Tuesday, September 28, 2010

The Rise of Funny Money

As the days drag on and the Federal Reserve continues its program of printing money in order to buy Treasury bills one wonders how this will all end. The past few days have seen economist after economist after financial pontificate alluding to the bright light at the end of the tunnel - Stocks. Its time to buy, buy, buy they say. What gives them the confidence? The Greenspan/Bernanke Put, better known as Quantitative Easing (printing money to buy government debt). These prognosticators are of the belief that that we are in a Heads We Win, Tails We Win economy. They've decided that if the economy gets stronger stocks will do well, but if the economy gets weaker the Federal Reserve will step in and support the market via more printing of money which will help support stocks and potentially even juice them ever higher. No matter the economic situation....stocks go up. In this view more funny money equals higher stock prices, in fact the worse the economy gets, the more funny money is printed and the better stocks will do.......what?

If you are like me you might be thinking to yourself....WTF (for all you Modern Family junkies...Why the Face?). In my view when a country purposely devalues their currency in order to bail itself out from past blunders the consequences shouldn't be a reward, it should be punishment.

My fear is that we are in for a Rope-a-Dope. I'll explain this more in my coming quarterly commentary. The Federal Reserve is trying to lure you into assets that you shouldn't be buying (at least at current prices) in order to bail out their insolvent banking institutions (our banking system is solvent only because of gimmicked accounting). The problem is that you can't simply keep blowing bubbles without consequence. You can't spend (even if you are the reserve currency) without consequence, you can't continue to borrow unlimited amounts of money without consequence. The Fed, however is backed into a corner and they are shooting their last bullets - hoping things work out, even though they know the odds are against them. Its like a hail-mary pass, you have little time on the clock and you are losing, either you go for the long-shot touchdown pass and make it or you throw an interception and the game is over anyway. The Fed is throwing a hail-mary, but the only potential receivers are down with hamstring pulls.

The stock market just might end up gaining heavily in the coming years, which would in turn lure people back into it - all of it is a set-up for the potential ultimate fall. Don't get me wrong, I believe that the market will likely end this decade closer to 16,000 (assuming we don't have another Great Depression), but we just might go to 7,000 or below first. The question remains how many people can put up with that kind of volatility for such a puny return.

The Federal Reserve is playing a dangerous game as it aids and abets our Federal Government, effectively enabling the Government to spend at will - knowing the Fed Reserve will be there to take up the slack if needed. This is the scariest Too Big Too Fail ever created.

Scott Dauenhauer CFP, MSFP, AIF