So far the forecast is on track. Since Marc Faber’s prediction about continuing economic stimulus leading to high inflation and resilient stock markets, the first and third pieces of that causality chain are apparent enough. Rumor is that the Fed will activate a new round of monetary easing and that fiscal stimulus will soon take place in the form of millions of forgiven mortgage obligations. Then there is the possibility of postponing or canceling tax increases scheduled to take effect in a few months, and the aggregate capital either entering or staying in the system is quickly adding up. Although inflation is not yet a visible threat, one can begin to see where Faber was going with this.
In the meanwhile, some of us continue to conjure up images of Madoff. His also was a system predicated on stimulus spending, if you will, having built a platform in which all participants thrived as long as the market continued to draw new funds. One could almost argue that, had the blueprint been disclosed from its outset, and had it been marketed less exclusively, Madoff’s may have been a legitimate system to compete with any developed economy. It would have been in every participant’s interest to keep the flow going, and for that reason perhaps all may have done so. In a worst case, outside intervention would have been justified and probably obtained, it being a legitimate scheme and all.
Of course, there was nothing underneath the surface in Madoff’s structure – either the real or the fantasized – and it was especially due to this vacuity that it could not last. Call it a bubble that eventually must pop, or a domino effect that can’t continue perpetually: What we are really talking about is a “greater fool” concept. Although we sometimes kid, foolishness, like everything, really does have a limit. When this manifests itself, we see bubbles start to pop, and dominoes stop to fall, and, in economic terms, perceived value declines to where real value – actual value based on fundamentals and building blocks and so on – can support it.
So, if and when the dominoes no longer fall in the real economy – on account of no stimuli left to implement, or because the limit of foolishness should get tested – the difference in collapse between this and the Madoff microcosm will be the extent to which the real economy can produce real value. The greater that real value produced, the lesser the fall. Ideally, real (economic) and perceived (market) value coincide, in which case there is no correction at all… but this is too much to hope for in an environment of free money.
All of which brings me to a movie I saw again recently, The Last Days of Disco. Some of us remember the era that is the film’s subject, that time in the early and mid eighties when perspectives and goals changed en masse. This was the time when “hippies” and “punks” became “yuppies.” Such innocent times, with hindsight. (Even Gordon Gekko – a different movie, I know, but covering the same era – seems tame now. “Lunch is for wimps…”? How endearing, how downright naive.) With hindsight, this may have been the period that we will look back to as the beginning of a bubble that now must be kept from popping. This was the time when markets (perceived value) displaced the economy (real value) in the pecking order of attention.Not to dismiss the importance of markets, which serve an economic purpose, but we may now wish to revisit history, maybe wax nostalgic about times when fundamental value drove financial value rather than the other way around, and refocus our energy accordingly. The party was nice and those of us who were there are fortunate to have been let in. But the sun is now rising on a new day and, as the crowd lets out into the early downtown street, the club doors have been closed and we find ways to move on. As my favorite singer used to like to say, when the music’s over, turn out the lights. This can be taken in a variety of ways.
Disclosure: No positions.
Disclosure: No positions.