A Look at the Stock Market Rally

The current stock market rally is based solely on two factors.

The first is the "time-honored" tradition of end-of-quarter markups on stocks. It happens nearly each and every quarter going back for decades. Yet people are often taken unawares by the actions of fund managers.

Ostensibly, the reason for the rally is the trial balloon being floated about a 2 trillion euro EFSF (European Financial Stability Facility).

It's amazing how supposedly sophisticated investors believe that waving a magic wand, ala Harry Potter, can solve the western world's economic ills. It can't!

There are several obvious holes in this trial balloon.....

First of all, where would the money come from? Insolvent southern European nations? Or, most likely, from simple money printing. Gee, that has worked so well in the United States.

Secondly, countries like Germany and Finland are very unlikely to ever approve of such a plan for two reasons.

One reason is that it involves the use of leverage which is an anathema to the culture of northern Europe. The second reason is, as obvious by its use if leverage, that it is an idea put forward by the United States.

Why doesn't Tim Geithner poke his nose out of Europe's business? Isnlt it bad enough that the leveraged, casino mentality has overtaken US financial markets. Europe has enough troubles without adding more leveraged debt to it.

Investors right now should take this rally as a gift and fade it. That is, sell into it.

Stock Market Selloff

This past week saw a massive selloff in the U.S. stock market, with the Dow Jones Industrial Average suffering its biggest weekly loss since 2008. Both it and the S&P 500 index were down about 6.5% for the week.

This market downdraft was one, by the way, that I gave a warning about to my Twiiter (@tdalmoe) followers last week.

The inevitable question I've been asked numerous times is “Why?”. The answer is simple.....

At the end of its meeting on Wednesday, the Federal Reserve made a major announcement.

The Fed said it would be purchasing Treasury bonds with the proceeds from other bonds and T-bills as they expired. There would be, for now at least, NO new money used to make their bond purchases.

My gawd! No more new money for the casino players on Wall Street. No more new money for the Wall Street “addicts” who had gotten used to free money from the Fed in the form of QE1 and QE2 to the tune of about 1.5 trillion dollars over the past two years.

The traders heard this and went into full panic mode, selling everything. Poor babies...crying from just getting a taste of what the American middle class has been getting over the last two years – no help.

What will happen next? No one knows, but here's my guess.....

The U.S. market has further down to go. Many other global stock markets already back down to 2009 levels, giving back much of the gains of the past two years.

The stock market has to play catch-up because the U.S. economy is in just as bad, if not worse, shape as other economies around the globe.

That realization is just dawning on stock market players who have fantasy booming earnings expectations built into the price of many stocks.

This is especially true for technology stocks.....

People all over the globe are struggling to make ends meet and in parts of the emerging world are struggling to pay for the high cost of food.

The “thinking” by investors in technology stocks right now is that it doesn't matter. People may not eat, but they will surely will buy the latest hot smartphone or tablet computer.

That “thinking” is sheer nonsense. Until this investor psychology is broken and the bubble in Nasdaq stocks is broken and the index is much lower, the U.S. stock market has only direction to go – down.

That is, until the Fed unleashes trillions of dollars in QE3 to Wall Street, ending the "shakes" from the money addicts there.

The Fed and History

The stock market enjoyed a big rally this past week.

Why, you may ask?

The answer is simple. Next week the Federal Reserve meets once again. And Ben Bernanke and the Fed are expected to have some form of more free money giveaways to Wall Street to the tune of hundreds of billions of dollars.

The Federal Reserve just continues on its path of destroying the value of the US dollar (down more than 80% since 1971) in order to please Wall Street.

President Obama's favorite economist, John Maynard Keynes, wrote some very prescient words in his 1919 classic, “The Economic Consequences of the Peace”.

In the book, Keynes spoke about Vladimir Lenin – founder of the USSR and of the Soviet Communist Party.

“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

Keynes agreed with Lenin's assessment saying, “There is no subtler, no surer means of overturning the existing basis of society than to debauch [debase] the currency.

He then went on to point with alarm to post-World War I Germany where officials were printing lots of money. Keynes' warning went unheeded, however.....

The money printing only accelerated, eventually destroying the German middle class. And in the ensuing social chaos, we all know what followed.

As Mark Twain was quoted as saying, “History does not repeat itself, but it does rhyme.”

The fact is that the US dollar has shrunk greatly in value since President Nixon took the United States off the gold standard in 1971. Since then, paper dollars have been backed with, well, nothing.

