No amount of QE will be able to keep the current stock market bubble from bursting

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investorzzo's picture
Status: Diamond Member (Offline)
Joined: Nov 7 2008
Posts: 1182
No amount of QE will be able to keep the current stock market bubble from bursting

It was the night before Christmas Eve, and CNBC trucked out TrimTabs' Charles Biderman to a de minimis audience, knowing full well that a man with his understanding of money flows would very likely repeat his statement from last year, that there is no real, valid explanation for the inexorable move in stocks higher, as equity money flows in 2010 were decidedly negative, and any explanation of the upward melt up would need to account for Fed intervention (and no-volume HFT offer-lifting feedback loops but that is a story for another day). A year after the first scandalous report was published, TrimTabs is sticking with its story: "If the money to boost stock prices by almost $9 trillion from the March 2009 lows did not come from the traditional players, it had to have come from somewhere else.  We believe that place is the Fed.  By funneling trillions of dollars in cash to the primary dealers in exchange for debt, the Fed has given Wall Street lots of firepower to ramp up the prices of risk assets, including equities." And, wisely, Biderman, just like Zero Hedge, asks what happens when the buying one day, some day, ends: "...stock prices will be higher by the time QE2 ends, but economic growth will not be sustainable without massive government support.  Then even more QE will be needed, and stock prices could keep rising for a while.  In our opinion, however, no amount of QE will be able to keep the current stock market bubble from bursting eventually." Ergo our call earlier that Bernanke has at best 150 days to assuage the market's fear that QE2 is ending (not to mention that we have a huge economic recovery, right Jan Hatzius? We don't need no stinking QE...). Therefore the best Bernanke can hope for is to buy some additional time. At the end of the day, the biggest problem is that the massive slack in the economy means that LSAP will have to continue for a long, long time, before the virtuous circle of self-sustaining growth can even hope to take over. By then bond yields may very well be high enough that Ron Paul will demand someone finally bring Paul Volcker out of the fridge.

dshields's picture
Status: Platinum Member (Offline)
Joined: Oct 24 2009
Posts: 599
Re: No amount of QE will be able to keep the current stock ...

I read this on zero hedge.  The Fed Res has been supporting the equities markets.  It explains alot of what goes on there.  The equities market (NYSE) is in an odd way.  Corporate profits were pretty good in 2010.  That would tend to drive equities up.  I believe that a fair amount of the profits have comes from:

1) The top 10% of wage earners have been spending away as their incomes have risen dramatically.  There is a Mall in NJ called Short Hills Mall.  It is in Summit NJ.  It has to be the most expensive mall I have ever been in.  There may be ones that are more expensive somewhere else but it is hard to imagine.  It is located near some very wealthy areas.  All through xmas the parking lot was packed.

2) In 2008 and 2009 corporations laid off millions of people and to their surprise they could still function without them.  With demand being modest they have not hired.

The result has been good money for them.  Some of the big ones received bailouts of one type or another but I don't think this has played a major role in the profit situation.  I think a lot of it is they were over staffed before the recession and did not realize it.

Then you have the Fed Res part.  I can't prove it but I have seen articles by knowledgeable people who have analyzed the market and say there are billions of dollars there that can not be accounted for.  That smells like Fed money to me.  Uncle Ben has stated that the Fed can be active in any market(s) it wants to be in.  I am sure they have been fooling around in the equities market(s).  It is a dangerous game they play.  I see media coverage of what can only be seen as negative events and the equities market will start to fall then all of a sudden it stops and goes up.  We used to watch this on a regular basis at work and just shake our heads in dismay.  This does not seem to happen as often as it used to say a year ago.  It seems like the equities market(s) are artificially high due to Fed activity.  They can not keep doing that forever.  Wall Street people must be aware of this but you know the old saying - don't fight the Fed, just ride the wave.  The Fed Res can not raise interest rates very much or the Fed Gov will implode.  When people smell that the Fed is not going to be active in the equities market(s) any more they may move to sell and capture their profits.  That would cause a huge sell off.  With program trading what it is these days, it could happen real fast.  I suppose that means QE3 is on the way.  With the ability of the Fed to invent money on demand, it is difficult for my brain to comprehend it all.  All my thinking is built around money has some meaning.  Infinite money on demand is like magic - it defies the normal thinking.  It seems crazy and bound for disaster but right now it seems to be working.  The DOW is heading toward 12,000.


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