The tail that wags the dog….
The worst kind of redemption is an act or response that seemingly has no relationship to the act committed. Such was the case last week when global financial markets dramatically spiked upwards in reaction to moves by the Federal Reserve and other global central banks to infuse the money supply with billions of dollars (and other currency). The knee-jerk reactionary euphoria was typical of a parallel disconnect I had defined earlier in which the appearance of two unrelated phenomena moving in the same direction take on the appearance of being somehow inextricably linked. But, alas such is not the case. A reflexive bounce in equity prices does not represent a sea change from negative economic data, nor does an infusion of capital mean that investors are likely to spend their newly-found largesse. As I’ve said in the media on many occasions, “you can lead a horse to water, but you can’t make him spend”.
Especially non-redemptive about last week’s monetary response was the naïve belief that the solution lies in combating poor credit or spending inflexibility. I believe that the world would beat a path to a “better-mousetrap”, and is hungry for solutions to biochemical research, alternative energy, education, infrastructure redevelopment, agricultural research and availability, technology deployment, etc. In other words, irrespective of market cap or geographic location, the financial landscape is rife with possibilities, solutions and opportunity, right now. And there exists sufficient resources and capital to invest in these projects. Standing in the way are governments, jingoists, and ego-centric bankers who see solutions as personal money-making occasions, not altruistic opportunity to combine profit with the public good.
….but the dog won’t move.
Further exacerbating the disconnect surrounding last week’s market gyration is the systemic intransigence of the underlying problem, namely inflation. Until this headwind abates, the profit picture for equities looks sullen. Inflation is not a derivative of the global credit crisis, it is a casualty of it. Lower interest rates, and the insistence of monetarists worldwide to lower interest rates, have succeeded in creating a hoarding of money that punishes those who don’t have it, while rewarding those who accumulate.
This accumulation might be represented by “things” (real estate, commodities, businesses) or it can be cash, itself.
Witness how there was enough cash in abeyance to move the markets last week, simply by the suggestion of a global capital infusion, and enough credit to go around to allow leveraged financing of mergers and acquisitions, equities, real estate and other depressed financial instruments. One of my friends likened the effect to “giving alcohol to an alcoholic”.
The “five sisters”.
The bottom line is that there remain several intractable data that didn’t change last week, and won’t, irrespective of any announcements or news releases:
· Inflation is the most insidious tax upon spending patterns since the 1970’s.
· Most global equity bourses remain in a secular bear downtrend.
· Corporate earnings are slowing at a rate not seen in the last 16 years.
· Currency exchange patterns are causing a rebalance in political and economic influence
from West to East.
· The trigger to a reversal in the bear will not be an event or announcement, but time and
its palliative effect upon what ails the financial markets.
Given no further action by the Fed or its counterparts, cyclical patterns should emerge in the next few months that will redefine the capital-gains landscape. It’s that complex, and it’s that simple.
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