As I often tell my kids, there is no accounting sometimes for how crazy people can be. “Crazier than a
shit outhouse rat,” as my Grandpa used to say, shaking his head.
We know now that QE2 was a bust, it made over-valued stocks and commodities even more over-valued and the hike in input costs naturally caused friction and drag on consumption, corporate profits and economic growth. As recent data is confirming the medicine provided no lasting benefit and has actually helped to re-sicken the patient. Some are shrugging this off with “oh well the Fed will serve us another round”. And given the track record of the Greenspan and Bernanke-led Fed nothing much would surprise me.
That said, the question for thinking people today is not “how crazy will others be?” The question is “how much of my life savings do I want to wager on the perpetual success of a Ponzi scheme where I must hope for a never ending supply of greater-fool-buyers to keep the lie going?” We all must answer this question for ourselves, and be prepared to live with the consequences.
Some seem to be answering with a hearty “count me in.” Many of these are actually bravely betting with other people’s money “OPiuM”. Others have little to lose in the first place, so they’re desperate and reckless. They feel they have to go for broke because, well, they are broke, literally. Nothing much to lose, and no real management method makes them in for a penny in for a pound, no matter how catastrophic the odds. Another group are just blindly hoping; they don’t realize how badly the odds are stacked against their capital at current market prices. And they don’t seem to realize that the choice of whether or not to ‘play’ these odds is ultimately their’s to make.
As Madoff investors learned the hard way, when you buy into a Ponzi scheme you sign up for an inevitable financial loss. One way or another, fake gains are taken back and then some. We all must decide our rule set in advance in order to stand for something or we will fall for anything. At the end of the day, each one of us gets to choose how much we will run with the madness of crowds.
In this video, PIMCO CEO, Mohamed El-Erian explains why he does not believe the Fed will implement a third round of quantitative easing because it would be more damaging than helpful. It’s a good discussion and I agree on the damaging part; not so sure that will stop the Fed from doing it, but I hope that it might. Either way, I know our own rule set. Do you know yours?