Buyer’s Remorse

The stock market was clobbered on Tuesday.  The DOW sold off 272 points.  What did it mean?  Was it an indicator the market is finally rolling over, as we’ve anticipated for some time?  Or was it just another head fake on the way to new highs?

On Wednesday we thought we had our answer.  The DOW ran back up 274 points…recovering all of the prior day’s losses, plus two points.  It was the market’s best day of the year.  Wall Street was euphoric.

Even gold stocks rose.  Junior mining stocks, as measured by the Junior Gold Miners ETF (GDXJ), jumped up 9.61 percent.  Fixed income investors also joined in on the fun.  Yields on the 10 year treasury note fell to just 2.32 percent, nearly to their 52 week low of 2.30 percent.

What was the cause for the elation?  Is GDP soaring?  Are incomes finally rising?  Is Putin packing up Russian troops and vacating Ukraine?  Was a vaccine for Ebola discovered?

Nope.  It was nothing of the sort.  What produced the buying frenzy was something we call worshiping utterances.  That’s right… Fed minutes were released and it appears the Fed will not raise rates anytime soon.

Money Is Not Wealth

Here at the Economic Prism we find it to be absolute madness that financial markets have been reduced to inferences made from an unelected board of policy dweebs.  Yet this is the world we live in.  We don’t deny it.  We don’t fight it.  But we are always amused by it.

Somehow keeping the federal funds rate at practically zero – where it has been for six years – is supposed to be good for the economy.  Yet how could it be?  Just because this radical monetary policy produces more credit based money…it doesn’t produce more wealth.  Steve Forbes explains…

“The global economy is a mess today because most economists, bankers and political leaders don’t understand that most basic of subjects: money.  When it comes to monetary policy, they have it backwards, thanks to the misbegotten ideas of John Maynard Keynes. Before Keynes and like-minded peers, economists understood that the real economy was the creation of products and services.  Money was the symbol economy.  It represented what people had produced.  It was a facilitator of commerce.

“The ability of people to trade with one another is how we achieve a higher standard of living.  Money measures wealth; it is not wealth itself.  It is a claim on products and services that people have created.  That’s why counterfeiting is illegal; it’s thievery.  But when government does this, it’s called quantitative easing, or stimulus.”

Following Keynes’ playbook, monetary policy these days is centered on the notion that by changing the supply of money, governments can change economic output.  This line of thinking is why, in Forbes’ words, the global economy is a mess.

Buyer’s Remorse

Of course, while all this funny money doesn’t produce a booming economy, it does produce an abundance of distortions.  Namely, in asset prices.  Stocks.  Bonds, Real estate.  You name it…all the stimulus has pumped up these assets in remarkable ways.

What’s more, the extent and duration this has been going on is much more than an individual with sound mind and honest intentions could have ever fathomed.  Perhaps the DOW will hit 20,000 before this is over…or even 30,000.  Why not?

But ultimately this too will crack.  Prices will deflate.  Credit based money will cascade down in a giant debt implosion as it always has done in the past.

In other words, the financial rug will be pulled out from underneath the economy.  To be clear, this isn’t a failing of capitalism.  It is a failing of central planners and their use of monetary policy to thwart capitalism through heavy handed market interventions.

Yesterday, after Wednesday’s buying frenzy, traders woke up with a severe case of buyer’s remorse.  Their guilt, their shame, for worshiping utterances.  It was all too much.  The DOW crashed 334 points.

Prepare for anything and everything.  Above all, prepare for disaster.

Sincerely,

MN Gordon
for Economic Prism

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