“The latest note from Cumberland Advisors’ David Kotok is pretty heavy. In it he demonstrates that current market conditions couldn’t be further from any sort of normalcy, new or old.
Rather, a complete “idea shift” has occurred:
“The old idea was that the official sector would intervene, rebalance the system, and then exit. The old idea was to get the private sector back in the game quickly. The old idea was to recover the official money and then let the market resume its functions of pricing and clearing and providing capital.
“The old idea is dead.”
The new idea involves an intrusive market role for the “official sector” — governments, intergovernmental organizations, supranational organizations. Think ECB, IMF — even GSEs, which Kotok notes are single-handedly supporting housing finance (although as we pointed out last week, it’s technically Treasury that’s fulfilling this role).
“The new idea is to crush the private sector and to keep the official sector in the game for a prolonged period,” he writes.
Under the “old idea” regime, such intervention would likely have resulted in inflation and weak currency. Kotok says these may yet come to pass — “but it will take a while.“ because “officialdom” will remain in the market for an indefinite period of time….”
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