as a method of pricing financial instruments on the basis of supply and demand. With prices warped, the relative risk of various instruments is impossible to measure – with results as ludicrous as they are dangerous. To take two simple and current examples: the yield on a ten-year bond issues by the Kingdom of Spain is only one-tenth of a percent higher than that on a 10-year US Treasury bond. Does that mean that Spain and the US carry virtually the same degree of risk? And if the spread between ‘junk-bond’ yields and ‘investment grade’ corporate bonds is at the lowest level ever, does that mean that the risk of weak corporations going bust is also lower than ever?

You had better hope so, because the people who manage your pension fund are acting as if it were.  I noted last week that concern about these distortions is becoming more widespread. This week it has widened further, to include even central banks who are the agents ultimately responsible for the problem in the first place!

Fed chair Janet Yellen repeated this week, in testimony to Congress, her view (call it an admission) that ‘some’ areas of the markets have become over-valued, such as internet shares. Back home, the Bank of Israel issued its first half-yearly Financial Stability Report, in which it warned explicitly that banks have exposed themselves to serious risk by their aggressive mortgage lending – and that the Israeli corporate bond market is also out of whack. Do not check the portfolio of your pension fund or ‘keren hishtalmut’, because you will find it massively skewed towards these corporate bonds.

The purpose of these warnings is not that innocent sheeple should listen, think about the implications and take action. They are, instead, to be used after the now-inevitable crash, to provide evidence that ‘the authorities’ were doing their job and looking out for the average Joe. If a large number of sheeple were to stop acting like sheep and actually think things through for themselves, there would be a rush for the exits and a crash – for which the people issuing the warnings would be blamed. The confidence of the central bankers that their words will have no impact in the face of their deeds –  warning of the dangers while pumping more money to keep the markets rising endlessly – enables them to behave this way.

Risk has not been eliminated, as the operators and primary beneficiaries of the financial system – banks and brokers – blithely pretend. It has instead been covered up by a flood of liquidity, so that it is invisible, unmeasurable and impossible to accurately protect against. That means that the markets, like the world in general, have become more rather than less dangerous, as a result of deliberate, consistent policies by governments around the world.

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About the Author

- About Pinchas Landau is an economic and financial analyst, serving as a consultant to major financial institutions in Israel and abroad on domestic and global developments. After working in banking and investment, he moved to journalism in 1983 and served as financial correspondent of the Jerusalem Post and then as senior columnist for Globes, Israel’s business daily. He has written for many international newspapers, including the Wall Street Journal and Barrons, as well as numerous professional publications. Since 1996, Pinchas has been writing and publishing The Landau Report, a unique newsletter service which analyses economic, business and financial trends in Israel, as well as tracking Israeli and regional geo-political affairs and has attracted a global subscriber base. He has also been providing quarterly and annual reports on Israel for the Economist Intelligence Unit for 25 years. Landau is also an accomplished speaker, lecturing in English and Hebrew to audiences in Israel and overseas on a range of issues relating to Israel and the Jewish world. Born in London and educated at the London School of Economics, he and his family have been living in Jerusalem since 1976.

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