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Thursday, May 13, 2010

Asset Prices Being Driven by Governments

I thought this was a very interesting article...

Please click here for the original post on minyanville.com
By Mr Practical May 11, 2010 3:00 pm
There's no longer any real market based on value.

Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

Hello my friends. I haven't deserted you, I've just been staying away from the market craziness. If you've been reading me for the past few years, then you'll agree that there really is nothing left for me to say. Yes I was early, but now you see the results of years and years of government intervention in markets (think artificially low interest rates and Fannie Mae (FNM)) in black and white.

Todd has asked me to answer one question, what happened last Friday?

It's not important, nor is it possible, to understand specifically what occurred on Friday's market drop. What is important is to understand the conditions that allowed it to happen.

Seventy-eight percent of the entire rally from the 2008 lows in US stocks occurred in overnight trading. This means it has occurred on virtually no volume. Additionally, real economic activity, significantly curtailed from deflationary forces (too much debt), has been replaced by government programs while income has been replaced by transfer payments.

Conditions are extremely tenuous and fragile. There are no real markets based on value anymore. Equity prices aren't based on investor expectations of future production. If anything, all asset prices are being driven by governments through currency debasement and its consequences.

I've never told anyone to short stocks. I've always concentrated on risk. You buy stocks
when there's value. Right now there is none. That doesn't mean there won't be a rally, only that if there is one you're taking a lot of risk and simply playing along with the greater fool theory.

We will get out of this, but it won't be the government that will do it. More debt is not the answer. Productivity is the answer and that only comes from the private sector. It will take years.

I still am in the US, for a while at least. But I'm keeping my wealth very safe, investing only a portion in the energy sector, specifically the smart grid and things of that nature which I find fascinating. Invest your time and money only in what you know.

All the best to you and your families,
Mr. P

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