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Take the Money and Run



This is not an in-depth analysis, but more of a general summation of the things that I have been writing about over the last several months.

First of all, the markets are acting very weird, very unnatural. For example, the last employment number sent the bond market on a move that while not unprecedented, was extremely rare. Commodities and currencies are making daily moves that defy fundamental shifts. This to me is a sign that there is very heavy and dramatic intervention by non-economic parties (those that are not motivated by profit and loss). Thus when some news is slightly unexpected it has a dramatic effect.

Yesterday's market moves were completely mystifying to me: the dollar up while stocks and bonds were down. To today's market students this may seem rational, but that is part of the problem. It seems today's market participants (partly because they are so short term oriented) are willing to try and fit pieces of the puzzle into spaces where they just don't fit. A rising dollar to me means that foreign participants want to buy U.S. assets, but declining stocks and bonds disagree. Where did all those bought dollars go?

Second, economic policy continues to be surreal, the Fed's easy posture surpassed only by Japan in their ten year battle with deflation. Mr. Greenspan's belief that real wealth has been created in the U.S. over the last two years is analogous to a little boy believing that he is nine dollars richer because he drew a zero next to the one on a one dollar bill.

To pull off such a policy the government must do two things: convince the world that there is no inflation (or deflation) and convince our trading partners that it is in their best interest to continue to finance our borrowing. It has so far been unrelenting and successful.

This economic policy has added capacity, pretty much useless capacity in the form of houses and condominiums, to an economy already suffering from over capacity. This economy has had tax cuts and negative interest rates for quite some time, but we ask what happens when that runs out?

Sure earnings have been better than expected. A lot of that comes from comparing them to those from very weak periods. A lot has come from overseas revenues that are taxed more favorably than domestic revenues (resulting in the fact that most multi-national corporations have a zero net tax liability).

You can see the trouble stocks have with even a mention of higher rates or a higher dollar (which still mystifies me).

From our vantage point it is a clear case of short term economic policy for a specific end. Economic policy is not being directed at building a sound foundation for the future: there is no domestic savings anymore; we borrow everything and this is very precarious. Bill Fleckenstein has commented on this many times and is concerned for very good reasons. Everyone is holding their breath for the Presidential elections, wondering what will happen after, and seemingly looking the other way until then.

For a clue to what may happen, just look at a chart of the Dow from the beginning of 1972 through the elections and into 1974. In looking at economic policy, war, and politics, this seems to us to be a good analogy.

If you believe in history repeating itself, you may want to take the money (whatever that is for I am no longer sure) and run.

No positions in stocks mentioned.

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