The stock market is doing well. The Dow Jones is near all-time highs, and a stock like Apple is skyrocketing. Is it the free market saying the economy is great, and that happy times are here again?
The answer is that this is a planned economy with central banks gone mad. Although the Fed says they aren’t doing any QE (QE, or Quantitative Easing is a fancy phrase for money printing), other central banks, (such as the European central bank and the bank of Japan), are actively engaging in debt monetization. Where is all this printed money going? Banks aren’t loaning out this fresh money, so its going into the stock market. The Swiss central bank owns $80 billion worth of US stock!
One of the first things I do in the morning is check the US Treasury 10 year yield. The higher the yield, the lower the price (or cash is leaving the bond market). If the yield is lower, cash is moving in to the bond market. What happens is that if the price goes lower, some entity come in and gobbles up Treasuries. Then, to push the stock market higher, they move to small cap stocks. If that still doesn’t push the stock market higher, they move on to tech stocks. I watch it happen close to every day.
Retail stores are closing left and right. I went out to dinner at Stir Crazy at 6 o’clock on Friday night. I was surprised at how many empty tables there were. So is the economy doing good? I don’t know. All I know is that 80% of people are living paycheck to paycheck. 34% have NOTHING at all in savings.
Why is all this central planning good for? The wealth effect. If people see their stocks going up, they are more likely to spend. However, only 54% of Americans have stock holdings so it isn’t a big section of the population that benefits from the wealth effect.
The Fed is trying to shrink their balance sheet of US Treasuries and mortgage backed securities. Will they pull it off with out the dollar failing first? If you look at history, the Fed always gets it wrong. Back in 2008, for example, they said it was contained to sub-prime mortgages, and that the economy will do fine. If history is any judge, they will get this wrong too, and have to cut rates and unleash some major QE program.