This morning, the major stock indexes are holding up very well despite a major warning from United Parcel Service (NYSE:UPS). Earlier today, the giant transport company cited slowing U.S. industrial demand and overcapacity in the global air freight market for cutting its full year earnings guidance. A couple of months ago leading competitor FedEx Corp (NYSE:FDX) said the same thing. Today, UPS shares are trading lower by 5.30 percent to $86.57.
Do investors care about what the leading transportation stocks are saying? After all, the iShares Dow Jones Transportation Average (NYSEARCA:IYT) is trading near all time highs. Today, the IYT is trading lower by just 0.13 cents to $115.19 a share, so the drop in UPS stock is really not having much of an effect on the transport sector.
It is really clear what is keeping the stock markets held together, it is the central bank easy money policies. As long as the liquidity is pumped into the markets the money is keeping asset prices inflated. Earlier in the week, the Federal Reserve Chairman Ben Bernanke vowed to keep interest rates low for considerable amount of time. Stock futures soared after the Bernanke comments proving that the stock market is trading on the back of easy money. Basically, as long as the Federal Reserve keeps its current $85 billion a month mortgage backed security and U.S. Treasury purchases everything is fine.
How long can the central bank continue to buy these assets from the large banks? Apparently, they can do it infinitely, or until the bond market tells them that they can't. The Federal Reserve says there is no inflation and openly fears deflation. In fact, Ben Bernanke said that inflation is good as long as it does not get out of control. Currently, the central banks balance sheet is around $4 trillion, but who's counting? The stock market keeps inflating along with the central bank's balance sheet. Is this going to be the mother of all bubbles, or is this going to be a gentle unwinding of the balance sheet? My only question that should be asked, why have we ever had a recession or a depression in the past? If adding liquidity can solve every economic problem we should all hail Ben Bernanke as the smartest man to ever live. History will ultimately tell us what he will be remembered.