The Big Fix - world markets snap their losing streak...based on more losing data

“Hey why’s the market up big?” your editor asked a stockbroker friend yesterday.

“Because everything’s great today?” the friend deadpanned.

“But wasn’t everything broken yesterday?” your editor persisted.

“Yes,” the friend replied. “But today it’s fixed.”

“Even Europe?” your editor asked incredulously. “Wasn’t Europe super-broken yesterday? Wasn’t Ireland bankrupt? And wasn’t the euro falling to its lowest level in nearly a year?”

“Yep,” said the friend. “But that was yesterday. Today, Trichet [the President of the European Central Bank (ECB)] came out and hinted the ECB might launch a European-style quantitative easing program. The ECB, in other words, might start buying up shaky bonds from Ireland, Spain and Portugal.”

“And that’s good right?” your editor joked.

“Yeah,” the stockbroker answered, “that’s good because any time any government steps in to fix a problem, you can be sure it will be fixed. So if the Irish borrowed more money than they can repay, no problem, the ECB can fix that, just by lending the Irish more money on different terms, while also printing euros to buy up a bunch of Irish bonds. It’s perfect really.”

“So is that the only reason the Dow is up 250 points?…Because the ECB fixed the Irish debt problem?” your editor wondered.

“No,” the friend replied, “the US economy is also doing just great, according to all these bozos that are showing up on CNBC today. Everything is just great. You can’t sell a house and you can’t get a job, but, hey, don’t worry about that, the ISM number was better than expected.”

“You’re sounding a little sarcastic there, buddy,” your editor cautioned. “Maybe you should try buying some call options for a change. As I keep writing in the Daily Reckoning, the stock market might be a short, but the bond market is a better short. This quantitative easing stuff is NOT bearish for stocks; it is bullish. Think about it; the housing market is flat-lining, the commercial real estate market is sketchy, all the TV people say gold is in a bubble and short-term bonds pay pitiful yields. So the money HAS to go somewhere. The stock market at least offers the hope of something better. I’m not saying things ought to be this way, just that they are this way.”

“Yeah, maybe your right,” the bearish stockbroker groaned. “But it’s hard for me to invest by default.”

“I don’t blame you,” your editor replied. “But just remember that cash isn’t the riskless trade it used to be. Thanks to quantitative easing – and sundry other dollar debasement schemes – cash is sort of the ‘new safe’ – certain to lose value, but probably not very quickly.”

The stockbroker laughed, but he wasn’t really laughing…and neither was your editor. Whatever the theoretical merits of Ben Bernanke’s quantitative easing experiment, the actual demerits are considerable. For starters, printing dollars is a strange way to instill confidence in the dollar…or in the economy that generates 13 trillion dollars worth of GDP every year.

For another thing, governments and bureaucracies fix far fewer items than they break, especially if the item happens to be complex…like a $13 trillion economy. The government does a decent job fixing potholes, but not such a good job fixing things as complex as ethnic strife in foreign lands or medical insurance, or even automobile registrations.

Governments muck things up. That’s what they do. That’s what Ben Bernanke is doing. Maybe, by some modern miracle, QE1, QE2 and whatever additional QEs may follow, will succeed in stimulating economic activity without also stimulating inflation. But we doubt it.

“We have to reinforce the authority of the public authority,” Trichet declared yesterday. “It is on the authority of the public authority that we can continue the resistance to an environment which is very demanding and will continue to be demanding for a period of time.”

Translation: We have to have more money to throw at the identical tactics that are already failing.

Our response: Falsum in uno, falsum in omnibus.

Translation: “False in one thing, false in everything.”

The curative power of currency debasement is a false concept – just as false as the “benefit” of every other governmental intrusion into the private sector. [Think: Social Security]. Neither Jean-Claude Trichet nor Ben Bernkanke needs “more authority”…or more money to indulge their monetary fallacies. They need more time in a La-Z-Boy doing crossword puzzles.

Let the debtors default and let the capitalists pick up the pieces.

Eric Fry
for The Daily Reckoning

The Daily Reckoning