Juggling Dynamite

Former Treasury Secretary John Snow explains the short strokes of QE last night on PBS Nightly News. He makes no bones about explaining the government's objective in printing more money (adding to tax payer debt) in order to buy paper assets in the open market. To wit:

“…you buy government paper that’s held by financial institutions or individuals. And then they have the money. And then they go out and buy some other financial assets, stocks. And they drive up the value of those other financial assets so we get an increase in the value of financial assets which means an increase in the value of lots of peoples’ household wealth. And the idea is if household wealth goes up, then that will be a spur to spending.”

So you artificially prop up asset prices above market values in the hopes that people will not sell their assets at these elevated levels and bank the profits, but rather you hope that they will continue to hold their units in the ponzi scheme, “don't worry be happy”, and find a way to keep spending no matter how bad the economy looks. Wow, this is the best plan of the most educated and informed financial minds in the government? Who wants in?

Watch the full episode. See more Nightly Business Report.

Hat tip: Tim Iacono.

ECRI's Lakshman Achuthan (on FOX! yikes, note the fires of hell graphic burning in the background) discussing what impact stimulus can have on the jobs market, and when ECRI can make a call on recession vs. soft-landing ahead. He says they will have a reading on this either way by the end of this month. So, a trick or a treat by Halloween.

August was very negative for risk markets around the world. Then September (and so far October) took off with wild abandon. Wild is the right word. The US dollar began falling again against the basket of world currencies and once more we are seeing a perfectly inverse rebound in pretty much everything else: commodities, equities and high yield debt. As shown in this next chart of corporate bonds, so far it does not matter a wit whether an issuer is an excellent or low grade credit, everything is being blindly grabbed like candy in a scavenger hunt.

If only indiscriminate buying were all one needed to do for successful investing. Alas we have seen this behaviour end badly many times over the past 20 years. At some point in the not too distant future, the tenuous condition of the global economy will come home to roost in a fresh wave of shock and panicked selling, as levered traders run back to liquidity and passive investors are left holding the losses all over again.
What is a rational investor to do? Keep your head. Stick to your prescribed risk management method, execute as your rules dictate, then block the hustle and noise: plug your ears and hum.
At the same time, we should not let green periods in publicly traded markets cause us to lose sight of the massive challenges currently at play in the world economy. This is not what a recovery is supposed to look like. See: Across US, Long Recovery looks like a recession for a good update.