Partner Center Find a Broker


“And we ask one question that they dare not firmly answer, whether they are not now making a tolerable attempt to pull the wool over the eyes of the people.”
                                    Milwaukee Daily Sentinel and Gazette, October 1839

Commentary & Analysis
Letting a good crisis go to waste: will they do it again?

Back in 2007 some no-name GOP political candidate with two first names emphasized the need to restructure our monetary system. But he had a hunch government would not even consider tackling the problem until a major crisis descended upon the US financial system.

About a year later, that crisis arrived. And while it centered on the US, it became a global financial crisis. It began with a bursting and subsequent deflation of the US real estate bubble; it continued with the insolvency of major banks and institutions; it was underpinned by a swollen and swelling budget deficit; and it was topped off with debt-strapped US households. There is more, but one would think that’s enough of a crisis to spur action.

Actually, it was.

Only the action was that of perpetuating the culture and policy which led to the crisis in the first place. So here we sit, somewhat in wonder and amazement of what Jack described so well in Currency Currents this week — here and here.

I say somewhat, because I am less and less surprised at the gall of the elites who dictate policy not for the sake of the US but for the sake of perpetuating their legacies of influence and wealth accumulation. And I am more and more disappointed that voters seem incapable of doing their part to rid the establishment of these types.

Although progress is being made on the latter point, a combination of establishment media and power men continue to succeed in pulling the wool over the people’s eyes. As to the people; they’ve grown dependent, to varying degrees, on the government doing something (e.g. cash for clunkers, stimulus, quantitative easing) to maintain an artificial prosperity (e.g. accumulation of stuff, rising asset markets).

A second crisis has descended upon the global financial system, this time centered in the Eurozone. And, not surprisingly, they’re going to let their crisis go to waste as well. In fact, as of this week, the world seems willing to help them fritter this opportunity away. Before long the IMF will get involved, more or less; and then the ECB will take it upon themselves (perhaps also with a direct plea to the Federal Reserve) to prop up the financial system.

I’m not sure I have much confidence in policymakers responding to crisis in a reasonable and responsible fashion; heck, they can barely even pretend to promote the type of responsibility and accountability necessary to sufficiently strengthen our economic system.

There is, though, one thing that can turn this around:

The market.

The only problem is that the market doesn’t particularly care how painful the cleansing process feels; a cleansing will eventually happen, regardless of how hard and long policymakers work to prevent it.

But when will we know the market has won?

Tough to say. Perhaps an early indication will come from general sentiment, i.e. the population’s refusal to accept continued monetary fluff as a solution to our economic ills and realization that said fluff is the underlying cause of our most serious economic problems.

Many readers, at this point, would ask: how do we invest our money in said environment?

A couple things:

  1. If investors continue to accept the monetary band-aids, risk appetite should stay firm; and investments in risk assets like stocks and commodities and risk currencies are the place to be.
  2. If investors begin to shun the monetary fixes despite continued pressure from monetary authorities, perhaps gold is the best place to be invested as it a) can compete in a low/no-yield environment, b) possesses an anti-government/anti-fiat appeal, and c) has adopted a bit of risk appetite appeal lately. (In fact, Jack put on a new trade this Tuesday in his Options Predator newsletter which targets gold; it’s up 20% in just four days! And it’s no fluke – see for yourself how successful Jack’s trading has been …)
  3. If investors shun the monetary fixes and policymakers begin to abandon their status-quo, then we likely see a firmly deflationary environment take hold; in which case it makes sense to be out of risk assets; US dollars will likely be the best investment, at least to start.

Ultimately, we need to be responsive to the shifting sands. Policymakers are not going to easily let go of their current strategy because they so very much fear deflation. That means markets likely aren’t going to give in without new and major developments (disappointments) in the economic data and, consequently, market sentiment

In other words, we should be open to a potential market crash, but we probably shouldn’t expect one yet.