Don't Fight the Guys Who Have the Power to Print Money

Here is a very good post from Michael Murphy regarding the psychology of the typical investor in regard to the emergence of bull markets in the midst of widespread skepticism. Murphy is of the view that a new bull market is under way and that the typical punter is going to miss out on it as is usually the case. His characterization of the process is familiar:

As you can tell if you read the comments on Yahoo Finance, new bull markets have a way of keeping undisciplined investors on the sidelines. Near the bottom, the pain gets too great and they sell their stocks to go to cash. As the market starts up, they buy some Ultrashort exchange-traded funds to make back some money when the “little bear market rally” falls apart. After taking a 30% loss on those, they start posting angry messages about how this is a garbage stock rally, a bubble manipulated by the hedge funds or a sucker's rally doomed to fail. They're not going to get sucked in, no siree.

After the market has recaptured some key levels, they decide it looks like the economy is starting to recover, and they would be willing to buy some stocks except that everything has gone up too much from the lows. Their fear of a weakening economy is replaced by a fear of buying too late, and getting caught at the top of a bear market rally. So they wait, hoping each consolidation down is the start of something big that will let them get back in gracefully. They forget that the market's job is not to make us all look graceful, it is to make us all look stupid. By the time they decide this is a bull market, not a bear market rally, and start nibbling, make some money, and build up their courage to get fully invested – the market is ready to top. Happens every time.

One comment which does lend great plausibility to his stance is the notion that one should never fight the Fed or as he puts it "there is no point in getting into a financial war with the guys who have the power to print money."

The moral of the story perhaps is that the long side is the place to be while they are printing money and that applies to equities, and especially to commodities but the long side is not the place to be for US Treasuries.

Comments

[F. Bradeen:]

Yes. I does bother me that the FED has pumped all this money into the banks with trading departments attached. Their trading departments then go out, using our money to pump up stock prices, profiting thereby.

And Yes, money must ultimately go someplace and it seems to be going into stocks and commodities at least for the moment. So your analysis may be right but only time will tell. I suspect there are a lot of land mines still to go off as the months pass. We do live in interesting times. Don't we?

Jun 15 07:44 PM

[Jasper M:]

They Don't really have the power to print money; rather, the power to create Credit. NOT the same thing (contrary to fashionable notions).

THIS investor will happily fight the Fed, as history, and the Austrian School (and pretty much any indicator you can name), tells me that they will lose.

Jun 15 09:15 PM

[Prudent Man...:]

If the Fed could create prosperity we wouldn't have to work. Money is not prosperity. It often takes people a few decades in the market and paying the price to get the education they will never get from school, books and certainly not for investment letters.

When you earn twice as much as you did ten years ago, have no debt and your standard of living has decreased you get the idea that the government is not on the side of the entrepreneur or middle class citizen Oh, there isn't any inflation. Does anyone at the Bureau of Economic Statistics shop? Remember they are appointed by politicians so only a fool would believe their numbers.

To politicians the "Forgotten Man" is the one to be skinned in order to buy the votes of the parasites. Where did the paper-shuffling "Boomers" dispose of Free Enterprise in their greedy quest for political correction and, therefore, mediocrity at best?

What will bring back meritocracy? How about a "Meritocracy Political Party" reigniting the Contract With America and the enactment of Congressional Term Limits? One political plank: Produce, incentive, ingenuity, save and the country will be on the road back to greatness.

Jun 15 09:55 PM

[Market Sniper:]

Clive makes the case that markets can go up forever as long as "money" is printed. Wonder how the Zimbabwe market in Harare is doing? Woops. They no longer have a stock market there. Basic problem again with what "money" is and what "money" is not. Fiat is NOT money. It is DEBT.

Jun 15 10:03 PM

[Jason Tillberg:]

I didn't like the idea that JP Morgan went out and bought 2 million barrels of oil and leased a tanker to store it on after taking $25 billion in TARP.

