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[TTHQ Staff]

The New New Economy

You used to hear it all the time in the 90s: it’s the new economy, man! Endless prosperity and boundless new highs in the stock market were ours to enjoy forever. That is, until reality rode back into town right around the year 2000.

Those days have long since passed so I’m here to welcome you to the NEW new economy. Don’t ask me what it is because I don’t know. But that’s OK, because no one else knows either. You see, the rules have changed, only no one is quite sure how. What we do know is that things have gotten really, really weird.

The weirdest thing about the new new economy is the imbalances upon which it is maintained. In the old economy we relied on making stuff and’ to maintain our deficits and support our profligate ways.

Anybody in his right mind would have expected foreigners to have headed for the life rafts long ago. But they didn’t. Because they couldn’t and they can’t. Because it’s that lopsided, imbalanced relationship that keeps the world economy moving modestly forward. Welcome to the new new economy.

Here at home, U.S. consumers no longer save money. Income is up 11% over the past 15 years while household spending is up 30%. This is perhaps the hallmark of the new new economy: Consumers are spending more money they don’t have than ever! It doesn’t make sense, it shouldn’t work, but it does.

In the old economy, wealth was generated through savings and investment. In the new new economy, very little real wealth is being generated. But that doesn’t stop the U.S. consumer from purchasing the accoutrements of wealth: McMansions, SUVs, digital cameras, etc.

In the old economy the currency was dollars. In the new new economy the currency is debt: borrow and buy, then borrow and buy some more. This, the powers that be tell us, is the ultimate road to prosperity. Indeed, the rules have changed.

The problem with the new new economy is that it’s founded upon nothing. You know it, I know it, the powers that be know it and the markets know it. You’d think that the markets would have fallen out of bed a long time ago with this knowledge. But they haven’t. Because they haven’t been allowed to.

You see, the new new economy requires new rules. The first and foremost rule is that nothing bad should happen and if something’s about to, someone upstairs needs to handle it. Last time we gathered here we talked about market manipulation. And that’s precisely what I’m referring to again here.

An economy founded upon debt, an expansion that is driven by borrowing, is not any kind of an economy in the classic sense. Left to its own devices, it wouldn’t work because in this world, you don’t get something for nothing. That which has no foundation tends to crumble. Unless It’s propped up by some other means, of course.

The fact is that we now live within a new economic paradigm l in which official management is the rule. Take a look at the markets for proof. Last time we discussed the means, mechanism and process through which the stock market is artificially maintained at higher levels. Because it must be in order to sustain the illusion that the economy is a real and expanding one. We talked about how gold prices are artificially suppressed. Because otherwise the new ‘rule makers’ at the Fed would rapidly lose credibility.

Now consider interest rates. The Fed has tightened repeatedly and they continue talking about further tightening. Yet take a gander at ten-year note yields, hovering around 4% and down sharply over the past couple of months. There are so many reasons to expect interest rates to be significantly higher, yet they’re not. Why? Because they can’t be higher.

Of course, classically trained economists have bandied about all manner of explanations to account for the anomaly, none of which include management nor manipulation. Most would consider my views just plain wacko. But is it so wacko to assume that those who obviously manage the stock market and the gold market wouldn’t stop at interest rates?

Isn’t it ever so convenient that an economy so heavily dependent upon a housing bubble is seeing mortgage rates drop even while the Fed is tightening and talking about higher rates? Is it just plain good luck for the Fed? I doubt it.

I submit to you, dear reader, that long-term interest rates are low and falling again because they must. Because our entire economy hinges upon it. Interest rates aren’t going to rise by much unless the markets panic, the same way that the stock market isn’t going to fall by much unless the financial world freaks out.

Volatility in the markets is at historical lows, even while the economy is more imbalanced than ever. How can this be? The same way that a morphine addict can retain utter calm in the midst of a plain crash: artificial management. Drugs. An external means of assuring that normal reactions are suspended.

You can’t argue that something strange isn?t afoot. Classic economic and market relationships are no longer holding up. Massive imbalance persist, seemingly without end. Consumers have less real wealth yet more accoutrements of wealth than ever. Is this natural? Is it real? Can it be? It can if you print enough dollars and issue enough credit. It can if you refuse to allow economic forces to take their natural course. (At least for the time being, that is.)

Why the manipulation? Why the management? Why should the powers that be act with deception? Because they must. Because we find ourselves in a huge credit bubble of their making and as all credit bubbles in all of history, this one too must pop. It is inevitable. But no one wants to see it pop on their watch and so extreme measures are taken to postpone the inevitable for as long as possible. The result is anything but free markets and anything but a laissez-faire economy.

Does that mean the markets are dead? Is there no longer an opportunity to profit? Hardly. Markets are in a perpetual state of flux. Those who would reap profits change with them. That market management exists is obvious to the thinking. That market management is right or wrong is an irrelevant question (for our purposes). That we can’t profit in managed markets is absurd. We must simply account for the presence of this big, dumb, rude behemoth stomping all over our markets.

The trick is to understand the motivation of the manipulators and position accordingly. Ask yourself ?what do they want to see?? And know that for the time being, we’re likely to see it.

What they want to see is stability. (They don’t have the resources to keep pushing the stock market higher, but they do have the resources to keep it from falling.) What they want to see are relatively low long-term interest rates. (Don’t buy the spin about raising rates to curb inflation. If the Fed cared about inflation, they’d fire themselves and go home. Problem solved.) What they want to see is a lid on the gold price. (Can’t have the financial canary croaking on Greenspan’s watch.)

If I had to sum it up with one word it would be: stability. Barring some big exogenous shock to our economic system, don’t expect any market to deviate too far from its trading band of the past two years anytime soon. Don’t expect any big trends. Trends are shaped by developing or eroding fundamental conditions. Fundamentally, our economic condition is plenty eroded and the powers that be, very well aware of this fact, are happy enough to keep things as they are, knowing full well that there’s no way to turn them around. (At least not without unpopular, temporarily painful vote-jeopardizing policies.)

To be sure, in time the game will unravel. But as long as everyone is committed to keeping the game alive, inevitable reality can be forestalled for quite some time.

In the meantime, the creative speculator can find plenty of opportunity in today’s market. What do you when you know that Dow 10,000 is protected with a vengeance? You buy it. What do you when you know the market isn’t allowed to fall but doesn’t have the fundamental underpinnings to climb much higher? Sell out of the money puts and calls beyond the extremes of the trading range.

Granted, you won’t bag the huge, outsized gains in times of low volatility. But by the same token, you’re not nearly as likely to get whacked by an adverse move out of left field. It’s not the best of financial times, but we can still learn a lesson from the tortoise: slow and steady wins the race in the new new economy.


Mark M. Rostenko
Editor
The Sovereign Strategist
Copyright 2004 Mark M. Rostenko
and The Sovereign Strategist
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