Investing In A Pretend Recovery

Tyler Durden's picture

Originally posted at Economic Noise blog,

We live in a pretend economy. It is important to recognize this condition, especially if you are an investor.

Current market behavior is concerning.  Bonds and stocks remain volatile and near record levels. Markets ignore the continuing stagnation in the pretend economy, buoyed apparently by government liquidity injections.

To justify investing today in these markets, one must anticipate one or both of the following:

  1. Economic growth is about to surge.
  2. Market values can continue to rise from here, potentially further widening the already large gap between valuations and fundamental economics.

No reading of the economic tea leaves suggests a surge in economic growth is coming. Indeed, a critical analysis of the data makes one question whether there has been a recovery at all. Certainly any recovery has to be labeled as abnormal.

If economic conditions look like they will continue to be sub-par, then an investor has to believe that it is realistic to expect market valuations to continue to ignore economic conditions. That assumption worked last year when markets rose about 30%. Is it reasonable to expect the divergence to continue for another year?

No divergence can continue forever but that doesn’t mean it can’t persist for a while.

Recession, Not Recovery


The recession ended (according to the National Bureau of Economic Research) in June 2009. Rapid economic expansion normally occurs during the first three or four quarters after a recession ends. The typical recovery period is characterized by three to four quarters of unsustainably high growth rates. That take-off growth never occurred when this recession was declared over. Nevertheless, government went into full propaganda mode and the pretend economy began.

At no time in my recollection has the word “recovering” been used to describe an economy five years after a recession was declared over. Perhaps the term was borrowed from “recovering” alcoholic which I understand is a forever state. Either the government is lying about a recovery or something has radically changed in terms of the economy. Both are likely.

The current “recovery” does not conform to other recoveries. After five years, history suggests we may be close to the next recession, not still “recovering” from the previous one. However, history is not economics. It may repeat or rhyme, but it doesn’t rule.

Causal behavioral relationships determine economic decisions and outcomes — ALWAYS! These relationships, to the extent they remain stable, may appear to produce repetitive time cycles, but that is a secondary effect rather than a causal one.

Behavioral relationships are dependent on perceived incentives and disincentives. If the underlying incentives/disincentives are altered, decisions and outcomes will change. That will alter any macro measurements like those captured in growth rates, employment statistics, etc.

Incentives at the micro-economic level have been altered dramatically. Labor participation rates reflect the disincentives associated with ObamaCare and other regulatory nonsense. Anticipated tax increases to pay interest and government debt dampen people’s expectations regarding the future. Capital expenditures are slowed or canceled in order to get a clearer picture of what is coming and when. When aggregated, the macro-stats appear different.

GDP can be manipulated in terms of definitions and data. Government spending is counted as economic activity. Some of it may be, but most of it is not. Increasing government spending is a way to mask a declining standard of living, which has corrosively been occurring for arguably decades.

There has been no real economic recovery. What has occurred is a pretend recovery. The pretend is not limited to this recent cycle. It has been going on for many years. In a sense, what we now have and have had for the last decade or more is a pretend economy. Government interventions have been the driving force in this pretend economy.

Government Intervention

Government has no incentive to not have a real recovery. It would prefer one, but that is no longer possible as a result of an accumulation of distortions that have built up over decades. A pretend economy is the next best thing. Interventions cover up reality (for awhile) but they also add to the economic distortions and damage.

Every intervention is an attempt to create a situation that free markets and men do not want. Every intervention distorts market signals. Decisions made by economic actors based on wrong information must be erroneous, no matter how carefully executed.

Prices are the language of the marketplace and society itself. Prices provide signals to economic actors and non-actors. They provide information regarding career choices, when to purchase less or more of something and many other personal decisions often not considered economic. A properly functioning price system is the foundation for peaceful social interaction and cooperation in any society based on a economic freedom and the division of labor. The price system may be the most important element in society. It makes coexistence, cooperation and peace possible. Damaging it has ramifications well beyond the economic sphere.

When prices are distorted, incorrect decisions are made. These incorrect decisions can be hidden for a while by perpetuating the distortions but not forever. When prices eventually adjust to what they otherwise would have been, prior decisions are shown to have been wrong and unsustainable. This corrective process is referred to as a recession or a depression.

Government always wants to prevent recessions even though it is their policies which produce the distortions. Attempts to do so have been on-going as government policy since the 1960s. It was then when it became fashionable to believe that an economy could be centrally managed. To the extent that government succeeds in its efforts, it merely makes the next problem bigger because distortions are cumulative.

The US economy now contains a half-century of distortions that are now, or soon will be, too much to contain. It is not accidental that the two biggest interventions since World War II were for the last two recessions, both of which occurred in the first decade of this new century. The cumulative effect of covering over distortions lead to the inevitable point at which the system breaks apart. Ludwig von Mises observed:

There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.

What To Expect?

Valuations and economic conditions are inconsistent. They can remain in disequilibrium for a period of time but not forever. One of the two (or both) is going to change to reflect the other.

