That sinking feeling

I wrote last week about central banks trying to figure out how to remove the "stimulus" they've injected to get economic growth going.

This week, the central banks of Australia and Norway started removing their stimulus by hiking interest rates.

Markets were not impressed.

Monday to Wednesday, the S&P 500 was down 3.4%. On Thursday, the market rallied 2.3% on a better than expected report of Gross Domestic Product (read here for my take on why GDP isn't the best measure of economic health), but then tanked on Friday (currently down 3.8% for the week).

This just goes to show that what the government can giveth, it can taketh away. Now that economic props are being removed, investors seem very worried about how well the economy can stand on its own.

This should not be a surprise.

And it seems like the worst is yet to come. If a Norway (population 5 million) and Australia (22 million) can tank markets, just think of what happens when Europe (500 million), the U.S. (310 million) and China (1.35 billion) raise rates. Ouch!

Don't get me wrong, I think central banks have to stop printing money or we'll have the much bigger problem of hyper-inflation. It's good that world governments are getting around to removing props.

But, you have to wonder about people that get overly excited about markets going up when it's clearly just due to government stimulus.

At some point in time, the props had to be removed. And, just like every other time in history, markets aren't happy when that happens.

Nor do I mean to indicate that markets can't keep going up. Governments can keep trying to prop things up. In fact, their props could lead to high inflation, in which case markets should be expected to go up (though perhaps not in real, inflation-adjusted terms).

This all comes back to the inflation/deflation concerns I've voiced in the past (here and here). If we get high inflation, you don't want to be sitting in cash. If we have deflation, you won't want to own commodities.

As the Chinese curse goes: may you live in interesting times. These are interesting times, and call for a sophisticated investment approach.

This is an amazing opportunity for investors.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.