The Agonists and the Ecstasy of the Financial Market

Exactly how much of the future is foreseeable? Exactly none, at least when it comes to human events. But then, maybe predicting the future is as easy as looking at the past (or Remembering the Future, as Phil Anderson puts it). ‘What has been is what will be, and what has been done is what will be done, and there is nothing new under the sun,’ the writer of the book of Ecclesiastes tells us.

Translation: it’s all been done before and will be done again. There have always been Ben Bernankes in the world. And there will always be people who believe the universe owes them something, or that you can get something for nothing. In a just universe, these people would get what they deserve. In an indifferent universe, what you get is random.

Today, what you’re getting is all-time highs on the S&P 500 and the Dow Jones Industrials. Markets rallied after Fed Chairman Bernanke told a conference, ‘You can only conclude that highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy.’ The bar is open. Drink up.

We’ll leave the policy debate to the wonks. A more useful way to analyse this news is to study the long-term effects of addiction on the biochemistry of the human brain. This has become a quite personal topic to us for various reasons. We were told recently that more Americans die from overdoses of prescription narcotics than die in car accidents.

We’re not certain that’s true. But the effects of addiction to prescription drugs are similar to the effects of prescription monetary policy. Initial pleasure is followed by addiction, and then the intense pain of withdrawal. Or death. Bear with us a moment and we’ll show you why it’s a useful analogy to the Fed’s situation, rather than a trite and careless one.

When you develop an addiction to opiates (morphine, heroin, oxycontin) you guarantee yourself a lot of pain when you stop, if you can stop. Opiates are agonists, which means they activate or perform the same action as a normal bodily function or process. In the case of opiates, they activate the receptors in the brain that suppress pain and produce sensations of relaxation and euphoria.

We call naturally occurring opiates endorphins. You can produce them by eating a hot chili, or running, or having a horizontal ending to a fabulous night out with your significant other. Use of opiates also leads to increased dopamine production. Dopamine is the brain’s way of telling you to do something again because it feels so good.

What opiates do, then, is increase the function of an existing neurochemical system. Alas, there is such a thing as too much of a good thing. Addiction to opiates increases the sensitivity of pain receptors in the body. You either have to flood the brain with more of them, or experience what the Klingon’s call ‘bij,’ a form of punishment for bad behaviour.

But calling in punishment doesn’t do justice to the pain and trauma of having altered the way your brain works. Stopping your use of opiates means enduring the howls of pain as your hyper-sensitive brain cries out for more drugs. This is why the relapse rate is so high for addicts. It’s less painful to get high than it is to get straight.

Now, it is not hard to see how all this applies to financial markets. Bernanke can’t get straight (sound money). Every time he tries to make the market off EZ credit, the pain in the system is expressed as higher interest rates and falling stock prices. The brain (investors) howls for more. And yesterday it got what it wanted.

What you have, then, is a financial culture addicted to pleasure and hyper sensitive to pain. It becomes increasingly dysfunctional, irrational, and euphoric. The market is high, literally. And the only way to keep it from coming down is to give it more.

That’s the nature of the rally you’re investing in right now. And that’s why we’ve casually called Bernanke a drug dealer in the past. He’s not just altering the internal wiring of the market. He’s incentivising people to seek out risky behaviour to their own detriment. There is a moral aspect to this that’s comparable to the way drug dealers profit from the destruction of a human soul.

Of course, this being a free e-letter, not all readers will be comfortable with the moral condemnation of monetary policy. If that’s the case, go read the Age. The social implications of altering human economic behaviour are real and damaging, whether you choose to acknowledge them or not, just as the cost of addiction is the destruction of lives, whether you choose to acknowledge it or not.

Let’s close the week with some reader mail, shall we?

Hi Dan, from a confused reader

Why did you say credit is a form of energy? It’s not, and saying so is confusing to readers (like me) who understand that.

Because we all consume energy to live, it is true that only those with sufficient energy (or money to buy food etc.) can afford to give or extend credit. That explains why investors give (and receive) credit for limited periods and according to their ‘wealth’.

