It is unbelievable that a speech where Mr. Ben Bernanke said nothing concrete could have triggered last week's sell-off! Markets have fallen across the world with news about something that will not happen now and probably will never happen anytime soon. Yes, it is true: if the Fed´s forecasts does not match with reality at the end of the year everything will go back to normal. That is with a comforting monthly monetary injection of $85 billion. If, by any chance, bad luck will lead to a transition by the end of the year then it will be a taper, just a taper. It looks like a fairy tale where the story always has a happy ending.
I wonder how the markets would react if something dramatic could happen in the U.S. or the world.
I have to admit: the U.S. economy is addicted to monetary injections, and this is a serious problem. In fact, a gradual reduction of Quantitative Easing hides many questions, and nobody knows the problems of that route. Unfortunately, one thing we realize without any doubt: an addict economy can always fall back.
I think U.S. market investors should be aware that no economy can live continuously with an illusory monetary aid of such size.
What a crowd-effect can do! As the stock market has been showing records, the average investor was certainly thinking that the world crisis had come to an end. Then Mr. Bernanke says something that appears like a setback and the world falls. It is difficult to believe that rational investors keep thinking that financial markets are trading normally while there is a constant help to do business.
But there is another problem: it seems that there is a strong correlation between QE and money flowing to the stock market. If that's true, then purchase programs haven't been successful enough to help the economy as they mainly have encouraged individuals and institutions to make money from stocks. Obviously, this can only bring additional troubles to the economy.
It is not by repeating a wrong idea over and over again that it becomes right. Likewise, it is not by doing the same unsuccessful monetary policies for years that problems may be solved. Especially if we understand the probability of further risks ahead. In my opinion, what has been done is wrong: one cannot restore an economy with money that is invested in the stock market for pure speculation or that is forwarded heavily to purchase single-family homes.
Apart from the stock market, one of the best indicators that defines America today is the real estate market.
Charts courtesy of Chart of the Day
Watching these two charts one can conclude that the purchase of homes at the current large extent already puts the United States at the level of 2003-2004.
It is worth noting that inflation-adjusted home prices increased more than 7.5% in one year, the fastest pace on record.
The second chart of "Annual Change in Home Prices" speaks for itself. Surely, the path that has been followed is not the best.
I present below the chart of the S&P500, which reflects the last four months of trading.
Chart courtesy of StockCharts.com
The index had a top in October 2007 at 1576.09, which was broken out to the upside last April. Since then optimism is still alive, but has nothing to do with fundamentals.
Chart courtesy of Trading Economics
In fact, the chart above shows that in the last three years GDP average rate has been around 2%, and has weakened in 2013.
All these indicators lead to the same conclusion: there are almost the same problems as before and still other concerns that make the situation very serious. I see financial problems in the future, low growth and conditions that may culminate in another financial crisis. I hope I'm wrong!
Disclaimer: The author of this article gives only his personal view and opinion, never making any investment advice to buy or sell specific securities. The information presented is from sources believed to be reliable, but its accuracy cannot be guaranteed. Before investing in financial assets, investors should do their own research and consult a professional investment adviser.