A Twinkie Market

Hostess Twinkies make childhood happier with totally artificial ingredients. The market has been made happier by government manipulation. 0% interest rates, Mortgage Lending Programs, Cash for Clunkers, TARP, etc...I'm worried to this day about what would happen if all the manipulation wasn't happening... And it's continuing with the European bailouts. It's as if the Government is in business to give bad financial advice and force unsophisticated (and sophisticated) investors to speculate. In the short term performance game, everyone needs to keep up

-Seth Klarman, May 2010



A little over a year ago Seth Klarman compared the current market to a Twinkie. It feels nice and good but its all artificial. It remains an excellent analogy. One of the most ignored aspects of the economy is that it is not standing on its own two feet and the government has had a large role in propping it up. This also means that corporate profits are being propped up, as profits would be lower in a weaker economy and absent 0% interest rates.



I believe that many investors are treating corporate profits as if they were self sustaining. Many others allow the "market action" to dictate their investment decisions, essentially doing the same thing as the former group. Its entirely possible that this trade continues to work out, as it has been. However, history has taught us that in the long run markets and economies cannot be manipulated by governments.

1 comment:

frank r said...

Defini