Financial Markets — Rated "R"

Tyler Durden's picture

Via Economic Noise blog,

Financial markets are complex in normal times. When government is actively supporting them, they only become more so and more dangerous.

If today’s financial markets were rated like movies, they would be rated “R” (perhaps, “X”). Whether the “R” stands for risky or restricted is immaterial. These markets are not for the naive or unseasoned investor. Traditional metrics no longer matter, at least at the moment. Markets seem to move inexorably upward despite what appear to be worsening conditions on Main Street.

The effects of excessive government monetary and fiscal shenanigans are primarily responsible for current financial market levels. These interventions, driven by the fallacious economics popularized by John Maynard Keynes, necessarily continue as a result of factors:

1. The simplistic and false belief that governments are necessary as central planners for complex economies. According to this doctrine, economies can produce outcomes that are below full capacity. That is obviously true. What isn’t is the belief that government intervention can improve this perceived inadequacy.


2. “Don’t just stand there, do something.” For a hundred years government has used the underlying belief of Keynesian economics to expand its power and size. Some fools in government may still actually believe this myth.  At this point, it doesn’t matter because the public has been conditioned to this propaganda. Not intervening, even though it is likely the best course of action (inaction), would be interpreted as neglect and incompetence.

I think it key to understanding both these points in order to understand current financial markets. At its heart is what I term the “myth of government.” In short, that myth is that government can do well or good. Government can do neither, yet government has built its existence by perpetuating both myths.

An excerpt of some recent comments to subscribers appears below. These comments convey my concerns with current market valuations.

I still believe we are closer to a top than a bottom in markets. The only way that could not be is if  high inflation took hold. Much of what we consider strong market performance is actually inflation which showed up in financial assets and much less so in wages and commodities. Thus, even in that situation, the effects might already be partially (mostly?)  reflected in these assets.


The breakout of inflation would drive the nominal prices of everything higher, probably including equities. Performance in precious metals in the last several weeks suggests that at least some investors are hedging against that possibility and increasing their positions in this sector.


Nominal price increases don’t necessarily represent real gains. Ask anyone who participated in the Zimbabwean stock market what it meant to have the highest performing portfolios when they did ultimately did not keep pace with the hyperinflation in goods and services.


There are a strong reasons why markets should correct:

  • Geo-politically, the world has grown more dangerous.
  • Economies have not regained the strength necessary to support current financial market valuations, a discrepancy that can only last for so long.
  • There is no recovery, nor can there be one with government’s version of Wizard-of-Oz economics.

At this point, it appears that worldwide government economic policy has only one goal — continue to  fool people to believe that a recovery is underway. We are now five years into this charade. How long before people see through this charade? I suppose, like any Ponzi scheme, you feel pretty good about your gains. It is always the end when the pain is incurred, hindsight is 100% and the damage has been inflicted. Then “everyone knew these markets were overvalued.”


Governments want an economic recovery but they are powerless to effect one. The tools they have are no longer useful. Overuse has left them ineffective if not harmful. So they do the next best thing (for themselves) — pretend that the economy is doing just fine. This foolish strategy buys time, but makes economies less efficient and less resilient. It is difficult to see how this economic problem can end in anything but a market crash and another Great Depression.


Markets may continue to have upside as a result of fiscal and monetary shenanigans. However, governments around the world are burning the furniture to get through this economic winter. Developed economies are all pursuing the same extend and pretend charade. Winter is not going away but the furniture is.


Compounding the problem in the US is the increasingly dysfunctional presidency. An aloof, detached and arrogant president, vulnerable to numerous scandals, seems oblivious to his own failings. At a time when he should be fearing for his presidency he continues to taunt Congress. Waving a red flag in front of a bull is never advisable. The only reasonable explanation seems to be that Obama is overwhelmed by events and believes his words and optics can overcome reality. If so, he is truly delusional, meaning the country and markets are in greater danger than most imagine. (For more on this, see Suicide by Congress.)


