Can Rising Stock Markets Serve as a Confirmation of a Crashing Economy?

Though I still believe a significant global stock market correction led by US markets is on the horizon, what if, against all odds, the US stock market continues to rise? Massive intervention into capital markets today by every major world government has created a bizarre situation in which investors in the major global stock market indexes will ultimately lose whether the major global stock market indexes rise or fall.

Since losses created by crashing stock markets are self-explanatory, let’s consider the opposite possibility of a continuation in the current global stock market rally. I’ve admittedly devoted few very articles to the possibility of a continued rally in US and European markets not because I don’t believe that this is a credible possibility but simply because the direction of the US stock market is largely irrelevant to my overall investment strategy (I’ll explain what I mean by that comment later in this article).

Let’s consider that the current rally in the broad US S&P 500 index has been led by the financial sector. To begin, it’s bizarre that a stock market rally has been led by a sector that is so fundamentally weak, that just last quarter, it had to scramble to inflate earnings based upon one-time, non-recurring events, changes in reporting periods, and changes in accounting laws that artificially created earnings from bogus asset revaluations. The response of some to this statement would be “Who cares? I’m still making money from these rising markets.” But are you?

As the Managing Director of an independent investment consulting and research firm, I constantly seek opposition views that challenge my current beliefs about the direction of the global economy. Should I find strong credible evidence that my current opinion is wrong, I do what every intelligent investor would do. Alter or tweak my investment strategies and continue to remain flexible.

So what if this current US and global market rally continues for several more months or gives birth to an even longer term rally? Will it change the foundation of my current investment strategy? No, not at all. There is no doubt in my mind that debasement of currencies will be the major contributor to share price appreciation should the US market continue to rally to significantly higher levels. Thus, a hypothetical additional 30% rise in global market indexes will almost certainly be almost entirely attributable to a 30% or more decline in the purchasing power of the currency in which the stock shares are denominated.

When I see evidence that global economies are recovering on a fundamental level, then I will believe that stock markets can continue to rally on something other than the debasement of the US dollar, the Euro, the British Pound, the Yen, and other currencies. Should US and European markets continue to rise, the financial elites and bankers that control the fraudulent monetary system will merely be creating an illusion of wealth that no doubt will dupe the average investor into the belief that he or she is recovering wealth through rising stock prices. In reality, either no real wealth at all will have been created or real wealth potentially will even have been destroyed in the process.

If one were to hop a flight to Zimbabwe. I’m sure one could find a Zimbabwean within ten minutes of disembarking the plane that could ably explain how bankers create the illusion of wealth while simultaneously destroying it. In November, 2008, the UK Telegraph reported that inflation levels in Zimbabwe were running at 13,200,000,000% a month. Just ask any person living in Zimbabwe if they feel rich because they had less than $1,000 Zimbabwe dollars in 2000 but now own more than $4 trillion Zimbabwe dollars. Central Banks, in their policies to combat the economic failure that they have created, are only interested in creating the illusion of economic recovery through rising prices in stock markets even though these rising prices ultimately create zero or very little real wealth and will most likely destroy real wealth in the very near future.

It is never the amount of money that one owns that defines the change in real wealth, but it is the purchasing power granted by that money that defines the change in real wealth. Thus, if a 40% debasement of currency is necessary to create an additional 30% rise in stock markets, oddly enough you can gain 30% more value in your stock portfolio while simultaneously losing 10% of your real wealth. To measure whether monetary policy executed by Central Banks is truly helping or destroying families’ abilities to weather this crisis, one must measure only the change in the purchasing power of your money and never the change in the absolute amount of money that you own.

Central Bankers have used the trick of illusory economic recovery throughout history to tame the masses into complacency at points in history when the masses were ready to revolt. Recall the US dot com crash in March, 2000 when the major US tech index, the NASDAQ, shed about 75% of its value in just 3 years. In response to the collapse of NASDAQ, the US Federal Reserve slashed interest rates 12 straight times, from 6.5% to less than 1%. The purpose of debasing the US dollar so dramatically through interest rate cuts was to erase people's memories about the substantial losses they suffered in the dot com crash by artificially creating a surge in real estate prices. Though the US Federal Reserve succeeded in creating an illusion that the economy had recovered, the true question everyone failed to ask back then was if the appreciation in real estate prices was real and sustainable.

