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Wall Street rejoiced yesterday as the Dow Jones Industrial Average once again went over 10,000. This time, however, there is a dangerous set of circumstances that could lead to social unrest. Two major factors are pushing stocks: 1. A worldwide ocean of liquidity -- zero short term interest rates in the U.S., and artificially low long rates; 2. Companies boosting profits by laying off workers. This is why stocks zoom while employment plummets. As long as the unemployment rate remains high, the Federal Reserve says it will keep interest rates at low levels. Wall Street speculators can borrow at extremely low (almost zero) rates and gamble with the money. Washington has assured large banks that they are too big to fail. So if the banks' gambles backfire, they know they will be bailed out. This is why, despite all you read, Wall Street does not want a solid economic recovery. It prefers a "not too hot, not too cold" tepid economy such as we had in the 1990s, when stocks also soared. Wall Street does not relish the prospect of a significant decline in unemployment -- Main Street's fervent wish. If the economy showed stout growth, the Federal Reserve would have to raise interest rates -- anathema to Wall Street. As long as the Fed keeps short rates at zero, we could be headed for another bubble. Commodities are already in something close to a bubble, and so are Treasury bonds, whose yields are quite low. It is not likely that we will see a bubble in residential or commercial real estate; both are in the tank.

The Dow first crossed 10,000 in March of 1999. A year later, the market crashed. Slowly it climbed back above 14,000 in October of 2007, but crashed again. It is still 29% below that peak but is up 53% from March of this year, when it hit 6,547.

I still predict that the Dow will end this year at 9,000, as I said at the beginning of the year. But the Wall Street/Main Street split is very disturbing. Also, if we have proved anything in the last decade, it is that bubbles are not healthy. But the Fed seems to think that bubbles (asset inflation) are better than inflation (product and service prices rising).

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Comments

Ponzi Oct. 14, 2009 @ 11:18 p.m.

Don, I read there will be no Social Security benefit increases next year because inflation was “negative.” What the heck? Everything I have bought has gone up in price. A burger is $10 at any restaurant. Gasoline is $3.00. Water rates here go up every time I turn around. “They” (whoever “they” are) say a tip is now 20% instead of 15%.

The 10,000 Dow because of all the money sloshing around. I’ve looked at the P/E’s and other metrics and they don’t support this new bubble. It seems there is a lot of inflation and a lot of the loose change if being parked in the stock market now.

So why is the government saying “no” inflation when it’s obvious there “is” inflation and people are feeling it and everyone agrees on it?

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Don Bauder Oct. 15, 2009 @ 7:04 a.m.

Response to post #1: Good points. First, the government rigs the inflation number downward through a variety of tricks that I have written about before. (For example, although car prices have gone up, they have really gone down, says the government, because the product has improved.) Second, asset inflation (stocks, bonds, commodities, etc.) is not recorded in the consumer price index. Even rising or falling home prices aren't included. The government uses a "rental equivalent" instead of housing prices. The most serious aspect, to me, is that it certainly appears that leaders have consciously decided that they would prefer asset bubbles to product and service inflation. For example, right now, government officials are straining to look worried when they "warn" that the economy will stay weak for quite awhile, so interest rates will stay low. Ha ha ha. With a wink, they are telling Wall Street to go out and gamble with cheap money -- we'll save you if you lose your gambles. The government is consciously trying to inflate a stock market bubble, just as it successfully created a real estate bubble. Have these people learned nothing from the disasters of this decade? Bubbles aren't good. Best, Don Bauder

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SurfPuppy619 Oct. 15, 2009 @ 8:55 a.m.

Are energy (gas) prices included in the CPI?

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Don Bauder Oct. 15, 2009 @ 10:16 a.m.

Response to post #3: Yes, various energy prices including gasoline are included in the CPI. Best, Don Bauder

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Visduh Oct. 15, 2009 @ 11:10 a.m.

Before the reform of the CPI calculation, many economists complained that it overstated the rate of inflation. That in turn led to "over-generous" inflation adjustments for Social Security recipients. Now it is true that the CPI understates the real price creep. Through thick and thin, has your dentist/dental hygienist ever stopped raising the price (or reduced it) of a dental cleaning? LOL.

This roller coaster of motor fuel prices can look terrible in one six month period, and wonderful in the next. But we're now paying close to $3 a gallon for 87 octane gasoline here, and that's historically very expensive.

The only thing I see getting cheaper is food, as all the supermarket chains keep proclaiming, but how long will that last? I suspect we've seen about all of that we'll get. Restaurants are folding right and left, and the remaining ones are sometimes offering better prices than in a long time. But again, how much more of that will we see?

This bit of food price relief is nice, but doesn't make up for a host of other everyday expenses that just keep increasing.

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Don Bauder Oct. 15, 2009 @ 12:24 p.m.

Response to post #5: The mantra is that the Federal Reserve must fight deflation (steadily falling prices), because inflation is easier to handle than inflation. But not enough people are talking about the consequences of that. In the guise of fighting deflation, the Fed keeps short term rates near zero. But that money is loaned out for totally unproductive and counter-productive activities, such as leveraged buyouts, mergers and acquisitions, stock market margin buying,etc. Middle class individuals and small businesses don't see much of that cheap money. The typical leveraged buyout, in which a group buys out a company that is already publicly-held, takes it private, loads it with debt, milks it, and then takes it public again as a highly-leveraged entity, is a total scam. Those who perpetrate it belong in prison. Mergers and acquisitions are the worst way for a company to grow. Many studies have found that. Generally, Wall Street rakes in all too much of its money from activities that are counter-productive to the economy. Best, Don Bauder

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