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We are a team of economics professors in the NY area with a passion for financial markets. In our blog "BubbleBustInvesting.com", we write about individual stocks as well as macroeconomics events. We believe that most of the returns in financial markets can be made during the blow and bust of... More
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  • Don't Count on a FED Put to Save the Stock Market 0 comments
    Apr 12, 2011 12:24 PM

    Complacency is dangerous, especially in a rapidly changing world. Back in 2007, when real estate began to crank, I did have an interesting discussion with a hedge fund manager. “I’m concerned about home prices falling and taking the economy and the stock market down, John,” I said. “You are worry too much,” he replied. The FED won’t let it happen. It will cut interest rates, and home prices and markets will resume their ascend,” John argued in an assuring voice. “Bank of Japan drove interest rates down to zero, and it didn’t work, the Japanese stock market is 80 percent below the 1989 high,” I explained. “Japan is different than the US,” John continued. The rest is history.  

    I am not sure whether John is still in business and has learned any lessons from history, but many investors seem to have missed it. Anytime, energy and material prices pull back, they do jump in to buy more shares. And when someone raises the question as to how energy and materials can continue climbing at these prices, the answer is clear and loud: “The economy will pick up; and if doesn’t pick up, the FED  will continue printing money.” The market goes up in either case! According to the AAII survey, in the first week of April, 43.6 percent of investors were bullish, while 28.8 were bearish—near the 2007 levels.

    I hate to spoil the party, but I must remind investors that we don’t live in paradise where economic resources are free and God takes care everyone’s need. We do live on planet earth where people are faced with scarcity, which determines the value of things. The FED may control the printing presses, may conveniently continue to focus on “core” inflation, but it cannot control the economy, and it cannot fool people who are affected by the overall inflation.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: No specific stock was mentioned. However, I am an investor on both the long and the short side of the market
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