The economy slips toward recession and stocks ignore it. Why? Courage from the average investor perhaps? Confidence in the underlying strength of the economy? Hardly.
Investors are in full flight, trampling each other to get out from under the collapse of the housing industry, just as they rushed out of stocks and into housing after the so-called dot.com bust. Now they are fleeing housing after creating a similar fiasco in that market. But the money has nowhere to go.
The Fed’s solution to every crisis since 1987 has been to pump low-cost money into the financial markets. That’s one reason Wall Street thinks IT SEES strength over the past four decades while Main Street has turned into a row of double-wides.
The money pump rattled into action again on September 18, when Bernanke and the Fed cut rates by half a point. There was only one excuse: To give the financial markets "confidence" so they can “run smoothly.” Bailing out financial institutions is a central bank theme. IT KEPT CHUGGING ALONG ON OCTOBER 31, WITH ANOTHER QUARTER POINT. AGAIN,THE AVOWED PURPOSE WAS TO:
"forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time." (Fed statement, 10/31)"GROWTH OVER TIME" MEANS THEY KNOW INTEREST RATES DON'T SIFT INTO THE REAL ECONOMY FOR 18 MONTHS. THIS IS NOT ABOUT ECONOMIC HEALTH, IT'S ABOUT BAILING OUT THE BANKS.
IN THE OLD DAYS, "LIQUIDITY" USED TO MEAN CASH AND LIQUID ASSETS, NOW IT MEANS ACCESS TO CREDIT. THE RATE-CUTTING ACTION OF THE FED IS EQUIVALENT TO PRINTING MONEY FOR THE FINANCIAL SECTOR.
So we have plenty of money sloshing around at the top. But where to put it? Housing is deflating. (Pity the poor homeowner who was counting on that to finance his retirement.) Stocks? It IS rumored some companies have foreign presence. Bonds? Sure, but you’re going to lose real value if inflation kicks up. COMMODITIES, OF COURSE, ARE TOPS AS AN INFLATION HEDGE AND AS A FIRST BET ON THE NEXT BUBBLE.
BOTH PRINTING MONEY AND BIDDING UP COMMODITIES MEAN WE ARE IN FOR INFLATION. INFLATION AND RECESSION IS THE RULE NOWADAYS, AND UNFORTUNATELY THE MILLIONS OF INFLATION FIGHTERS IN THE FORM OF THE UNEMPLOYED CAN'T TOUCH A COST-PUSH INFLATION THEY DIDN'T START.
The smart money is buying foreign securities. Even if they don’t appreciate in value, you can ride up with the underlying currency. Or at least avoid sliding down with the dollar.
WEAKNESS IN THE STOCK PRICE OF THE FINANCIALS IS NOT WARRANTED. THE FED IS PROVING "TOO BIG TO FAIL" IS STILL IN OPERATION. WHAT COULD BE BETTER FOR A BANK THAN ACCESS TO THE MINT? A MASSIVE TRANSFER OF WEALTH FROM THE REAL TO THE FINANCIAL ECONOMY IS UNDER WAY. GET THOSE FINANCIALS WHILE THEY'RE DOWN.