Boom–bust cycles are artificially created by Central Banks. They create the initial boom cycle in four stages: (1) Slash interbank lending rates so low that businessmen and businesswomen cannot resist the urge to borrow and speculate. There will always be many takers for money that is offered at practically free rates. (2) Create an initial artificial rally in asset prices that is directly attributable to the debasement of the currency in which the asset is denominated. If a Central Bank debases a currency by 15%, then the asset priced in that debased currency will automatically rise 15% even though no real wealth has been created. In the post dot com crash environment, the US Federal Reserve actively sought to drive up the price of real estate assets. (3) Employ the support of various very visible banking and political leaders worldwide to issue public statements of economic recovery and report how consumer confidence is growing at rapid rates. (4) Allow the synergies of rising asset prices caused by currency debasement and official public support by prominent individuals to attract speculative buying to fuel a further spectacular rise in asset prices.

What inevitably follows this period of boom, because it is entirely created by unsustainable Central Banking monetary policies, is a period of market joy and then bust that follows the following three stages: (1) Central Banks win appeasement of the public’s anger from the previous crash they helped create (in this example, the dot com crash) by artificially creating another “rally”. However, since they jump start any new rallies by creating a rise in asset prices that is solely due to the deliberate debasement of currency, and not through a sustainable demand for goods and services that are driven by free market forces, the only possible end result of the new manufactured rally is its eventual bursting; (2) Since the current rally is based upon a gross distortion of free market forces, it eventually bursts; (3) Bankers act shocked when the current rally falls apart, and in response to angry citizens, claim that unforeseeable circumstances are the cause of the new rally failure.

In response to public anger, Central Bankers repeat steps (1) through (4) of the boom creation cycle above, which inevitably will be followed by steps (1) to (3) of the bust cycle. Central Banks have created the same boost-bust cycles over hundreds of years with very little real wealth creation surviving the bust portion of the boom-bust cycles. That is exactly why over time, the rich have been getting richer and the poor have been getting poorer. The rich get richer primarily because they understand the fraudulent nature of our current monetary system and thus have always understood when to cash in their chips. The poor get poorer because they have zero understanding of the fraudulent nature of our monetary system, and what little wealth they accumulate is always destroyed during the bust cycles.

Given the horrible fundamentals of the global economy today, I am quite sure that a continuation of this stock market rally, should it materialize, will create almost no real wealth or even losses in real wealth for the great majority of its current participants. Thus the conundrum is, whether the US markets rise or fall, for those invested in the broad market indexes today, most will suffer losses of real wealth. Only the very few that recognize the fraud upon which such rallies are built will have the foresight to exit in time.

However, there is a way to combat the fraudulent illusions of wealth that Central Banks create. Those that properly position themselves in hard assets, regardless of (1) whether global stock markets continue to rise; or (2) crash by the end of the summer / beginning of fall, will continue to create real wealth. And that is the beauty of truly understanding the fraudulent nature of Central Bankers and the fraudulent monetary system they impose upon the world.

Whether I am right or wrong about US markets tanking by summer’s end / fall’s beginning, if I position my investment assets based upon an understanding of the fraudulent monetary system, I can still continue to create wealth. And this is why I spend so little time discussing the possibility of a continuing US stock market rally. I only wish to participate in markets in which rising prices produce real wealth. In essence, even if US markets continue to rise and take global stock markets along for the ride, in reality, they will truly be crashing in terms of purchasing power. And if the Dow doubles in numerical terms (a far different story than doubling in wealth, because an increase in number is not the same as an increase in wealth), the only possible end result of such a rally built on the back of a fraudulent monetary system is eventually a monumental crash.

Comments

[Egg:]

Well said.

Jun 11 03:26 AM

[Kristjan Ve...:]

This is why it's so important to have some of your assets in physical gold and silver. People need to realize that what they've been hearing about gold is actually true. It does protect you from inflation! The only thing that is keeping prices relatively stable in the US is the fact that the money created by the FED hasn't achieved considerable velocity. Once it picks up speed in the next six months, look out for the drop in the US dollar. Let's just hope it turns out better than in the Weimar Republic.

