THE GLOBAL GOVERNMENT PUT

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.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. Nobody told me there’d be days like these/
    Strange days indeed, strange days indeed/
    Everybody’s runnin’ and no one makes a move/
    Well everybody’s a winner and nothing left to lose/
    … most peculiar mama/

    • Everybody’s flying and no one leaves the ground
      Well everybody’s crying and no one makes a sound
      There’s a place for us in movies, you just gotta stay around

  2. Sad indeed. Markets crash when there is no government support and rally in anticipation of it. Meanwhile, unemployment is high and global angst is rising. The stock market is just another case of the aristocracy protecting their own skin. They’re not fixing anything. They’re just fixing their own portfolios so they don’t lose their enormous wealth. The rest of us are just floating in the wind.

  3. In many contries if you are a top manager in a financial institution you compromise your own personal assets in the case the institution goes bankrupt. Your real estate equities and everything else is taken to minimize the loss of depositors. In America the CEO gets his bonus when his large bank goes under harming the nation taxpayers. Fixing that could be a start to avoid 2008 in the future. Same logic should fit politicians too.

  4. “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.”

    We’re all Kremlinologists now.

  5. Just posted similar points at a website in my country (european). It will be for the history books to judge what this will do for capitalism, long term economic growth, incentives, moral hazard etc. I am not positive.

  6. I don’t think the market rally is about Europe. Look at the volume today–nobody’s fooled.

    This is about the Fed floating the idea of more large scale asset purchases in time to goose the market through a technical barrier. Now there’s another bigger technical barrier overhead, while the reality that the Fed won’t be doing another LSAP hits on Wednesday.

    I wish everybody here would read Gregor MacDonald’s piece today at Chris Martenson’s blog: The Great American False Dilemma: Austerity Vs. Stimulus. Since the limiting factor in the economy is oil, none of the options being discussed to save the economy will work. MMT ideas work well with MacDonald’s perspective on oil, and like Cullen, MacDonald recognizes the terrible hit on the middle class and poor from the cost-push inflation caused by the Fed’s asset purchases and threats of asset purchases.

    • Definitely a piece of the puzzle that we should be addressing. I saw recently that net oil imports account for about half of our trade deficit. According to sectoral balances, reducing this “oil deficit” would help reduce the government deficit, increase private savings, or a combination of both, correct? I’d imagine that would be a very good thing.

      The satellite photo of LA in the article is a bit scary. God forbid we build some dedicated bike paths in this country, so that I’d occasionally be able to bike the 5 miles to work rather than crawl along on a 4-lane beltway…

  7. I am quite startled to see 10% + on most stocks in my account today. And, -8% on one momo stock short I have. ((
    That is not a normal market, for sure. This is beyond moral hazard at this point, this is an insane casino with the government being the house.

  8. After the next G-X meeting in early November all attention will then shift over the Atlantic to the Congressional “Supercommittee” and we can do this multi-week tap dance one more time.

    And we had all best be thinking just how far it will float SYP and everything else equity should they announce a “grand bargain” package of 4 trillion consisting of 3 trillion in cuts and one trillion in preference eliminations. In such a case expect relentless leaks, press releases (and conferences) and the like all intended to levitate the equity markets as we move toward the big announcement day.

    If they do it right (the European way) they can get SPY into the 150s by early January or even by EOY 2011.

  9. it will work til it doesn’t………doesn’t is coming we just can’t see it yet.

  10. Steve Jobs said that when he returned to Apple in 1997 and it was three months away from bankruptcy, CEO Gil Amelio had a saying: “Apple is like a ship with a hole in the bottom, and my job is to get the ship pointed in the right direction.”

    Given how things are going, that would be a good quote for Merkel.

  11. Knowing when to get on and get off is NOT easy. This rally is similar to the one during the week of July 4 or the day of July 21. Both gov’t puts were failures and markets dove shortly after. We all know markets are up big this month and today. What about tomorrow? Getting on or getting off?

  12. Yep. We have been macro bears for 7 years, we have never been more cynical about governments than we are now — and we’re up 7.5% today. As soon as markets close, I need to go take a shower to wash the slime off.

