My Central Banker Can Beat Up Your Central Banker!

Another week - another gain for the Dow. The S&P was slightly positive but what’s up with the Nasdaq? It was actually down a few percentage points. While the other indices were rising because the economy was getting better, the Nasdaq was falling because the economy was not getting better. Go figure! Was Bernanke only buying the senior indices this week? Isn’t that all that matters? I think the following chart explains things quite clearly.

The chart shows the time frame from the QE2 announcement and the effects of the Fed’s manipulation. The major US indices have been rising since September 1, 2010. They will likely continue to do so through June of 2011 - the end of QE2. The Shanghai Composite, however, initially rose with its compadres but has not been able to sustain the rally. Why not?

Here’s where we can see the new era very clearly. Investing is most certainly not tied to fundamentals anymore and it is also completely detached from investing skill, intelligence, and knowledge. Today, all that matters is central bank manipulation. If you will, the US is saying to the rest of the world, “My central bank can beat up your central bank”. Boy, howdy! Compare the US stock markets to China’s Shanghai Composite. For the past four and a half months, the US markets have gone nearly straight up. Indeed, there have only been four weeks out of the period that were negative. We can only assume that Bernanke must have been too busy manipulating the bond markets to keep the air under the stock markets for those four weeks. But comparing the US markets to China is interesting.

Pure and simple, the Chinese central bank is trying to contain inflation in their country and the US central bank is trying to foment inflation in theirs. The stock markets reflect inflation. Economically, China is certainly growing their economy faster than the US is growing theirs. The US is hopelessly growing debt obligations to the moon and the Chinese have so far supplied the fertilizer. President Hu came to visit this past week and Mr. Obama did his standard bowing act to his superior. One must maintain proper manners when the landlord is in the house. Maybe the only thing Mr. Obama could claim as a ‘one up’ on Mr. Hu is the US stock markets are outperforming the Chinese stock markets. Maybe President Hu wanted to get Mr. Bernanke’s secrets to manipulation. Mr. Bernanke is, of course, a master!

For his part, President Hu wanted to emphasize that the clock is ticking as the US dollar status as a world reserve currency is ‘past history’. Countries around the world are beginning to trade commodities in currencies outside the US dollar. This is bad for the dollar but it could be good for the US stock market. Yes, Virginia, the stock market is purely a reflection of inflation. And luckily for, and unbeknownst to, investors, there is a lot of inflation out there. I’m sure that Mr. Obama imparted the secret to controlling inflation to a worried President Hu. In the US, the government simply lies about inflation. The government lies about everything. They fabricate data and news stories to placate the populous. Statistical formulas are nothing more than wet clay that can be molded to represent the ruler’s view. 

For our study, however, all we care about is the stock market. As long as Mr. Bernanke pushes the indices higher every week, I suspect Mr. Hu could come to America and start putting his name on properties in exchange for debt default and not a single US investor would mind. They are all just thankful that they are getting some of their lost portfolios back - at any cost. Mr. Hu may have been here to tally up the bill! What we are seeing in the stock market is the US central bankers are boosting the domestic stock market. Unless the Chinese central bankers get on board and boost the Shanghai Composite, we must be content that our central banker can beat up their central banker. It looks like the US markets will do better than Asian markets as long as this mindset is in place. But, whenever the Chinese pull off the old currency switch-er-rue, it all crumbles like a dry cookie. 

Chart 1 - DJIA in black, Nasdaq in green, SPX in blue, SSEC in red - Past 3 mths

Chart courtesy StockCharts.com

Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented. BMF Investments, Inc. assumes no liability nor credit for any actions taken based on this article. Advisory services offered through BMF Investments, Inc.