Financial Markets — Rated "R"

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.