Thursday, February 26, 2009

The Fed's Maginot Line

In 1939, the French completed construction of the Maginot Line, a truly massive undertaking that sought to fortify the border between France and Germany. The Maginot Line was built in response to the traumatic events of WW1, as well as the looming threat of Germany. In theory, the Line would serve as an impregnable wall of defense, negating any possibility of a German invasion. The finished product did not disappoint, and succeeded in providing the French with a certain peace-of-mind regarding their national security.

Unfortunately, in1940 the Germans launched an offensive codenamed "cut-of-the-sickle", in which they invaded Belgium at the weakest available point, circumvented the entire Maginot Line, and invaded France via the Belgian border. German troops quickly advanced upon Paris, and the city fell with minimal real resistance.

We would submit to our readers that the Fed has constructed its own figurative Maginot Line for the equity markets at the approximate lows of the bear market that ended in 2003. This level marks an extreme support for the markets, a powerful breaching of which could ultimately send the equity markets to multi-decade lows. With the abolition of defined pension plans, the retirement savings of millions of Americans are tied up in 401k's that primarily invest with a long strategy. A continued deflation of equity prices would force millions of Americans to put retirement on hold. We see the same panicked behavior in the Government's response to declining housing values. These too are a necessary part of the equation.

Aside from the issue of delayed retirement would be the widespread recognition that the decades-long trend of ever increasing wealth and prosperity has largely been an illusion. The opiate of continued asset inflation has made the average American numb to the crumbling fundamentals of the economy. We hold that the Government/Fed have a vested interest in the doling of that opiate to the masses, as it keeps the citizenry happy and preoccupied with the  accumulation of material objects, all the while oblivious to reality.
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