One way to explain what’s happening in global markets that may paint a clearer picture is by making an analogy. Let’s for a minute imagine that the global economy is a cancer patient, that Central Banks and governments are the team of doctors, and that the various liquidity injections, emergency lending facilities and government stimulus programs are the chemotherapy being used as the treatment.
Cancer is an appropriate metaphor in this example, especially if you consider all the consumer debt and toxic assets on bank balance sheets that built up over the decades to be like tumors that grew unchecked. And much as a person with cancer, the economy survived and even thrived for a time but eventually, as the malignancy gradually displaced more and more normal tissue, serious symptoms began to ensue.
Left without treatment this patient would surely have died, much as the economy would have if not for all the emergency measures which have been implemented since the onset of the financial crisis. And make no mistake about it; the world as we know it came frighteningly close to ending after the collapse of Fannie Mae, Freddie Mac, AIG and finally, Lehman Brothers.
Now, here’s the thing about chemotherapy-it’s actually a poison designed to kill living tissue (healthy and malignant). Of course, the goal in administering it is to kill off the bad tissue at a faster rate than the good but unfortunately, that isn’t always possible when for example the malignant cells are widely dispersed among the normal ones.
There’s something else about chemotherapy as well-even when it works as designed, no patient can stay on it forever. You can only take so much poison into your system before it becomes overwhelmed. But with luck, the chemo kills the cancer while leaving enough normal tissue intact and from there, the patient can begin the recovery process (which essentially means regenerating more healthy tissue to replace what the chemo destroyed).
I already mentioned that as far as the economy is concerned, the chemotherapy that’s been administered consisted of liquidity injections, special lending facilities and government stimulus programs (in the U.S. alone, it’s estimated that about $11 trillion has been either lent, spent or guaranteed). However, I left out one crucial element in all this-Bernanke’s infamous 60 Minutes interview on March 15. To my way of thinking, the Fed admitting on national television that it was (“electronically”) printing dollars was the strongest form of treatment that could have been given. Not only that, I’m firmly convinced that Bernanke said what he did out of sheer desperation.
Why? Because all of the emergency measures had been put in place months before the S&P bottomed at 666 on March 9. To that point, everyone had been watching to see if the November 2008 low would hold and when it didn’t is when I believe that Bernanke decided to drop his biggest bomb.
So, the purposeful depreciation of the dollar is the real chemotherapy that has gotten this patient turned around. But just as with the real thing, dollar depreciation has the potential to kill a lot of healthy tissue as it seeks out and destroys the malignancy. And just as it’s important to withdraw this type of treatment from a patient at the right time, it will be just as important for the Fed and other Central Banks to gradually remove the excess reserves that have been created.
In the meantime, the big question is where things are headed to from here and as you might have guessed, I have an opinion on that. As far as I’m concerned it seems obvious that the next target for U.S. stock markets resides at the levels they were on just prior to the collapse of Lehman on September 15, 2008 which for the S&P is just above 1200.