Posted on 05/08/2009 6:33:17 PM PDT by sickoflibs
Strike up the band, boys, happy days are here again! Recently released short-term economic data, including unemployment claims, non-farm payrolls, home sales, and business spending, which had been so unambiguously horrific in February and March, are now just garden-variety awful. With the Wicked Witch of Depression now apparently crushed under the house of Obamanomics, the Munchkins of Wall Street have sounded the all clear, pushing the Dow Jones up 25% from its lows. But the premature conclusion of their Lollipop Guild economists, that the crash of 2008/2009 is now a fading memory, is just as delusional as their failure to see it coming in the first place.
Once again, the facts do not support the euphoria. Over the past few months, the government has literally blasted the economy with trillions of new dollars conjured from the ether. The fact that this "stimulus" has blown some air back into our deflating consumer-based bubble economy, and given a boost to an oversold stock market, is hardly evidence that the problems have been solved. It is simply an illusion, and not a very good one at that. By throwing money at the problem, all the government is creating is inflation. Although this can often look like growth, it is no more capable of creating wealth than a hall of mirrors is capable of creating people.
We are currently suffering from an overdose of past stimulus. A larger dose now will only worsen the condition. The Greenspan/Bush stimulus of 2001 prevented a much needed recession and bought us seven years of artificial growth. The multi-trillion dollar tab for that episode of federally-engineered economic bullet-dodging came due in 2008. The 2001 stimulus had kicked off a debt-fueled consumption binge that resulted in economic weakness, not strength. So now, even though the recent stimulus administered a much larger dose, we will likely experience a much smaller bounce. One can only speculate as to how much time this stimulus will buy and what it will cost when the bill arrives.
My guess is that, at most, the Bernanke/Obama stimulus will buy two years before the hangover sets in. However, since this dose is so massive, the comedown will be equally horrific. My fear is that when the drug wears off, we will reach for that monetary syringe one last time. At that point, the dosage may be lethal, and the economy will die of hyperinflation.
As always, the bulls fail to understand that investors can lose wealth even as nominal stock prices rise. As a corollary, the bearish case is not discredited by rising stock prices. While there are some bears that mistakenly cling to the idea that deflation will cause the dollar to rise, those of us in the inflation camp understand that the opposite will occur.
In the meantime, stocks are not rising because the long-term fundamentals of our economy are improving. If anything, the rise in global stock prices is due to investors realizing that cash is even riskier then stocks. The massive inflation that is the source of the stimulus is essentially punishment for those holding cash. To preserve purchasing power, investors must seek alternative stores of value, such as common stock.
It is important to point out that despite an impressive rally, U.S. stocks have substantially underperformed foreign stocks. In the past two months, while the Dow Jones has risen 30%, the Hang Seng and the German DAX have risen by over 50% in U.S. dollars. Commodity prices are also rising, with oil hitting a five-month high. And gold is shining as well, with the HUI index of gold stocks up 30% during the past two months, and 2/3 of those gains occurring in the past month. If this rally really were about improving economic fundamentals, gold stocks would not be among the leaders. Further, during those two months, the U.S. dollar index fell by 7%, with commodity-sensitive currencies such as the Australian and New Zealand dollars surging 20%.
To me, the relative strength of foreign stocks and currencies indicates that perhaps the global economy is not as impaired as many have feared. It has been my view all along that after the initial shock wears off, the world will be better off - once it no longer subsidizes the American economy. The shrinking U.S. current account deficit is evidence of this trend in action. Renewed strength in foreign stocks and weakness in the dollar may indicate that not only is the world decoupling from the U.S., but benefitting as a result.
So let the Munchkins dance for now. But remember, the Witch is not dead, only temporarily stunned by an avalanche of fake money.
I'm still saying to expect a bond dislocation in the short term (3-4 months)
Stock indexes do very poorly vs inflation. There are always individual companies/industries that may thrive in any kind of conditions, but broad-based indexes like Dow Jones & S&P500 do not react well to inflation. See this paper:
Inflation Hedging for the Short-Term & Long-Term
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1394810
When there is a sudden outburst of prolonged inflation:
* Commodities outperform all other investment classes for 6-18 months, all other asset classes lose value or are flat.
* During the 2-5 year range (after the beginning of an inflation shock) commodity prices start to level off or decline after a big run-up, long-term & short-term bonds start doing better due to high interst rates. But stocks tend to still stay flat.
* After 5 years, stocks, bonds and short-term bonds (cash) start to perform better & regain their historical risk-return tradeoff.
