There's a movie about a zombie apocalypse where fireworks are used to distract the zombies. While their yellow eyes are peeled to the sky, scroungers go looking for food outside the safety of the walls. The violent zombies are so absorbed by the fireworks they let people walk right past them. Think of it as stimulus.
The last two weeks have seen the pyrotechnicians busy goosing the zombie economy. While they were doing so, their mates got away with the goods.
In Germany, the European Central Bank set off fireworks by agreeing to bail out countries that ask for their help. Where does the money for the bailouts come from? A bookkeeping entry. Thin air. A few taps on the keyboard. In other words, the central bank just creates it.
Then, just up the Autobahn from the ECB, the Bundesverfassungsgericht ruled the bailout mechanism of Europe's governments to be just fine. Over-indebted governments can now bail out even more indebted governments. The zombies loved it.
Not to be out done, Federal Reserve Chairman Ben Bernanke sent the zombies scrambling to see his $40 billion a month fireworks show. He announced he 'will buy $40 billion of mortgage-backed debt per month until the outlook for jobs improves substantially as long as inflation remains contained.' That left Sydney's New Year celebrations for dead.
If you're wondering why on earth a central bank would buy mortgage debt, you're caught up in the fireworks. You need to snap out of the zombie mentality and realise what's really going on. But before we get to that, here's another story right out of the zombie movie itself.
For some of the zombies, the fireworks don't have much of an effect anymore. They don't own American shares, they don't pay German taxes, and they don't live in Greece or Spain. So the distraction had to be a little more creative:
'A group of suspected bank robbers threw cash out of the windows of their getaway car as they led police on a wild chase through the streets of Los Angeles. Crowds of people reportedly flocked onto the streets in search of the cash as the chase was televised live from news choppers in the US. 'Some residents believe the suspects robbed the bank as a noble gesture, so they could share the spoils with the neighbourhood, according to police. But Sergeant Mike Parker from the LA Sheriff's Department said flinging cash out of the window was probably a tactic to attract people to the street in a bid to distract police and form a sort of human blockade.'
Bernanke is famous for declaring that the central bank he runs could drop money from a helicopter if economic times got desperate. Apparently economic times are so desperate, he had to swap his helicopter for a black van.
Hey, if the banks refuse to lend all the money being pumped into them by central banks, why not get things moving in a different way?
Given the stimulus, money printing and bailouts so far, what exactly is any additional manipulation supposed to achieve? It's not like we've had a half decent economic recovery anywhere. At least, not one that looks sustainable.
If you think the last two weeks of shenanigans are anything other than a distraction, you've been zombified. Here's a hint as to what's really going on. Just up the highway from the bank robbery, people have been living it up on other people's money:
'In Santa Clara County, the center of the global tech industry and one of the wealthiest places in the United States, most home buyers get help from the government, an analysis of government lending data shows. The same is true in other wealthy enclaves such as Nassau County, outside New York, and Arlington County, outside Washington, the analysis of more than 50 million loans finds.'
That's right, while the poor fight over cash lying in the street, and the middle class fight over goosed stock markets and welfare cheques, the rich are getting help with their mortgages. How quaint.
What keeps this system of looting alive is the distractions the zombies are fed. Without the pyrotechnics at the Fed, ECB and government, the zombies would quickly be up over the walls. Some zombies are catching on and staging a non-violent protest:
'"There are so many people like me who aren't paying their mortgage so they can buy groceries and gas," said Harris, who was rejected for loan modification programs. "It's creating this whole false economy".'
Just imagine if the false economy were exposed with realistic interest rates, honest mortgage repayments, or failed government budgets. In other words, imagine if the zombies were reincarnated. Reality, at this point, is quite terrifying.
Don't worry though. Bernanke, Draghi and their minions will blow up the whole world with their gunpowder before letting the zombies figure things out.
That leaves you in an awkward position. How should you deal with a zombified investment market?
First up, make sure you don't get caught up in the fireworks. And, depending on your ethical disposition to such things, make sure you get your unfair share of the government's loot. For example, invest in small cap shares, which have a habit of soaring under money printing conditions.
You might also want to protect yourself with assets that are too boring to attract the attention of zombies. Assets that are real and unalterable by laws and showmanship. Assets like gold and silver.
But most important of all, don't get caught relying on the false global economy. Bailouts, money printing and stimulus fail eventually. Economic law holds. It just happens to be irritatingly patient.
The Daily Reckoning Weekend Edition