Via Mark J. Grant, author of Out of the Box,
I have seen it before. God willing, I will see it again. A world that is dislocated, on a different axis, where the economy is doing one thing and the markets are doing something else that is not connected. After almost forty years on Wall Street I have seen a great many imbalances. None quite like this one though; none as distorted.
As political nonsense becomes the world's normal banter; the official language in the Press is little more than printed or spoken noise.
It is all caused by the Fed's outpouring of money into the system which has caused carnage for savers, investors and has pushed the equity markets past anyplace that the economy can rationally support and caused bond compression that is frankly, dumb. The employment numbers on Friday are a good indicator of the real economy; a real unemployment rate of 11.6% that has been fictionalized by the amount of people no longer in the work force so that the data is seriously skewed towards political fantasy.
The world will return to its senses once again either driven by some "event" or by the Fed beginning some sort of withdrawal. In the meantime the markets are beginning to back-up some as moved by becoming accustomed to the continuing flood of money. It is rather like a fine Bordeaux. One meal, two meals, a week's worth of meals and the experience is marvelous but if you drink it every night for dinner the magic begins to dissipate. It is no longer special; it is something expected, it is just the normal fare.
Rational reactions become irrational when confined to an irrational world. We live in such a world at present. The money created must go somewhere and so it does which causes the soaring markets while not improving the American economy enough to justify it. If nothing else we have all now gotten to see what the unlimited creation of little blue and green pieces of paper does to the world. The outcome, so long wondered about by any number of economists, has now been proved but I fear the magnificence of the Bordeaux is wearing off and may turn to vinegar before it is all consumed.
"Irrational exuberance" has returned and in a bigger way than before. It is not this market or that market but all of the markets that have been afflicted by the new money that has been created. It is too much paper and a trash bin that has grown no larger and so it spills out and blows about in the wind. Japan has now joined the fray and so there is no region left on Earth where they have not learned the trick of mixing water with pulp and calling it money.
It may be an "event" but it may just be the "Bordeaux Effect" that turns the ship one night as we are all sleeping.