If we narrow it down, the one lesson is simply to not invest against the central banks.
Forget the GDP and corporate profits because those represent economic supply and demand curves. What matters are the supply and demand curves of the financial markets themselves. Yes, they should be and were once affected by economic factors. But today the central banks are directly manipulating the financial asset supply and demand curve.
But first let’s look at Bitcoin…
Central banks would never let Bitcoin succeed since it would usurp their ability to create money out of thin air and their ability to restrict capital flows when needed. Cyptro currencies that are not under the control of central banks never had a chance.
“Stupid is as Stupid does” — Forrest Gump
Meanwhile, after not seeing the Tech Bubble the Federal Reserve enabled the housing bubble in their “wealth effect” attempt to re-inflate the bubble economy. Then after failing to achieve total financial Armageddon during the financial crisis, they decided they needed to create “monetary tools” to create the everything bubble to achieve a larger “wealth effect” attempt to re-inflate the bubble economy. And here we are.
…the Stupid today
So there is a distinct difference between Bitcoin and the financial asset prices today – Bitcoin did not have the support of wall street and their central banks sugar daddies and the financial market prices did.
The question of the year is do the financial markets still have the support of the central banks and how much. And if they still do, how long will it matter because they had it when the financial crisis hit and it did not matter. Of course, the central banks have those new tools now to support the financial markets, not the economy.
With a new Federal Reserve Chairman and a correcting parabolic stock market, we will find out soon how much support the markets have and how those “tools” work. And the markets may be disappointed. Not all at once, it takes time for investors to wake up.
The smart investors wake up first although there are not many smart investors left in this market. I don’t expect value investors to re-enter this market in mass until much lower prices are in.
The stupid today are not investors chasing bubbles, but the creator of those bubbles that ultimately do so much damage. The stupid today are central bankers and their policies that bought and limited the supply of financial assets with money backed by nothing and that was created out of thin air.
Now what Jerome Powell?
New Fed Chairman Powell’s comments found in 2012 Fed Meeting Minutes recently released…
I think we are actually at a point of encouraging risk-taking, and that should give us pause. Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy.
Did you get that: There was no pause in the Fed encouraging risk-taking. They “prevented losses” in the financial markets and not just “serious losses”. Investors took more and more risk. Their strategy was to “blow a fixed-income duration bubble across the credit spectrum. Jerome Powell knows this and now has to deal with what happens when they stop buying…
[W]hen it is time for us to sell, or even to stop buying, the response could be quite strong; there is every reason to expect a strong response. So there are a couple of ways to look at it. It is about $1.2 trillion in sales; you take 60 months, you get about $20 billion a month. That is a very doable thing [???], it sounds like, in a market where the norm by the middle of next year is $80 billion a month. Another way to look at it, though, is that it’s not so much the sale, the duration; it’s also unloading our short volatility position.
Folks, volatility is back.
And the same front-running of Fed policy on the way up is going to turn to front-running Fed policy on the way down. There is nothing doable about the Fed reversing course because… stupid is what stupid did.