Tuesday 19 February 2013

Incomplete models produce inaccurate results

Armstrong: Markets decline BECAUSE everyone who has EVER thought about buying has bought. There is no more reservoir of potential buyers to pick up the ball and take to the goal post. Consequently, the market falls because it has lost the momentum to sustain the rally.

With every Central Bank in the world today having a remit for price stability, and with every aspect of the global economy underwritten by the free-flow of cheap and abundant fossil fuel, Martin appears to be overlooking (at the very least) two premises that are apparently not in his model for some reason?

  • The reservoir of potential buyers to pick up the ball cannot and will not dry up, if and while there is an environment consisting of (1) a fiat currency system and (2) a Central Bank with an overriding political will to achieve some specific goal (e.g.: act to counteract price inflation or deflation — AKA "price stability"). Strangely enough, given it would appear to be overlooked by just about every analyst, today presents just such an environment. This is not an insignificant detail in modelling the future of finance, IMO. It seems to be accepted wisdom that inflation was never willingly tolerated by any Central Bank and their intolerance was expressed through the market for gold, which then had regressive effect in other markets. Deflation is no less intolerable to a Central Bank today.
  • While the world remains thirsty for energy commodities, beyond the capacity to consume of the energy exporting nations, there is still always at least one large potential buyer, luxuriating in the reservoir and ready to pick up the ball any time it gets tossed their way.
There is, however, a qualitative difference among the residents of the reservoir of potential buyers. Many private Western traders are entirely happy to speculate in the gold market using any of the many "derivatives of physical gold" (forward contracts, options, spreadbets, ETFs, silver, miner shares, and other "goldish investments" too numerous to list). Others entities are meanwhile content just to work with the real thing and the real thing only. There may be trouble ahead…

Come in, the water is lovely! Just make sure you have your swim shorts on and firmly tied at the waist — you never know, the tide may go out.

Such progress! All financed by mountainous, unpayable debt, now due.
No default possible. No deflation tolerated.

It's a pickle alright!

1 comment:

DP said...

FOA: In effect, the dollar was placed on a one way street that required it to be inflated into infinity. All as a means of protecting dollar originators; the US banking system. Dollar leverage, that is actually US liabilities, is now built up endlessly. This all points to a nonstop, end time need for an uncontrollable inflationary expansion by our fed.

More QE, anyone? Deflation doesn't stand a chance.

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