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Monday, March 21, 2011

Black Swans and the Markets

Multiple choice question: Market Watch headlines thunder the upswing in the market in response to: A) A third war in the Middle East: Lybia, and the loss of Lybian oil on the world markets. B) The tensions in Bahrain and Saudia Arabia that promises to further destabilize the entire region. C) The destruction of the world's third largest economy (Japan) and their on-going nuclear crisis. D) A takeover deal in the Telecom sector.

The answer of course is D. If you live on planet Denial.

The real answer, is that Japan had dumped another 500 Billion dollars into their economy (roughly the size of QE2) to prop up the markets in the short term in order to avoid a complete financial meltdown. The US markets in turn understand that this money is not intended for "Reconstruction" but will go directly to the Japanese banks and then into the Japanese stock market - and of course other markets outside of Japan. The Nikkie rallies and the futures go up here in the US.

Why is this good news for the US markets? Because it shows the governments of the world will support the financial markets ad infinitum in the belief that if they can float their stock markets long enough and high enough eventually their economies will follow. It lends credence to the hope that the Fed will follow QE2 with QE3, QE4 etc etc. And of course they will. Because they don't know how to do anything else.

The politicians all talk tough as long as the markets seem healthy. Because all their money is in the markets. The minute the markets tank, all the "Conservative" tough talkers suddenly are clamoring for the Fed to "Do something." And what could that something be? Oh, yes, funnel more printed money into the banks, so that they can dump it into the markets.

Can this strategy work forever? It's working right now. Today. It has worked for the last forty years, though the market has flatlined for the last ten. (Yes, it's gone up and down, but it's still at the same level it was at ten years ago.) Recent History - the history of the last 40 years - is on you side if you say it will continue working. The rest of the 5000 years of human history is against you.

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