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8/22/2011

Should the incredible price swings throughout the global financial markets be a surprise?  No way….

In case you’re wondering why stocks took yet another look into the abyss at the close of trading last week, while silver and gold surged higher and higher, despite the fact that oil prices declined some 20% over the same time period…keep reading.  Then again, maybe you’re not wondering, but let’s shed some light on the issue regardless.

What the markets continue to price-in is a lack of credible policy making in many of the major developed economies around the world in dealing primarily with debt financing but also unemployment and sinking real estate prices.  The preverbal “kick the can” which has been the strategy for about a decade is no longer acceptable.

Following the bursting of the US equity bubble that peaked back in 1999, the Fed responded with a kicking the can strategy of establishing a near zero percent interest rate policy back in 2001, which ultimately caused massive imbalances in the economy that revolved around the creation of excesses in the real estate market, which peaked in 2006.  Kicking the can worked for about 5 years that time around as bubbled up housing assets enabled consumers to consume beyond their core capabilities.  Following the fallout of the real estate bubble in 2008, “kicking the can” took the form of TARP and zero interest rate policy once again and also QE, all which now appear to be running out of steam.  This kick only lasted about 3 years.  At the current time, the can has turned into a 100 gallon drum filled with cement, where short term monetary and fiscal kicking strategies simply have no affect…in fact they have added to the negativity in the marketplace. 

Months ago, we warned that the economy was not on track to grow itself out of the current problems it was facing and that as time passed, the state of affairs would worsen and not improve.  What is now transpiring is that the time for change is running very short, where the market will require significant structural policies to rectify unsustainable and inappropriate policies that have been in place for too long. Unfortunately, nothing is on the table yet.