“The ‘Recovery’ Is A Mirage” Mark Spitznagel Warns, “With As Much Monetary Distortion As In 1929”

Loading

Tyler Durden:

Today there is a tremendous amount of monetary distortion, on par with the 1929 stock marketĀ and certainly the peak of 2007, and many others,” warns Universa’s Mark Spitznagel.

At these levels, he suggests (asĀ The Dao of Capital authorĀ previously toldĀ Maria B, “subsequent large stock market losses and even crashes become perfectly expected events.”

Post-Bernanke it will be more of the same, he adds, and investors need to know how to navigate such a world full of “monetary distortions in the economy and the creation of malinvestments.” The reality is, Spitznagel concludes that the ‘recovery is a Fed distortion-driven mirage‘ and the only way out is to let the natural homeostasis take over – “the purge that occurs after massive distortion is painful, but ultimately, itā€™s far better and healthier for the system.”

Via Investments & Wealth Monitor:

On the “recovery” in the United States…

Spitznagel: TheĀ somewhat improved economic activity that weā€™re seeing is based on a mirageā€”that is, the illusion created by artificial zero-interest rates.

When central banks lower interest rates in hopes of stimulating the economy, that intervention is not the same as a natural move in interest rates.

AĀ genuine drop in interest rates is in response to an increase in savings, as consumers defer consumption now in order to consume later. In a high-savings environment, entrepreneurs put their capital to work to become more roundabout,1 layering their tools and intermediate stages of production to become increasingly productive. The time to make these investments is when consumers are saving, so that entrepreneurs can be in an even better position to make the products that consumers want, when they want them.

In an artificial rate environment, however, thatā€™s not whatā€™s happening. Instead of consumers saving now to spend later, they are spending now.

ButĀ because interest rates are artificially lower, entrepreneurs are being fooled into investing in something now that they will have to back out of laterā€”building up what the Austrians call ā€œmalinvestment.ā€Ā Therefore,Ā the illusion is unsustainable, by definition. The Fed canā€™t keep interest rates low forever.

From an investor perspective, people are trying to extract as much as they can right now. Consider the naĆÆve dividend investment argument: ā€œI canā€™t afford to be in cash right now.ā€ Investment managers have to provide returns today.

Whenever investors sell a low dividend-paying stock to buy a higher-dividend stock, some piece of progress is sapped from our economy. (The cash needed to pay that higher dividend isnā€™t going to capital investment in the company.)

This is the exact opposite of entrepreneurial thinking that advances the economy.Ā Consider the example of Henry Ford, who didnā€™t care about paying dividends today. He wanted to plow as much capital as possible back into making production more efficient for the benefit of the consumer who would pay less for a higher-quality product.

Read more

0 0 votes
Article Rating
Subscribe
Notify of
1 Comment
Inline Feedbacks
View all comments

I note his point here:

A genuine drop in interest rates is in response to an increase in savings, as consumers defer consumption now in order to consume later. In a high-savings environment, entrepreneurs put their capital to work to become more roundabout,1 layering their tools and intermediate stages of production to become increasingly productive. The time to make these investments is when consumers are saving, so that entrepreneurs can be in an even better position to make the products that consumers want, when they want them.

Then this:

Whenever investors sell a low dividend-paying stock to buy a higher-dividend stock, some piece of progress is sapped from our economy. (The cash needed to pay that higher dividend isnā€™t going to capital investment in the company.)

This is the exact opposite of entrepreneurial thinking that advances the economy.

No.
Not the ”exact opposite.”
The ”exact opposite,” of entrepreneurial thinking that advances the economy is Obama’s MyRA’s.
That $15,000 per household savings plan saps all of its power out of private enterprise by forcing every dime into US Debt as gov’t bond purchases!
IF Americans get it into their heads to finally begin saving, this is the LAST place they should pour their cash.
Maybe if they are really old and risk averse because they need a safe last refuge for their cash (as opposed to in the mattress.)
But younger working folks need to GROW their savings.
Not just sock it away AFTER TAXES for themselves.
The best way to grown one’s savings is to DEFER taxes by investing in traditional 401K’s and only taking the money out when they are retired and (presumably) in a lower tax bracket.
Obama’s MyRA is the rip off, both of the individual and of our economy.