Washington, DC -- (ReleaseWire) -- 02/11/2015 --"I want the truth!" "You can't handle the truth!" That exchange between Tom Cruise and Jack Nicholson in the movie A Few Good Men seems relevant to our financial markets in so many ways. For so long, the truth has been massaged and manipulated by governments and central bankers to justify well-meaning but ultimately futile and even irresponsible programs such as quantitative easing and persistent zero-interest policies. The media, the White House, Congress, even individual and institutional investors have allowed this "truth" to stand nearly unquestioned for six years.
Another quote about truth is attributed to the German philosopher Friedrich Nietzsche. He supposedly said, "Sometimes people don't want to hear the truth because they don't want their illusions destroyed." In the financial industry, we see this all the time. Investors cling to advice and information well beyond its usefulness, twisting it to fit the situation as well as they can, but ultimately failing because their illusions are more important than the facts on the ground, and their "truth" obscures the fundamentals of the market.
Case in point. The moment our very own Federal Reserve stopped quantitative easing, the pricing of equities in the U.S. began to see a great deal of volatility, and even oil dropped in value. Markets swing wildly, up 250 points, then within 30 minutes down to -70, then up to 184. This doesn't reflect any rational reality. There are no basic fundamentals underpinning these brutal and rapid swings. U.S. equity markets have lost approximately $1.1 trillion since the peak on December 29th, 2014, and last Friday, the last trading day of the month, didn't even see the typical end of the month lift we've seen for the last three or four years. Apparently even the Fed's 'Plunge Protection Team' wasn't able to achieve a month-end positive result. And still, investors, the media, the White House are not acknowledging the truth that Keynesian manipulation by central banks has done little or nothing to improve the basics of the U.S. and global economies.
Last week, Citibank analyst Matt Kean warned that the central banks' grip on the economy seems to be waning. The question becomes whether the central banks will keep pumping liquidity in when the economic benefits are not showing up. The more times these questions are asked, the more some investors are seeing the light. For the first time in a very, very long time, it seems that many are ready to "handle the truth." The truth that this manipulation must eventually stop, because it can't go on forever, and that when it does, we will experience significant economic and geopolitical turmoil before markets can normalize back to being truly free. Those that aren't ready seem to be waiting for some thunderbolt, some black swan to show them what's happening and what's to come.
That thunderbolt might have come in the form of Alex Tsipras' "Open letter to the German readers: That which you were never told about Greece," published originally in the German language business newspaper Handelsblatt. In it, Tsipras, Greece's newly-elected Prime Minister, lays out the anti-austerity party Syriza's case against Germany and the European Central Bank, regarding loans, bailouts, and austerity measures.
Tsipras says, "In 2010, the Greek state ceased to be able to service its debt. Unfortunately, European officials decided to pretend that this problem could be overcome by means of the largest loan in history on condition of fiscal austerity that would, with mathematical precision, shrink the national income from which both new and old loans must be paid. An insolvency problem was thus dealt with as if it were a case of illiquidity." This is clearly true, and Tsipras is simply laying out situation for Germany and the ECB as concisely as he can. He goes on to say that predictions of failure were confirmed within the year, the combination of huge loans and government spending cuts not only not reducing Greece's debt, but punishing citizens who had previously been living within their means with lower real income, leading to a rapidly accelerating "deficit of hope." In other words, you cannot solve a debt problem with more debt, and when you try there are economic, political and social consequences.
Tsipras continues, asserting that despite evidence of failure, the "extend and pretend" logic is still going on. "The second Greek 'bailout', enacted in the Spring of 2012, added another huge loan on the weakened shoulders of the Greek taxpayers." As many issues as there are with Syriza's economic goals and views, nothing in this open letter is the work of an economic madman. Tsipras is simply pointing out that the math doesn't work, invoking the simple economic truism that what cannot be paid back won't be paid back.
One of the most stunning and apt turns of phrase in Tsipras' letter is, "Greece's debt is currently unsustainable and will never be serviced, especially while Greece is being subjected to continuous fiscal waterboarding."
Fiscal waterboarding is a good description, not only of Greece's crushing debt, but of our own. The U.S. Government has $18 trillion in federal debt, a staggering number that seems all-but-impossible for use ever to pay off. If only our Federal Reserve, the White House, Congress had the strength of character to write a letter to the American people saying, "We can no longer subject you to this sustained program of fiscal waterboarding. It has been ineffective and ultimately destructive to our economy." If only the Fed had written such a letter to companies like AIG and GM before the bailout nearly seven years ago. Will this be the sort of letter the American people receive when the Fed and the White House finally start telling the truth?
All data sourced through Bloomberg
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com. She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett or email@example.com