Common but seldom mentioned credit providers are employees. Unwealthy or poor employees paid in arrears need sufficient energy or money to subsist until paid. If they don’t, they must depend on others, for example children may depend on parents until they leave home. However even the wealthiest individuals cannot afford to give or extend unlimited credit for short periods or limited credit forever — not even ‘Helicopter Ben’ and his cronies!

I could go on but my question remains: Why add to readers’ confusion by saying credit is a form of energy?


Jim S
PS:We met at 2011 Gold Symposium :]

Hmm. Good question Jim. Let’s begin with definitions. We define energy as the capacity to do work, in a physical sense (the sense you can measure). Accumulated savings represent potential energy. They are stored surplus energy in the same way the carbon-based energy is stored solar power. You ‘spend’ solar income when you burn wood, coal, gas, and oil. In a healthy economy where credit does not exceed available savings, then, credit is the potential to do new ‘work’ based on new productive investment. We suppose the problem occurs when the supply of credit exceeds available savings. What happens then is that credit booms borrow from future prosperity by ‘bringing it forward’ now.

Come to think of it, this is similar to the way agonists mimic a normal biological process. Our main point, though, is that if you try to get too much of a good thing by producing too much credit, you do long-term damage to the viability of the system, whether it’s biologic (like the human body) or a complex adaptive system (like the economy).

By the way, we haven’t committed to going to this year’s Gold Symposium due to an uncertain travel schedule. But we note the yellow metal is up over three per cent in US dollar terms since yesterday. Gold is not monetary dope. It remains the real metal deal. And the Gold Symposium is the best place in Australia to talk about it.

Hi team, I had dinner with a mate on Saturday night, he drives semi-trailers from Perth to Port Hedland. He told me, for the past few years it was difficult to find a parking space in a truck bay, now they are practically empty. He was also saying he rarely had a back load and came back to Perth empty most trips, now has a back load most of the time. I’d say things have changed. The boom is definitely behind us.


Last night at the Crown casino we visited with a colleague from the US and conveyed the same message. The three-phase resources boom — an increase in prices, and increase in investment, and an increase in production volumes — created an enormous increase in national income and real wealth in Australia. It was probably the greatest boom in 200 years. But we’re on the other side of the boom now.


I think your statements concerning the consumer cost of energy are a little overstated.

You are right in respect of the wholesale cost of gas. We are going to see this increase from around $3.50/GJ to parity with the supply cost to the LNG facilities currently around $9.00/GJ. Note that the sale price of LNG includes a major energy input cost for the liquefaction process. 

However, in respect of the domestic gas supply prices the effect will be greatly subdued. Domestic gas suppliers buy/obtain gas at $3.50 and sell the same gas to their customers for close to $20. The difference being their profit and the cost of maintaining their distribution networks. These will be largely unchanged with the increase in wholesale costs. The consumer price therefore is likely to be around 40% not 300%.

Similarly, but even more so, the price increase for electricity will be much smaller. Gas fired generation constitutes only 10% of our total electricity generation. Of this the gas supply cost is only around 40% of the generation cost. In addition the generation cost only constitutes around 20% of the price we pay for domestic power supply. So the gas supply cost component of our domestic power supply is just 0.8%. Tripling this will have a barely noticeable effect on domestic power prices.

Having said all that, I agree with your conclusions. Although it does not sit well with my free market disposition, I believe all state governments should have a domestic reserve policy similar to the one deployed in Western Australia.

John R.

Thanks for that John. Australia ought to move to more gas-fired power. It will be more expensive than coal, given how much coal Australia has. But it would be cleaner, and a great boon to industry to have cheaper power. The best way to lower power prices is to produce more natural gas, in our view, and modernise the power generation fleet.

On the issue of domestic electricity prices, we reckon they’ll find a way to increase anyway, despite the case you’ve made. It will be interesting to see. The energy market makes very little sense to us right now. For example, we only recently learned that smart meters estimate your bill, not your actual energy use!

Imagine paying your bills based on your estimate of what it cost you. It would never be acceptable. But somehow it’s acceptable to bill someone based on an estimate of what they used, rather than what the actually used. It’s insane.


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Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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