The Edmond Sun

May 10, 2013

THE ASTUTE INVESTOR: Too many things don’t make sense

Nick Massey
Special to The Sun

EDMOND — Are you as confused as most people with all the conflicting pieces of data and advice from economists and other forecasters? Who do you believe? On the one hand this, on the other hand that. Which is it? To paraphrase Harry Truman, “Somebody please find me a one-armed economist!”

There is a very funny book about cowboy wisdom titled “Don’t Squat with Yer Spurs On!” The best piece of advice the book offers is “No matter who says what, don’t believe it if it don’t make sense.” It’s good advice.

A lot of what you are hearing every day “don’t make sense” and you shouldn’t believe it either. We hear that the economy is recovering rapidly, the consumer is back, housing has bottomed and we are seeing the beginning of the next great bull market. In light of the facts, those arguments “don’t make sense.”

In 2006 I was on CNBC when I predicted the Dow would hit 14,000 in 2007. At the time, that was a pretty outrageous suggestion. I was right and was actually on the floor of the New York Stock Exchange with CNBC when it hit 14,000 in July 2007. Then I got cocky and said that it would hit 15,000 by the end of the year. Oops! It hit 14,100 in November and that was it. There is nothing like the stock market to humble you now and then.

I tell you this because the Dow hit 15,000 this week — a new all-time high. I guess I could say I was right about my 15,000 prediction — I was just six years early. So much for timing. Wall Street just about threw a parade over the new high, but many people remain skeptical. There is a saying among technical traders that “the trend is your friend.” It would be better to say “the trend is your friend until it isn’t.” The “isn’t” part is coming. I just don’t know when.

I could rail against the Fed, the European Central Bank and the Bank of Japan, as each entity (along with other large central banks) has had a hand in driving equity prices to crazy highs in the face of anemic economic numbers, all the while siphoning off value from savers and bondholders. But you’ve heard all that before. What worries me is what comes next, and what that means to you and every day investors.

Stability creates its own instability. It is a weird statement, but it has a lot of power. Economist Hyman Minsky described the process well. Minsky, who died in 1996, was an American economist and professor of economics at Washington University. His research attempted to provide an understanding and explanation of the characteristics of financial crises. Minsky was sometimes described as a post Keynesian economist because, in the Keynesian tradition, he supported some government intervention in financial markets and opposed some of the popular deregulation policies in the 1980s and argued against the accumulation of debt.

He pointed out that, over time, stability (or the lack of volatility) creates instability because people become accustomed to the status quo, become over confident and then take on more risk than they should.

A few examples: The markets are going up again? Of course they are. The Fed is printing $85 billion a month to make sure of it. Are the manufacturing and trade numbers bad? No worries, the markets are going up again anyway; the Fed is making sure of it. The European Union is in recession? No problem, the ECB has pledged to take care of it, and the markets are going up again.

At this point we all know the game. Whatever happens, wherever on the planet it happens, the markets won’t go down because the Fed doesn’t want them to.  Right up until the system collapses on itself, that is. Right up until people realize that we added jobs, but fewer jobs than the number of people who joined the labor force. Right up until people realize that we added 278,000 part-time jobs because people couldn’t find full-time work. Right up until people realize that unemployment in the EU is now above 12 percent and going higher.

But until then, the markets are marching higher, propped up by the central banks across the world, who continually tell us not to worry, because they’re here to make sure nothing bad ever happens. The longer this situation goes on, the worse the eventual downturn becomes. This is what eventually creates the “Minsky moment” when people become too complacent. Perceived stability actually creates instability as people take on too much risk before it suddenly blows up.

Why would central bankers continually do the economic equivalent of feeding drugs to addicts when the obvious but painful choice should be detox? Because no one wants to be the person to pull the plug. No one wants to be the person who acknowledges the actual size and scope of the debt crisis that never went away, but was just pushed under the rug and hidden by trillions of newly printed dollars, yen and euros.

With the markets at new highs, now what? How long can central banks keep up the charade? How long will people blindly follow the pied pipers of finance? I don’t know. For now, there is not much choice but to go with the flow. But be careful not to stay at the party too long as there is definitely greater danger ahead. Now that makes sense! Thanks for reading.



NICK MASSEY is a financial adviser and president of Householder Group Financial Advisors in Edmond. Massey can be reached at www.nickmassey.com. Securities offered through Securities Service Network Inc., member FINRA/SIPC.