From an email................
For all of the fireworks that were supposed to accompany September's big decisions, we are not seeing the sky light up much at all. The stock market closed out Friday flat, calm and as quiet as a mouse. Even the Volatility Index (VIX) gave a big yawn, as it dipped below 14, signifying that the market is clearly saying, "What, me worry?" The ECB and the Fed have succeeded in taking all of the fear and risk out of the market, and as good as it feels if you are of the bullish persuasion, you just have to wonder where this strange road ultimately leads.
It has been four long years since the Lehman meltdown put global financial markets on the edge of a cliff, and as frightening as that time was, we somehow survived. The problem with this "survival" was that it was not a natural cleansing from the free market, but rather it was a series of massive interventions to prevent us from experiencing "something worse." Well, it’s four years later and we have a stock market that has more than doubled and interest rates are basically at zero. While that should be a plus, we also have an obliterated housing market and massive unemployment.
We also have a Federal Reserve that now says it is responsible for getting the jobs picture to improve. The Fed also says rates will remain near zero until mid-2015, regardless of inflationary pressures. Among the strangest developments of the past four years is the fact that the Fed now says it will continue to purchase bonds, Treasuries, MBS and other "assets" as needed, essentially forever. QE-eternity is the funny name the Gorilla has taken a liking to over the past week or so. In the immortal words of Dorothy in the Wizard of Oz, you have to agree that "Toto, this doesn't look like Kansas" anymore.
What the financial markets look like right now is anybody's guess, because it certainly doesn't look like anything resembling free and disciplined markets. The initial TARP bailout of $700 billion plus opened the floodgates for program after program that has led us, Europe and Japan down this strange journey, where Central Banks are the new Central Planners for the economy. Central Planning failed miserably last century in the Soviet Union and the Eastern Bloc, so that should serve as a warning for whatever it is that these current "geniuses" are doing now.
China punted on the Communist agenda and essentially became capitalists, and we all have seen how that worked so well for them. It is too bad they could not have thrown political and religious freedoms in with those reforms, but that is another story. Freer markets worked extremely well in China, and it is amazing that the West has drifted so far toward having government and central banks call all of the economic shots. The growing buzz the Gorilla is hearing is that it is a complex story that will likely end badly. Time will tell.
In the meantime, the promise to buy everything in sight will flood the world with freshly printed currencies, and that in turn, will likely debase existing currencies, trigger big inflation or give us a big mix of both outcomes. It will be interesting, and we can bet that all of that money will somehow find its way into housing, stocks, commodities and food prices. Bulls are thrilled at the idea of a stock market rally, but it would feel a whole lot better if the rally were driven by earnings, growth and job creation rather than by Helicopter Ben dropping trillions of dollars from his chopper.
Enjoy the weekend and be ready for anything in the weeks and months ahead. We are in unchartered waters, and no one is quite sure what to expect. It seems that the Japanese model of the past 20 years is where we might be headed, and that is no party. It was just a lot of bailouts for banks and no growth. Again, the U.S. and the capitalist world deserve better, so stay tuned. The Gorilla wishes each and all a wonderful autumn weekend filled with changing leaves, crisp air and college football. We will be back in action on Monday!
Realist - Everybody in America is soft, and hates conflict. The cure for this, both in politics and social life, is the same -- hardihood. Give them raw truth.
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