Americans need to ask themselves one question.....

Why in the world does the Federal Reserve continue its mad money printing when it is benefiting only one segment of society (Wall Street) and is causing the middle class to shrink every day.

Think about the Fed's policies the next time you go to the grocery store or fill up your gas tank. The higher prices you see are at least partly caused by the Fed's money printing.

The United States of Zero

Some of the political pundits have begun calling President Obama “President Zero”.

That is because the August employment figures showed no net new jobs created here in the good old USA.

But these pundits should look back a little farther. There have been a lot a zeros the United States has generated since the turn of the century.

How many net new jobs have been created in the last decade? Zero!

There were about 130 million jobs in America in the year 2000. And there are about 130 million jobs in America today.

How much more does average US wage earner make? Zero!

Adjusted for inflation, he or she made about $16 an hour in 2001. He or she still makes about $16 an hour today.

How much more are stocks worth today? Zero!

The S&P 500 has gone nowhere for over a decade. And adjusted for inflation, investors are on the losing end.

How much more are houses worth? Zero!

Gains made early in the new century have been erased and more.

So by all the important economic measures, Americans are zero better off than they were a decade ago. Perhaps the pundits could call our nation the United States of Zero.

Actually, the statement that Americans are zero better off is incorrect. Americans are much worse off. They have much more debt than they did at the turn of the century.

Here's a look at some numbers that are unfortunately not zero.....

In round numbers total debt to GDP (US economic output) increased from around 200 percent to over 350 percent. Federal debt alone went from 57 percent of GDP to nearly 100 percent today, a figure where many economists start worrying about the future solvency of a nation.

What is truly worrisome is that the leadership of both political parties seem clueless and have come up with zero fresh ideas for solving the country's economic ills.

It's just more of the same.

It's either more debt being issued, attempting to paper over the already huge debt hole in the economy.

Or it's printing up trillions of more dollars via the Federal Reserve in an effort to drive the value of the US dollar to zero and thus eliminate the debt that way.

No heed seems to paid to the fact that such a policy will completely devastate the US middle class' standard of living.

Policy makers right now are grading out in my estimation to a zero.

The Fed and Wall Street

How appropriate that in advance of the Labor Day holiday the party on Wall Street came to an abrupt end.

The reason? Jobs...or rather the lack of jobs. The August employment data, released on Friday, showed a continued lack of job creation in the US economy.

Wall Street was surprised by this as the dummies there cannot grasp the concept that the policies of the Federal Reserve are not working.

The reason for this lack of a grasp of the obvious is that all of the monies printed by the Federal Reserve have gone to only one place – Wall Street.

According to Bloomberg, during the financial crisis, Wall Street received $1.2 trillion in “loans” from the Federal Reserve to keep the big banks going.

In addition, the Fed had its QE1 and QE2 programs which gave in excess of another $2 trillion to Wall Street via purchase of Treasury and mortgage securities.

With more $3 trillion received directly from the Federal Reserve, no wonder Wall Street has enjoyed such a party since March 2009!

But what the party goers on Wall Street have ignored is the fact that they have received all of the Fed's largess. Main Street got nothing and conditions continue to worsen there.

Recently, Fed chairman Ben Bernanke hinted very strongly that sometime before the end of the year, possibly as early as later this month, the Fed would initiate QE3. It would likely be in the amount of half a trillion to $1 trillion and you guessed it – the monies would go to Wall Street again.

That is why until Friday Wall Street was in party mode again.

So why does the Fed keep using a policy that does not work?

Simple. As explained in a prior article, the Fed is not an independent agency as it is portrayed. It is literally owned 100% by the banks and its main purpose is to see that the banking industry remains healthy.

A second reason is the short-term mentality which now permeates Wall Street. Most of its denizens could care less about anything longer term than three months...only short term profits matter.

Think of two scenarios.....

In the first scenario, the economy and especially Wall Street would suffer through a terrible two years. But afterwards, all would be well and what would follow was the biggest boom in history.

In the second scenario, Wall Street would have a terrific year. But afterwards, it and the US economy would enter a period of many years that would make the Great Depression look like a picnic.

If forced to make a choice, I think most people would choose the first. I know I would.

But if this question was asked of people on Wall Street, my 30 years of experience tells me that today 99.9% of them would choose the second - "let's enjoy the party and not worry about a year from now".

Until this psychology changes, the "Great Recession" in the United States will continue to linger.