Saturday, February 20, 2016

Stop Wasting Your Time On Politics

If you are a regular reader of this site you are likely more educated on finance and economics than 99% of the world. I don't say that because you are reading something special on these specific pages, but more importantly, you are taking the time to be here reading it.

Most people don't read or pay attention to anything happening in the financial world beyond checking their 401k balance a few times a year. Ironically, based on the way the human mind works and the danger someone can be to their own portfolio because of emotional decisions made at the worst possible time, not paying attention at all can sometimes be a benefit.

However, you are likely not that person. You probably have a strong understanding of what caused the financial crisis in 2008 and you also know almost every political and monetary action taken since then has only created the foundation for a much greater crisis coming in the future.

You know the 2008 crisis was caused by the "Greenspan Put;" the term used to describe central banks stepping in to "save" the financial markets every time they have tried to heal or correct since 1987 (when Greenspan took over as chairman).

Since 2008 we have moved from a policy of the "Bernanke Put" to "Pre-emptive Central Bank Action." What this means is central banks no longer act after the markets begin to struggle, they now act in advance to try and preemptively stop financial asset prices from declining in value. For more on this topic, which is by far the most important change in the global financial system this century, please see: The Grand Finale For Worldwide Asset Bubbles: Pre-Emptive Central Bank Action.

I first moved from studying the markets as a casual observer to studying the markets as a semi-religious obsession in the year 2004. I remember how my thoughts and emotions evolved as I became aware how the financial system worked and everything political leaders were doing to make it worse. Reading books, papers and newsletters was like reading about a world dying of lung cancer while our leaders were force feeding it cigarettes three at a time.

My first reaction was anger, as it probably was for almost everyone that has been through this intellectual awakening. Then over time, slowly, the anger subsided as I realized there was absolutely no changes that would take place unless they were forced on the world through a crisis. 

Politicians will never, ever, ever, make the right decision for the country in the short term. Even if there is a politician out there with the courage to make that decision they ultimately will never be voted into office. Ever

If that last paragraph makes you mad, please take a deep breath and let it go. There will never be enough voters with the intelligence or forward looking ability to vote in a leader that will stop or even slow down a crisis before it occurs. They will only vote for change, in anger, after a crisis has occurred. By that point it will be too late and the free market will have already made the necessary changes. 

Think back to the fall of 2008 when the world was watching stocks free fall, people line up for bank runs, and our leaders telling us we were only hours away from Marshall Law in the United States. That was the moment when the collective public became outraged and declared "there should be no more subprime loans issued in America!" However, the market had already taken care of the problem a full year in advance.

I worked in the residential housing industry back in those days. We had conversations every Monday morning about how difficult it was becoming for buyers to obtain NINA (No Income No Asset) loans. Then how difficult it was for them to obtain Stated loans (made-up income). Then all the sudden we watched them both disappear almost overnight.

Those conversations were not happening in late 2008, they were happening in early 2007. The market was already shutting off subprime loans while politicians and the public were focused on global warming and oil going to $500 a barrel.

The reason I review this topic now is because people are beginning to spend more and more time focused on politics. If you want to study candidates to learn about their the foreign aide policy, thoughts on global warming, gun control, drug policy, surveillance programs, abortion, gay marriage, and immigration then please take the time to do that.

But please do not spend one moment trying to figure out which politician will make an impact on our economy. They are all the exact same person in that regard, and yes, I am including Donald Trump who I think has a strong business mind.

When the next crisis arrives it will be met with a large dose of government stimulus and central bank action. That's it, no questions asked. Following the crisis there will be anger and outrage about how money was lent out to lower grade corporations (junk bonds), unprofitable energy companies (energy junk bonds), bubble priced real estate around the world, shaky emerging market corporations, Chinese shadow lenders who financed ghost cities, and European banks who were purchasing negatively yielding European government debt.

There will be large regulatory plans drawn up to make sure that type of terrible lending stops immediately. Only the lending will have already been shut off by the free market about 18 months before the government regulatory plans even begin to be drafted. 

The causes for the next crisis have been building day after day since March of 2009, and when the effect arrives people will clamor for politicians to save them. And they will. Then once we are "saved" they will focus on "making sure it never happens again."

Our main focus coming out of 2008 was to make sure the largest banks were no longer too big too fail. Today they are far larger than they were entering the last crisis, they are far more interconnected into the global financial system and the $700 trillion derivatives market continues to grow with no regulation. During the next systemic crisis, when liquidity disappears, they will be joined by private equity funds and ETFs which have become larger than the GDP of most major countries.

When you understand the circular process it is like watching a car wreck, adding more horsepower to the car, providing more alcohol to the driver and then sending them back out on the road.

Stop wasting your time watching politics. Focus your time on what will actually happen, not what should happen, and do your best to protect yourself and potentially profit from the inevitable outcome. 

For more see: The Grand Finale For Worldwide Asset Bubbles: Pre-Emptive Central Bank Action

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