  13. Governments (incl. the FED, ECB, etc.) can only stimulate. They can’t fix the problem. If Mr. Market doesn’t want to cooperate then any government is powerless.

    This was NOT a large government intervention. Too many folks were short and got their head handed to them and were forced to cover their shorts. What it took was one little push and the market went the other way forcing the shorts to cover. This is a market called “”Trade the trader”” since early May.

        • I should have added that any time you see 90% days which include racks of bluechips moving 8,9 10% or more you can bet the farm you’ve just blown a fleet of shorties right out of position.

          • I wasn’t referencing the short covering. He’s probably right on that. I meant his persistent claim the U.S. is at the whim of bond vigilantes.

      • Oh, yes.
        1. In 2008 foreigners started to sell their Agency paper, instead of buying more Agency paper. And that led to the bankruptcy of Lehman Bros. It was NOT an European bank that went down first.
        2. Because now the US Trade deficit is shrinking this WILL lead to less foreign demand for US T-bonds and ultimately to higher interest rates. And that’s VERY dangerous especially now when in the US the federal budget deficit is going through the roof (> $ 2 Trillion). And a shrinking US trade deficit is the result of both falling world market prices for commodities and/or falling US demand. (oil, copper, gasoline etc.).
        3. China could dump their T-bonds when the US continues to meddle in Afghanistan, Tibet and W.-China. It would wreck their export market called USA but in this case geopolitics trumps economics. Because it would ruin the US economy.
        4. China has issued in 2009 their own T-bonds in Hong Kong in order to facilitate their trade in Asia. This simply means less demand for US T-bonds. Because e.g. Australia could buy chinese T-bonds to invest their proceeds of their trade with China.
        5. The US is the world’s largest importer of gasoline (originated mainly from Europe). So, if Europe would cut off that flow then especially the US east coast would have to cut back on driving.

        And these are forces are beyond the control of the FED. So, that’s another set of reasons why the FED CAN NOT control interest rates and that’s why the US is at the mercy of foreigners.

          • You just keep putting the cart before the horse,that’s all. Those that bought US Tsy decided to save in USD. If they don’t want to save as many USD – no problem, by sectoral balances their savings go down – the govt deficit goes down. Savings desires drive the deficit, not the other way around. If the non-govt sector in aggregate wants to shift from Tsys into USD – no problem, they’d have to do something with those USD – demand goes up – deficit goes down. Yes, this could be sometimes ugly if the demand channels into commodities and causes some Cantillion effects on the prices. Always a danger, though.
            You still haven’t wrapped your head around the fact that the govt does not need to issue bonds – it is really a favor for the non-govt sector that it does.

        • If the Chinese feel it would be smart to put up their US T-bonds for sale, who is likely to buy? If they are unwanted, the price drops, China loses, and the USA will be less able to buy Chinese products. If the purchaser is correct in expecting they will really go up, then China has again lost. Actually, China is more likely to trade US T-bonds for US real estate or industry.

  14. Cullen, you’re not against government intervention though, right? This piece reads like that. Correct me if I am wrong.

    • How many jobs has this unprecedented government intervention/s created? How many has it preserved? What type of intervention would have created the most jobs? All I’m seeing from this is speculative froth, absent any real desire to grow the PRODUCTIVE economy.

      • Well, when we fail to understand the monetary system we fail to understand what hurts it. So we save banks and implement policy focused on helping the wrong elements. We misunderstand what caused the problems so we fail to fix it. I am not saying that govt intervention can actually fix all of our issues, but it can certainly help if implemented properly. The last few years have been a total disaster in terms of policy. If anything, it has proven how poorly our leaders understand the system they are trying to fix.

        • “I am not saying that govt intervention can actually fix all of our issues, but it can certainly help if implemented properly.”

          Have you any writings on proper implementation or could you provide a few bullet point ideas? Thanks.

    • “I am certainly in favor of govt that can allocate capital efficiently. Unfortunately, that’s proven difficult with this group in charge. But yes, MMTers understand the need for deficits, particularly at a time like right now. Though I think the definition of “intervention” will vary depending on your political affiliation. From an economic perspective, MMT is agnostic in this regard.”

