When a hunter runs out of
arrows in the forest, it’s usually curtains for him, or, at best, a poor
hunting season. When the Federal Reserve
Board runs out of tools to “fix” the economy, it’s an even worse scenario. They are not simply useless, they become
irrelevant.
And so, last week the Fed
meekly bought more long-term treasuries in an effort to salve the economy by
keeping interest rates, all across the time spectrum, low. Instead, what they wrought was disdain,
confusion, and declining confidence.
I’ve said it before. Low interest rates today are analogous to
giving free drinks at closing time. You can lead a horse to water, but you
can’t make him spend.
Instead, what the markets need
is a surplus of cash with an incentive to buy.
Globally, such just isn’t the case.
Rather, we are faced with
austerity packages and budget-cutting, which puts the onus not so much on
liquidity (monetary policy) but upon demand (fiscal policy). It’s no wonder the global financial markets
gyrate intraday upon rumor, innuendo, hyperbole, and rarely, data.
Reality.
In studying my proprietary
stochastic integers (a tool which measures magnitude, amplitude, and
distribution of cycle trends), I have observed that although global securities
try to rally on “good” news, the magnitude and breadth of participation within
the rally is diminishing. Price levels
are not making new highs. In fact, we are threatened with the
possibility that sector lows might breach even further downwards. Nothing demonstrates this more than the
calamity inflicted by the Fed upon the markets last Thursday, a 400 point drop
in valuation.
Within this search for
downside stability we must juxtapose a panoply of bad economic news, earnings
levels not withstanding. In my
vernacular, earnings that derive from technology efficiencies, layoffs, mergers
or acquisitions are neither “moral,” nor real earnings acceleration. Demand
is the key to building a better mousetrap.
“If you build it (and they need
it) they will come.” Thus, the burden for recovery is
entrepreneurship and the immediacy of filling a need by investment of capital.
Within that framework, the
markets (and the economy) are too awestruck to get out of their own way. Therefore, I envision a scenario in which
prices decline in financial securities by as much as 15-20%.
But…
There are exceptions,
however. Certain sectors have
demonstrated a resilience more powerful than their contemporaries. Regionally,
those geographies with a high concentration in natural resources have done
relatively better than their counterparts.
Canada , China , Chile ,
Brazil , South
America , have pockets of capital gains, most notably in timber,
coffee, energy, and gold.
Unfortunately, the global
economy doesn’t consume coffee and gold on a 24 hour timeline. We must create wealth, and wealth equality,
sufficient to sustain purchases in non-tangible assets as well as socially
responsible endeavors. Education,
agriculture, technology, pharmaceuticals, biotechnology, potable water, waste
management, and transit infrastructure seem like a good place to start. While everyone’s attention is on what’s not happening in the economy, sooner or later someone will sort out a
moral/social hierarchy and get to work on solving problems, and building a network
of capital gains opportunities in the process.
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