Monday, June 22, 2015

Government Bubbles

Over the weekend, with a moment to relax and step back from the day to day battles, I wondered how much longer this bull market will keep going.  I read parts of a book by Ed Seykota called Govopoly in the 39th Day.  It got me to thinking that there has been a massive fundamental shift from a free market economy to one that is more centrally managed and meddled with by the Federal Reserve and the other major central banks over the past 30 years.  As soon as Greenspan became Fed chair, you had the Fed actively involved in providing a put for the market, by pumping money and lowering rates when the stock market got weak.  It just went into QE hyperdrive since 2008 because of the enormous pressure to keep the government dominated system going due to the weak economy.

As a result, you are getting bubbles in the stock market, and even in the bond market, although it is less egregious.  These are not natural markets.  The massive amounts of liquidity make bubbles a rule, not the exception.  You cannot compare pre-2008 with what we have now.  The global economy is dependent on central bank liquidity to keep the charade going, otherwise the bubble pops and you have a massive bear market.  The Fed can't turn back the clock, it is stuck now.  It cannot normalize rates, and that is why you keep getting the can kicked and delay after delay after delay, regardless of the jobs numbers.  The nonfarm payrolls number is irrelevant.  The Fed will find an excuse to NOT raise rates, and then at the first sign of weakness, they will go to their trusty playbook, QE.  This bubble can last for quite a while, because it is still not unstable enough to pop on its own.  And there is no way the Fed will pop its own bubbles.

The global economy is dependent on inflated asset prices to spur the real economy.  The alternative, which would be to print money and have an expansive fiscal policy would bring about an inflationary tidal wave that they don't want to mess with.  The easy thing to do is to just print money, make the rich people richer, and get enough trickle down effect to keep the masses from revolting.

In this new paradigm, you have to be long financial assets.  Making money shorting stocks or bonds over any considerable period of time will be nearly impossible.  If you are bearish, you are much better off buying bonds than shorting stocks.  If you are bullish, obviously long stocks.  The end game will be when you get unstable markets to overly inflated prices, and also rising inflation, and money printing contributes to the problem, rather than solving it.

I thought the Greeks were going for the hard line and waiting for the EU to blink first.  The Greeks blinked, and gave in to make a deal.  I would have gotten long ES if I had the confidence that the Greeks were bluffing again, but they tricked me.  I underestimated the can kickers, they will keep kicking the can, as long as the market reacts to headlines.  The moment the market stops giving a sh*t, the EU will probably tell Greece to go take a hike and then we'll get the Greece default, and not any sooner.  If the market still cares about Greece, the EU will keep kicking the can.

No real opportunity, waiting for the trade to come to me.  Nothing imminent here.

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