Smart Money, Dumb Money, & Your Money

By Darryl Robert Schoon / Gold Seek

Crime is far more common than logic. This is the refuge of bankers.

In capitalism’s end game, leveraged debt fatally destabilizes the supply and demand dynamic necessary for stable economic activity. Understanding this is critical to understanding why capitalism today is failing.

In the banker’s ponzi-scheme of credit and debt, debt-based money is created through central bank credit. Usually, the central banks’ constant expansion of the money supply results in rising prices, i.e. inflation. In the end game, however, this is no longer true.

In the end game, when demand slows, excess supply forces prices lower resulting in a deflationary trend called low inflation. In the end game, low inflation continues until demand falls so low the velocity of money is no longer sufficient to support aggregate economic activity; a monetary phenomena that ends in a catastrophic deflationary depression similar to hypotension, a medical condition where blood pressure falls until fatal.

In June 2009 I wrote in my article, Bull Markets, Bullsh*t and Bubbles:

Deflation arises in the wake of extraordinary speculative bubbles and is caused by a collapse in demand which happens after such bubbles pop, when producers/sellers chase buyers hoping to turn inventories and soon-to-be illiquid assets into cash in order to pay down ever-compounding debts.

Deflation happened in the 1930s in the Great Depression, in the 1990s [through today] in Japan and is now again spreading in the US, the UK, [the EU] and other overly mature late-stage capitalist economies; and akin to a deadly economic cancer, deflation, once metastasized, is exceedingly difficult to eliminate.

…The serial dot.com and US real estate bubbles so distorted the global demand and supply dynamic that memories of the 1930s depression have now been re-awakened, memories that will soon become reality as deflation spreads around the world.

…Bubbles and busts have now replaced the expansions and contractions common to early stage capitalism. We are now in late-stage capitalism, where debt instead of credit is the critical factor and the bond markets, not equity markets, determine the economic future.

CONFUSION IN TODAY’S MARKETS

Today, when it looks like a bull, walks like a bull and acts like a bull, it’s probably a bubble. –Bull Markets, Bullsh*t and Bubbles, DRS, 2009

In late-stage capitalism, stock market highs are like a tan on a dying man. Investors formerly seduced by higher stock prices abandon equities as chances of a bubble bursting increase. When this happens, investors move into bonds—capital’s safe haven of choice. In the end game, however, bond markets are where the final bloodbath of capitalism’s debt-based money will take place.

The current stock market bubble is like no other. Even though stock prices are reaching nominal highs, trading volumes are falling. This is the first time in history this has happened.

Two charts from über analyst Gordon T Long provide further evidence that stock markets today are radically different from previous markets.

Today, the Fed and other central banks are so desperate for economic growth they have exacerbated systemic instability by underwriting directly or indirectly the rise in today’s asset markets. On June 15^th, the Official Monetary and Financial Institutions Forum, a central bank research and advisory group, noted that central banks and other public sector institutions have, to date, invested $29 trillion in global markets.

Regarding today’s unprecedented market conditions, on June 16^th, Citigroup strategists led by Matt King in London wrote:  We blame the wave of central-bank liquidity, which has pushed up asset prices irrespective of fundamentals…This creates a vicious circle: ever-higher prices, ever-less trading and liquidity.

Not only has the Fed’s unprecedented and artificial insemination of liquidity distorted equities, bonds, too, are grossly at variance with traditional metrics.  On June 2^nd, Bloomberg News reported: After unprecedented stimulus by the Fed and other central banks made many traditional models useless, investors and analysts alike are having to reshape their understanding of cheap and expensive as the global market for bonds balloons to $100 trillion.

On June 18^th, Mohamed El-Erian, chief economic advisor to Allianz and former co-CEO of PIMCO, the world’s largest bond fund, warned investors of dangers regarding continued central bank support of markets. El-Erian advised:  …rather than continuously increasing exposure to ever-rising markets, it is time for highly exposed investors to gradually take some chips off the table.

Instead of betting vast sums on an uncertain future in uncertain markets, smart money institutional investors are now, as El-Erian advised, taking some chips off the table. The dumb money, i.e. private/retail investors, however, are still, literally, buying the bull.

As the odds of systemic collapse rise, safety becomes paramount, even when such safety offers little or no returns. Since peaking in the 1980s, US Treasury interest rates have fallen to almost zero as central banks made credit increasingly cheaper, futilely hoping that with more and cheaper credit, markets can achieve exit speed.  In the end game, they can’t.

Despite today’s unprecedented lack of yield, growing distrust of liquidity-driven equity markets, investors are finding refuge in the perceived ‘safety’ of bonds.

Since 2000, investments in bonds are triple the amount invested in equities.

In the end game, the safety of bonds is as illusory as it is fatal.

THE END GAME: PANIC IN THE BOND MARKETS

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