Think of the economy as a tooth. If you have a healthy tooth, you don’t need to fix it. But when you have a cavity, you need to fix it. Otherwise, it will get worse. To fix it, you have to drill to clean everything, and then, you put in some kind of filling.
However, with our modern economy, which is “run” by a bunch of PhDs, you don’t fix the tooth/economy by drilling because drilling is too painful. You simply cover up the cavity and tell everybody that it is fixed. Then, you tell everybody that you will remove the cover (remove the QE) when the cavity heals. Well, the problem is that the cavity never heals, and instead, it gets worse. So what is the solution? QE 2 and 3. If QE does not work, we make it bigger. Then, we get to September and everybody is convinced that the Fed will taper. However, can we really taper/remove only a small portion of the cover? Well, we could if we can find a small area in the tooth that does not really show the cavity. In reality, we can’t really remove the whole cover because the market cannot handle the truth. So, what do we do? We tell the market that we won’t taper in September but we will taper/remove some of the cover in October, and by 20XX we will remove everything. As always, the market buys this fantasy.
After this, he said, “I get your point that things are not looking as good as the media is presenting it, but you can still make money and get out before things crash.”
I said, “You mean get out when everybody else is getting out?”
He said, “Well, I know I am not going to time it perfectly.”
I said, “Isn’t it like investing in the greater fool theory?”
He said, “Yes.”
This conversations definitely reminds me of 2005, 2006, and 2007.