The economy and the nature of politics are such that policy regarding economic downturns will not be willingly changed. I agree fully with Doug Casey‘s assessment:

I don’t see a real recovery until they stop debasing the currency, radically cut government spending and taxation and eliminate most regulation. In other words, cease doing the things that caused this depression. And that’s not going to happen until there’s a collapse of the current order.

It is suicidal for either political party or any individual running for office to advocate policy changes that necessarily will produce a depression. Mr. Casey’s comment as to how the change will take place is both ominous and obvious: “That’s not going to happen until there’s a collapse of the current order.”

The economy will continue to be pummeled with interventions and distortions for as long as it can sustain the blows. Will the cover-up be able to be extended one more time? I doubt it, but it is easy to underestimate the survival instincts of institutions, especially powerful ones.

Attempts if they do in fact succeed will only serve to weaken the economy further.

Markets will correct before an economic collapse is apparent. This correction may or may not take place in advance of an economic debacle. Even if the economic debacle triggers the market collapse, it will appear that the markets corrected first. Markets react faster than changes in economic momentum and the lag in reported economic statistics.

When the market corrects it is unlikely to be to some fair value commensurate with economic fundamentals. Markets notoriously overshoot, especially on the downside. In the first decade of this century, markets twice dropped from highs to lows by more than 50%. The next correction may exceed this number.

It is impossible to time either a market or economic collapse. A market collapse is possible without an economic collapse, but not vice versa. Once the market begins its decline, it may be orderly (over several months) or nearly instantaneously (think the 23% decline in 1987). Even with “circuit breakers” on markets, a massive drop likely takes only a few days. The fact that it occurs over three days does not mean you or the many others who want to get out on day one or two will be successful in doing so.

Playing these markets in any conventional manner is akin to writing insurance policies for suicide bombers.

They are, in my opinion, ridiculously detached from economic reality. “Bubble” is not too strong a word and a reasonable description. The term “bubble” never appears before an adjustment, whether it be stocks, bonds, housing, student loans or whatever. It is always an after-the-fact description, used matter-of-factly, suggesting everyone could see it. No one wants to be labeled a fool when the bubble bursts.

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Shizzmoney's picture


Investing In A Pretend Recovery

What's next?  How to play tennis optimally against a wall?

Thought Processor's picture



Invested or not, I don't think anyone is going to escape the toilet flush that's coming.

NotApplicable's picture

Well, no one other than the .01%ers jumping up and down on the handle.

zaphod's picture

People are "investing" with the expectation the dollar will go to zero, not in a pretend economy. 

Boris Alatovkrap's picture

Participation in pretend economy, citizenry is pretend work, TPTB is pretend pay. All is pretend be happy and fulfillment in pretend economy.

Thought Processor's picture




..........therefor the pretend must extend!

Cursive's picture

@Thought Processor

Yep.  Now that FX is in play, we are ALL invested.

alangreedspank's picture

With these new EPA regulations, the flush might not even work on this toilet.

NEOSERF's picture

There is a third "justification"...numbers used for decades to evaluate relative value of companies simply don't matter any more.  Due to the government's finagling of every major statistic, the 1%'s need to continue the recovery meme, HFT creating momo out of any news item, clearly nobody wants to peak under the covers anymore.  And why would they...does anyone from Calpers to Obama to Hillary to Grandma in Gary Indiana, to the Hamptons really want to pull the curtain back...not really becasue we already got a glimpse of what is coming, and pretend as retarded as it has been for 4 years, certainly beats the alternative.

lasvegaspersona's picture


how right you are, the PTB and nearly everyone with any insight sees just around the corner....and they don't want to go there. Those with the power to forestall the inevitible will do so, the price of gold will be the victim....right up to the last minute.

CrashisOptimistic's picture

"Playing these markets in any conventional manner is akin to writing insurance policies for suicide bombers."



So why not farmland and only farmland?

NotApplicable's picture

It's going to be the most interesting bubble yet.

Think about what happens once the price of farmland outpaces the ability to service its debt. As I posted recently, a NYC investment firm ran some prime bottom-land up to $15k an acre.

I originally thought they had won the auction at that price, but the local family who owned all of the land around it, beat them out at $15.2k an acre. They were ready to beat the shit out of the bidder from NY who told them afterwards, "I thought you guys didn't want it."

So now they'll be paying interest on a premium price to a bank system that bid against them.

Major Major Major's picture

Gotta know when to fold um.


Who is the best pretend savior of this pretend recovery?  a) Dimon b) Obama c) Bernanke

NOTaREALmerican's picture

d) Greenscam.  I think he was Babe Ruth of pretend.  

Clowns on Acid's picture

Will have to grow very high quality weed on that acreage to get a decent ROI.

1835jackson's picture

blah, blah no wage growth blah, blah, blah the world is on the brink of WW3

firstdivision's picture

...and there goes WTI

Yen Cross's picture

  And there goes usd/jpy through 102.00 .

Winston Churchill's picture

Dollars getting really hammered.

TPPT can't elevate markets and the dollar at the same time.One or the other is going

to be sacrificed here.

