Monday, June 1, 2009

Is the Economy on a Run...

...or about to take a nosedive? What the heck is going on? GM declares bankruptcy, and the DOW is up 200+ points for the day. In fact, the DOW is up almost 30% from its March lows. Even more encouraging, a critical manufacturing index is up in China, as is consumer sentiment. Are good times here again? Is it all over? I'll do a little speculating. Across the globe, governments have been spending the last several months printing piles and piles of money in a global fit of "quantitative easing." (Meanwhile, of course, they have reprimanded their fellow governments for doing precisely the same thing. But I digress...) This is in contrast to normal policy, which is to print money slightly more slowly. The motivation for the fist act is, as we all know, to allow those who have run up bills that they can't pay to pretend to pay them and avoid bankruptcy. Especially politically well connected debtors, like large banks. Thus far, the government has been careful to keep the printed money "off the market," and safely locked away in the vaults of the FED. The motivation for the second, more routine act, is to "stimulate the economy" by suppressing interest rates. This money is freely allowed to enter the economy, and hence the fractional reserve banking system which multiplies it through its activities. Done a little at a time, it takes a very long time to show up in the CPI, which is the measure most people use to "measure" inflation. Incorrectly, mind you, but this is what they do nonetheless. It is amazing what kinds of business activity are profitable when there is an ever expanding pile of money available for paying one's bills. Now, when the FED stopped policy number 2, in response, in part, to $147/bbl oil, and ever so briefly before it started policy 1, the abject stupidity baked into the economy as a result of the slow trickle of money was revealed. Kind of like when you wake up after a night of heavy drinking and find that your aren't quite sure where your pants have gotten off to or how the furniture came to be set on fire. As a result, there was a "correction." With the quantitative easing now in full force, the "correction" has given way to something of a "recovery" over the past few months. Which is to say, an awful lot of rascals have gotten out of paying their bills, and the "stimulus" is making businesses look profitable again. (Amazing how easy that is when money appears out of thin air, as it were...) I expect that the next quarter's reports will probably look much improved over the previous two. I expect more "good news" on a variety of fronts. I expect a further rally in stock markets. However, I predict it will end. The seed of its destruction is beginning to appear. Oil is again nearing $70/bbl. Last month's CPI numbers were ominous. Thanks to the precipitous drop in gas prices since last years moon-shot, overall numbers were flat. But sans energy, they are up. Up quite a lot for it being the midst of the biggest recession since the 1930's. I expect that in a few months time, possibly sooner, overall CPI numbers will rise. Markets will fall in response, because they know what this means: the jig is up. Party's over, and its time for the hangover. The FED will either have to stop its money-printing binge, putting the brakes on paying old bills with new dollars and sending markets back into the pits of doom, or watch prices shoot through the moon, destroying the value of equities and sending markets back into the pits of doom. The two possible outcomes have tremendously different ramifications for various investments, of course, but don't bet on things getting better anytime soon. Pure speculation, of course.

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