Saturday, July 20, 2013

2013 Second Half Outlook: Stimulus Is Now Lifeblood Of The Global Economy

2013 Second Half Outlook: Introduction
2013 Second Half Outlook: How Rising Rates Impact The Overall Economy
2013 Second Half Outlook: Why The Fed Can Never Exit
2013 Second Half Outlook: What Is An Interest Rate Swap?
2013 Second Half Outlook: Stimulus Is Now The Lifeblood Of The Economy
2013 Second Half Outlook: US Stock Market Decline Coming
2013 Second Half Outlook: Real Estate Experiences Mortgage Rate Earthquake

Most of the people actively involved in the financial markets day to day, such as the operators of the high
frequency trading machines (which dominate close to 70% of all trading) and the large investment bank traders (which control almost everything else), have a clear understanding that behind all the smoke and mirrors there is just one simple summation of the current market structure:

Stimulus is now the lifeblood of the economy. It is the only thing sustaining the current artificial mirage we current live in.

Readers of this site understand this, but I think it is important to know that most professional participants in the financial markets as well as most intelligent business owners understand this as well. 

With that understanding, the obvious question is: why would these participants even be involved in the financial markets if they know this?

The answer is that they believe they will be the first person out the door when the building catches on fire. Some of the them will be, and they will make a lot of money trading these artificial markets until the building does catch on fire. Some of them will not. One thing both we, and they, are sure of is that the greater population will burn in the building when it catches on fire. Those that invest into stock and bond mutual funds “for the long run” will still be holding their assets strong . They will turn around when the building catches on fire to see that the 1% of the participants (that dominate most of the day to day activity) will have left already left the building before it was even possible to see or smell the smoke.


It is these unfortunate people, just as they did in 2008, who will feel completely duped when the collapse arrives. This time, as we will discuss in a moment, the collapse will come in both stocks and bonds. Those that think they are protecting themselves by hiding in the “safety” of bonds will find out just as they did in June, that their mutual fund which holds 60% bonds and 40% stocks for safety is seeing 100% of its value falling simultaneously.

At the same time the financial industry that sold them the mutual fund will still collect its 3% annual “maintenance fee” of the fund as well as profit from their assets falling as they take the short side of the position on their trading desks on the way down.

It will be horrifying to watch for those that understand what is coming.


I bring this up because we are about to discuss more of a fundamental conversation around the current (over)valuation of stocks and bonds (specifically in America). This helps show why there is no fundamental reason beyond “stimulus” for asset prices to be rising, and will help those that are witnessing the coming collapse understand why it occurred.

But the truth is that this understanding does nothing to help forecast the timing it occurs, which for some reason makes the situation extremely frustrating due to natural human psychology.

The music will stop when it stops, just as it is impossible to determine which snowflake will trigger the avalanche on a very unstable mountainside.

What is far more important than trying to find the specific snowflake is to understand that the mountainside is primed perfectly for avalanche. Then you can just relax from a distance, while drinking coffee, and enjoy the spectacle as it occurs.

With this understanding we will focus now on the instability of the mountainside.

Up Next: 2013 Second Half Outlook: US Stock Market Decline Coming

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