If You Think The Stock Market Appreciated After QE3, You Were Duped
The worse off the economy, the better off the market. As the economic numbers, post-banking collapse, signal that things are merely getting worse, as income falls and the costs of goods and services appreciate, the Fed begins flirting with the prospects of further currency debasement, putting on a show for the public as different advisors eschew different dovish and hawkish opinions, until finally Ben “To Infinity and Beyond” Bernanke steps into announce the Third Bretton Woods system of perpetual debasement.
The “Bernanke Rally” that we saw yesterday as QE3 was announced is akin to the shortlived high of veteran drug users. Lower returns on long-term Treasuries and mortgage-backed bonds are designed to herd people like cattle into a stock market that is near all-time highs -albeit illusory highs – while the real economy is a wreck with high joblessness and shattered price discovery. If you think the stock market appreciated, you were sufficiently duped, as the stock market was merely compensating for guaranteed dollar destruction.
Japan has embarked also on quantitative easing, and serves as a pressing example of what is happening in the US and west. The central bank of Japan increased the money supply via purchase of longer-term government bonds, similar yet less aggressive to what the Federal Reserve is doing now. Beginning in March 2001, and ending in March 2006, the program resulted in the Nikkei 225 Index rising from 13,000 to 17,059.
Think of the markets as the mind, reeling from the high for the short time, and the economy as the body. The mind recalls the joyous parts of getting high, while the body, wearing the brunt of the addiction, is worse for the wear over time. While the markets in Japan skyrocketed, the economy barely grew.
In the US, since the first QE program, the stock markets have gone up since their low in fall of 2008. The Fed is enabling a cashing in on the markets with the promise of future prosperity. The sort of sugar rush the Fed is giving the markets is not a natural sugar induced high, from foods like fruit, but instead the highly processed sugar found in diet sodas, killing off brain cells. As I wrote in “How Saving is the New Investing“:
I mentioned in my article yesterday that saving is the new investing. A glance at five year graphs across the board pretty much demonstrate this point. Other than day traders, there’s not much long-term appreciation. And, even for day traders, the increasingly volatile conditions on the markets are making price movements increasingly difficult to predict. Below is the 5-year chart for the S&P 500. At the onset of 2007, at 1450.00, it stood on the edge of a precipitous price drop below 700.00 in 2008-2009. Today, nearly four years later, the S&P 500 hangs 100 points off its high.
The Dow Jones Industrial Average comprises the same storyline. In 2007, at 12,700.00, it stood on the precipice of a fall down to below 7,000.00 in 2008-09. Over the following years, until now, it clawed its way back to about even with its beginning of 2007 price.
In March 2012, NASDAQ reached 5-year highs around 2600 before falling off to 2610, Friday’s close. Up about 800 points from five years ago, NASDAQ stands out with visible gains. But, these gains appear more impressive after the 2009 lows than they actually are:
But, amidst the rallies in the stock markets, the true story is elselwhere: the dollar index. The US Dollar since its August high of 84 has tumbled down to 78.89. This is not consolidation. This is a spasm on the longterm path of dollar devastation. So, while the stock market might be heading higher, keep in mind that once you cash out, it will be for United States dollars you will be inclined to unload as quick as possible. And, no, your broker will not allow you to cash out in gold – even if you’re holding GLD.
This new journey of QE3 provides clear short-term and long-term direction for the US Dollar, and that is down. In the meanwhile, investors look past this obvious underlying red flag and celebrate a rising stock market.
The precious metals complex, in particular gold and silver, have headed higher not due to the appreciation of the stock market, but instead because of the more important debasement of the US Dollar. The stock markets appreciation is an illusion. The true trend here is the dying US Dollar and a stock market suspending disbelief, compensating for the delusion.
The Third Bretton Woods System – perpetual QE – will lead to surging precious metals in the longterm as the currency is debased, but the stock market will not sustain itself amid devaluing fiat currencies. Gold reached 6 month high in dollars, closed in on a new record high in euros as well as reaching a new nominal high in Swiss francs. Platinum tangoed with $1,700 for the first time since March while silver and palladium both reached their highs in the last 6 months, as the Fed announced its QE until things improve.
The “stunningly bold” and “open ended” program signals that the Fed merely wants to bring the economy closer to the abyss. In the meantime, Wall Street and monied investors can party, cashing in along the path to financial collapse. Each month until the labor market improves, an extra $40 billion dollars can be injected into the economy. That is paradigm shifting debasement and the reason why the stock market has not appreciated, but merely compensating for the new dollar paradigm.