Dancing With Dinosaurs

Monty Pelerin / EconomicNoise.com

Whew! It has been a crazy several days!

On Friday the bottom fell out of the gold and commodities markets. Stocks plunged as well. Monday, the selling increased in the precious metals markets, but stocks rallied strongly. They recovered what had been lost on Friday. Yesterday, stocks were off 138 Dow points. Gold held even and silver declined a bit.

These are not normal markets or normal movements. Something is spooking markets, banks and/or governments. I include the latter two entities because I believe they are responsible for these erratic movements. Their influence and power no longer stands in the shadows. They participate, almost openly, in markets. Laws designed to prevent them from doing so are ignored and not enforced. These two entities dwarf regular buyers and sellers, especially in the short-term.

The survival of banks was threatened a few years back. Since then, banks have gotten bigger, not smaller, making them even more vulnerable to the next economic shock. Banks were saved by government and they know their future survival will again be dependent upon government. This is inevitable. It is a flaw in the concept of fractional reserve banking, heightened by the moral hazard government has created via bailouts.

Crony capitalism has changed markets. Government and the banking system are co-dependents. In effect, our banking system and our government have become one. Neither can survive without the other. Custom, tradition and laws became meaningless when this much power aggregates. As conditions worsen for banks/governments, markets become more perilous.

It is no longer enough to understand a company in order to be a successful investor. The general state of the economy is less important than the economic condition of the government and its cronies in the banking system. The animal instinct to survive is present in institutions as well as nature. As our economy continues to deteriorate, government and banks are more threatened. Intervention and market manipulation are trivial when survival is at stake.

Real economic recovery is not possible given the distortions and imbalances that exist in the economy. But perception is a reasonable substitute, at least for a time. In short, markets have become the primary tool for government to manipulate in order to fool the population.

No cure is possible for the economy short of another Great Depression and a re-definition of the role of government. Politicians do not want either to happen. So long as they can continue to make people believe things are getting better, they can retain power and their ability to plunder. Markets reflect their attempts to fool the populace. This deception may continue to work for a while.

Understanding what is happening is key to participation in these markets. Money can be made, but remember you are playing in a space dominated by a dinosaur whose swinging tail can create serious damage to your financial health. Be nimble, be quick and be careful!

http://www.economicnoise.com/2013/04/18/dancing-with-dinosaurs/