08 October 2009

What's Fueling This Market Rally - Dólares en El Fuego

Ponzi Scheme: a fraudulently artificial investment scheme that pays returns to investors from their own money and that of subsequent investors, rather than from any actual profit earned. The Ponzi scheme usually offers returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors, as well as the necessary 'accounting adjustments,' in order to keep the scheme going. When the flow of money falters, the scheme begins to collapse, until confidence in its sustainability is lost, and the scheme quickly collapses.
Why say it myself, when this video featured below says it so well and so reasonably and completely?

A less probable but rather nasty twist on the probable scenario in the video is that after an initial reversal in the dollar that is quite sharp due to a short squeeze and a liquidity crunch, the buck and bond turn lower WITH stocks, in a general revulsion towards the Fed's financial engineering and a loss of confidence in Wall Street.

These are all just probabilities, extrapolated from some very real current indicators and phenomena. Equities are a puffball based on fundamental measures, the insiders are selling in droves, and there is a general movement out of dollars into 'real assets' such as gold despite a huge drop in nominal aggregate demand.

The Fed has had a few tricks up its sleeve, and was able and willing to create a deadly housing bubble through willful policy and regulatory error in response to the tech bubble collapse of 2000.

There is still a genuine possibility that a stubborn adherence to policy errors will lead us into a decade of Japanese style stagnation as the real economy is crushed under the weight of the zombie banks. The Fed is neutral only in the headlines; it is owned by and serves Wall Street when push comes to shove. The limiting factor will be international acceptance of an increasingly debased bond and dollar.

We ought not to underestimate their desperation and ingenuity in the present situation. Much of financial innovation is a subversive response to regulation or the opportunistic arbitrage of asymmetries in leverage and information, often created for the occasion. And the Fed and the Treasury have learned their lessons in the manipulation of markets and information, trading and treachery, from Wall Street and its Sith lord, the-investment-bank-that-must-not-be-named.

In other words, wait for these things to clarify more and unfold. Who can say what will happen with any certainty in times of general greed and deception, when powerful people are making up the rules as they go along?

We have not been shorting this rally except to scalp the occasional corrections, while holding longs in precious metals, bonds, cash, and a few other commodities.

Gold can keep spiking while Obama keeps failing, and for now that seems like a reasonably good bet.

Global Perspectives

Steve Meyers from Grainbelt Commodities