Faith (in markets) Without Works Is Dead ~ The Risk Averse Alert

Friday, February 18, 2011

Faith (in markets) Without Works Is Dead

"Nothing is more common than for men to pass from the abuse of a good thing to the disuse of it."
Alexander Hamilton

That is a quote possessing at the moment several forms of meaning. Most imminently, it speaks of skillfully played gags presently bolstering faith in risk assets and restraining such fear as in bullish times otherwise precipitates increased selling of shares over the course of an advance in the stock market. This is the so-called "wall of worry" the market is said to climb — an abstract notion made real where the rubber meets the road when money changes hands, and measured by the volume of shares exchanged. Nothing of this worry has been displayed over the entire course of the market's rally off March '09 bottom. "Thus also faith by itself, if it does not have works, is dead." (James 2:17) Another twist on the current situation, and my sentiments exactly.

"Abuse" presently is valuing too much a past whose impossibility of re-establishing has become only more plain with time's passage. Absent capacity to further leverage an economy in an advanced state of physical breakdown, the past rather is fated to fade in the memory of an ongoing reckoning with a mountain of badly mis-priced risk whose illusion brought yesterday's "prosperity," that now with backing from lenders of last resort brings faith still to abound in the return of that illusive prosperity's promise. However such belief appears fated for "disuse" at the depths of collapse whose elevated probability is proportional with the impossibility of restoring confidence necessary to revitalize a credit system equipped with an infinite multiplier. Indeed, Hamilton's observation well-summarizes that shadow banking system of old whose last hope rests on GSE reform leveraging every last dime of the U.S. Treasury (this in desperate attempt to extend fantasy insisting that, "it's a liquidity, not a solvency crisis" beleaguering the trans-Atlantic financial system) and whose added policy agenda requires taxpayers be gouged that Treasury's coffers find adequate backing. Pity this isn't 17th century, colonial America, when, because of technological constraints, it took decades to form a consensus in opposition to such overreaching frauds. Seeing the effects of physical collapse beneath it all now being met with increasing revolt across the globe, well, how does one not fear that, it could be game over for lowly equity?


That said, a couple long-held beliefs of mine find suitable moment for reaffirming. First, the Dow Jones Industrials Average could fall to 3600 tomorrow and still remain in a long-term uptrend. The area in which this index traded in the 1987-1994 period is indicated above. This is the range to which I expect the average to fall even as soon as over the next twelve months or so.

Now, despite unsettling imagery one's mind might conjure upon reading my long-established (and still well-confirmed) bearish case described with words like "chaos" and "collapse," let's not ignore those many decisive battles and lessons predating this moment and extending over many centuries. Let's not suppose great leaps made inevitably must be followed by great falls.

No doubt history reveals many horrors and a river of tears, even in an uptrend wherein mankind barely has scratched the surface of discoveries allowing it to radically improve life on this earth. Yet despite terrible setbacks, advancing means elevating mankind's attainment of its natural and intended perfection simply press upon our collective experience over countless generations, every last one of which found many who were called into purpose toward this end, but few who were chosen in truth as a path maker. Our generation will be no different, nor will any that follow. No scam invented by man could ever alter this.

Yet impede progress to the point of causing a plague whose effect wipes out a third of the population of an entire continent? Been there, done that, don't need the wake up call...

Fast Money
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