Equity markets are not the place to be if you have alternatives. Financial repression has eliminated most other options. A reasonable strategy at this point might be to increase cash in your portfolio. Stay extremely cautious, probably best achieved by remaining under-invested until markets exhibit a trend up or down.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
InjectTheVenom's picture

or how about R for RIGGED  ?!

tallen's picture

Or how about R for RETARDED

smlbizman's picture

how about r for being ass raped for the last 100 years plus...

aVileRat's picture


As in don't bother trying to understand the markets unless you have 17 years of investigative and market intelligence under your belt. Everyone else is going to think the movie is so "edgy" and "cool", but in reality its just a shock fest grindhouse movie with a bunch of former A-list celeb's suckering in the next bunch of stubs so they can cash out. The flick is called "The Dow: buyback boogaloo".

Spoilers: nobody in the large caps are actually researching the cure for cancer, or anything productive, it's just a bunch of people who are trying to talk down growth to half percentiles, amid massive tax planning so that greed stock institutional accounts do not suffer losses, warping & pervetting capital and market recognition from sectors actually growing hand over fist.


fonzannoon's picture


Equity markets are the place to be. Financial repression has eliminated  other options. The only strategy at this point is to increase anything except cash in your portfolio. Stay extremely retarded, probably best achieved by remaining over-invested until you die.

NoDebt's picture

I resemble that statement.  But you forgot to say 'cash AND gold'.

The last 5 years since the Fed decided to directly control the "market" have been the 5 easiest years to invest in the history of the world, I think.  Buy an index fund, sprinkle in some high-beta tech stocks, preferrably fresh off IPO.  Done.

When every line is up and to the right, you can't miss.  I don't see any reason to change that plan right now.  When the Fed starts raising interest rates (not just tapering QE), reassess.  All we've done is trade the business cycle for the Fed cycle.  Every now and then the Fed tries to prove they are NOT in a liquidity trap and raises rates.  A year later, everything goes in the shitter and they drop them again.  Lather, rinse, repeat.


NoDebt's picture

I missed it earlier but I just read it now.

You know how many people have become my client after walking in the door with a fistfull of non-traded REITs and one question:  "What the hell did my advisor sell me"?  Thereafter we refer to that person as their PREVIOUS advisor.

Those things are pure commission-driven sales.  There is almost never a benefit to the person buying them.  Opaque, packed with fees (how else they going to pay your broker that HUGE commission they get for selling it to you?) and horrendously illiquid.

One of the few investments available to the general investing population that makes an annuity look like a damned good idea.

So for God sakes, lets NEVER tell anyone what's really inside those things.  Never or 18 months, whichever comes first.  Believe me, you don't want to know.

fonzannoon's picture

the best is when they go to sell and find out it's completely illiquid. soon after followed by redemptions at 30% of the "listed" share price. bwahahaha.

NoDebt's picture

I love reading those letters.  About every 6 months to a year, the REIT sends out a letter to their "investors" basically asking "So, you had enough yet?  How's about you sell that crap back to us for XX pennies on the dollar and make the pain stop?"  The watermark on the fine parchment paper it's printed on is a middle finger, if you look closely.


Grande Tetons's picture

Extremely retarded? That is it....I am not going to block for you anymore.


ebworthen's picture

Yup.  Get everyone on public assistance or trapped in the equities casino.

Encourage 401K's and IRA's you can't touch until you are 70.5 years old (if you are still alive).

Then it will be taxed out the ass, and anything you try to leave to your progeny will be halved.

Commissions fattening investment houses all along the way as your savings are used for leverage.

Al Huxley's picture

Here here.  BTFD every morning.  In the unlikely event the price continues to drop into the afternoon, double the fuck down.  If you have a house, get a HELOC and go all in.  If you don't have a margin account, get one, then take the money from your HELOC and lever up.  If you have credit cards that you can draw cash against and the interest rate's less than 20%/year, max out, and lever that up full margin too.  It's the only way.


Oh, and short the fucking miners to zero.  SLW to 23 by week-end.

NoDebt's picture

See, Al gets it.  How hard is that to understand?

Who's got two thumbs and loves free money?  This guy.

deflator's picture

 Nobody. I mean nobody trusts the PM miners. They's too easy for them to steal. They put all the costs*and the costs are very high) on investors and pocket most of the profits.

Al Huxley's picture

That's why they're such a great short.  The have these spikes, then they consolidate, and it LOOKS like a little flag consolidation setting up for another leg up, then you wait for the 'breakout', and sell them heavily, and then again into every occassion that somebody from the FED opens their mouth, and then somebody dumps a couple billion gold, and down they go - 10 - 30+%.  You would think it would get old after a while but it never does.  AND there's always the added potential that the incompetent management (they're all incompetent, so that blanket statement works) will fuck something up as an added bonus 10 - 20%.


