Thursday, May 9, 2013

A Potemkin Rally

Famed market strategist David Rosenberg, of Toronto’s Gluskin Sheff is always worth reading. His remarks are normally reserved for his firm’s clients and subscribers, but they are occasionally available for public viewing.

Yesterday some of Rosenberg’s recent remarks were posted on They are especially interesting because they show a marked shift in Rosenberg’s perspective. He has given up on the bond market, as a deflation play and is moving toward more inflation sensitive stocks.

Since, by his account, he has long been bullish on bonds for a quarter century, his call is worth noting.

As for the current bull run in the stock market—the one that many of us underestimated—Rosenberg agrees with those who see it as the product of Federal Reserve money printing. He calls it a Potemkin rally:

We currently are witnessing the Potemkin rally. For a quick background the phrase Potemkin villages was originally used to describe a fake village, built only to impress. According to the story, Russian minister Grigory Potemkin who led the Crimean military campaign erected fake settlements along the banks of the Dnieper River in order to fool Empress Catherine II during her visit to Crimea in 1787.

The term, however, is now used, typically in politics and economics, to describe any construction (literal or figurative) built solely to deceive others into thinking that some situation is better than it really is.

Ben Bernanke, recently proclaimed “The Hero” by Atlantic Magazine, is the “Wizard of Potemkin.”

Since 2009 Bernanke has engage in massive monetary experiments. These experiments lead to future dislocations. The chart below shows that for every dollar increase in the Fed’s balance sheet it has translated into $1 of NYSE market capitalization to GDP.

Rosenberg believes that the Fed is trying to convince people  that the economy is better than it really is.

For those who are interested in analyzing the markets, Rosenberg’s text will be well worth your time and attention.


JP said...

The massive amounts of Fed Fast Cash are being used to bid up the stock market.

And it will keep going up as long as massive amount of QE is poofed into existence.

However, my real reason for commenting today is because I have found the Thomas Friedman op-ed generator.

Try it. It works!

Did you ever imagine being able to create your own Thomas Friedman columns in your spare time?

Well, now, thanks to modern technology, you can!

Stuart Schneiderman said...

Thanks for the friedman op-ed generator... it works perfectly.

David Foster said...

I don't think Bernanke and his colleagues are actually trying to make the economy appear better than it is...they actually believe that what they are doing WILL improve the economy, using the only levers available to them.

One analogy that comes to mind is someone desperately trying to get more air or fluid through a hose. Someone is standing on the hose, so they keep increasing the pressure...eventually, the hose bursts.

Another analogy is someone trying to make an airplane climb if they were only able to use the stick/yoke but not the throttle (which is set at a low power setting.) They will be able to get the nose pointing up, and may actually make that sucker climb for a few seconds (if the airspeed is high enough), but pretty soon the speed will decay, the wing will aerodynamically stall, and the airplane will head in a definite downward direction.

JP said...

"One analogy that comes to mind is someone desperately trying to get more air or fluid through a hose. Someone is standing on the hose, so they keep increasing the pressure...eventually, the hose bursts."

It's not going to burst anytime soon.

Because there's no actual wage or commodity inflation.

Just asset inflation.

I'm not seeing anything on the horizon that's going to stop Infinite QE.

What they are doing is driving all returns on all timeframes toward zero.

JP said...

Also, if you want charts, Lee Adler is currently producing some of the best (most honest) charts using actual economic (non-adjusted) data.

Dennis said...

There will come a time, if the current approach is still in use, where one cannot go any lower. Whether this is zero or somewhere just above it remains to be seen.