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Data, Shell Game, Send Investments Lower

Jun 21, 2012
Goldman Sachs woke up and read the Wall Street Journal today; and it prompted them to recommend shorting the S&P 500 to their clients. The recommendation came amid another wave of negative Market fundamentals. 

A short sale is performed when an investor believes prices are going to move lower. Goldman, therfore, sees "the market" moving lower from here. Who could blame them.

The Dow Jones Industrial Average was around 12,800 when the Goldman short strategy hit the Street. It traded down more than 200 points an instant later, ending the day sharply lower at 12,573 (-2%). Stock market strength also moved lower, dropping 1.6%, and gold lost 2.5%. Here’s the year-to-date picture. (PS: If trading is your thing, shorting the S&P 500 is an easy bet when the Dow is near the action zone high.)  


The other piece of significant news this week was Federal Reserve chairman Ben Bernanke announced an extension of Operation Twist for another six months and $247 billion. This monetary technique is intended to lower long-term interest rates in hopes of luring corporations into making long-term investments. The hope here is that lower interest rates will increase lending that will reverse negative market trends and boost economic output and jobs. If this sort of thing worked, it would have worked the first time it was employed, last year and $400 billion ago.

Interest rates – short term, mid term, and long term rates – are already at historic low levels. They’re not the Market’s problem! – and dropping them another 1%, which isn’t even possible with the Twist operation, won’t increase lending, jobs, or economic output above fractional misgivings. History has proven this. 

This is also why Ben Bernanke left the door open for another round of quantitative easing (QE). QE is the process of buying bank assets like mortgage backed securities with newly printed money. The Fed does this to reduce bank stress and risk levels by purchasing a portion of their riskier assets, and to increase a bank’s cash position in hopes it will lend more money. 

But the first two QE programs didn’t work; so why should we believe a third one will? Someone once said, ‘the definition of insanity is doing the same things and expecting different outcomes.’ Insane, perhaps – desperate for sure.  

Here’s the point: Money games can’t fix the market economy! They’re a shell game, a temporary puff of life to make economic recovery appear like a real possibility, while only prolonging an agony that gets worse over time.  

Banks make money on money. Devaluing that currency by printing more of it is bad for their business. It increases inflation, the cost of money, and that’s bad for the money business – especially when interest rates have been persistently low. Artifically twisting rates lower will only give banks less incentive to lend – because there’s less room to profit and more risk in monetary loss.  

These monetary measures are counterproductive.  

That’s why bank CEO’s like Jamie Dimon look to capitalize on potentially higher returns from higher risk "synthetic" portfolios. Traditional lending, in a bad money environment with rock bottom rates, is simply not worth their time and effort. That’s why the housing market remains in total shamble (see: Home Resales Drop, Wall Street Journal on-line.) Banks aren’t lending money and it has nothing to do with interest rates being too high. 

Persistent monetary shell games are a sign of weakness and Fed desperation. The Market has systemic flaws that must be addressed before recovery can truly take hold (see my Fixing the Market series found on the right rail this blog area.) Perhaps this is Ben Bernanke’s biggest flaw. He’s an academic, and believes he can outsmart and outmaneuver less competent fiscal and regulatory governance. 

But he can’t. Only the President and Congress can effectuate the changes required to turnaround the Market condition. That is the only way to put an end to acadmeic monetary games that can’t possibly solve anything. Delay, yes. Fix, no.  

Until such a time, consider it a hostile environment for stocks and bonds.  

Stay tuned…and let me know if you need help
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