The Wizard of Oz Effect

a way of thinking about what's happening in markets now

This strangely formatted article has so much important information about the financial terrain in this moment. What I'm getting from it is that there was a Wizard of Oz effect in finance and trading, and the curtain has been pulled back somewhat (though please everyone take a look and see I'm right!).

Some questions. Of course the stock market is going down because there's a production crisis. But why is it going down in the exact way it's going down? And how will it recover? Why, for instance, are airlines in such bad shape? And why is the allocation for large corporations in the CARES Act so high ($454 billion)?

'Corporate greed' is a lazy answer!

Interest rates have been at promiscuously low levels since 2009. Part of the stock market rise since then is because of corporate buybacks of stock (and simultaneous leveraged loans).

These buybacks have raised earnings per share 270%. Mr. Market happy.

But according to the piece I linked to above, the increase is an accounting trick. The revenue growth for these same companies only increased 60%. This creates an illusion of profitability.

Increasing the earnings per share lines the pockets of shareholders and corporate boards and leaders. That where they get their paychecks. But the underlying asset price is much lower.

The culprits are airlines, hospitality, and real estate. Thus why airlines need their own line item in the relief package.

That's all pre-pandemic. Now that the pandemic has hit, terror abounds because there was a Wizard of Oz effect in finance. The buybacks and leveraged corporate debt made it look like we had a strong bull (270% earnings per share!), but there was a little hubristic bear (60% revenue increas) behind a curtain the whole time.

Of course, fiscal and monetary policymakers learned a lesson from 2008: what they call optimal control. Do a lot really fast, rather than slowly. But the dramatic quality of the Fed's tidal wave of relief was—according to the above— inspired by finance and trading not being what it looked like it was.

And now companies are ending their buyback programs, pulling out of everything, and asking for bailouts.

So if the strength of the market was a fake-out, the mask is off now. That's why $454bn is going to 'large corporations' but actually going to leverage the Fed's monetary relief.

The mode of production needs a huge presence. But there never was one to begin with, and the mechanism for creating that huge fake face is gone. (Which could also explain why this isn't exactly at the top of all the business news headlines. It's embarrassing.)

This all means a difficult recovery: a U or L. Not because of the pandemic, but because of what the pandemic revealed: a little sniveling capitalist making a big noise behind a velvet curtain.

The ruling class should at least try to shift back to reinvestment and productivity rather than cheating again! And socialists should push them on this relentlessly during the upcoming deliberations on a new fiscal program in Congress.