      Imagine a world where MMT is the accepted orthodoxy. Do we have a battle royale over the proper role and size of government? Who will win in a world of inattentive voters?

      I accept that MMT is the proper description of the way the economy really works. But wow. What an opportunity it provides for those who have an incorrect view (in my opinion) of the proper role of the federal government.

      I’m genuinely afraid of the “truth” becoming widely known just because of the opportunity for catastrophic abuse.

      • P.S.

        I’ve felt guilty all day for not complimenting you for the most excellent analysis you made earlier on the euro rescue situation. Now I don’t see it. Please be aware that I’m old enough to have premature (I hope) Alzheimers concerns. What happened to it? Be gentle.

        • Hi Alan,

          I think the post you are looking for is here:

          http://pragcap.com/europe-buys-some-time

          It’s been moved to the Special Reports section (upper right) on the main page. And you weren’t the only person looking for it. So feel free to yell at Cullen about these things. I do it all the time.

          For instance, I can’t get back to my non-anonymous profile where I can change my name every 90 seconds. He’s messin’ with me. I just know it. He underestimates me though.

          RAISE YOUR VOICES! WE WILL NOT BE SILENCED!

          Oh wait, never mind, wrong website…(I think).

          :)

          • I don’t always 100% agree with you, but 100% of the time you make me chuckle.

            Thanks.

  15. 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. Cullen Roche

    We have not had genuine capitalism in the US since 1913 at the latest. All the current government intervention has been inevitable since then.

    One might have faith that genuine capitalism would pull US through. But what is the basis for faith in fascism?

  16. Cullen,

    You are spot on 100% with the strategy from March 09 up to now. Yet, as with all ponzi schemes, this one works until it does not. Remember, what happened to those who utilized “don’t fade government intervention” strategy in the spring of 2008, when Bear Stearns had been saved and government intervened heavily? They god destroyed.
    At some point government intervention is just not enough and fails. Could you imagine the magnitude of failure under current “world government” put? I feel it will dwarf 2008-09 events.

  17. Governments that manipulate free markets; the best and brightest economists study history and end up with conclusions 180 degrees from each other. I was less confused when I read much less. Going back to trusting my own gut and instincts. Served me much better.

  18. but it’s not just sell the news, is it?
    some of the announcements you refer to have created real momentum.

  19. Oh, I think buying and holding stocks that are good values still works. Mind you, I am not saying many stocks are a good value, but that makes another point. Being negative on stocks longer term (or positive for that matter) based on valuation in the face of government intervention will eventually pay off. Your “tracking error” if you care about such a thing will be huge, but you can still win. Whether clients and our own impatience can survive that is another matter.

    Not to say that it should be the only tool in the box, but it can work. In fact, it has over the last few years.

  20. “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”

    For the rest of my investing life I’ll remember this great quote. The Great Generation told stories of landing in Normandy … I’ll be telling this quote to my grandkids.

  21. Great post! Gov’t wins again, and again. Now about those bonds in Italy…..hmmm.

  22. «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.»

    That’s ridiculous — the portfolios of wealthy politicians is their influence, not whatever their campaign funds are invested in.

    The politicians (who are as a rule far from clueless, and well briefed, and know what they are doing) «will do anything to make sure that the portfolios» of their constituencies are protected as much as possible as long as possible.

    In particular two constituencies: the 1% who are unloading their properties at the top of each bubble, to invest in higher growth markets elsewhere, and the 10% who are buying those properties at the top of each bubble going dementedly after the tax-free capital gains they think will deliver them the mirage of an aristocratic lifestyle in retirement, because they deserve it, having been hero producers.

    Then there is the older slice of the bottomost 90%, who are being kept quiet with no really bad news about their defined benefit pension funds and their 401k small accounts. As long as possible, while the top 1% is trying to get rid of the OASDI insurance that is the only thing that would save them to get them to support property prices by getting them invested in the market.