Congress had the key last. Ask them what happened to the money.
What lockbox?... If there is one its a shoebox full of IOUs signed by congress.
Thank you very much for the tip and info. :-)
Yup! Pay no attention to that man behind the curtain Dorothy.
Note what is worse - theu keep tagging and as national park or grabbing it as uncle sam’s. A lot of it has minerals and energy (oil, coal, shale oil, etc). Clinton locked up the clean coal in Utah for the Riaddy Group because they have huge amounst of clean coal.
We need 10th Amendment.
One or more people bashed me about bitching about RINOs like Juan McCain. Cjarlie Crist is another. The FL House passed a bill for offshore drilling between 3 to 10 miles. I guess the state controls that. Crist said he would no support it and veto it - another Saudi bought & paid for stooge.
Perfectly timed for the 2010 and 2012 elections. We may be watching the last gasps of liberalism in the USA. Once the peasant class figures out how their quality of life has eroded to support government workers, unions and bums, the Democrats will not hold power for decades (or so I hope)...
That's the whole Quantum Easing thing. The Fed announced this spring that it would step up open market purchases to assure the US Treasury that it could sell all of the bonds it needed to fund the $4 trillion in deficit spending. In effect, the Fed is manipulating the interest rate market by artificially suppressing the long term rates by creating bogus demand for these bonds. Without Fed purchases, the interest rates would be significantly higher now than they currently are today. Seems like market manipulation to me, as this is mostly done in secret. Someone should wake up the SEC Enforcement Division!
Schiff is losing his marbles; the market is hanging on spider webs, and when they break there’ll be no warning. (actually the warning has already sounded)
This worked in the late 1970s, sort of... The trick was to find companies with assets that would benefit from the hyperinflation. Oil, coal, minerals. These all increase in value during inflation so the common stock acts as an inflation hedge. I suppose stocks could be rising these days as cash moves to equities. But, beware. Picking stocks in companies that are hurt by inflation will cost you plenty in capital losses. You need to chose wisely if you want the stock market to protect you from inflation. I BOT Alcoa recently because they control lots of Aluminum and the emerging world, according to those Coca Cola commercials from the 1970s, will be drinking lots of pop in cans! I'll be rich!!!!!!!!!!!
The Euro is in far worse shape than the Dollar.
As an active trader, I suggest that given the extreme volatility in the markets today, and the worsening economic conditions, it is damn risky to play long term “buy and hold” at this time. Time and time again, I’ve seen stocks get hammered overnight because some talking head idiot ran off at the mouth in front of a camera. At this point, I rarely hold overnight, preferring to be in cash at days end. No one knows when the bottom will drop out of this current bear rally — if you’re holding when (not if) the freefall happens, you’re dead meat. If trading’s not your thing, than physical gold and maybe silver is where it’s at for the time being. Look at the gold charts over the last 5 years and you’ll see why.
Trouble is getting delivery on physical metal for anything near London spot -- so much downward manipulation out there that, last fall, people like Blanchard were getting $100 over spot for timely deliveries of gold. The pecking order is physical (not quoted), then spot, then ETF "paper gold" (badly manipulated by the Fed, don't touch it).
Another possibility is closed-ends like CEF (Central Fund of Canada), but closed-end managers like to dilute you with "rights offerings". You have to step up and participate 100% in the offering, in order to avoid getting diluted. Last summer CEF suddenly announced a huge rights offering which would be done in tranches. The shares dropped by a third overnight. It's management's way of squeezing shareholders. Robert Scott used to follow closed-ends, wrote a book and a newsletter, but eventually the endless rounds of rights offerings spoiled investor interest in the funds, and he went off and started doing discount brokering.
Mining shares got crushed last July when Bernanke and Hank the Shank walked into the commodities space at the President's behest and cut the elevator cable. (They did a "long squeeze" similar to what the Fed and CFTC did on the Hunt brothers back in 1980, to crush commodities prices and punish the dollar bears.) That started a deluge of margin calls that the hedgies had to meet, and they wound up throwing even their best mining shares out the window to meet their calls .... then after Lehman Brothers finally went broke (partly as a result of the squeeze), everybody got an extra dose, and most mining shares and mutual funds ended up down 70% from the previous May -- an absolute disaster. Punishment for disobeying Ben and Hank's preference that everyone stay in dollars as future bagholders. And the President's preference for lower gasoline prices.
They may be corrupt and evil, but stupid they are not.
‘I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.' - Thomas Jefferson
What warning is that? Higher energy prices?
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