Tuesday, June 29, 2010

Did I Mention There Was No Liquidity in the System?

Oh yeah, I did.

Near the bell:

Dow                  9,889   -249 -2.46%
Nasdaq              2,136    -85 -3.82%
S&P 500  1,041     -33 -3.12%
GlobalDow      1,720     -58 -3.24%
Gold                1,240        -3 -0.21%
Oil                   75.33   -2.92 -3.73%

Do not pay any attention to any of the talking heads that will be on the news tonight. They are, for the most part, all trend followers. You had to be out of this market before the downturn started a few weeks back.

From Larry Summers on down, they had no clue this was going to happen to the markets.

In September, 2009, Larry Summers wrote this nonsense:

The wisdom of Keynesian policies has been confirmed by the performance of the economy over the past year. After the collapse of Lehman Brothers last September, government policy moved in a strongly activist direction.

As a result of those policies, our outlook today has shifted from rescue to recovery, from worrying about the very real prospect of depression to thinking about what kind of an expansion we want to have

At the time I wrote:

Now as the Dead Cat Bounce is long in the tooth, Larry Summers has come out to tell us, on the White House blog, everything is fine, thanks to Keynesian economics...After setting himself up for a major embarrassment as we head towards Bernanke Crash II, he amazingly writes about the importance of innovation...

This as President Obama wants to choke off innovation by propping up the old and suffocating creativity through new regulations everywhere you turn, from health care to global finance. And, as there is a growing deficit and talk of new taxes, which will result in less money for new ideas.

With thinking like this, and reality not even making an appearance, I can see how Summers' management at Harvard brought the university to its financial knees.

What's going in the stock market is pretty simple stuff. The Fed has not been printing any money. The ECB is not printing any money. And China has slowed its money printing. This means the economy is moving away from the distorted structure built up by previous money printing during the Greenspan years, and parts of the Bernanke years. For whatever reason, most likely because the Fed and the ECB (and Larry Summers) really don't know what the hell they are doing, they have stopped the money printing presses. As long as the money printing is stopped it's going to be pretty ugly---even for gold, until the economy readjusts. Left alone the economy will completely readjust itself within six months. But that isn't likely to happen. Cash will be king until the Fed and ECB turn on the money presses, then everything reverses with inflation becoming the real threat.

Another very real danger is that governments will try and regulate and spend the economy into prosperity, this will mean protracted problems for the economy.  Governments are designed to be spending and regulation machines. They will take a problem that could work itself out in months and turn it into a multi-year problem. If you don't have superior skilz in knowing how to operate in this type climate, and few do, it is going to be very, very tough going.

Count on nothing. Your pension could be cut, if you will even get one. Social security payments will be reduced. Are you a recent college grad? Good luck with that. In this environment unemployment could hit 20%. Your house and your investments will fall in value. The gold price will be whipsawed just enough to scare the hell out of you. Superior skilz, or stagnation, that's what it will be all about. The only chance you have to achieve anything during the period ahead is to become an entrepreneur in the Israel Kirzner sense of the word. And that is all about skilz, i.e., spotting opportunities and grabbing them.

1 comment:

  1. Hey Bob,

    What do you think of the theory that the fed. is cutting money growth to "scare" big money into long term US treasuries, so when they crank up inflation the big money is already locked in? Is the government that smart?