A Letter From Mr. Practical
Government is now all about spending borrowed money because that is what our politicians are getting paid to do.
I empathize with your frustration, but as you get older you will realize that you have to just let things play out. Yes, I think you are right in just about everything you wrote me and in the way you have presented the state of the markets on Minyanville. But you and I do not matter; it is what the other several million investors do with their money that counts. They tend to do it all at the same time only when things begin to move against them. And that is very important for what I think is going on.
Your facts are correct in that the U.S. economy is extremely levered and dependent on the weakening housing industry. Personal income is dramatically falling behind and the consumer is in real trouble. I think the markets, particularly the stock market, are not reacting negatively for one reason: government intervention.
The Fed and their counterparts at other central banks have been busy offering a lot of credit. That is what they do best. But there is a good chance that they are now engaged in an even more dangerous manipulation as that little game is no longer effective.
The Fed is on record in papers for anyone who cares to do a little homework that they will take extraordinary measures to avoid deflation. Since all these bureaucrats know how to do is print money, that to me means they will print money to increase the velocity of money, something that just offering credit will not do. This means they will actually use the printed money to buy assets. They have a fancy name for it called "monetization."
They do this to reduce volatility, the enemy of investors. When things get volatile, people want to reduce risk. This is the last thing the Fed wants to see happen. When people reduce risk, stocks go down and volatility goes up even more. It feeds on itself. So the Fed knows they cannot even let it get started. Everything in the real economy is now dependent on higher nominal stock prices which act as collateral to borrowed income.
How would the Fed go about buying stocks? They could fund an offshore hedge fund with printed money (credits) and buy stocks and bonds. $100 billion in new credit is nothing to them. Have you noticed how much money is now held in the Cayman Islands for hedge funds?
There is no hard evidence of this. I read between the lines of the "ideas" the Fed has dreamed up to fight deflation. I read between the lines of the markets as I watch them trade. But most importantly I read between the lines of the culture of the moment.
The U.S. now has a culture of "what is the government going to do about it." When stocks go down, investors scream for the Fed to do something about it. When Medicare gets too expensive, they want to know what the government is going to do about it. When interest rates go up it is the government's fault.
This is precisely the opposite of what the U.S. is supposed to be about. The markets used to tear down unproductive capital through recessions and then re-allocate that capital to more productive companies. Now the bureaucrats have a better idea and through the extension of easy credit have decided to allocate that capital equally to good and bad companies alike; to conservative and speculative investors alike. The last I looked this was called socialism and it breeds mediocrity and we now see it everywhere. Insiders see it and are bailing out of stocks and getting the shareholders to pay for it through stock repurchases. Government is now all about spending borrowed money because that is what our politicians are getting paid to do.
A free society is about transparency, but our society and government are becoming less transparent (another indication of socialism). The Fed no longer publishes some essential data and manipulates what they do publish.
What to do about it? Nothing except get out of the way. Patience is essential for one of two things will happen. The markets, if allowed to work, will unwind these excesses and manipulations. If they are not allowed to work, our political system will eventually be over-hauled to match this financial manipulation. We will officially become our enemy.
If that is what U.S. citizens want, so be it.
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