Since the March lows stocks have rocketed up 50% or more and the trend shows no sign of abating. Back in March there was almost universal pessimism. So what has changed?
Have fundamentals really improved? Unemployment is still going up. Tax receipts are falling drastically and state and local government must make cuts as they cannot "print money". I guess California at least gave it a try with those infamous "IOU"s. How green will the shoots stay if government money slows or stops?
In my opinion this is a tax payer fueled rally. A massive infusion of newly printed money (backed by US taxpayers) is flooding the system. The major recipients of this largess, the banks, get this money loaned to them at 0%. They then do what all good bankers do, reinvest the money at higher interest rates and profit from the spread. With global crash fears ebbing, money is leaving the safety of short term treasuries, going into longer term treasuries, equities and commodities, all riskier assets.
The suspension of mark-to-market accounting has allowed bank held bad loans (still there and growing) to be kept on the books at face value. Now we have banks reporting profits, even though the quality of the asset side of the balance sheet has not improved. Question is: Can profits generated from investment income compensate for buried-in-the-balance-sheet bad loans? If Bernanke, and Geithner keep interest rates at 0% perhaps profits can be generated for a while yet by this risky carry trade. Let's hope they don't start leveraging.
Unfortunately, US taxpayers will pay a terrible price. Government deficits have quadrupled with no end in sight ($Trillion dollar deficits from now on?). The simple fact is we cannot realistically pay off this debt short of debasing the US dollar and that may exactly what Bernanke intends to do. He doesn't dare raise rates, he may have no choice about leaving short term rates low. I always wondered why hyperinflated economies didn't stop the printing when the initial debts were devalued. You know stop at 50-100 percent inflation, why go on to thousands or millions percent like Zimbabwe. Maybe policitcally they had no choice.
Investors know this is dooming the dollar and it is dropping like a rock (see here) while non-printable assets such as gold (see here), oil (see here), grains, and stocks steadily march upward. Even real estate is showing signs of bottoming.
Devaluing the dollar will cost all Americans dearly. It will increases the price of just about everything and sets the stage for hyperinflation. Think of gasoline at $10 or more a gallon, a loaf of bread at $10, a big night out with the family at McDonald for $40. Health care? Well, we don't even want to go there. Savings and fixed income instruments would be devastated.
We have always had to deal with inflation to some extent. The problem now is it threatens to spin out of control. Hitting that magic window of 1-3% inflation may no longer be possible. People in the know are loading up on non-printable dollar denominated assets while most Americans are blithely unaware of the storm clouds of debt towering on the horizon.
Disclosure: No positions in UUP, GLD or UCO
Why the Big Market Run Up?
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