Jun 11 05:18 AM

[CurveTrader:]

Great article, I absolutely agree. Always look at the S&P in terms of gold and other commodities. By doing so, you realize we're in a bear market since 2001.

Jun 11 05:26 AM

[Dave Wrixon:]

Well investing in Gold might give the individual solace and substantial short-term profit in even real terms. What investment in Gold cannot do is provide a sustained income over the longer-term or provide any kind of solution to our economic woes.

Jun 11 06:08 AM

[Matevski:]

Hi Kim!

Great article! Looks like you have been reading som books from Murray N. Rothbard :)

Here is something I have always wondered: hos is the value of the US Dollar determined in real time (for instance, what is it that determines the level of the USDX in this very second?).

Jun 11 06:53 AM

[buyitcheap:]

To support the idea of a coming asset repricing, now that the banks are sitting on $1T in cash courtesy of the Fed, and can lever themselves up again, it's in their interest to talk up rates, push asset values down, so they can take that free money and buy smaller banks(read TARP-laden) on the cheap.

Jun 11 06:59 AM

[Vuke:]

Well said Mr. Kim. But, it isn't just evil CB's that create the downward spirals of inflation, for their job is merely to keep the party going. It is also the population for they elect those who appoint them.

The mania of derivative creation over the last two decades must be faced in one of two ways.

1/ Pay off the losses or 2/ Paper them over with a devalued currency. A calculation of the real costs of 1/ leads one, inevitably, to conclude 2/ will be also employed. Historically, this has always been the road more travelled.

Jun 11 07:26 AM

[fireball:]

mr. kim
thank you again. every time i read your articles my target percentage on precious metals rises. dave wixon is right but right now it seems best to protect our own ass-ets.
what is the federal reserve if not a central bank on steroids owned by a cartel of bankster oligarchs. has it ever served its' stated purpose? hasn't it instead allowed spendaholic politicians to steal by stealth and funneled the wealth of the u.s. into the stockholders hands?
i am trading some, not much except when a politically favored bank or business plummets (i.e. citi, gm). these are just quick bounce trades. most of my effort is trying to figure the best protection for what i have earned. gold and silver seem best.
unless i miss something, every fiat currency fails, always.

Jun 11 09:04 AM

[Burticus:]

Your shots are grouped in the bullseye, as usual, Mr. Kim. I am preparing for the bankster cartel's gasoline-soaked house of cards to collapse ablaze by August.

Disclosure: Long physical silver, CEF, oil, steel/lead, food and hangin' rope.

Jun 11 09:20 AM

[Phaneendar ...:]

Well...it would be great if one is able to participate in the rally, time the markets reasonably well and add to wealth. The added wealth would atleast protect one from falling asset prices/purchasing power to a certain extent.

Gold is definitely a good asset in these times...

Jun 11 09:30 AM

[yodoc:]

My guess as to the next few months is that at a certain point they will push the 10 yr bonds rate back down. My reasoning is that it is less expensive and more effective that way. By letting rates rise they save some funds for future use and make it less tempting for people to bet against the low yield on the 10 yr bonds. It also creates a pool of would be home buyers or refinancers who missed out on the great rates of march/april who will jump the next time rates go down. (The plan here I think is to recycle all those crappy mortgages and by devaluing the $ making those under water homes less underwater)
Inflation is unlikely as long as consumers are holding back and saving, even though commodities may go up, at the retail level stores are trying to stay alive and cutting prices.
Eventually inflation/devaluation of the $ will be an issue and they will let rates rise, the market will take a big hit because of the additional effect of baby boomers pulling money out because they are of that age.
Timing is everything though. I believe that the market will be inflated on and off until the mortgage mess (with those trillions in swaps and sivs) has passed, so that means we get perhaps a couple more years of market volatility.
There is no simple solution, although as a guideline I think that tangible real assets should retain value (provided they aren't already overpriced). Some stocks of well run companies will hold value and should be good for the long run eg: agro business, we all have to eat, I can't see that changing. Investing in commodities, so long as one takes a position that is not too large is also worth considering. Volatility in the markets means writing options can be very profitable.
In summary, I think that the Feds will push again on rates because the mortgage meltdown isn't over, only when will they do it?

