I used to be a bull, then for the last 2 1/2 years I’ve been a bear. Now I’m starting to itch like I want to shed my fur and go bullish.
That is likely because we are at a top, having rallied hard care of the Fed from the edge of the cliff in the new year.
The fed has made over 100 billion last year from rescuing/manipulation the markets. It doesn’t have to stop if protecting equity and house values for everyone is a money making enterprise. It only has to stop when it starts to blow its capital on the manipulation.
That day has not come.
The beauty of QE is this:
The government buys its interest paying bonds back for cash. Cash is a bond with no interest.
The benefits of QE are::
Retires government debt. There might be $18 trillion of US Govt debt on paper, but $5 trillion of it or analogs are stored in the Fed’s safe, so it is actually net $13 trillion, a big fall.
It lowers the cost of financing the US national debt.
It artificially increases tax bases, property taxes and all.
It transfers wealth from passive savers to active borrowers, of which the government is one.
It artificially keep people feeling rich, by inflating asset values, again increasing tax takes.
Its inflationary effects are proven neutral because of imported deflation and negative balance of payments.
It makes the government money by buying bonds cheap and then pushing up their value.
Cash generated by redemptions can be used to smooth market both ways.
Its worked for years and has no signs of creating acute problems.
You might not like it, but there it is.
So why be a stock bear?
Is ‘unconventional’ monetary policy going to implode any time soon? Is so why?
So why force yourself to be a bear?
What is the worse that can happen?
Inflation.
As Mario Monti at the ECB said, “where is it then?”
The real answer is, as long as it didn’t go non-linear, inflation wouldn’t hurt stocks.
So lets forget our prejudices.
Lets play Bull.
Here you go.
So the chart has two what ifs.
A break out from this level, after a break from the long post crash rally weve had during the expanding QE period.
Then there is the possibility that the current market simply becomes exhausted at these levels and at some point the cyclical QE cash re-injection from bond redemptions, being used to stabilize the market, stops working.
I feel we are a long way away from QE tightening, so there is a floor on the market and this is what we should play off.
While a sudden rally into the 20,000s seems a long shot, for now the worst that will be allowed to suffer is a correction of the scale we had this new year.
In its self this is a really trouble moral hazard, but that’s what you get when the invisible hand become the visible hand of government. You have to get onboard the gravy train and hope it doesn’t derail.
In any event, because the current market controlling axis is government, you have to be able to be a changeable in your theories as they are in their policies.
So we need to be constantly looking at the what-ifs and become less dogged in our views. With much at stake this is a very hard thing to do.