The lesson of the past three years is the ultimate in simplicity; Don’t fight the Fed.
It used to be that interest rate policy was the blunt tool used to shape economic and market activity. Making money cheaper or more dear was the “throttle” to make things go faster or slower. Simple.
Now is a whole different story. No longer is the cost of money used to shape an outcome. Money is free to Central Banks and they have taken matters to their most extreme: creating money out of thin air to buy the bad investments that nobody wants to buy. And the capital markets think that is a reason for optimism or earnings multiple expansion. If you think about how bad the investment landscape must be in order to justify this type of action, and think about the market’s reaction, it is the very definition of insanity.
The money used to buy these investments will never see the light of day. They will be marked as a total loss. But it doesn’t matter to markets. The SPX has rallied 100 points, again, for the eighth time in a few months and just in time for the Holday Season. Yet we remain in our trading range and below major resistance.
You are being trained that there will never be a reason to sell any investment because no matter what the situation, prices will not be allowed to fall more than 10% or so without a new printing or stimulus scheme. Over and over again, prices that should fall and investments that should fail are not being allowed to. Soon nobody will ever sell anything ever again. A new “permanently high plateau” will be reached and higher prices will be justified as “normal”.
Can this scheme ever end? I am beginning to exhibit “Stockholm Syndrome” as even I am being brainwashed into believing that regardless of the events of reality, the fantasy of price will be victorious no matter what. Unless Ron Paul becomes President, and he’ll probably be assassinated before that could ever happen…