Wednesday, March 4, 2015

"Buy The Dip" mentality explodes!

Are We In The Eye Of A Storm?
Could it be we are in an economic cyclone and all is calm because we have entered the eye of the storm? America seems to be on a "economic" sugar high with the President busy taking a victory lap as he throws out phrases about how more needs to be done to console those still suffering. While pondering the current economic climate it occurred to me that we might be in the eye of a massive slow moving storm. The eye is the calm we find in the center of the storm. The most recognizable feature found within a hurricane is the eye. They are found at the center and are between 20-50km in diameter. The eye is the focus of the hurricane, the point about which the rest of the storm rotates. It should be noted that skies are often clear above the eye and winds are relatively light. It is actually the calmest section of any hurricane.

Many investors have been lulled into complacency by the extraordinary actions taken by central banks and governments over the last six years. This means it should not be a huge surprise the rest of the population has been carried along taking as fact the positive spin that things are getting better. The question thinking people must ask is, have these actions really worked or merely masked over major flaws and problems? For month after month unspectacular economic numbers have been spun and laundered to confirm we have finally rounded the corner and a strong recovery exist. Still some among us dare to doubt all is well and think the light at the end of the tunnel is a train boring down on us at full speed. I continue to see a major flaw in this so called "recovery" in that by not demanding the right kind of growth and simply by throwing money at problems we have only delayed and added to festering issues that face us in the future.

Recent numbers show that the GDP is again slowing, this has been ignored or discounted by the markets. The hard core truth is that capitalism is all about creative destruction. It is not about subverting the economies of the entire world to propping up terminally insolvent institutions. Only by destroying and replacing weak or obsolete systems with stronger and better systems does capitalism retain its vitality. Transferring debt from households and consumers to the national debt and the public where some economist claim it is less relevant and does not need to be paid off is not an answer. This shift in obligations and artificially low interest rates is an effort to free up consumers with little long-term spending power to go on a consumption rampage and pull demand forward. 
Modern Monetary Theory often referred to as MMT by its many believers is to remove much of the risk ahead and guarantee that we will always be able to muddle forward. This is a economic theory that turns to newly acquired tools like derivatives and currency swaps that are suppose to allow us to print and  manipulate away problems. This has created an "almost surreal" feeling of indifference towards reality in an effort to lessening the importance of debt. This is not a sustainable solution, it is encouraging waste, misallocation of resources, and it creates false markets in the hope that just by producing more goods we can correct our economic ills. This and massive government deficit spending continue to disguise deeper structural problems and hide weaknesses. Valid concerns exist as to just how strong the financial system and the economy it supports really are.

It is important to remember that when trends form or take hold they are not always steady or controlled, many times they progress in fits and starts. The recent flow of money out of the yen and euro and other currency moves should be viewed as a signal of instability across the globe. It is not uncommon to pull back or "back-fill" after a big move. Nothing has been resolved as to the long-term impact of transferring debt to governments that already are overburdened by future promises that they will be unable to keep. Still many people have been fooled into thinking that by kicking the can down the road we can continue to muddle along. Beware that an event might take place at any time that resolves this mess in an unfavorable way or creates an unforeseen twist with dire consequences.

I have seen and heard far too many comments by those bullish on higher equity prices and ever higher markets basing their strategy on a policy of  "don't fight the Fed" and "buy the dips." While this has worked since 2009 it is no guarantee that it will continue to produce results in the future. Remember that governments make big moves every now and then, and sometimes these occur during the middle of the night. Caution to those who believe CNBC, Bloomberg, the WSJ, or any other of the other propaganda media outlets that seek to extend the status quo.  They see their role in this play as to keep their government patrons and Wall Street advertisers happy, while keeping the masses misinformed, sedated, and reassured.  Extend and pretend is the flavor of the day and in doing so they find it best not to properly analyze the facts or seek the truth. The explosion of the "buy the dip" mentality is proof of the folly they promote. This mantra will prove very costly when a real correction does occur. 

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