Price Discovery Lost

The definition of price discovery is “… a method of determining the price for a specific commodity or security through basic supply and demand factors related to the market”…..


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Dr. Walter Snyder –

There are many other definitions, but they all make clear that price discovery means that supply and demand determine the price of a security. In fact central bank intervention has contributed to the exaggerated prices of equities and the low prices of precious metals. David Stockman has claimed that price discovery has practically been eliminated in the markets.

Huge increases in sovereign and corporate debt, QE, ZIRP and NIRP have contributed to the creation of an unstable financial environment that central bankers apparently are intent on preserving by means of the acquisition of stocks and bonds. Japan has gone the furthest in having the central bank monetize sovereign debt and shoring up the stock market by massive purchases of ETFs. The ECB has gone overboard with bond purchases while even the SNB has bought over $80 billion of American equities. It can be assumed that central banks along with the BIS and IMF have entered into agreements between themselves to promote stability in the markets.

In just such an environment the Fed is planning on continuing to raise interest rates and drawdown its inflated balance. The reaction of the bond markets will indicate if price discovery is still functioning at least there. As interest rates rise, prices of issued bonds should fall. We shall see what sort of bear market results.

The manipulation of the prices of precious metals is already well-known, and even so no criminal proceedings have been undertaken against the central banks, which also buy stocks. This has had as a consequence that the prices of equities are at the moment artificially high. Investors should take profits now.

Misallocation of capital slows economic growth, which is not promoted by central bank purchases as proven by the example of Japan that is going nowhere and sluggish growth in the US with the EU only slightly better off. Markets fail to function properly because of manipulation due to central bank intervention. This results in a shift of wealth in favor of the haves. Price discovery would help to keep markets working properly and not only benefiting the wealthy. The poor are going to be poorer as interest rates rise and governments go bankrupt.  It is symptomatic of this trend that focalization in the US has resulted in finance accounting for 7% of GDP as opposed to 3% a few years ago. This means income redistribution in favor of those who already are better off than workers.