The Dow-Jones Industrial average closed over 17,000 today, for the first time since August. Do not misinterpret this recent rise. Happy Days are not here again.
The Fed is stymied in the near-term. It would like to raise interest rates but just the threat of that happening (or the notion that they will not do so) is enough to produce disproportionate reactions in financial asset prices. There are many who believe that a bullet has been dodged and that markets are now safe to re-enter. Maybe, but probably not. As pointed out in an earlier post [6]:
The strength of an economy creates wealth. Without a strong economy no nation grows wealthy or stays wealthy. Asset valuations are ultimately grounded in the economy, at least in the long run. Rising employment, standards of living and financial asset prices accompany strong economies. Without these pre-requisites, long-term wealth cannot be created.
Our economy is weak, not strong. It has been exhausted by massive government and its idiotic policies. True wealth is not created or expanded under these circumstances. Wealth and the standard of living are shrinking. Wealth may be shifting hands from one group of people to another, but it is not growing. Nor can it until government is stripped of much of its size, power and regulatory excesses.
Whether markets continue to recover (appear to recover is more proper) is anyone’s guess. A hyperinflation, should it occur before a hyper-deflation could push the Dow over 20,000, but would the rise only reflect a deterioration in purchasing power? A hyper-deflation could push the Dow below 10,000, a likely unthinkable level for too many market participants. Were it possible to neutralize inflation/deflation, I suspect the chances of going below 14,000 from here are greater than the chances of crossing 20,000. If monetary effects on asset prices could be neutralized, that is a bet I would willingly make.
In today’s world, neutralization of inflation-deflation is impossible. Government has every incentive to continue to inflate financial asset prices as it is the only thing left that they can fake. Their ability to engineer an economic recovery ended a few years ago. The only question is whether they can continue to create financial asset inflation as their smoke and mirrors cover.
Happy days are not here again, regardless of what happens with the stock market. We are perched on the precipice of an economic collapse.
[7]
