Wednesday, August 10, 2011

Markets Going Back Up!! Don't Be Fooled!

For the financially uninitiated, yesterday's 429.92 point spike upwards in the DOW might be enough to restore some semblance of confidence that there'll be no further 401k's being shattered. In the wake of this glint of daylight, they might well have settled on some optimistic belief that "all is well", they can exhale, and keep their precious nest egg money parked in volatile markets without repercussions. And hey, it's certainly better than stuffing it under the mattress or - to hear the pundits tell it- keeping it in cash such as bank accounts, CDs or money markets.

Maybe, but then, maybe not. I am inclined to go with the negative view because in the end there is nothing, no sign of any indicator out there, that tells me there's a realistic basis for the growth on which markets depend. There is no outlook, other than in a crazy person's head, for any job growth nor for any GDP enhancement. The reason is simple (to quote a small piece on page B-1 of today's WSJ): "as the government spending goes, so goes the economy, that's the reality".

Since government spending now stands to be massively retrenched, then the economy must inevitably suffer retrenchment as well. This is what happens when you have a demand poor environment and no one wants to or is able to spend - not businesses, not consumers, and now ...not the spender of last resort, the government.

Yesterday's near 430 pt. spike in the DOW in this sense was a basic aberration, a result of Fed Chairman Ben Bernanke once more gaming the markets and temporarily juicing them. This he managed by a statement that the Fed planned to keep interest rates near zero until the middle of 2013 at least, thereby providing the markets with two more years of cheap money!

Who doesn't want cheap money! Well, certainly the Wall Street traders do! So, after pondering Fed move, and overcoming some tentative jitters, the traders (and obviously a significant number of investors) went on a stock buying spree. THAT is why the market spiked up yesterday, not because of any genuinely sound economic indicators.

The bottom line is Bernanke's trick made things worse. By keeping interest rates essentially at zero percent he's deprived millions of people of extra purchasing power via earned interest, mainly seniors. Indeed, between this stingy move and possible COLA adjustments (or no COLAS) for Social Security the next two years, we are looking at massive belt tightening. (Some seniors have even told me they plan to start storing canned goods and intend to halt any further 'nonsense' spending, especially on cinemas - even for senior matinee specials- and going out to eat for "senior breakfasts" at Perkins).

Bernanke's rinky dink move also caused the dollar to crash in value against the Swiss Franc and Japanese Yen. To give a comparison, when I was in Switzerland in 1978 (Grindelwald), the ratio of the Swiss franc to the dollar was 4:1, or one U.S. quarter equaled about one Swiss franc. Today, as reported in the WSJ, the dollar was worth only seven tenths of a Swiss franc!

Worse, today's 'Marketplace' section of the WSJ (Luxury Sales at Risk) notes that the wealthiest are also now "scrimping on luxury spending as their portfolios shrink". Evidently, they are so fearful of more losses to their stock portfolios they've cut back on luxury yachts, Bentleys and more blood diamonds. This means that both the high and the low end of consumer demand will now sustain major hits, and recall that consumer spending is 70% of GDP.

Inevitably this means aggregate demand must fall. As noted on page C-1 of today's journal: "As government spending goes, so goes the economy, this is the reality". True, because while no tea baggers evidently grasp it, in a low demand environment spending is the only thing that keeps an economy afloat, NOT spending cuts! No one ever taught these simpletons Econ 101.

If businesses won't spend (i.e. on new plant or hiring labor) and consumers won't spend (even the luxury ones) and government is hogtied by spending cuts so it can't spend, then we are on the road to disaster. Further, the investor end of demand is barely holding up. Before yesterday's cheap money gambit, the "Bears" (worried about U.S. lack of demand and European Sovereign debt) were leading the "Bulls" 29 -14 in the 4th quarter with 1 minute left.

Bernake's dink pass put the ball on the 15 yard line, but with only 45 seconds left and no timeouts for his "Bulls" side. Can the Bulls now overcome a 15 pt. deficit with 45 seconds on the clock? Maybe, but I wouldn't put my money on it!

In the end, Bernanke's ploy ...or play,...only buys short time for a few investors. The others will realize it's game over so long as austerity reigns in the Beltway and deficit hawks have more sway with cutting than sound minds have with spending. And YES! We are all Keynesians now, or should be! If we aren't, and instead buy into the frenzied deficit reduction meme as the path to prosperity, we need to go back to school and take a basic economics class!

For me, I recognize these ploys with the DOW for what they've always been: more smoke and mirrors! Well, at least Bernanke didn't pull out a "quantitative easing III".

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