The Dow Jones Industrial Average shed 1% of its value this week as news surrounding the "fiscal cliff" continued to mount. To the contrary, the 15-51 strength Indicator gained 1.5% and gold rose more than 3%. Here’s the year-to-date picture.
The Dow and gold have been in a street fight for most of the year. One indicates the market economy and the other contradicts money -- and neither is showing any sign of dominance. Stock market strength is performing fabulously – but then again, these trends are only temporary.
The Dow Jones is up 8% this year and gold has advanced 7%. Strength, via the 15-51 Indicator, has gained more than 40% in the eight months – that’s inflation in the highest order. These gains should be compared to the actual market economy (GDP) which is growing at a pitiful 1.5% per year – and that pace is slowing. That’s the reason the Dow can’t advance beyond its average historical high (point noted above.) Every time it tries to attain it, poor economic data turns it away.
Even though the Wall Street establishment knows these valuations are high, everyday I hear calls to investors recommending that they "add" to their positions. Wall Street recommends, therefore, that their clients buy into inflation – to buy high. I caution you against spitting in the face of wise cliché.
The fact that the Dow is up at the levels is an overstatement to the greatest proportion. Economic health is poor, unemployment is high, money is weak, and global recession is staring investors in the face. Any ambiguity in this condition is caused only by mass media speculation and operationally slick Wall Street sales rhetoric. They’re famous for artificially pumping-up prices in order to sell average investors – their customers – short. It happens all the time. (And it motivates me.)
Realize that irrational exuberance is not a new idiom. The tech-boom, the housing-boom, all went awry for the same reason – Wall Street was drunk on irrational exuberance and too greedy to acknowledge it. I demonstrate this in my book surrounding the 2008 crash. And today we sit on that doorstep once again.
Should the Dow Jones Industrial Average move beyond the action zone high point, consider it nothing short of irrational exuberance and brace yourself for impact. Remember, exactly one year before the market crashed, October 2007, the DJIA hit its all-time high of more than 14,100. One year later – the entire financial industry fell into ruin.
Fool me once, shame on you. Fool me twice…
That said, and knowing that this stock market must correct from its inflated state, expect the 15-51 Indicator and gold to crisscross in dramatic fashion when chaos ensues. The reason for this is simple: the next correction will be due to a monetary crisis driven by global economic recession, a condition that is vehemently brewing at the very moment. That’s bad for stock prices and good for gold.
And since the Wall Street establishment and cable news programs are speculating about the possibility of such a crisis or "fiscal cliff" proves one thing: Stock market valuations don’t yet reflect the crisis conditions that currently exist.
The reason for such speculation is only possible because GDP growth has not yet turned negative. In other words, because the numbers don’t prove that recession exists – it’s not there; and for so long as the "number suggest" avoiding recession is still mathematically possible.
Nothing can be further from the sane truth. (See: Recessionary Proof)
Investors should correctly expect a stock market adjustment.
In the face of this reality, Wall Street is clamoring for another round of quantitative easing (QE), and just recently in a pointed comment, Senator Charles Schumer almost insisted more Fed action. Of course, Ben Bernanke’s over-active Fed already had been planning another round of quantitative easing for quite some time – this would be QE3.
In some sordid way, the establishment believes that the only way America can avoid a "fiscal cliff" or deep recession is through more monetary shell games. So not true.
Think of QE this way: the Federal Reserve prints new money and walks into a bank, let’s say JP Morgan Chase for example, and says to its CEO, Jamie Dimon, Here’s $250 billion – what kind of high-risk, troubled assets can you give me for the new cash?
Dimon looks over his crappy investment list and says – Here’s some subpar paper (debts and mortgages) and deeds (titles to ownership) for underlying collateral (assets). None of them are paying market interest rates and most of them are spoiling. Good luck with them. Where’s the loot?
A reasonable mind might wonder: Why would the Fed would do such a thing?
Since the QE programs began, the Fed has purchased more than $2 trillion of "troubled assets" from banks (and this doesn’t included Congressional programs such as TARP.) Much of the notes are subprime mortgages collateralized by American land (see: Land Grab.) The Fed does this to reduce risk in bank portfolios in hopes that it will encourage banks to lend new money that will produce economic growth. (It also gives the Fed more land to mortgage to China.) But after two rounds of this kind of monetary easing, banks still aren’t lending and the economy is no better off than before the QE programs began.
Look at my shocked face.
Interest rates are already too low; lowering them more will only produce less bank activity. There’s no money in lending – that’s the reason banks aren’t lending it! Banks see inflation coming, and to lend money at these historically low rates will cause them to lose money in Real terms once inflation commences.
Instead, banks, which are now all investment banks, would rather invest the new Fed money into – ready for this shocking revelation, ‘well-diversified investment portfolios’ – you know, stocks, bonds, commodities, emerging markets, and "synthetic" hedging vehicles (a.k.a. bets) – to maximize profits and "hedge" risks.
That’s where the hypocrisy of QE begins – it really only helps the investment banks and certain politicians. It’s not a solution to economic woes; it delays them, inflates them, and makes them worse. Two prior QE rounds have proven this. A third time will only make fiscal matters worse.
In a sane world, you would expect Wall Street to cheer good economic policy and banks to jeer poor monetary policy. But that’s not the case in today’s world.
Wall Street loves the thought of a third round of QE not because it’s good for the economy but because it’s fresh meat. During QE, banks get to off a bunch of deadbeat investments for some newly printed cash. Perhaps that’s why bank stocks have been on a sustained run for some time. Financials, located in IS: 4-1 and IS: 4-2 in the 15-51 Indicator, are up 29% so far this year. Remember, when the government adds currency into the economy it does so through banks. And because they are the first to touch the new money, they are the first to inflate from it.
The Federal Reserve, for its part, has done the same thing Wall Street banks have done. It has transformed itself from a national bank into a national hedge fund dealing in junk bonds and bad investments. This is against its traditional and intended role; and by so doing, has effectively transferred garbage assets from investment banks into the pockets of American taxpayers. As if our problems with Congress aren’t bad enough already!
The Fed needs to get out of The Market, because like Fannie Mae and Freddie Mac, they are corrupting it. Please, no more QE – and then maybe, just maybe, we can stop Twisting in the Wind.
Until then, Wall Street will accept every new round of QE with smiling cheer even though the practice stabs their customers, and all American taxpayers, directly in the back.
Talk about hypocrisy.
See also: De-Institutionalize