Tenshin Headache's picture

Playing these markets in a conventional manner is like writing an insurance policy on your own life, payable to the banksters, and then standing by the edge of a cliff waiting for them to push you off.

nickels's picture

As a nation we operate on the principal of crisis management. When the crisis becomes insurmountable, politicians morph into the perennial carpetbaggers that they really are to abcond with whatever is not tied down.

NOTaREALmerican's picture

It's not a pretend recovery for the Elysium Class and the Elysium Support Class.

And, when has the Trash Class ever mattered?  

lasvegaspersona's picture

duh...of course the government has been 'fixin' the numbers...don't you read ZH?

Dr. Destructo's picture

Just call it a depression FFS.

NotApplicable's picture

You mean "The New Normal."

Dark Ages 2.0

Dr. Destructo's picture

They denied we were in a depression in 1933 as well. "The New Normal" really isn't all that new when one thinks about it.

NotApplicable's picture

We're not getting out of this one, though. There was still plenty of real wealth that existed back then.

Today? Piles upon piles of IOUs propping up a half-century of decaying malinvestment.

Unless you're planning on moving to one of those empty cities in China, that is.

ZeroFreedom's picture

Problem with this analysis is did not state the simple fact, we are still in a recession or worse.

NOTaREALmerican's picture

Well,  only for the Trash Class.   

We've really got to stop treating the US as one nation.    There's separate societies, each with its own economy.

The top 20% (or so) is doing fine, and top 10% is doing better than anytime in history.   

Luckily, Merica is still has the most Class mobile society in the world, so everybody above-average kids will be fine.

Itchy and Scratchy's picture

Use the 'pretend' USD they are printing!

I Write Code's picture

The US economy now contains a half-century of distortions that are now, or soon will be, too much to contain.

Well, let's take a deep breath and reconsider.   Compared to what's in the textbooks yes, we've been in the grip of the federal reserve since 1991 at least, and the US has been living with unsustainable trade deficits since at least 1975 but without being called on it, and the US has stupidly been outsourcing manufacturing and basic industries since 1960.

BUT of course this came with certain short-term benefits as well, and it's not really clear what the classic alternatives would have produced.

Finally, it IS NOT GOING TO HAPPEN that we go back to the status quo ante.  The future will be different yet, more "distorted" and in ways hard to imagine.  For better or worse.

Thought Processor's picture



It's pretty much a lock now.  Rates in the US can not rise, as the debt that they are based on would become unserviceable.

Simple math has decided the fate of the US.   Even though they are doing everything possiible to manipulate the variables that go into the equation.  At some point it just makes the outcome worse.

And we have long since passed that point.

813kml's picture

I was told there would be no math on this stress test!!!

Colonel Klink's picture

What's next?  Paying taxes to a pretend government?  One that claims to represent the people, yet serves only it's corporate and foreign masters.

Spungo's picture

Buy the stupidest fucking stock you can find and set a 10% trailing stop. Worst case scenario, you lose 10%.

Bluntly Put's picture

Great article. 5 stars.



bobbydelgreco's picture

invest in equities not for growth that won't happen but invest because ms piggy will detaper before november

CHX's picture

"Marktets will correct before a collaps is apperent". I think this is a 50/50 at best. With Fed, PPT and who knows who else interventions, the levitations of these "markets" may last well into the collapse. IMO, the real US economy is collapsing, right here and right now, but stock indices are still near ATHs... My suspicion is that the USD and Gold will show the collapse as a currency/debt event. We'll all see how it all pans out (or rather not) in due time. Good luck to all.

Oldwood's picture

Its only pretend money when you are making it. When it all disappears, it is very real.

Clowns on Acid's picture

We have a pretend President (neo Bolsheviks), we have a pretend currency (the Fed), we have a pretend immigration policy (neo Bolsheviks), we have a pretend Bond market (the Fed), ....

I don't know do you see a trend, as to who is responsibe for the pretend ? 

Itchy and Scratchy's picture

Not as bad as a pretend BJ tho!

MedicalQuack's picture

Here's a group with a  crowd fund project on Ingiegogo, so how dumb have we become.  It's raised almost a million dollars and now a physicists is telling the folks they can't physically make good on their product as they cannot condense the power source as small as their model claims it will be. 

It's a classic example of when the the virtual world comes face to face with the real will be interesting to see if company decides to respond and as of this writing they have not.  This might be why physicists make good quants too as they do know the real world has some limitations where blind data scientists don't seem to have that balance.

You just waive this magic watch over your food and you get all kinds of food information on the app on your phone...don't laugh as almost $1 million dollars worth of backers are ready for it.

I started calling it "The Grays" and people don't know any more where the virtual values and real world values are, when they collide, when to separate or anything.  Even Google has not introduced an internal study to learn about "how people work" even though they have hired thousands, they don't know so I guess there was too much focus on bots instead.

So maybe it's a virtual recovery instead of pretend because they have to be able to go somewhere and play it out??   Add on the news and marketing and that' enough to toss many right over into the virtual world of recovery.