    I am mentioning here again this very interesting analysis by the research department of the Atlanta Fed:

    http://macroblog.typepad.com/macroblog/2011/10/state-and-local-fiscal-fortunes-follow-the-money-collected.html
    http://macroblog.typepad.com/.a/6a00d8341c834f53ef014e8c52cacf970d-popup

    that shows that public sector pension fund returns follow closely the SP500 on the upside, but overshoot it significantly on the downside, which seems to mean that the funds are mostly invested in the stock market instead of treasuries and bonds, that stock investment is leveraged, and their buying power is used to push prices up (they are in effect the greater fool), but when this does not work, the leverage kills them on the downside.

  23. Spot on Cullen.

    I’m not afraid to admit it – I’ve been short running into this event, and it had hurt plenty. I will not close, because Europe has not fixed the underlying problem as evidenced by Italian bond yield action.

    Cullen – you have been saying this is not a “buy and hold” market for some time. Reluctantly, I can now accept you are right.

  24. Looking back at history, it is self-evident that government policies drive economic expansion, extension, contraction, gives birth to new industry, destroys old ones, and among other things. The only difference of why more people can see the effects and implications of government policies now than ever before is because they are most blatant lately. The concept of allocating capitals by understanding government policies is nothing new. George Soros had implemented this investment concept successfully in many occasions-the most well known trade was the currency trade. That faithful day of March 17th, 2009 was the day I bought bonds and gold because I had a check list of what the government had done and had not done to save the economy, and I knew the only thing left for Bernanke to do before he had to bring out the canon was that he HAD to purchase bonds to drive down interest rate. My decision was based on Bernanke’s speech in 2001 where he spelled out his plan to save the economy if it were to experience a deflationary period like in the depression. I did not care whether his action was going to actually going to fix the economy or not. I just knew that bonds and gold will be up if he would buy bonds. Ironically, not a few people were betting that Bernanke might purchase bonds.

    The question of whether the policy is a right one or a wrong one, or if it can fix anything is a discussion for another day. “I’m not a policy maker, I am a steward of other people’s capital and I’m here to outperform.” Jefferey Gundlach

  25. When the Fed buys assets such as mortgage securities, it intervenes in a particular market and picks winners and losers. Cutting payroll taxes in half gives everyone who is employed a significant raise; it does not pick winners and losers and does not target a market. The Fed is in the process of destroying its legitimacy with what it facetiously calls “unconventional” monetary policy.

    Many (but not most) politicians now have grasped that the Fed’s balance sheet and magic keystroke money machine can buy the world under exisiting statutes, with inflation being the only true constraint. Even though these politicians may not have heard of MMT, the Fed is educating them every day as to this reality. Once the great secret of our fiat dollar is no longer a secret, American politics will fundamentally change. Saying “no” to any constituency is going to get ever more difficult for the politicians and the Fed to do. A secular inflation trend, slowly growing over time but steady and sure, is my bet, but it could turn on a deflationary dime if we surprise ourselves and elect a “take your medicine” anti-bailout government. What the government is doing, planning to do and thinking of doing are the three most important issues for investors today.

    This site has been a fantastic education in what is actually going on behind the curtain, and it has paid off for me in the real world. Thank you TPC and the MMT regulars on this site for the free education in how the world really works.

  26. I noticed that oil also popped today, along with the stock market. The price action in oil has convinced me that the global economy is energy constrained. Governments will print money like mad to prevent collapses before elections (France is next May) or to prevent the favored elite from taking losses, but they can’t print oil. If oil goes to 150-200 again it will be time to get really bearish.

  27. “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.”

    Cullen, we have had ABSOLUTELY ZERO FED intervention No QE3, 4 5 Six etc since the last one expired this past summer and look at the markets Down and Right back up.

    So is the FED really pointless? OR is there really something more PATHETIC and ROTTEN to the CORE? A system where there is no real free mkt and only one where News media spin coupled with BS political noise at play.

    The whole free mkts are looking and Smelling VERY Fishy.

    Think about it. China, the great Bastion of free mkts is saving the cradle of Democracy and the Magna Carta?

    Come On Man, This is getting stranger than an Alfred Hitchcock Movie.