One Wall Street veteran has a warning investors should heed.
Here’s a little story for you.
Once upon a time, there were so many cobras in Delhi that there was a bounty placed on each dead cobra delivered to the government. The plan worked at first, but then people began breeding the snakes and killing them for the income, and authorities were forced to end the bounty program.
But then those who were breeding the cobras released them when the money dried up. And you can guess what happened… Delhi’s cobra population again exploded.
This is what’s known as the “cobra effect,” and one expert says that’s exactly what’s playing out in the market right now.
Larry McDonald, owner of the popular blog Bear Traps Report, said this week that unprecedented public policy and government intervention in the economy is giving way to unintended negative consequences.
“We believe we are at the early stage of the biggest cobra effect in the history of economics,” McDonald said. “As the massive monetary and massive fiscal stimuli (over $15T globally) conjoin to save the economy from a deflationary depression, they will cause instead a hyper inflationary economic collapse.”
McDonald went on to say that if the government sees that such a collapse is imminent and changes course, a deflationary depression could follow that could be “much more severe” than if policy makers hadn’t intervened in the first place.
“How far has the world turned in twelve months,” the former strategist at Société Générale said. “The ‘Iron Chancellor’ in Angela Merkel has formally capitulated this week, agreeing to issue common debt on a large scale. We’ve gone from a ‘black zero’—Germany’s austerity obsession—over to fiscal handouts to mathematically unsustainable debtors in the periphery.”
But in the U.S., McDonald says policy makers are overlooking a handful of economic principles that will likely have a significant impact on investors.
“Basic economic assumptions, or structures, will turn out to be much more fluid than policymakers can anticipate,” McDonald continued. “Therefore, the results will be disastrous and unimaginable.”
However, it’s not all bad news. McDonald said that even with this result, “we’ll survive and thrive after the adjustment process.”
Still, he cautions, “Hell hath no fury as a cobra breeder scorned!”