Rodney Johnson | Thursday, April 11, 2013 >>
In the early 1950s, Dallas, Texas, suffered a record drought. The town was practically a tinderbox, with officials worried about the possibility of a massive fire that could raze the entire area to the ground.
When the drought finally broke, regional officials vowed they would beat Mother Nature by creating a series of reservoirs, which is how the greater Dallas area came to be marked by many large, manmade lakes.
Of course, the inevitable happened…
These lakes became watery playgrounds. People started building homes near them to enjoy the waterfront life. This was all great, right up until Dallas needed to use the water.
In the mid-2000s a fuel spill contaminated one of the area’s main drinking water reservoirs. City officials studied their options and created a contingency plan, which involved using Lake Ray Hubbard, a very large reservoir surrounded by homes, for drinking water.
This plan would have taken almost all the water out of the lake, leaving a big, messy mud pit behind. Naturally, citizens along the lake were outraged. Not only would their property values plummet because “mud-side living” doesn’t have the same ring to it as “lakeside living,” but also the stench and foul environment would wreak havoc on the local communities.
The city’s response: “Not our problem! We didn’t build the reservoir so you could have a water-front property.”
This story came to mind recently when Harry Dent was on CNBC as the S&P 500 reached new highs…
As everyone familiar with our research knows, we are somewhat bearish. We think that propping up a stock market by printing trillions of new dollars while incurring trillions in new governrnment debt is a bad idea.
There was another panelist on that show that took a bullish stance. His view was that, as long as the Fed keeps printing trillions of new dollars, the sky is the limit! Everyone should jump into the markets so they can cash in on the good times.
This struck me as the same as saying, “As long as Dallas never uses the lake water, then lakeside residents have a great deal!”
What happens when things change?
Harry pointed out that when the Fed stops printing there’ll be this massive sucking sound in the financial sector, which will lead to a dramatic drop in the artificially inflated assets.
The bullish guy’s response was telling…
He agreed with Harry, and said that the possibility of a big drop was the reason the Fed should NOT quit printing new money.
So, we have a financial meltdown caused by too much debt and irresponsible lending. The Fed attempts to stave off the resultant economic collapse by printing new dollars, which it then hands to banks through asset purchases, and holding interest rates below inflation.
This does nothing to solve the long-term economic slowdown, but it DOES create asset bubbles in some areas, including the equity markets, while stealing value from savers.
And now, five years after the downturnrn and four years after we began to recover, we’re supposed to count on the artificial influence of the Federal Reserve to keep an asset bubble alive… even though the programs are not serving their intended purpose?
Call me skeptical. Call me anything you like. Just don’t be fooled…
We recognize that the markets are moving higher, but we want to make sure we aren’t left standing when the music finally stops. That’s why our Portfolio Manager for Boom & Bust, Adam O’Dell, keeps both long and short positions in our model portfolio. We want to capture gains, but not be blind to the risk in the market.
And when both bears and bulls finally openly discuss the house of cards on which market gains are based, it should be obvious to everyone that things won’t end well. The only way for this to not fall apart is for the Fed’s actions to become somewhat permanent, printing hundreds of billions – if not trillions of dollars – per year, while holding interest rates below the rate of inflation.
The continuation of these programs would mean an ever-falling standard of living for the 80%+ Americans that live on their paychecks or fixed income, while pushing up the value of inflation-friendly assets that relatively few people own.
The old economist Herbert Stein once wrote, “If something cannot go on forever, it will stop.”
Ahead of the Curve with Adam O’Dell
Rodney, as always, makes great points about the rather befuddling disconnect between our economy and stock markets.