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Dow 14,200

Posted by Jeff (ILoveCapitalism) at 10:49 pm - March 5, 2013.
Filed under: Depression 2.0,Economy,Free (or Private) Enterprise

Today the stock market, as measured by the Dow Jones Industrial Average, hit an all-time high of 14,283 (intraday basis; closing at 14,253). A broader measure of stocks, the S&P 500 index, also seems to be doing well as it closed at 1539, nearing its all-time high.

So all is well in Obama’s economy, right? People are confident, great time to invest in stocks, right? Not necessarily.

The economy’s fundamentals remain poor. I believe that the Federal Reserve Bank’s “Quantitative Easing” program, which pumps around $85 billion per month of newly-printed money into the financial markets, causes the stock market to go up irrationally.

People know that America’s economic fundamentals are poor; but if the Fed is pumping so much money into the markets, then the markets are going to do well ‘no matter what’, at least for awhile. Realizing this, people feel a pull to join the party – after all, everyone else is doing it – and that makes markets go up even more.

I don’t see how it can end well. I see it as another market bubble. When the Fed stops QE – and it will have to, eventually – the stock market seems more than likely to crash. Bubbles are terrific fun, while they last. That is the phase we’re in now: the drug-QE-induced euphoria.

Moreover, what’s really going on here is (I believe) a process of inflation. I’ll explain.

“Inflation” is a confusing term, because people have different definitions of it. Some people think – or insist – that it only means consumer price inflation, as measured by the CPI, the government’s Consumer Price Index. And by that measure, we’ve had low inflation.

But, as I’ve discussed before, the CPI understates inflation. The government has jiggered the statistical methods over the years, to make inflation seem low. The government has huge financial incentives to do this: for example, it can give smaller Social Security increases, that way. (Smaller in their real value; their real buying power.)

The average consumer knows the truth: she sees the inflation at the grocery store, the gas pump, a restaurant, the doctor’s office, her kid’s college, etc. Moreover, there are other kinds of inflation that affect people: for example, inflation in asset prices, like housing or stocks (cough).

The definition that I use, is monetary inflation. Inflation happens when the Fed adds to the money supply (prints money). The rest – consumer prices increases and whatever else – is mere consequences, which need time to play out.

As I’ve discussed before, when the Fed prints money, the money goes to the government and the financial markets, first of all. And that is, again, what I believe we’re seeing in today’s stock market: nothing but the euphoric effect of $85 billion per month in new Fed money, hitting the general financial markets.

The important point about money is always, always, What does it buy you? Gas and food are approximately double what they were when Obama took office; 3-4 times what they were ten years ago. Same with gold, and much else that you’d want to buy with your money.

So what if the stock market hits highs, when many (or most) of the things you’d want to buy with your money are up so much more over the last several years, that you are materially worse off than you were 5-10 years ago?

That is what I call inflation: A process of declining living standards, under a currency that is de-valued against assets and/or real goods, because that currency has been (or is being) over-printed.



  1. A few things going on: Notice that these record highs are being made on pretty low volume. There aren’t a lot of shares trading hands at these prices so it isn’t really building much of any support at these levels. In other words, if few people hold shares at these prices, when the market turns down, it can fall fast. Say 100 people bought shares at $100 and 5 people bought shares at $200. Now lets say the price falls to $185 in a hurry. The 5 people who bought at $200 might be reluctant to sell but the 100 who bought at $100 are going to want to take their profit and they are all going to sell at once.

    The Federal Reserve is basically giving cash to the banks who are buying stocks for their own accounts. That is pushing a lot of this buying activity. The “retail investors” are not really participating in this.

    The US dollar is doing pretty well against the Yen and the Euro which seem to be in a “race to the bottom” currency war. This makes the dollar rise relative to those currencies despite Fed printing of cash. If you are in Europe, buying dollars and investing that in the US stock market (where you can get better returns than bonds albeit at more risk) is a good bet while you own currency is falling. It is a matter of “right now we suck, but we suck less than they do” sort of thing. This is also why you see gold falling. It is because of the investors fleeing the Euro and Yen and running to the dollar is bidding the price of the dollar up relative to other currencies.

