In the last few years we’ve witnessed unprecedented government intervention at every twist and turn. We’ve seen massive fiscal stimulus, endless monetary stimulus, QE2, Euro plans, etc, etc. It’s been an endless parade of government “fixes” that don’t appear to have really fixed anything. And if you’ve been an investor in this market, there is one clear cut lesson from all of this government intervention – don’t fade government intervention. If you’ve shorted government intervention in the last few years you’ve had your face smashed into the pavement time and time again.
The problem is, without the government intervention, market participants inevitably settle into the reality that the government isn’t really fixing anything through all of these various policies. They’re more or less shuffling chairs around on the deck of the Titanic. And yes, they can move the chairs where ever they want when ever they want, but they’re not fixing the hole that is sinking the ship. So this market has turned into one great big “buy the rumor and sell the news” event. This all really started in early 2009 when rumors of suspension of mark to market and the implementation of several other government policies were rumored to be on the table. At that time I made an incredibly lucky buy call the day before the market bottomed on March 8th (my thinking was entirely based on this idea of not fading the government), but I never could have imagined that the strategy over the next 3 years would be one of constantly trying to front run the governments at every twist and turn.
The recent Euro “fix” is the latest and greatest case of government intervention. And if you’ve been short into this event you’ve had your face rightfully smashed. And while this government intervention appears to be great in short bursts it also has an inevitable downside. And the problem for the markets now is that they have to once again wake up to the reality that there’s no government intervention in the near-term. The EMU leaders have unveiled their great “fix”. Fiscal stimulus in the USA is off the table as politicians fight over the bankruptcy of the USA that will never occur. And QE3 is on the table, but unlikely to be implemented until we see inflation indicators simmer down. Who will calm the markets in the near-term with its much needed intervention?
One of the keys to succeeding in this market during the balance sheet recession has been discovering government interventionist policies, front running them and selling the news. It’s absurd that I am even writing about this, but this is our reality. The global government put has come to dominate every twist and turn in the markets. There is no buy and hold. There is no value investing. There is only one big roller coaster of volatility based on the decisions of clueless politicians who fail to understand our monetary system, fail to understand the impact of their policies, but will do anything to make sure that the portfolios of wealthy politicians don’t get blown to smithereens. Unfortunately, like any trusty rollercoaster, we get off right where we got on.
In sum, know your government intervention. While all this government intervention might not be doing much for capitalism, the failure to understand it is surely detrimental to your portfolio’s well-being. Sadly, this is what “investing” has come down to in the day and age of the “New Normal”. Welcome to the global government put. Fight it at your own peril.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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