Jun 11 10:13 AM

[H. T. Love:]

Great article!

Being relative new at this "game", I had done lots of research and reading and come to the conclusion that the existence of Central Banks was a well-orchestrated fraud upon the country and its citizens.

If I recall correctly (not sure I do) Abe Lincoln got rid of the CBs and the country flourished for a very long time. The question was posed "Why incur debt to present the media of exchange for commerce"? And why give such power over the economy of a nation to a private institution?

I wish we could explore/try these questions and the option of no CB and see what results. From what I've found on the net ...

The only reason I can see for the CBs is to maintain power and influence for the corrupt.

HardToLove

Jun 11 10:23 AM

[TradingHelp...:]

Unfortunately, there are a lot more average traders than brilliant economists in this business. Accurate and thought-provoking analysis of the US economy doesn't move markets. Herds of buyers (or sellers) do. That is why you may be right, or wrong, re the near-term direction of equities, irrelevant of the fact you have a strong grip on the structural problems the economy faces.

Jun 11 12:11 PM

[Davewmart:]

A fine article. Except for the super-rich who can continue to make money on taxpayer scams though, I would question how much it is possible to protect people from loosing lots of money.
The problem is that if you go to, say gold, over the long term that does not actually create any wealth, and so unless you are so rich that your personal expenditures are trivial compared to your assets, the wealth you have will need to be gradually eroded in order to live, if you exclude short term gains from good market timing.
Meanwhile, investment in real assets via the stock market or or even if you open a factory is being crucified by the financial shenanigans, as you so ably demonstrate in your piece.
These are the only real assets which can provide true growth, and they are sterilised by Government action.
Other hard investments, notably in property, are not only likely to suffer real value falls, but with shrinking tax bases are likely to incur increased taxes - at some stage the party will be over, and the printed money is not going to pay the bills.
So the best most of us can do is mitigate, not eliminate, the damage.

Jun 11 12:50 PM

[Davewmart:]

A fine article. Except for the super-rich who can continue to make money on taxpayer scams though, I would question how much it is possible to protect people from loosing lots of money.
The problem is that if you go to, say gold, over the long term that does not actually create any wealth, and so unless you are so rich that your personal expenditures are trivial compared to your assets, the wealth you have will need to be gradually eroded in order to live, if you exclude short term gains from good market timing.
Meanwhile, investment in real assets via the stock market or or even if you open a factory is being crucified by the financial shenanigans, as you so ably demonstrate in your piece.
These are the only real assets which can provide true growth, and they are sterilised by Government action.
Other hard investments, notably in property, are not only likely to suffer real value falls, but with shrinking tax bases are likely to incur increased taxes - at some stage the party will be over, and the printed money is not going to pay the bills.
So the best most of us can do is mitigate, not eliminate, the damage.

Jun 11 12:50 PM

[RiskReturnO...:]

As measured in US$ purchasing power, the following ETFs will offer the best risk reward:

FXI / EWT / EWT / TAO

LQD + TBT (roll over the monthly yield you get from LQD into more TBT to compound the gains)

DBA / DBV

If you must own US market, then XLE and QQQQ can create wealth (net of depreciating US $).

Jun 11 01:51 PM

[Tom Colangelo:]

Thank you for adding useful guidance to all of the generalizations above.

DBV tracked S&P closely, so not sure how that would insulate against U.S. mkt decline.

Thanks again for your selections. It helps to be able to see how others respond to theories similar to my own.




On Jun 11 01:51 PM RiskReturnOptimizer wrote:

> As measured in US$ purchasing power, the following ETFs will offer
> the best risk reward:
>
> FXI / EWT / EWT / TAO
>
> LQD + TBT (roll over the monthly yield you get from LQD into more
> TBT to compound the gains)
>
> DBA / DBV
>
> If you must own US market, then XLE and QQQQ can create wealth (net
> of depreciating US $).

