E-Wave for the S&P 500 Index

[RCKS]

(Continued,from previous Post)

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"This is the same type of trap the Fed creates for businesses when it floods the market with liquidity. All that liquidity is mistaken for genuine economic activity. So, of course, businesses respond to it as businesses do, just as if it were indeed genuine activity. But when the money pumping stops, as it invariably must, businesses are left high and dry, with too little genuine economic activity to continue supporting them.

And this is likely why we have yet to see any "dire unintended consequences" from the QE programs. This ain't our first rodeo, after all -- most of us lived through the 90's boom (on the back of Greenspan's "free money" policies), and we likewise lived through the bust at the turn of the century.

We then lived through the boom of 2004-2007, which came on the back of the housing bubble, which again was created on the back of Fed policy. And we lived through the subsequent 2008-2009 crash.

And now we've lived through this "new" recovery, driven by the Fed and the world's Central Banks.

And through all that, we've learned this: The problems never seem to come while the Fed is running the pumps; the problems come afterwards.

Everything booms when the cheap money is flowing -- but this "false boom" is, in fact, exactly what plants the seeds for the future bust.

It seems to be an endless cycle of the current Keynesian economic policies.

So we've seen this movie before, and we know how it ends. What we don't know yet is exactly when. And exactly how bad the destruction will be when the inevitable bust comes, because this time, we are in uncharted waters. The last couple boom/bust cycles were primarily caused by "easy money" policy -- they weren't "easy money policy" PLUS $4 trillion dollars of QE. Plus the pumping of EU, BoJ, and BoE.

If the "bust" output is inversely correlated to the "boom" input, then this next bust may be even worse than anything we've yet seen in our lifetimes.

We also have to take into account that, beyond the Fed's significant pumping, Federal government spending increased dramatically, starting in 2009. This has been politicized quite a bit, but we are not discussing this for political reasons; only because it's relevant to the equation. Most people know that during the mere 8 years Obama was in office, the US national debt doubled, from about $10 trillion to about $20 trillion.

That is an awful lot of money being pumped into the economy over 8 short years.

And for all that effort, we got a tepid "recovery." Plenty of folks lament the debt we'll be passing to our children, but how many have stopped to consider what we actually purchased with that $10 trillion? And what happens when the effects wear off.

Of course, how many more times can we do that? If we doubled the national debt every 8 years, as we've done now over the past 16 years... well, nobody wants to think about that.

Shortly after I wrote most of this, Trump's new tax plan cleared its first hurdle. That tax plan might keep the "free money" going for a while, so keep that in mind. And likewise keep in mind that more free money is just going to add to the above numbers, it isn't going to "cure" anything.

Beyond the Fed, keep in mind that, even though the EU is on the "verge of collapse," it is still pumping money into the markets; as are other CB's. Since the EU is going to cease to exist in the (relatively) near future, and for other reasons, there is a lot of foreign capital flowing into our (America’s) markets right now. And that’s continuing to fuel the bull.

We are still perceived as the world’s safe haven, so bad times elsewhere means more money flows into our markets. All this foreign capital is in fact part of what allowed the Fed to quit pumping so much in the first place. The foreign central banks, and heavy-hitter foreign investors, are doing the pumping for them now.

Which brings us to our next point: A lot of readers have asked (in the years since my last "bearish fundamental" article), "Why can't the Central Banks keep this going forever?"

Well, because that's just not how the world works, is why. Producing liquidity out of thin air is not the same thing as creating wealth through production. Just take this to its logical conclusion to understand it: What would happen if the Fed printed $1 trillion for every man woman and child in the USA and handed out the money from helicopters? Would things "go great"? Is everyone rich afterwards? Or would worldwide financial chaos ensue? (Hint: it's the latter.)

You can't create material wealth from thin air because material wealth is the result of exchanging something tangible for something else tangible: Goods, services, etc., must be produced somewhere up the line, and then they can be exchanged, and that activity produces material wealth. There is no way to produce wealth from "thin air" any more than you could produce a house from "thin air."

Summed up in its simplest possible form: You can't get something for nothing unless you have previously gotten nothing for something.

So, that's reason number one as to why the Central Banks can't keep this false prosperity going to infinity. The game only works if people perceive money to have value -- and money loses its value if it's treated like it's a worthless commodity that can be endlessly produced from nothingness.

Thus the Central Banks know they're walking a fine line when they're running these programs, which is why they wear suits and act overly serious (I'm only half-joking -- "image" is very important in this game), and why always heard so much talk reassuring the public that they would "taper" and "tighten" and "reduce balance sheets" and so on. If people were to lose faith that there was some degree of responsible management behind this, then the whole jig collapses overnight.

So the CB's can't do this endlessly, because everyone knows it's "cheating." We're willing to overlook a little cheating, as long as we're reassured that it's temporary and under the "strictest" control. But endless cheating would crack the foundations of faith that keep the whole system functioning.

Reason number two is that everything moves in cycles of endless change. You've heard me say this before, but consider this: Change, in a very real sense, is exactly what creates our perception of time.

Time is fundamental to the nature of reality. Change is fundamental to the nature of time. So change itself is likewise fundamental to the very nature of reality.

The Central Banks may appear all-powerful, but they are not capable of altering the nature of reality.

So, even if they could cheat the system as often as they wanted (which, as we just established, they can't), then eventually the fundamental nature of reality would impinge upon the dream. Something would happen that alters the playing field. It's unavoidable.

"Black swan events" (unexpected cataclysmic-type events) are really a misnomer, because they're not "long shot near-impossible events," as implied by the "black swan" label. They are instead events that come about (in a seemingly-cyclical fashion) because time itself is -- fundamentally -- constant change.

And if things are going smoothly, then change can only be in the opposite direction.

The moment the sun reaches its zenith, it begins to set. There's nowhere else for it to go, unless we altered the nature of time itself and could somehow freeze everything, to stop change from occurring. But not even Janet Yellen can stop the progression of time.

So the Central Banks hope this will die the way they "want it" to, but they do know it has to die eventually, to preserve faith in the system. Obviously, they hope it will not be a Black Swan Event that ends this round, because they lose all control in that situation. But for reasons just discussed, that is a very real possibility.

One way or the other, it does eventually end.

As I said, it may not be tomorrow, and may or may not be "soon," so I'm not saying we should start worrying obsessively and blindly shorting every rally. In fact, I would strongly suggest you do not do that. Let's partake of the punchbowl for as long as the party is still going. When the time comes for it to end, the signals will be there.

As I said, I wrote this partially because I wanted to provide at least a bit of "early" education for the new generation of investors.

And I did want to put to rest the myth that this "new prosperity" could go on "forever." It cannot go on forever, because the fundamental nature of reality forbids it. Trade safe."