    All of that said, this bubble is pretty fragile and it isn’t going to take much to “pop” it. All it is going to take is an interest rate rise. I have *NO* confidence in ANY economic statistics the Obama administration is putting out. I have *NO* confidence in all the news coming out sugar coating the economy. Yes, housing prices are up but that is more due to regulations than due to market conditions. The US government put the brakes on foreclosures after the first of the year by changing the regulatory environment and greatly slowing down the foreclosure process. That means less foreclosed properties are hitting the market. Foreclosed property on the market tends to depress prices, less of those means prices rise. But the number of mortgages in default/arrears isn’t falling. We are simply building up more properties that are in default but have not cleared the foreclosure process.

    The instant interest rates go up, the whole thing falls apart. The instant the fed stops giving free money to the banks to pump into the stock market, the whole thing falls apart.

    Comment by crosspatch — March 6, 2013 @ 2:19 am - March 6, 2013

  2. OK, crosspatch said what I was going to say. I’m still buying silver.

    Comment by V the K — March 6, 2013 @ 9:01 am - March 6, 2013

  3. Am visiting with a financial anylist who agrees whole heatedly and applauds you. No one else anywhere, in any form of media has mentioned this.

    Comment by Leah — March 6, 2013 @ 11:14 am - March 6, 2013

  4. Well Glenn Beck has been talking about it. I need to see what I can move what’s left of my 401k to.

    Comment by The_Livewire — March 6, 2013 @ 11:20 am - March 6, 2013

  5. When 80-90% of the Market’s volume is actually generated by high-speed computer trading trying to arbitrage a penny’s difference for a thousandth’s-of-a-second, you know it’s a bubble. And there are twice(?) as many mutual funds and ETFs than there are publicly-traded companies on the NY Exchange, OTC and registered public companies…you have to assume it’s all flumerie.

    And the Derivatives markets is 10-times the size of the Economy??

    It’s not a “market”, it’s a casino!!

    Comment by Ted B. (Charging Rhino) — March 6, 2013 @ 11:46 am - March 6, 2013

  6. cp – Fair point about market volume. I don’t know if I would call it low – on, it seems to be in line with trend – but it certainly isn’t increasing. And as Ted points out, a lot of volume nowadays is computers not humans, so yeah, the average investor’s participation in the market’s rise is probably not high.

    Fair point also, about the housing market’s shadow inventory.

    The instant interest rates go up, the whole thing falls apart.

    Yes… the question is, when and why will interest rates go up?

    Some people think the U.S. could go on with QE and ZIRP for decades, like Japan. My answers to that:

    1) That is still NOT a good outcome. Japan has had two “lost decades”, going on a third. (Thanks, Keynesians!)

    2) Japan and the U.S. are different cases. Until recently, Japan has been a trade surplus country and a world creditor, which has kept them fairly wealthy and stable. The U.S. is a trade deficit country and a world debtor, which means we depend on foreigners to accept and hold our excess dollars, that is, we depend on foreigners to put up with our nonsense. Foreigners’ patience with our profligate ways is nearing its end; for example, countries are making more trade agreements among themselves, paving the way for a rejection of the U.S. dollar from its existing place at the center of the world trade system.

    Now that Japan has become a trade deficit country (thanks, anti-nuclear activists!), it is headed for a sovereign debt crisis. My guess is that when they hit it, they will have to hyperinflate their currency and/or sell U.S. Treasuries, either/both of which will push the Fed to do EVEN MOAR QE.

    But the point is, the Fed will be able to do so and thus to keep interest rates low, for awhile yet. If the Fed becomes 100% of the Treasury bond market (and they are already 50-70% of it, for new issues), “so much the better” for their power to set rates.

    Interest rates will go up, when and only when the Fed is politically compelled to stop QE, because even the most backward leftist can’t avoid seeing that QE has become intolerable, i.e., hyperinflationary. All that will happen, in time. But when?

    Comment by ILoveCapitalism — March 6, 2013 @ 1:17 pm - March 6, 2013

  7. (continued) My guess is: Maybe tomorrow… Probably within 3 years, i.e., before the next Presidential election. But that’s a broad range of time, though. And if it takes 4 years or more, well then my guess was wrong.

    In 2010-11, I thought it *might* happen in 2011-12. But I did qualify that by saying (a) it might not, and (b) if it didn’t, then Obama would win the 2012 election. I was right, on the second point. My prediction was that, one way or the other, Obama would inherit the collapse (having so greatly contributed to it, with his bad policies). We’ll see!