Jun 11 04:30 PM

[Tom Colangelo:]

Dave,

I agree with you on the difficulty of selecting an investment that doesn't have a downside that loses money.

My conclusion is that only the bond mkt hasn't been totally corrupted by invisible hands like the stock mkt. I'm wainting for bond funds to correct with a decline in price in response to the Treasury auctions (rising rates) and factoring in expectations of inflation (rising rates).

Given that slight edge, corp and muni bonds will be good investments with good diividends for the 2 year instability period I expect. Even if they decline in price, they still deliver an income.


On Jun 11 12:50 PM Davewmart wrote:

> A fine article. Except for the super-rich who can continue to make
> money on taxpayer scams though, I would question how much it is possible
> to protect people from loosing lots of money.
> The problem is that if you go to, say gold, over the long term that
> does not actually create any wealth, and so unless you are so rich
> that your personal expenditures are trivial compared to your assets,
> the wealth you have will need to be gradually eroded in order to
> live, if you exclude short term gains from good market timing.<br/>Mean...
> investment in real assets via the stock market or or even if you
> open a factory is being crucified by the financial shenanigans, as
> you so ably demonstrate in your piece.
> These are the only real assets which can provide true growth, and
> they are sterilised by Government action.
> Other hard investments, notably in property, are not only likely
> to suffer real value falls, but with shrinking tax bases are likely
> to incur increased taxes - at some stage the party will be over,
> and the printed money is not going to pay the bills.
> So the best most of us can do is mitigate, not eliminate, the damage.

Jun 11 04:38 PM

[CLH:]

Little sense in your article. The market goes up and down so its easy to be right. Those who are out of the market now are losing big time. After a year of crazy panic stocks are cheap cheap cheap.

Jun 11 04:50 PM

[fireball:]

lincoln issued greenbacks. very similar to the united states notes jfk tried. one of johnson's first acts was to restore control to the federal reserve. one more odd similarity to the two assassinations. both were debt free.


On Jun 11 10:23 AM HardToLove wrote:

> Great article!
>
> Being relative new at this "game", I had done lots of research and
> reading and come to the conclusion that the existence of Central
> Banks was a well-orchestrated fraud upon the country and its citizens.
>
>
> If I recall correctly (not sure I do) Abe Lincoln got rid of the
> CBs and the country flourished for a very long time. The question
> was posed "Why incur debt to present the media of exchange for commerce"?
> And why give such power over the economy of a nation to a private
> institution?
>
> I wish we could explore/try these questions and the option of no
> CB and see what results. From what I've found on the net ...
>
> The only reason I can see for the CBs is to maintain power and influence
> for the corrupt.
>
> HardToLove

Jun 11 06:16 PM

[baduch:]

So if the stock market has to rise 30% a year for it to keep up with inflation what happens to all those suckers sittign in bonds and cds getting 4% or less on their investments? does this mean they are really losing 26% on their money a year! Scarry


On Jun 11 06:16 PM fireball wrote:

> lincoln issued greenbacks. very similar to the united states notes
> jfk tried. one of johnson's first acts was to restore control to
> the federal reserve. one more odd similarity to the two assassinations.
> both were debt free.

Jun 12 09:59 AM

[htex:]

"the only possible end result of such a rally built on the back of a fraudulent monetary system is eventually a monumental crash." J. S. Kim
Eventually...it will come to pass. The other crashes ("panics" - when the sheeple learned something they didn't know in mass or were not paying attention to until a failure that could not be ignored) people refer to did not have the amount of information readily available to so many. Eventually they will figure it out and you will be correct.

Jun 12 05:02 PM

[TruongKy:]

Have no worry, the fed has been supporting the market with their 24-hour money printing machines:

zerohedge.blogspot.com...

