Thursday, January 31, 2013

Is it Groundhog Day for the markets?

At first glance, the markets look healthy, the economy is okay, and the FOMC continues to stimulate, so everyone thinks this asset rally will continue with their support. However, behind the scenes something else is happening, and it may cause the "Stimulus Bubble" we are in today to burst.

The bubble we are in now is not unlike the Internet Bubble or the Bubble leading up to the credit crisis. Each of those had similarities to today, none more pronounced than their impact on equity prices. At the peak of the Internet Bubble, the S&P was at 1520, at the peak of the Credit Bubble the S&P was at 1560, and here it is again just over 1500.

Market performance since 2000 (13 years):

  • � Dow (DIA): +20%

  • � S&P 500 (SPY): 0%

  • � NASDAQ (QQQ): -20%

Although the purpose of this article is to reveal material truths about the bubble we are in today, the real question might actually be if this is Groundhog Day (the movie, that is). After each of those prior two peaks, the S&P turned down and tested the 800 range before finding legs.

Of course the bursting of those prior two Bubbles caused the markets to come down (each bubble burst for different reasons), and in hindsight, we can easily see the overvalued nature of the markets back then, but back then, when investors were in the middle of it, most did not see what was right in front of their eyes. The aftermath was painful for investors from all walks of life who did not pay attention.

We know that the bursting of those prior two bubbles caused the declines, so if we are in a "Stimulus Bubble" today, what might cause this bubble to burst? We know that the government has been spending at a fevered pace since this crisis began, and we know the FOMC has been printing money on a seemingly endless basis to improve economic conditions, but the economy is still weak in the face of that. I have a very tangible explanation, and it will help answer the important question posed above.

Being an economist by nature I turn to what I know best to find out why the economy is weak in the face of these capital infusions. My Investment Rate indicator will help explain the divergence between aggressive stimulus and what should be very strong economic growth. The answer lies within the root of all economies, and that is people. According to The Investment Rate, the economy is in a natural state of weakness, this is demographic, and no one can stop it from coming, but the endless spending and printing has thus far sheltered the economy from the natural weakness that would otherwise be there.

In fact, one might argue that if they stopped stimulating, and if the endless spending began to abate, that may be exactly what begins the bursting of this Stimulus Bubble."

If that is true, then it deserves more attention, so I have used the economic background I have to find more information on the real net-current stimulus in our economy given the combination of fiscal and monetary policies that exist today. In a Special Report I offer to clients I disclosed a little known fact: Given the changes to fiscal policy that occurred on Jan. 1, 2013, the net real stimulus of fiscal and monetary policies is negative. To be exact, these are now, and for the first time in as long as most of us can remember, a monthly drain on the liquidity within our economy by $5.2 billion per month.

I will leave it up to the readers of this article to determine whether that constitutes the beginning of the bursting of this Stimulus Bubble, the information contained in this article discloses information that very few people recognize, but like Groundhog Days of years past if we can see what lies ahead we can use it to our advantage, just like Bill Murray did in that classic movie.

No comments:

Post a Comment