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From Sea to Shing Sea: Liquidity

Federal Reserve Chairman Ben Bernanke said today (Sept. 15) that the recession is probably over. Stock market averages hit their 2009 highs. Actually, a day earlier, Janet Yellen, president of the San Francisco Fed, said the same thing: the recession has probably "run its course," she said. However, she warned that the recovery will be tepid, the financial system is not back to normal and is vulnerable to shocks, more credit losses lie ahead, and consumers may be in a new era of lower spending and more saving. Actually, Bernanke stated that the recovery would be weak, but that was hardly reported.

If the recession is over, what accounts for it? Liquidity. Oceans of it. David Rosenberg, former economist with Merrill Lynch, now works for Canada's Gluskin, Sheff. Unlike Bernanke and almost all so-called experts in the Fed and government, Rosenberg foresaw the present recession and financial industry collapse. (That's probably why he is no longer with Merrill Lynch, now part of Bank of America, but I have received no confirmation of that.) Rosenberg said today that "rampant fiscal stimulus" accounts for all of this year's growth and 80% of next year's. In the second quarter of this year, the total economy purportedly contracted by a 1% annual rate; Rosenberg said it would have plunged by 6% without that stimulus. The consensus is for 2 to 3% growth this quarter. Rosenberg says it would be zero without all that money pouring out of Washington.

Liquidity is also fueling stock markets all around the world. (Other governments are flooding their economies, too.) Rosenberg thinks the U.S. market is already overpriced. Most think the rally will continue, and I believe it has further to go, because it is pushed by liquidity, not economic fundamentals.

But here is a frightening thought: Wall Street WANTS a tepid recovery. It is delighted that the employment picture is still grim and consumers ailing, for two reasons: 1. A rapid recovery will lead to inflation, and 2. As long as Main Street is sick, the Fed will keep interest rates at these low rates (U.S. short rates are almost zero, and long rates are artificially low.) One reason for the current rally is the prospect that the recovery will be very fragile, and the government will continue spending and the Fed printing money, thus keeping stocks up. This could create ugly social unrest.