Wednesday, December 1, 2010

The Stock Market is Like a Duck Billed Platypus

In today's looney bin of a stock market, what was thought to be truth has turned out to be fiction. And fiction writers couldn't have invented what seems to be true. Here's a sampling.

1. First, ignore all the economists. There are no economists with consistently strong records of predicting the direction of the economy. There are no economic models that explain much of anything. Forget what the economists say.

2. Be a Liberal. If there is one force that has supported the economy and uplifted the markets, it's government. The emergency credit offered by the Fed and central banks of other major economic powers, along with the bailouts and fiscal stimuli provided by the U.S. and other governments, pulled the world economy out of its biggest downswing since the time of Prohibition. Today's revelation that in 2008 and 2009, the Fed loaned out $9 trillion, or $3 trillion, or however one wants to total up the numbers, to support everyone from Goldman Sachs to McDonald's to Europe's central banks illustrates that in times of crisis a strong Fed can make a difference. Whatever one might think of GS or Europe, America without Big Macs and fries with that would be a disaster.

Fair questions have been asked about the Fed's current adventure in quantitative easing. On one level, it is apparently a stock market manipulation designed to induce consumer spending by creating a wealth effect. In general, governments don't manipulate asset values without eventually producing catastrophic consequences (see 2008 real estate crisis for further reading). But today's stock markets embrace governmental action and become deliriously exuberant whenever another bailout or easing is announced.

News reports tonight indicate that the United States is now prepared to join in a bailout of the Euro bloc, since Portugal, Spain and who knows what other countries seem to be in line for a handout. The stock markets should soar at the prospect of another federal giveaway.

3. Mind the debts. The past twenty or so years, a/k/a the Age of Leverage, saw shiploads of bad loans made to home buyers, credit card customers, businesses, nations, states, cities and anyone else not previously mentioned. These debts, in gigantic amounts, remain with us, and lurch around the financial system looking for someone or something to crush. Every time they look like they're circling a victim, the markets shudder. Ireland's recent "rescue" (which was really a rescue of banks holding Irish debt) is illustrative. As before, governments and central banks mounted up and sallied forth, with the William Tell Overture playing in the background. Dealers in the financial markets had a nice profit opportunity, trading the markets down and then up. Investors might have been left feeling like hit-and-run victims. The herd of bad debts will be with us for years. Indeed, as bailout follows bailout, the can is being kicked down the road only to haunt us farther into the future.

4. Statisticapalooza. The markets obsessively fixate on all variety of statistical minutiae, ranging from retail sales results for a single day to self-declared sentiments of consumers to inflation figures that exclude any items that might reveal inflation to the differences in borrowing costs between, say, Belgian and German debt. Small bits of information become large symbols. Rational analysis is kicked into the gutter.

The stock market is like a duck billed platypus. If you look at it, you think it can't be true. But apparently it is. Weirdness is the world. The only certain way to make money is to be the Fed and print it. Everyone else might think about eating cake.

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