Fact 1:

As Bill Rafter recently wrote, "what drives markets most of the time (i.e. 90+ pct.) are two things: momentum and sentiment. If you have a handle on those you can make money."

Fact 2:

Credit drives GDP. "For the period from January 1955 through June 2015, we found that nearly 88% of periods in which the trailing twelve month average of private debt acceleration declined or was negative occurred when the U.S.' real GDP was falling, and if we look just at the periods in which the trailing twelve month average of the real GDP growth rate declined, we find that nearly 84% of those periods are ones in which the acceleration of private debt was either falling or negative."

Fact 3:

We live in a world where cash and checking account balances have given way to credit as the medium for actual transactions.

Fact 4:

The people and businesses who actually have the discretion to spend more (or less) do not need the approval of banks or bond buyers to do so. They depend entirely on their existing credit limits and their cash flows.

But the current presumptions of nearly everyone–male and female–who wears a suit and tie to work are that these facts can be ignored. The watchers/believers in the oracles of the Federal Reserve Banks still believe in that old time religion: bank reserves and the interest rates on them drive the economy by changing consumption preferences. They may be right even if their theories of political economy no longer fit the known facts.

History makes it more than a bit clear that "the stock market" (really, the credit market) not only leads but controls "the economy". Collapses in production and employment follow collapses in credit, which are, in turn, dependent on sentiment and momentum, which are now largely dependent on what people believe about who is in control. We skeptics may be the greater fools. It may not matter that there are only semi-midgets spinning special effects wheels behind the curtain that the little dog has pulled away. As long as people believe in the magical powers of the flashing lights and sheet metal thunder, they will save their worries for important stuff –like Syria and the Chinese invasion of the Spratlys.


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