In my opinion, the stock market rise is not connected with reality.... the so-called fundamentals. The fundamentals are terrible. Unemployment keeps rising, retail sales are extremely uneven, and would be terrible if you took away the artificial sugar high of the government's stimulus, like Cash for Clunkers and the $8000 tax credit for first time home buyers. The real numbers are very bad. Worse than they've been since the Great Depression. Look at sales tax receipts, for example. That's a pretty accurate summary of the buying and selling activity. Consumer credit is down and continues to trend down. People aren't borrowing money to buy things. They're scared to. They're retrenching and paying off debt (or defaulting on it.) That is deflationary, not inflationary.
I thinkt he mechanism behind the stock market's rise is fairly straightforward. It is due to three factors.
1. Foreigners with American dollars in their pockets are expecting inflation. I think those foreigners are wrong, but what they expect rules the roost for now. In an inflationary environment, you want to be out of cash and cash equivalents, like bonds, and into "things." Rather than repatriate their dollars or buy bonds (which are bad to buy in an inflationary environment, since the depreciation of the currency eats up the gain of the interest accrued), they are choosing to trade their dollars for "things" in anticipation of a steady devaluation in the purchasing power of the dollar. One of the "things" they can buy is stocks. In an inflationary environment, stocks generally do pretty well. Foreigners are buying stocks, thus driving up the market. They are also buying gold, thus driving up the market. Thus inflationary expectations create a rise both in gold and stocks. We saw my prophesied correction in gold, or at least the first part of it. Gold went from $1120 to $1100 before rocketing to new highs on Sunday night. I confess I am stunned. This is a powerful upward move. More powerful than I anticipated. Gold is still ripe for a correction, but the price of gold indicates stocks will continue to rise for the near term as well. I need to rethink my Elliott Wave count concerning gold a little bit. It's still ripe for correction. It's still a buy when it corrects. Silver hasn't matched gold's new highs, but if you look at silver's performance in the last 12 months, percentage-wise it has actually outperformed gold. It was at about $8.50 in November of 2008. It's now sitting close to $17.80. It has more than doubled. Gold, on the other hand, went from $710 to $1120+, approximately a 60% increase. Though silver has yet to make new highs, $1000 invested in silver in November of 2008 would be more than $2000 today. $1000 invested in gold at the same time would be a little more than $1600 today.
2. Banks and institutional investors are taking government money, loand through the Fed via the TARP program and similar programs, at essentially no interest, and investing it for a return. One of the places they are investing it is the Treasury bond market. In other words, they are borrowing money from the government and less than 1% and then reloaning it to the government at about 4%. Nice, huh? I wish I was a banker.
But they are also speculating in stocks with it, and that drives up the price of stocks.
3. Joe Six Pack, or what some investors call "Dumb Money" sees the rise in the markets and chases it. He throws his cash in, but is usually a "late adopter" and ends up buying just as the move is finished. The "Dumb Money" is in with both feet right now and is uber-bullish. The "Smart Money" is turning bearish, but is not there yet. The markets generally operate in such a way as to fleece the Dumb Money and give the proceeds to the Smart Money. That is, after all, why they call them the Smart Money. When the Dumb Money jumps in with both feet (and they have) then the end is nigh.
Topping is a process. We are getting there. We are not there yet, I think.
This is still a bear market. This is still a Depression, not a recession. This is still a cyclical bull market in a secular bear. This is still a nice and useful rise in confidence in the midst of a terrible economic situation. Enjoy it while it lasts, profit from it if you can. I still am expecting deflation, and not inflation. This market rally will end, and it will end sooner rather than later.
Get out of debt. Save money. Live frugally. Buy a little gold and a little silver. Don't buy the "Green Shoots" lie to your own harm. The green shoots are just weeds.
Peace.