Vipers and thieves.. rout them out.

Jun 15 10:58 PM

[Market Sniper:]

Heads on spikes.


On Jun 15 10:58 PM Jason Tillberg wrote:

> I didn't like the idea that JP Morgan went out and bought 2 million
> barrels of oil and leased a tanker to store it on after taking $25
> billion in TARP.
>
> Vipers and thieves.. rout them out.

Jun 15 11:11 PM

[untrusting ...:]

Jasper, sounds OK and you may well be right in the LT, but sure hope you have LOTS of cash and a long enough time frame .....because I always remember the adage "the market can stay irrational probably longer than you can stay solvent".


On Jun 15 09:15 PM Jasper M wrote:

> They Don't really have the power to print money; rather, the power
> to create Credit. NOT the same thing (contrary to fashionable notions).
>
>
> THIS investor will happily fight the Fed, as history, and the Austrian
> School (and pretty much any indicator you can name), tells me that
> they will lose.

Jun 16 12:40 AM

[Dave Wrixon:]

What of the hunting, hunter bold?
Brother, the watch was long and cold.
What of the quarry ye went to kill?
Brother, he crops in the jungle still.
Where is the power that made your pride?
Brother, it ebbs from my flank and side.
Where is the haste that ye hurry by?
Brother, I go to my lair to die!

Jun 16 12:55 AM

[Dave Wrixon:]

Actually that is incorrect. What you and me get is debt. What the Fed issues is Money, although it is increasing worthless. Fiat currency are here to stay because they have the most efficient asset backing which is implicitly the tax base of the government. Unfortunately, with expanded Government debt, an expanded Fed balance sheet and a weak economy that cannot sustain realistic interest rates let alone more taxation, the US Dollar is starting to look increasing worthless.


On Jun 15 10:03 PM Market Sniper wrote:

> Clive makes the case that markets can go up forever as long as "money"
> is printed. Wonder how the Zimbabwe market in Harare is doing? Woops.
> They no longer have a stock market there. Basic problem again with
> what "money" is and what "money" is not. Fiat is NOT money. It is
> DEBT.

Jun 16 01:01 AM

[Jasper M:]

untrusting,
Why, yes, as a matter of fact, I Do have lots of cash. And time. BUT I think the failure of reinflation will be manifest by next spring.

Dave,
Congratulations, for bringing up a better literary reference than I can.
But, forgive me, I think your last post refutes itself -
"Fiat currency are here to stay because they have the most efficient asset backing which is implicitly the tax base of the government"
As over-issuance threatens to destroy a currency, it will so distort the economy it is used in, as to destroy the tax base that is its backing.

Jun 16 04:01 AM

[johnbee:]

I subscribe to the go where the money is theory. weight of money (buying power) has always been the principal reason any market goes up almost regardless of conditions since it has to go somewhere, and that's what Bernanke has created and is directing.
What he is trying for is a balancing act to keep everyone happy in which he saves the banks on condition they help out such as keeping the oil price at a level which helps the oil countries balance their budgets and so stops revolutions. This makes the banks profits also so neither they or others will want to see new losses now. For the same reason Banks have also been buying equities and helping to finance new issues to put a brave face on the Stock market and at the same time keeping people just scared enough to buy enough Treasuries while keeping gold below $1,000 to make the $ look fairly firm by comparison, while letting a small amount of inflation help house prices along with very low interest rates.
Bernanke has done a good job to date but he must sweat every night that he can keep all the balls in the air at one time. He has obviously been helped by friendly Japan to say they have confidence in the $; and it makes sense for the Chinese and Rusians to say say also, as they have recently done, while slowly divesting into commodities and hard assets and buying IMF bonds in an attempt to find alternatives to the $ in the future. Everyone of them knows it all hangs in the balance. If it all does collapse again then the banks are finished for good. What best therefore for investment? Gazprom is the largest energy company in the world supplying natural gas and oil on long term (up to 50 years)contracts all over Europe with immense reserves. Agriculture plays such as DBA are effectively currency hedges and with the least downside if the markets fall again as people need food first and foremost, and the Canadian wheat and grain fields have all but failed this year. India is not so reliant on exports as China but China has a far better global strategy and huge funds to go with it to buy and stock commodities cheaply for future internal growth, and both are still growth areas and will be for years ahead with low cost labor and huge expanding populations equalling half the world's people; mostly under 35 years old with far more skilled people than Europe to come in future years. In any sensibiity these stocks are riduculously cheap. These countries will not nosedive for long, if at all, as there is too much impetus now and the desire to work to better themselves while the West whinges for its welfare and pension rights
My stocks: Gazprom;Infosys; Morgan Stanley China fund; Chinalco;
China Mobile; DBA. Only buy exporters in US and Europe.