As No Debt said, there's never been an easier market to call.

Caviar Emptor's picture

World governments and global banks are interested in the state of the yuppie. Because without her/him, all the manipulating and finagling was all for nothing. And the entire trickle down model fails miserably. In other words there will be no after-party: there will be rich and there will be poor. The center collapses. And all because you, dear reader, are shopping till you're dropping

NOTaREALmerican's picture

Well,  perhaps we'll have a kinder-n-gentler poor "condition" now.    Enough (near) food and entertainment, some bling to impress the other poor neighbors...   who knows, maybe we live in a Utopia and don't realize it. 

disabledvet's picture

This only scratches the surface actually.  We all now KNOW that Government itself is BANKING on Wall Street ...and as well "that Wall Street ain't coming through." (No recovery.  PERIOD.)

So the question seems pretty simple:  if you can't inflate the debt away...who's gonna pay for this...and how?...???????

Funny Money's picture

Who cares?  As long as it keeps going up I'll be laughing all the way to the ba...


...uh oh.

falak pema's picture

financial markets went bubble crazy BEFORE the CB started to QE, admittedly aided by Greenspan's Zirp and easy money policy. But that was Friedmanian logic applied to pumping WS assets on steroids--  Lance Armstrongonomics-- comes to mind, as the Tour de France circus hits the high Sierra. 

They went crazy out of greed and thanks to NO real regulation, as regulation was contrary to true Reaganomics.

The unconventional CB plays post Lehman were like the captain of the Titanic saying: what Iceberg damage ? I don't see any water in the boat! 

disabledvet's picture

This wasn't Japan...these policy folks saw that iceberg dead ahead and slapped 750 Billion on the table AND QE AND the Zero bound rate policy AND "the plunge protection team" AND...well, you get the idea. "They put the Pee in Paranoia.". For all you history buffs out there (cough, cough Trichet cough, cough) in the 1930's the Fed actually RAISED interest rates.

That's with ZERO deposit insurance and ZERO social safety net! The USA could "barely afford" a 100,000 man Army in 1940.

By 1945 it had a ten million man military!

There was some inflation.

About 3 percent I believe.

Interest rates (on savings) were far higher though. That dollar was good money.

Not today.

Wait What's picture

markets will never fall because a fall means deflation, and deflation means Fed steps right back in. ergo, concordantly, viz-a-viz, the markets will never fall. er, i should say, the markets will never be ALLOWED to fall. bubbles remain inflated or the financial world as it exists comes to an end. trademark that message.

ebworthen's picture


Taxpaying citizens getting ass-raped by sleazebags from Wall Street and Washington.

potato's picture

I assume you're using "taxpaying" in the derogatory sense.

But I always assume that.

Al Huxley's picture

I think maybe it's time to throw in the towel on all this permabear positioning and accept the fact that, evil and destructive as it may be, the big FIs have won, they have free reign over the financial and economic landscape, and they're no longer bound by mundane considerations like rationality, reasonable valuations, honest reporting or even any antiquated concepts like rule of law.


But in deference to the bears, may I suggest that this site switch to publishing bearish commentary on the mining stocks, particularly the PM miners.  Then not only will that bearish bent be satisified, but everyone will get the double whammy of actually having the market dumping on a consistent basis.  Less tilting at windmills and more crowing over successful downside calls I say!

Professorlocknload's picture

Guess I'll move my portfolio up to the local Indian Casino. Easier to calculate the odds.

Al Huxley's picture

What are you talking about - go long, as long as you can, and the odds of winning are 100%.

AdvancingTime's picture

The study of economics is often baffling and confusing. Many economic theories exist but many are full of holes and conundrums. Much of how people react to a policy may have to do with timing and perception instead of reality. Economics is full of loops that feed back upon themselves and unexpected pitfalls based on expectations.

All this can become quite abstract. Economist predict events that never tend to unfold as expected or planned. Many of the "modern monetary theories" in use today have not been proven over time, but reflect an attitude that we can control  economic cycles better than in the past. More on how few people really understand this very important part of our lives in the article below.