Stock Market Bubble and QE3 Surprise

Bernanke is getting his wishes without doing anything. The stock market is in la la land, moving higher today on false consumer confidence hopes based on a Democratic Convention push that has caused consumers to believe the political rhetoric coming from the convention will magically turn this economy around. Richard Russell has called this market action “crazy,” which leads me to believe something’s got to give here soon.

Moody’s says the U.S. may lose its Aaa rating if they don’t get a budget deal. The budget deficit is soaring. Germany says U.S. debt is too high. The Baltic Dry Index and Chinese manufacturing are in a steep decline. Chinese crude imports are rapidly fallingU.S. Manufacturing declining still. European unemployment has risen 13 straight months.  U.S. Unemployment is still bleak as more unemployed fall off the “counted” tallies leaving the real unemployment rate at about 15% according to RBC Capital which according to their recent report notes that only 3 U.S. states have U-6 unemployment rates under 10%.

Yet the stock market moves higher and higher. Something’s got to give.

I post this chart again for readers to see just how out of whack we are. It shows the Baltic Dry Index, a leading indicator of economic activity, and the S&P 500. Unlike the 2008 fall in both the BDI and the S&P 500, we’re supposed to believe “this time it’s different.” Really?

The Stock Market Is Not the Economy

If you throw enough money at something, it can make it move higher. And that is what the Fed’s QE and Operation Twist has done with the stock market and bailing out the banks. But it hasn’t improved the economy but in certain sectors (like banking). However, this game is far from over. The underlying data seen above tells me this. They may call it a fiscal cliff for America, but in reality, it’s a world wide fiscal cliff.

Greenspan created the last stock market bubble by artificially lowering interest rates. Bernanke has created this current stock market bubble by artificially lowering interest rates. The one’s who always get hurt are the small investors. Big investors will be out of the market after selling to the Johnny come lately’s.

Look at the chart below of the 10 year Treasury. My recommendation is to be completely out of the stock market once you see this rate go to 2%, if not before. The data I have written recently about tells me this is all fluff created by the Fed as to why the stock market is higher.

I’ll give you an example of how money thrown at something distorts what it is thrown at.

Today’s college tuition costs have outpaced inflation by a large margin. Why is that? It’s because the student loans handed out by the government are guaranteed. If you run a university, you can charge higher and higher prices as long as there is a government providing larger and larger student loans. And you wonder why one school recently revealed they have over 30,000 students who have defaulted on their loans? Just because you give money away, doesn’t mean its paid back.

But the money thrown at the schools did what? It caused the students fees to go higher and higher. This is what money thrown at the stock market has done. But when the money stops, or Bernanke stops with QE type manipulation, the market is left to deal with itself.  But unlike the debt slaves the schools have created, where they still have to pay that money back, you can press a button or direct your financial advisor to exit this stock market today. Or possibly begin to liquidate today should we continue a bit higher.

Reality Check

Our politicians don’t live within their taxable means and create wars or meddle in foreign affairs that really serve no purpose but to destroy economies and take lives. As investors we don’t learn from our past mistakes but the result of Federal Reserve manipulation of interest rates destroys economies which affects people’s lives.

The chart below shows how US asset bubbles become more volatile as real interest rates fall or stay low.

The S&P 500 is presently at 1435 and interest rates are at historic lows. Will history repeat? Is this another stock market bubble created by Fed intervention? How did that work out last time?

While the stock market waits to hear the results from the Federal Reserve’s meeting on Thursday, what will happen if the stock market doesn’t get any QE3? Why does Bernanke have to do anything if he can just talk the stock markets and interest rates where he wants them to go? Well, one thing is for sure, he can’t talk up unemployment. And eventually, he will lose his grasp of talking up anything. Eventually, the Fed will become irrelevant.

But for now, the Fed has the market fooled as the data speaks for itself.  Personally, I don’t think we get QE3. I say this because we are close to an election and the market has already reacted to has last words. A big disappointment may be around the corner, with a Fed ready and willing to act after the election and before the Fiscal Cliff of January 13th.

 


About Doug Eberhardt

Doug Eberhardt is a 25 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here. Contact phone number for Buy Gold and Silver Safely is 888-604-6534