All it takes for our new era stock market to lurch forward is an hour or two. In the week ending 05/22/09, we had a one day rally of almost 3% across the board on Monday. Presto! the Dow moved higher from the 8200 Bernanke line of intolerance. The rest of the week went negative every day so we wound up where we started. This was a lesson from our new leaders. One, they obviously wanted to take the rest of the week off as we looked forward to a Memorial Day weekend. Without our government buying stocks each day, the market is liable to slide toward zero at an unsustainable pace. Two, our new government wants to put the fear of the Fed in the short sellers of the world. Rallies will form from nowhere based on nothing and the markets will lurch higher as the government wishes. Why not just board the train of irrational optimism and play along with the con?
Well, there are a few weeds in the 'green shoots' of economic growth that the government is selling these days. The Fed themselves now believe economic recovery will not happen this year. Further growth will even be slower than previously thought. GM and Chrysler are broke and have joined the government dole for daily survival. Housing starts slackened to the lowest on record. Unemployment is pressing 10% (even by government figures). We all know the stock market 'climbs a wall of worry' but this is ridiculous! This is reality. The task for our new government is to blow the next bubble in the stock market and hope that their precious banks can enrich the masses so we return to the mortgage offices and car dealerships with cash in hand.
All depressing economic negativity aside, we have to make the stock market go up on declining earnings and shrinking economic activity. That means the market will have to support the eventual highest valuations ever. Of course, you can accomplish this task as long as you have a printing press and a completely ignorant populace with no clue as to the destructiveness of such monetary printing. Good luck, Mr. B.
Here is the way the government plays us. Our government is heavily indebted and we all know and accept this fact. So, the Treasury issued $44 billion in bonds. The world cannot absorb all this debt so the Fed kindly announced that they would buy $7 billion of these bonds. Of course, what really happens is the Fed buys the bonds from the banks and now the banks have $7 more billion to lend and play with. Using the lending power of '9', that $7 billion becomes $70 billion. If you are keeping score, our government borrows $44 billion and with Federal Reserve help, turns the exercise into a $26 billion dollar currency injection. Gee, I wonder if some of those billions will find their way into the stock market? Only in America!
Stock chart courtesy StockCharts.com
Dow daily 1 week chart 05/22/09