The market is falling! The market is falling! And it has a long way down to go.
翱辞辞辞丑鈥�
Bad, bad day yesterday. Municipal bonds took a big hit. California is going broke. The Dow finished down 178 points. Gold up $30.
Did you pay attention to our 鈥淐rash Alert鈥� flag, dear reader? Hope so. This market is dangerous. Because it is built on a lie 鈥� that EZ money from the Fed鈥檚 printing press will cause stocks to rise, interest rates to go down, and the economy to revive.
It ain鈥檛 gonna happen.
Never in history has it worked that way. Ben Bernanke maintains that what he is doing is merely an extension of normal monetary policy. It鈥檚 not. It鈥檚 a daredevil maneuver in which the Fed funds about 100% of the US government鈥檚 borrowing needs over the next 8 months.
Will it do any good? It could cause a speculative boom in the stock market. Or a speculative bubble in commodities鈥r emerging markets鈥r anything else.
But real, genuine, honest-to-God prosperity? By just printing up money?
Nope. Not possible. It鈥檚 not that easy.
The risk is that investors may connect the dots. Let鈥檚 see鈥� Stocks haven鈥檛 made them any money in 10 years. Yields are still down around 2% 鈥� so they can鈥檛 expect any decent returns from that quarter. And stocks are still expensive 鈥� with P/Es close to 20.
So, what can investors expect? Will P/Es go up? We can鈥檛 think of any reason why they should. Will stock prices rise? Again, they can do what they want鈥ut we can鈥檛 think of any good reason for them to go up.
On the other hand, we can think of several good reasons for them to go down. The best one is this: that鈥檚 what markets do. They go from peak to valley鈥nd back to peak. This one was at a record peak in 2000 and then another record peak in 2007鈥nd still no valley. Stocks never got to be as cheap as you would expect at a major bottom. So, unless something has changed鈥hat valley still lies ahead.
And wouldn鈥檛 it be just like Mr. Market to bring it on now? Investors are creeping cautiously back into the stock market. They took huge losses in 鈥�07-鈥�09. Their houses are down 30%鈥nd still sinking. Many have lost their jobs. They have retirement ahead of them. And they haven鈥檛 saved enough money. So, they鈥檙e hoping to make some money now.
Meanwhile, the feds are hoping that this big $600 billion inflow of new money lifts stock prices. This is supposed to make people feel richer. Then they act richer鈥nd then, like magic, they ARE richer.
But if the feds want stocks to go up, they should buy stocks, not bonds. When they buy bonds the money goes into the banking system. Does it end up long the US stock market? Or does it end up betting on gold or cotton or Indian stocks?
No one knows. But there is no guarantee that the feds鈥� gamble will raise stock prices. On the other hand, wouldn鈥檛 it be a cruel and obnoxious thing for Mr. Market to hit them all now with a major bear market?
Yes it would. Will he do it? We don鈥檛 know. But it鈥檚 a risk. Stay out of stocks. Buy gold on dips. Be happy.
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