Wednesday, March 20, 2013

A Macro View - Part 2, Decay

To recap the last post, the economy is lack-luster, and it doesn't have a lot of upside potential.  There is too much debt and most innovation is just "bling", full of flash and dazzle and signifying nothing.

So the economy languishes, but the markets are on fire.  Interest rates are held low using both traditional and non-traditional means.  The Australian economist Steve Keen holds that the stock market is a debt-fueled bubble and he illustrates this by comparing the relationship between margin levels and stock market levels.  Highly correlated and both highly high.

It appears as though the stimulus money has gone into the market, rather than the economy.

Bernacke is going to hold tight to QE.  I don't blame him, it is his job to try and fend off disaster and make the economy grow, but I think he is fighting against the tide.

QE may have unintended consequences - the depreciation or potential devaluation of the US dollar, perhaps a currency war and the damage this will cause to international trade.  Throw the EU/Cyprus thing into the mix (the tax levy on savings balances) and confidence is further undermined.

I think this desperate desire to make things grow is at the root cause.  In nature, pruning and sometimes even controlled burns are helpful to the cycle.  But the point is, it is a cycle, of growth and decay, growth and decay. 

In my opinion, we want to transcend this natural process and just grow, grow, grow.  Did you know that never happens?  From a microscopic to a universal scale, we ride a sine wave that oscillates us, up and down, forever and ever, amen.

I don't know why this needs to be a problem.  Embrace it, we can't change it anyway.  Look for opportunity in the decay phase.

That will be the topic of the next post.

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