Jun 13 02:07 AM

[ed233:]

I couldn't disagree with anything you've said in this article. A lot of people think that by remaining in liquid cash there is the problem of losing out on the recent run up in equities since March 9th last. Cash could prove to be a better bet if as you say there is going to be another crash. What is happening right now is the rise in interest rate on money. Notice that yields have been increasing lately. I believe this is the result of foreigners becoming reluctant to support the fed in their recent issuances. That's why Mr. Geithner's trip to China was so important but I think it was unsuccessful. That will place pressure on the US dollar causing interest rates to rise. Without support from the international community you could see problems where interest rates might rise substantially to attract domestic money into the fed's instruments. This crash you speak of could eminate in the bond market first and eventually spread to the equity market because corporations will be unable to compete with the fed's offerings. LOL Looking after your money.

Jun 13 05:36 PM

[untrusting ...:]

Michael, generally you are absolutely correct that herds of buyers or sellers are what moves the market. However in this bear market rally, it has been noted by many including Tyler Durnan that the market has attempted to make downward corrections on many occassions since the March lows. However there have been many many days of "unusual activity" or stick saves of the market late in the trading day. Big price spikes late in the day have in effect prevented the market from moving down. These spikes are simply a fact, observable to anyone who cares to check the daily patterns, particularily on the S&P 500, for say May and June/09. One has to ask the questions - who has the money to do this, who has the trading operations to do this, and who has the motive to do this? As has been pointed out - Goldman Sachs, JPM, and other large banks are the primary suspects. Large program trading, preferential market trading fees, and probably winking approval of the Fed and Treasury have been mentioned. Some have even identified possible involvement of the Fed and Treasury directly via new accounts with State Street. There is little doubt that there are some mighty strange support activities going on in the US markets.
An occassional spike? Sure. Repeated and consistent spikes over an extended period. Highly unlikely.


On Jun 11 12:11 PM Michael Young wrote:

> Unfortunately, there are a lot more average traders than brilliant
> economists in this business. Accurate and thought-provoking analysis
> of the US economy doesn't move markets. Herds of buyers (or sellers)
> do. That is why you may be right, or wrong, re the near-term direction
> of equities, irrelevant of the fact you have a strong grip on the
> structural problems the economy faces.

Jun 14 01:15 AM

[TurtleTrader72:]

Great article. I have been saying all along that oil, gold and the overall stock market has been driven by the movements in the US dollar not an increase in economic activity. After all, anything valued in US dollars will naturally cost more to buy as the US dollar loses value and vice versa. The recent decrease in the dollar has created the illusion of an economic turn around and a false sense of value in the stock market. If you doubt this, simply overlay and compare the longer term weekly charts. A picture is worth a thousand words. However, with that being said, i am not as bearish (in the longer term) on the dollar as many other people so i dont feel that oil, gold, and commodties in general will sustain these recent higher prices. Additionally, the current market leaders (which have been commodities and financials) also led the previous bull market. However, history reveals the former leaders rarely lead the next rally. This leads me to beleive that we are still unwinding the previous bull market. Not establishing a new one.
Again... great article!

Jun 14 10:43 AM

[Danny Furman:]

Mr. Kim,
I've enjoyed your writing for some time now and can't help but notice a sense of progressive complacency in your style: The underlying weaknesses of this economy are growing by the day and all that's left to do is say:
"Banks, in their policies to combat the economic failure that they have created, are only interested in creating the illusion of economic recovery through rising prices in stock markets even though these rising prices ultimately create zero or very little real wealth and will most likely destroy real wealth in the very near future."
...over and over again.
No disagreement here, simply pointing out that things are so bad that the falsely confident can't even come up with new arguments to refute.

Yourself and others talk about an August-October timeline for bubble bursting. It seems to me we're much closer than that. The BRIC meetings this week may be spun by domestic media in such a way that inflates the bubble even more, however they pose the first real opportunity for things to burst.

Cheers to another good article and an interesting week to come!

Jun 14 10:15 PM

[Adam Hayes:]

People believe that u cant have inflation without growth. I agree with u completely that there can be decrease in the value of money (especially fiat money) to create the illusion of growth along with rising prices and interest rates, but that the growth is indeed negative in absolute terms.

Jun 17 12:43 PM

[CAPITALIZER:]

Good wisdom in untying this knot. Something I've also suspected, the elite have been renting us over the years and will sell us when we're used up. Ha!

Jun 17 11:32 PM