The consequences of a marked-to-market world

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The writer is an adjunct lecturer at William & Mary and author of an upcoming book on confidence-driven decision-making

“The markets are plotting against me,” an international student told me recently. Between the dramatic rise in US used-car prices, the increase in short-term interest rates and the strength of the dollar, the monthly loan payment on the small saloon she had hoped to buy was unaffordable. What caught my attention, though, was she reached her conclusion not because of a recent visit to a dealership, but thanks to her iPhone. At her fingertips, she had the real-time market price for every input.

She’s not alone. Today, before we buy a home, a plane ticket or a new pair of jeans, we check the market price online. It’s second nature to us. Thanks to the democratisation of data, we — and the businesses we work for — are intensely aware of the current market price of everything. We are active participants in a marked-to-market global economy — where it takes but a moment for a price change in a market to impact our real-world decision-making.

Consider the recent dramatic price moves in oil. Data from GasBuddy, a company that tracks real-time fuel prices at more than 140,000 petrol stations in the US, Canada and Australia, suggests that in early March it took just a few hours for costs at the pump to reflect the rocketing oil futures market. And we all felt it, whether we were filling up or just passing the large, illuminated numbers showing the prices. The pain was immediate.

In an era of rising financial markets and disinflation, a marked-to-market economy is a beautiful thing. As we check buying apps on our phones, we smile knowing we got the best deal possible. And when we check our soaring investment portfolios, we get a dopamine rush that reinforces the wealth effect of higher asset prices. Amid rising confidence, our pleasure-filled, marked-to-market mindset fuels a virtuous cycle in record time.

As the 2008 US housing crisis cautioned, though, a marked-to-market economy is anything but good news on the way down. The signalling effect of fast-falling asset prices stings us at every turn. Two years ago, we saw a far wider-reaching rerun when Covid took down market prices and the global economy with it. When investors, consumers and business leaders saw the end of the world together, so did the financial markets, retail spending and business investment. All were marked at once.

Today, not only are even more segments of the economy marked-to-market online, but as my student experienced, supply chain disruptions and inflation fears are roiling stock, bond, currency and commodity markets simultaneously. The real economy has become a punch bag for dour market sentiment as dramatic price moves race in parallel across multiple markets, amplifying the impact.

Historically, institutional investors and businesses have been responsible for navigating the treacherous waters that rise when intense price volatility and the real economy collide. From futures to forwards, they’ve relied on the financial markets to mitigate the impact by hedging and insuring price risk.

Today, they are joined by a new crowd — retail speculators — who have far different objectives. Thanks to today’s highly financialised markets, it’s now as easy for individuals to trade fixed income, currencies and commodities as it is to trade shares in companies like GameStop.

While that is troubling, what concerns me most is the potential for crowd sentiment to feed upon itself in an environment of 24/7 online trading.

The signalling effect of rapidly moving prices can be powerful. A sudden flash mob of bullish or bearish interest in a market now has the potential to create a quick economic spillover as the consequences of wild market price swings are felt immediately around kitchen tables and in manufacturing facilities around the globe.

Then, there are the geopolitical implications as the fate of debt-issuing and commodity-producing nations swings with the crowd.

A global economy that’s marked by the minute to investors’ impulsive behaviour presents enormous challenges for consumers, businesses and policymakers alike. Far more than just economic price stability is market dependent.

They say that what happens in Las Vegas stays in Las Vegas. That’s not the case in today’s sometimes casino markets. As goes investor sentiment now, so goes the world.

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