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The Stock Market Appears to be Confused

By: Steve Johnson

10/28/2009 - 21 Comments

I’m not sure what to make of the market right now. There are just too many things that don’t seem to make sense.

In the long run I believe the stock market is going to sink, once the Fed reverses policy and starts pulling back all the money they poured in.

But so far, they have only been talking about pulling the money back – maybe to test the reaction of the market before they actually do.

Housing

The Fed is talking out of both sides of their month, like today with congress considering extending the first-time home buyer’s rebate – yet a few days ago Obama says we cannot afford to extend the rebate.  Which is it going to be?

Without the rebate, the housing market will surely crash. With the rebate the dollar will continue crashing.

Banks

The banks are in bad shape. Many of the largest banks are insolvent if it was not for the accounting rule change that the congress made a few months ago that allowed them to pretend their real estate assets are worth more than they could sell them for.

The FDIC Chair and Paul Volker say we need to stop the ‘too big to fail’ policy and let the banks fail.  But Obama and congress want to keep the money coming and pile on the regulation to keep banks from overpaying executives or taking too much risk.  Which is it going to be?

Gold vs. Dollar

If the market crashes, which I think it will very shortly although it’s impossible to predict how the government will respond.  The dollar will rally as investors sell stocks and gold will probably drop a little bit or perhaps hold its value. 

But after the crash, which could be sudden or it could drag on for many months, the dollar will continue to sink as investor will move back into equities.

Interest Rates

Interest rates need to be a lot higher before any real economic recovery can begin because money needs to be worth saving before anyone is going to save it and savings drive innovation by funding new product development.  Today innovation is driven by foreign savings and investments, but that will come to an end with the weakening dollar.

Just the other day the Fed said that interest rates will remain low for an extended period of time because the economy is too fragile and Inflation is not a problem.

Fed Chairman Ben Bernanke also said that the Fed cannot support the market indefinitely and the Fed is going to stop buying U.S. Treasury Bills in Nov. as planned, which will cause interest rates to increase.  Which is it going to be?

Conclusion

In light of this precarious situation, I’m not sure what to make of the market.  The stock market is clearly overvalued, but as long as government policy continues to support easy money and high risk, investors are going to continue to leverage up their assets.

I think the day is approaching when the Fed will no longer be able to control the market like they do today, because all of their influence comes from their ability to print money and once the dollar sinks, they will lose much of their influence - just like the rating agendies that rated the sub-prime mortgage loans AAA have lost their credibility.

The entire financial system has been taken hostage by the Federal Reserve. Everything from the value of our retirement accounts to the value of our currency to our jobs is in the hands of the Federal Reserve. 

Their next move will either keep the phony economy going a little while longer or will cause the house of cards to come tumbling down.

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