Submitted by Mark Grant, author of Out of the Box,
A Dali Landscape
Imagine that you are walking through a Salvador Dali painting. Everything is disjointed, tilted and mangled. The clocks are dripping, the colors are ravishing and the trek is difficult as disorientation precedes each step.
In the financial world at present the markets are fueled by the liquidity of the central banks. Not only is nothing else of importance but good news becomes the joyful noise of some divinity, bad news is elevated to good news and horrible news brings ecstasy as it will enlarge the contributions of Mr. Bernanke and Mr. Draghi.
The various economies are irrelevant. Growth is insignificant. Debt levels are made up and then ignored. The growing stockpile of small bits of pulp mixed with water is all that matters as we stumble along in our Paper Mache world.
Now I do not argue with reality. Equities up, bond compression unrelenting, yields down and we play the Great Game to win and not to be right. Yet I am aware, I am always aware, that reality is lurking in the swirling mists. There is nothing that separates us from chaos except the unrelenting supply of money because the underlying economies in America and especially in Europe cannot support these kinds of markets. Even in Germany, who reports a debt to GDP ratio of 81% while the real number exceeds 200%; the storm clouds are gathering.
The next barrage will be fired soon by Mr. Draghi. It will be a cut in interest rates that will cause the next heretical dance but it will be short lived I fear. Markets up, the Euro down and right at Kelvin’s Absolute Zero will be the temperature reading. There is not a normal in sight. Not the old normal or the new normal or any sort of normal; just the Fed and the ECB with their fingers in the dike.
It is the land of easy money. Heaps of it more than just before the 2008/2009 debacle! That last go round was money provided by the private banks. This go round is provided by the central banks. The last time leverage was in play. This time the capital is minted by creation. Easy money though, always leads to serious mistakes as it gets shoved into inappropriate places.
Yields may be down for sovereign debt in Europe but debt levels are up as every country on the Continent has entered the sinkhole. Mandated debt levels are now being ignored as exemplified by Spain with a 10.6% ratio as ever more debt is added which must be serviced as the total amount of debt cannot be paid regardless of the interest rate.
We live in a world where everything is ignored but the time will come when this ignorance will be shattered. We will pay the price for our stupidity because there is always a price to be paid. Mr. Bernanke and Mr. Draghi have been the Saviors but the church has been built on thin air and the weight of the building is increasing and increasing at an alarming rate. This kind of normal is unsustainable.
The lessons of the past are being ignored once again but I caution you to not forget what you have learned.