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.