Jun 16 05:36 AM

[fireball:]

use them to up your fiat currency. they have made it fairly obvious that political favors will be repaid and ultra wealth will be protected. use them to gain to protect what you can. the banking cartel scam will most likely run its' course. take the trades buy some metal. later use the wealth to resist.
this is not about warehouses full of fiat currencies anymore. it is about making the sheeple dependent in order to solidify power and control. in the end he who has the gold makes the rules. you could substitute real assets for gold.

Jun 16 08:25 AM

[Graham and ...:]

"Boys will be boys" and more to the point, "banks will be banks." We just need to change the rules of the game.


On Jun 15 11:11 PM Market Sniper wrote:

> Heads on spikes.

Jun 16 08:27 AM

[Alphameister:]

Mike Murphy's description is a classic, Clive. Had to laugh as I read it because I knew the reaction on Seeking Alpha would be the same as on Yahoo Fiinance. Hold up a mirror and those guys still can't see themselves.

Jun 16 12:23 PM

[OldLimey:]

Use TARP money to drive the market up - suck in the stooges - sell and short - use TARP money to buy back in and ride the next elevator up - etc etc. Provided the downlegs aren't sufficiently serious to cause revulsion, this can go on for years as we cycle periodically between the promise of recovery and the reality of low, jobless growth. Sheep, fleece, and shears come to mind.

Jun 16 02:13 PM

[untrusting ...:]

Old Limey,
A good summary. Perhaps alphameister above has enough money to purchase all the TARP spike shares Goldman, JPM, etc. have been purchasing to keep the bear market rally going. Although that is pretty doubtful, as that is one massive amount of shares. I am a buyer also but at significantly lower levels from here, so alphameister is welcome to purchase as much as he may want at these levels.


On Jun 16 02:13 PM OldLimey wrote:

> Use TARP money to drive the market up - suck in the stooges - sell
> and short - use TARP money to buy back in and ride the next elevator
> up - etc etc. Provided the downlegs aren't sufficiently serious to
> cause revulsion, this can go on for years as we cycle periodically
> between the promise of recovery and the reality of low, jobless growth.
> Sheep, fleece, and shears come to mind.

Jun 17 01:05 AM

[Did U Think...:]

Well said Jasper. The fed's ability to control the economy is a complete illusion which is what you would expect from a bunch of con men.

The only caveat here is timing. While the fed is not larger than the market, it is a master gamer of same and it knows how to stretch its influence using leverage in the financial markets as well as in the political arena. The fed is starting to tire out but may have one last hurrah left in it leading to a final summer rally and then the dreaded Red October.

What the fed is about to learn is that it can't fool all the people all the time and that the market is far bigger than any government.


On Jun 15 09:15 PM Jasper M wrote:

> They Don't really have the power to print money; rather, the power
> to create Credit. NOT the same thing (contrary to fashionable notions).
>
>
> THIS investor will happily fight the Fed, as history, and the Austrian
> School (and pretty much any indicator you can name), tells me that
> they will lose.

Jun 17 02:10 AM