Welcome to 2012. We are now in the Academic-worthy fiscal and economic policy of “Extend and Pretend” and it is still nowhere near over. When it is finally all said and done, it will be the template for business students around the world, for decades to come.
Since March of 2009, some 34 months ago, the government “came to the rescue” of the frozen financial system and major banks by changing the banking rules and choosing to take the risk that the markets refused to take. Hence the saying “private gains and public losses”. The Capital Markets responded as expected, recovering almost all the losses from the now-defunct Securitization and Housing Boom. The money went to Money Heaven yet was replaced by newly minted digital cash created out of thin air. Never in history has such a thing been done but that is what the Powers that Be decided must be the case. So by creating trillions of new dollars, our economy can go along its merry way, with most participants oblivious to the reality of the situation.
Lately Europe has been in the same position but without the luxury of the ability to print new money as organically as we here in America, the land of the free and the home of the brave. So they create an “entity” and it somehow gets funded with a quick trillion. Problem solved. But not really.
These unprecedented monetary actions have many anticipating a giant reset of the system; a crash when reality is finally and unmistakably recognized. But so far it has not happened. Funding goes on, markets open and trades get settled (mostly). The newly minted cash goes right where it is directed, the closed loop of banks and investment assets, and it stays there never to escape. With the Fed’s zero percent interest rate policy, the cost of cash is effectively zero for those Primary Dealers who can borrow it. Reminder: nobody can borrow at zero percent but the Primary Dealers, so the big money loop stays closed.
Today the bond king, Bill Gross, publicly stated the truth about the bailouts and stimulus and called it what it really is; A Ponzi scheme. But does the truth matter to the markets? Not one iota. The liquidity of newly minted cash and the calendar preceed the gains and losses that happen in the marketplace. In fact almost nothing of a fundamental nature can move the market. It is simply the next phase of the policy of “Extend & Pretend”, and the marketplace buys it hook, line and sinker. Same as it ever was.
Interestingly, there has been a substantial change in the nuts & bolts of the equity markets, with defensive and dividend issues leading to the upside while materials and commodities wait for the next round of stimulus to begin its next advance. And all the while, the shiniest bauble, Apple, adds billions in market value every day, day after day and week after week. It serves to distract everyones attention from the reality of our situation. Overall market volume continues to drop and roughly 95% of all gains come from the pre-market and a gap up at the open. Some say it is being driven by the “strong domestic economy”. That is a false assertion as any strength is due to the back-ended holiday season and will disappear soon enough. And oil prices? Don’t ask. That is the stuff of another piece.
So, my resolution for the New Year is to suspend my disbelief once again and force myself not to bet that reality will overtake fantasy anytime soon. My greatest investing fear is that one day we will wake up and find that it has.