When Markets Fail

Imagine if you bought a stock and at the end of the day, after it had accelerated wildly in price, the exchange canceled all of the day’s trades.

Sorry, no profits for you.

Sounds incredible, right? Yet this is precisely the sort of thing that is happening on the London Metal Exchange, where twice in recent weeks all the day’s trading in nickel has been voided because of price action.

Add in shutdowns and trading halts and the picture is bleak.

And, according to a Bloomberg story, traders are fleeing the exchange, looking for more viable alternatives and thereby leaving volume and liquidity problematic. Price discovery is a mess.

Why should you be concerned? Two reasons.

First of all, nickel is used in a lot of everyday items such as batteries, stainless steel and other steel alloys. Toasters, electric ovens, even desalination plants (which take salt out of water) use nickel.

When it costs a lot more, you pay more.

The second point is that if markets cannot be trusted to determine fair prices, the entire world economy cannot function. And this LME debacle seems to indicate we’re closer to that than one might have thought as recently as a month ago.

Holders of precious metals (gold and silver) long have looked at the LME with a jaundiced eye, suspecting pricing gamesmanship.

Separately, U.S. firms have been found guilty and fined due to trading shenanigans with those two shiny metals.

That the LME is holding trading sessions, then acting like they never happened, is a stunning development, even to the skeptical crowd.

Russian and Chinese stocks have suffered through market closures and bizarre trading.

Imagine this all coming home to the good, old New York Stock Exchange or NASDAQ.

Can’t happen?

Why not?

Ponder the run on the entire financial and banking system if the exchanges did close, or nullify trades ex post facto.

Already Joe Biden, aka The Big Guy, is out and about telling us to expect food shortages.

Joe and many of his fellow Economics 101 dropouts here and abroad also are proposing sending direct payments to citizens to help them cope with rising energy prices.

This is economic madness. You don’t create more demand for a product thought to be in short supply by increasing purchasing power without looking at increasing supply.

Price’s function is to diminish demand by rising until supply can increase to meet higher demand.

As much as Russians are being blamed for inflation, that genie was out of the bottle well before the Ukraine invasion. Inflation was fueled in part by those stimulus checks given to all, along with shutting down the economy — therefore bottle-necking supply lines – and declaring a war on fossil fuels when there is no viable alternative on a worldwide scale.

There is talk yet again about another infusion from the strategic oil reserve, which last time it happened was a bust because it is like trying to fill a swimming pool with a garden hose.

Times are tough and about to get tougher. Market breakdowns and runaway inflation are the in-your-face indicators.