Painful Keynesian Lesson

I am much more drawn to the teachings of Hayek and Von Mises than those of John Maynard Keynes.

However, our current government attempts to control our economy by implementing Keynesian principles, and has since the creation of the Federal Reserve system in 1913.

His famous quote that is becoming all too painful for me goes like this: "The market can stay irrational longer than you can stay solvent."

Another famous Keynesian quote: "There is nothing so disastrous as a rational investment policy in an irrational world."

Now, if you are an trader, you understand exactly what I'm talking about. Timing is crucial.

If you are not a trader, you can stay safely in cash and avoid all this craziness for a while.

(Fortunately, there are ways to be short where you can stay solvent and stretch out your time horizon.)

http://econlog.econlib.org/archives/2009/08/how_to_stay_sol.html

If you missed this great rally by sitting mostly in cash, don't fret. At least you weren't short.

All that said, I am still net short this market through put options.

The fundamentals HAVE NOT changed. This run-up is driven by government over spending and bubble-like hopes that the worst is behind us. I am afraid it is not. We will break through the March lows, I obviously just don't know exactly when that will happen.

Don't forget what sparked the rally off the lows: the government suspending mark-to-market accounting for the large financial institutions. Instead of letting the market correct, the government basically stretched out the timeline banks had to disclose their bad assets. The hope being this would give them time to save themselves as the stimulus kicked in.

The problem with this logic is that there are many, many more losses to come. There are hundreds of billions of bad loans sitting on the books of the banks. Housing prices have not bottomed. There are millions of more foreclosures on the way.

I am not trying to be depressing, rather just interpreting the facts as I see tham and being as realistic as possible.