June 23, 2015

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Circularity defines the policy environment. Example: Greece gets money from the IMF and uses it to pay the IMF. Result: a circle. Another option: Greece is refused money by the IMF and therefore fails to repay the IMF. Result: a circle. The only difference between A and B is the text of the document. One is a pronounced default; the other is not. In both cases the financial market impact is the same: the debtor cannot pay; the governmental institution has an indefinite and perpetual claim.

Here’s another form of circularity. Our Federal Reserve buys a US Treasury note. It holds it and collects the interest. It then remits this interest to the US Treasury, which is the debtor that issues the note that the Fed bought. Circularity? Seems like it to me.

Another example is in Japan. The government pension system says it will sell its government bonds and use the cash to buy stocks via a special ETF. The Bank of Japan creates new yen and buys the bonds. The market impact on bonds is neutralized; hence it is circular. In the case of stocks, the prices rise due to the substitution of stocks for bonds. If you are a private market agent, this is a wonderful outcome for your stocks.

Circularity may make for a very pleasant market experience. Or it may be neutral. Pain comes only when the circularity stops or when the rate of change is altered.

Entering the vortex of circularity is easily accomplished by “can kicking” political or financial moves. Stopping circularity is tough. Reversing it seems to be almost impossible.

To reverse it requires real growth (expanded output and rising income) or nominal growth (inflation) or a combination of both. Circularity by itself creates neither. All circularity accomplishes is deferral.

In June of 2015, we find ourselves in a circular financial world. It’s a form of musical chairs. The symphony is loud and melodic in Japan, stimulating but tentative in America, and cacophonous in Europe.

The most exciting times in the market unfold when circularity is fully at work, as it is today. The pain comes when the music stops. That will happen in its own time. That time will come at 11 o’clock on the day after we sell and raise cash. That day is in the future. It is not yet here.

We draft this note from Leen’s Lodge as we prepare for the first group’s arrival post-Father’s Day weekend and for the August group’s arrival. Both groups are fully booked. There is still some space on Labor Day, though, and we have decided to open the weekend up to first-come, first-served until it is full. Call Leen’s Lodge at 207-796-2929.

Circularity in Maine in a pristine watershed has a different rhythm and significance than circularity in the financial world. Both may be green, but in Maine, in the northern and remote St. Croix River Valley region, circularity is natural and welcome.

The fishing is great. The days of blue sky and clear water are calming and inspiring. And my fly rod seems to know what to do.

Musical chairs can wait another day.


The ideas and opinions expressed in this blog are those of the author, and they should not be perceived as investment advice or as any other kind of advice.

The preceding is a commentary by Cumberland Advisors and has been reposted with permission. Cumberland Advisors commentaries are available at

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