    Comment by ILoveCapitalism — March 6, 2013 @ 1:44 pm - March 6, 2013

  8. The when on interest rates going up is soon. see the attached chart:

    To explain what the chart is saying – “all hell is going to break out” when rates start to rise. They already have started to a degree. The 10 year treasury is up 39% from the July 2012 lows, and the 30 year treasury is up 28.5% from July 2012, compared to current prices. As the chart depicts, there have been 5 times before today going back to the 1960’s where Baa bonds have hit significant lows, with the current reading being the lowest in over 50 years. Folks, the interest rate party/bubble is coming to an end, and as I said in earlier comments: “It ain’t going to be pretty.” My advice, free as it is, is walk away from bonds, or shorten your duration – that is the only defense.

    The real problem is coming when the fed stops keeping their hold on rates. Bernenke has promised through 2014. Political environment or not, he will not be able to keep the QE party going, plus he wants out as Fed chairman. He knows what could happen – he is an expert on the Great Depression – that is what his doctoral thesis was all about. The monkey wrench in the plans will be the language the fed puts out prior to the end of 2014. The market is a discounting mechanism, and it will start to anticipate the rise in rates/inflation. Herein lies the problem for stocks. The cost of money to a corporation is very important. As the cost of money goes up, earnings will fall. Per share earnings is what DRIVES the stock market, everything else is noise. In fact, the great finacial crisis and housing bubble burst of 2008-2009 was really the world entering into a de-leveraging crisis. Don’t see much about that in the media and press, or on the web, but that is what was at the core of the crisis. If you can find them, just go ask someone who was at Lehman or Bear Stearns in 2007/2008 – they lived the horror of a company being de-levered.

    Comment by mixitup — March 6, 2013 @ 3:55 pm - March 6, 2013

  9. mixitup – TLT doesn’t look too bad to me yet, on its 2-year chart where it will find support at 110. On a 10-year chart, we see that it would have to break below 95 (or the 90-100 zone) for the situation to get serious, and I’m pretty sure the Fed can defend that zone, if only by increasing QE until the Fed owns all of the long-term Treasury bonds. I think they will (when the time comes).

    I don’t doubt your conclusions; again I just “question the timing”. Bernanke would be happy, I think, to extend the party through 2014, then throw the hot potato to his successor.

    Comment by ILoveCapitalism — March 6, 2013 @ 4:46 pm - March 6, 2013

  10. I don’t know if this chart will paste, it comes from my point and figure source. Support is at 115 for TLT:

    The next chart is a longer term chart:|2.000&type=TREND&country=&source=showchart
    TLT is indicating it broke support at 118, with major support at 108. If 108 is broken, then 88 is in the cards.

    I agree, 115 is the near term support.

    ILC, I agree about to the end of 2014, but what I am referring to is the phenomenon of a market discounting 3-6-9 months out, prior to the actual event. Looking back at history, the market does a good job on that front. For example, the home building stocks ALL gave sell signals, broke support, and started their cratering in 2005/2006. Years before the actual event. My thesis is that the market will at some point start to discount what you and I are convinced WILL happen. Then in 2009/2010, I couldn’t get a client to invest in a home builder, yet look at where they are today.

    Comment by mixitup — March 6, 2013 @ 5:06 pm - March 6, 2013

  11. Sorry, second chart doesn’t paste – only the default chart shows up. Trust me, on the longer chart 108 needs to hold or 88 is going to be seen.

    Comment by mixitup — March 6, 2013 @ 5:09 pm - March 6, 2013

  12. Ahhhh -you can click on the 1.00, 2.00, and .25 charts and they do open up off the default. You will see the other support points.

    I use these type all the time. Point and figure charts are pure price driven – every buy and sell gets a vote.

    Comment by mixitup — March 6, 2013 @ 5:12 pm - March 6, 2013

  13. Very interesting. I will watch 108.

    Believe me, I still have a few shorts and I’d love it if it did hit 88… I’ve just learned to “stop dreaming”. 😉

    Comment by ILoveCapitalism — March 6, 2013 @ 6:22 pm - March 6, 2013

  14. […] week, I mentioned that the markets are most likely up because the Federal Reserve Bank is pumping out $85 billion per […]

    Pingback by GayPatriot » Is the economy really growing? — March 10, 2013 @ 11:50 pm - March 10, 2013

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