Are markets valid?
Lately I have been questioning the validity of markets, specifically whether markets are the result of organic interactions between humans or whether markets are State-constructed funnels for moving portions of monetary energy from consumers to the government via taxes. I have to be mindful that markets are not some linear, mechanical construct where you input a supply and demand schedule and voila, out pops a price. Prices reflect sentiment on expectations and the value of the expectations are generated within parameters of obligations owed to a third-party i.e., the tax man, spouse, or the kids.
If I stay focused on the human interaction aspect of price discovery and generation, I can move to the back of my mind all the excess banter one hears about the beauty and necessity of markets. Humans in the past entered into exchanges without the formality of markets. Getting rid of the market mechanism that overlays organic exchange would not eliminate the natural exchange of expectation that humans engage in about the future. More on that later.
How is price determined?
I believe that when determining the price of a currency or commodity, sentiment targets a price that fits the trader’s predetermined target of value. In other words, if you need $1,063 a day to meet the obligations owed to your spouse, the kids, and the landlord, you will demand a price at which your trade can generate the currency that clears and settles these obligations.
In the case of a central banking system, the system will set a price for money that meets the government’s need to keep a valid currency in circulation. A valid currency transmits the value of money and messages to the world that the currency represents a jurisdiction that has the labor, financial capital, product, and services to meet the world’s needs.
However, interest rates are not made in a vacuum. The standards for formulating these rates are set by committees of experts and analysts. They are negotiated on a case-by-case basis between thousands of individuals and a couple handful of banks. The numbers we see in the press are mere averages put out as narrative for public consumption.
For illustrative purposes, I want to introduce you to Al Lusty Bobo. Bobo represents who we described in our law school tort classes as “the reasonable man.” In this case, not only is Bobo reasonable, but he is also wealthy.
Wealth is a bundle of contracts that generate income. A trader’s portfolio may contain leases with tenants, corporate bonds, or government bonds all generating some form of rent or yield. In the case of Bobo, he has a portfolio of $9,587,225 generating returns of 4.05% or $387,995 a year. Bobo wants to ensure that in order to meet his needs and desire for an income of at least $387,995 per year that his returns exceed the change in price levels for consumer goods or services.
So, given the annual increase in the consumer price level of 2.3%, Bobo would have to seek out returns of 6.35% to ensure his 4.05% real returns. Bobo is consistently assessing the bets he has to place, the allocations he has to make to generate his desired returns. In other words, reconciling his sentiments about his returns and the performance of the macroeconomy means Bobo is not about to leave his fate in the hands of market actors who he has never met.
Trade involves an active assessment of legal, political, and interest rate risks. A trader purchases information and processes the purchased information to determine expectations about some future event. You place a probabilistic value on the event and enter a contract where you exchange expectations about the event’s outcome.
You place your bet, hopefully win, and get paid.
(Ready for your next trader challenge? Visit https://app.toptiertrader.com/buy-challenge/?referral=wiwx35yeMYBq1eGP)
On the other hand …
The pushback on the argument about market validity is that market price or spot price merely reflects an aggregation of the wants and needs of each and every Al Bobo out there. The market actually represents an exchange of trader sentiments and for that reason the market is organic. I can see that point. However, what turns mere exchange of human sentiment into a market is the overlay by a taxing authority of rules and institutions that encourage continuous buying and selling necessary for generating taxable income and generating tax revenues.
Conclusion
Whether we view the market infrastructure as organic or fabricated, Bobo has a lot of work to do in order to flip that dollar and bring home a buck fifty at the end of the day. He needs to find a contract that gives him the opportunity for that buck fifty payout. This means finding someone who will take the other side of a contract. Bobo will need enough capital to place an increasingly risky bet. Bobo will need a lot of actionable information.
Alton Drew
8 June 2025
Get my book, “Take it From a Black Man. WASPs Need to Take Back Their Country: Essays on Capital, Democracy and Political Narrative“, at amazon.com/author/altondrew
DISCLAIMER: I am not a financial adviser. These blog posts are for educational purposes only. Trading of any kind involves risk. Your trading decisions are solely your responsibility. It is imperative that you conduct your own research and seek professional advice as necessary.
LEGAL ANALYSIS: For an analysis of the legal or regulatory environment surrounding the events described in this post, contact me at altondrew@altondrew.com to set an appointment.
AFFILIATE DISCLOSURE: Some of the links on this channel are affiliate links, meaning at no cost to you I earn a commission if you click through and make a purchase.
Lawyers Write the Bets. Bankers Sell the Bets. 