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Cheap Money Means Nothing

This morning the stock market is going bonkers once again because the President agreed to a bipartisan tax deal to extent the Bush tax cuts. The bipartisan agreement also included an extension of the government unemployment insurance which is already 99 weeks long and a payroll tax cut. This seems to have been the main catalyst for the spike higher in the S&P 500 Index futures.

On Sunday night the 60 Minutes interview with Ben Bernanke was aired. In this interview the Federal Reserve Bank Chairman defended his position to buy another $600 billion in U.S. Treasuries. He also said that he was 100 percent sure that this action would not cause inflation. As we should all know by now oil is trading over $90.00 a barrel and gasoline is trading at a new high for the year. Copper, gold, silver, cotton, and many other commodities continue to make new highs. However, the Federal Reserve Bank Chairman Bernanke does not see inflation as being a problem. He also said that his quantitative easing action does not effect the money supply. He is right it effects the cash reserves and this causes commodity prices to rise. The next time that Chairman Bernanke gives an interview it should be conducted by a trader or someone that understands markets. The interview should not be conducted by a television reporter that obviously does not know the first thing about market mechanics and manipulation. Shame on 60 Minutes for worthless interview.

Today the U.S. Dollar Index is losing some ground again. As the U.S. Dollar Index declines the major stock market indexes inflate and trade higher. When the U.S. Dollar Index rallies or trades higher the major stock indexes deflate and trade lower. It is just simple at this time. Since the year 2000 the cheap dollar policy has been administered and the stock markets have experienced two major bust cycles since that time. Therefore, we can all enjoy the rally in the stock market while the music is playing. However, once the party is over it is only those with the insight that will be able to jump off or get out of the market at or near the top. This current boom cycle is likely to lead to another devastating bust cycle. Cheap money is what we have at this time and this policy has really lead to quicker boom and bust cycles. The unfortunate fact about cheap money is that each bust cycle is probably going to be worst than the one before.

Nicholas Santiago
Chief Market Strategist