Saturday, May 2, 2015

The Great "Time-lag" Effect!

Events Play Out At Different Speeds
Time-lag is defined as the period of time between to closely related events. Not everything happens at the speed of light, often a time-lag exist such as the gap between seeing and hearing the lightning bolt. Some of what we see occurring in the financial markets and the economy should be viewed with this in mind. Only during a panic does it become obvious just how precarious a position we have allowed to develop. Recently, I stumbled across a line describing how the markets have lost their ability to discover fair market value and no longer reflect honest or real value. The lack of true pricing should raise red flags and be of great concern for all of us.

The great "time-lag" effect may soon exert itself in a most wicked way over our economy. Recent data has been underwhelming and once again attempts to spin these numbers in a way that emboldens those trying to paint a picture of a growing economy are beginning to fail. Momentum appears to have turned downward and the time looms ever closer when being able to rally the market on bad news could become a distant memory. At some point bad news will simply become bad news and seen as a sign that the economy has problems that more quantitative easing can not address. At some point it will become apparent that we have only delayed addressing the root cause of what ails both our economy and many of those across the world, that is to much debt that will or can never be repaid.

We should remember two issues are in play that have yet to fully impact both our day to day economy and markets these are the strong dollar and falling oil prices. While these hit months ago it takes time for the effects of such powerful forces to totally work their way through the economy.  The recent drop in drilling is only now beginning to take hold and leave its mark. If oil prices remain in a slump as expected it will become obvious over the next few months that many people overlooked just how important a driver the energy sector has been to the U.S. economy during the last three years. This sector has been responsible for much of our job and growth and investment spending since the onset of the great recession.

As for the strong dollar, as I have written earlier, unstable currency markets can be a precursor to massive shifts in value and a sudden drop in confidence. It is logical to think that in such a situation insiders would be the big winners. The main reason the world has chosen a "reserve currency" is to have some benchmark to peg currency values to and lessen the impulse of countries that have accumulated massive debts to attempt to address their problems by just printing more money, this results in devaluing their currencies but often fails to face the root cause of their problem. This is especially true in our modern world where the carry trade is a major force and money flows across borders at the blink of an eye.

History shows wealth will  flee both from a country when its currency drops in value and temporary flow to a safe haven, that is happening today. The bottom-line is that while many people go about their daily lives giving little thought to currency valuations they leave themselves open to the whims of those that control, manipulate and play in this important area of the global economy. When your currency moves ten percentage points higher or lower against a foreign currency it can have a great deal of impact on how your net worth stacks up against someone across the world and the ability of your country to be competitive in producing and selling products.

The fact is with little in the way of real demand there is not much reason to invest in plants or equipment unless it is to lower cost or with the goal of reducing labor. Over the years artificially low interest rates and easy money have caused a massive rise in the misallocation of capital. Market seem hell bent on imitating a crazy dog chasing its own tail. The huge number of stock buybacks is a direct result in a lack of compelling investment opportunities. An example of such an over-saturated market is the recent announcement that McDonalds will be closing or reducing the number of stores it has in America. Central banks have been pushing on a string with their flawed policies and allowed a false economy to develop by propping up those who should have been allowed to fail.

What is being hailed as our economic future holds a troubling aspect, as more large companies crowd into existing markets they will only dilute profits and fracture those markets further. A recent example is Google's unveiling of its long-awaited phone service which will put the search giant in competition with Verizon, AT&T and other wireless service providers. This should be viewed as bringing lower cost to the consumer but will cripple earnings of those already in the business. It is difficult to argue the current giant distributors of wireless phone will not be affected or feel the pain. Small business has been under such assault for years and as the trend continues to play out it will become even more apparent the gross domestic product is moving sideways rather than upward even as government and private debt explodes.

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