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Wednesday, November 7, 2012

End of the Ride

While there is plenty to be worried about, you’d never know it from the way the markets have performed.  The S&P 500 has rallied 121% since March 2009 and sits only 50 points away from its recent high which, itself, was only 100 points from an all-time high.

All it took was $16 trillion of deficit spending, a few trillion in quantitative easing, some serious arm-twisting overseas, and a Plunge Protection Team that paid very careful attention to chart patterns.

Some economists (and central bankers) maintain that these steps were necessary in order to free the economy from the worst recession since the Great Depression.  I maintain they were taken primarily to keep global banks from failing.  Ending the Great Recession is the hoped-for side effect.

In my opinion, the books of the world’s largest banks are being cooked (with central bankers’ blessings) to such an extent as to make their balance sheets and income statements a farce.  They are being allowed to carry distressed and dead assets at book value, and to report their trillions in derivatives as a matched book without providing any details to investors.

Why do I harp about government, Fed and bank balance sheets?  Because, in the end, they must be dealt with.  The enormous sums are somewhat manageable with historically low interest rates, a co-dependent regulatory environment and a complicit mainstream media.

But, eventually, the scales will tip.  The truth will out.  Simple arithmetic will once again be accepted and the severity of our situation acknowledged.   The key to higher stock prices isn’t whether everything is getting better.  The key is how much longer TPTB can catapult the propaganda.

While I enjoy making money in the markets as much as anyone, I am saddened by the circumstances that make the analog we're following [see: A New Old Analog] possible, if not inevitable.