Why is the stock market going up in first half of 2011?

If you think of the stock market as a measure of future expectations, why is it rising when we are continually hearing terrible news in the media? From Greek debt default to "Great Recession", stories of our collective failures mount and yet, the stock market heads ever upwards from its low in March 2009.

List of terrible news which should send markets down

1. USA have hit their debt ceiling - they have run out of money unless congress extends this ceiling by 2 August 2011

2. Manufacturing jobs have left the West and yet politicians are looking for an increase in exports to the East to create our recovery - this will take a very long time, if it happens at all...just as a reminder the UK has borrowed money to finance everything it built since 1981

3. Eurozone is struggling to deal with the periphery countries which have borrowed too much (mainly from French, German and to a lesser extent UK banks).

4. China has embarked on a policy of lax credit rules to aid the economy during the 2008 crisis. This has meant their banks hold a large proportion of loans which are probably never going to be paid back.

5. There is a race to the bottom for power currencies like the £ and $ as both countries struggle to be competitive against other countries.

6. Every job created since 2000 has been lost from 2008 - 2011 but the US has 30m more people since 2000 who need jobs too. Unemployment keeps rising, and why shouldn't it? We've got no more graduate jobs for lots of marketing/film studies grads with no work ethic and all the low paid jobs have gone to immigrants who work harder and longer for less benefits and salaries. If you look at inflation vs salaries we get paid less to do graduate jobs today than we did 25 years ago.

7. Arab uprisings increasing  oil prices. Oil of course is an input to everything we use, eat or transport.

The main reasons for this inexorable rise seem to be:

1. Cheap money from the Federal Reserve

Effectively, banks borrow money at next to nothing from the Federal Reserve discount window at the moment and invest this money into more risky assets e.g commodities and equities. From the banks point of view keeping the cash would have a negative return due to high inflation and lending the cash to small/medium businesses is just too risky at the moment. Ironically, the reason the government has to issue so much debt is because it had to bail out the banks - the bankers always win! Moral hazard anyone? It doesn't matter that this "hot money" increases the prices of our food and oil - as long as the bankers can afford it I don't think they care.

2. QE from various countries

Quantitative Easing is just another name for creating money out of thin air. Governments do this by creating money they use to buy their own government debt from banks.

 Every month the large banks offer bids to buy government debt so they can sell it on to investors at a small profit. Since 2008 the government has been the main buyer of its own debt - this makes easy profit for the banks. They just buy the debt from the government and then add a profit margin and sell it straight back to the government. In exchange for its own debt, the government gives banks the money it just created to lend out into the economy. Unfortunately, banks are so worried about their own futures that they are using this money to improve their own balance sheets in case of further loan losses and impending rule changes called Basel III which makes them hold more cash in order to continue business. Just to remind you - the US government now owns more of its own debt than any other investor! That's right, it has bailed out so much of the banking sector that it created and bought back more of its own debt in the last 3 years than all the debt it ever owed to other investors in the history of America!

Conclusion

So the governments of the world are engineering a false high in the stock market in an effort to keep the system going. They think they can act like a starter motor to the combustion engine of the world economy. Unfortunately this "free money" handed to the wealthy investor community simply increases the price of our goods and services due to an increase in general inflation. Its important to remember that after the Great Depression it took around three years (1929 until 1932) before the markets collapsed completely. History doesn't repeat it self in the same way...but it often rhymes!

Regardless of the false stock market I believe we in the West are in for a tough time for years. Our quality of life is about to get significantly worse. If you think about how quickly the world changed from 1970 to now (two car families, mobile phones, cheap holidays abroad, internet) it stands to reason that are world can equally change for the worse in the next 30 years. Of course there is a big difference between our living standards and those of the majority of the world who live on less than $2 a day. This inequality needs to even itself out over time and there's going to be upheavals as that happens over generations.

Interesting resources

www.zerohedge.com
www.shadowstats.com
www.armstrongeconomics.com


PS - If you think about it, now would be the best time to bring in a new head of the IMF who has no economic background (a lawyer) so the bankers can run circles around her and use economic blackmail to do what every they want. Seems rather strange that Dominic Straus-Kahn's charges have simply disappeared yet his job has changed hands. I hope the sane people in government can think past their election campaigns and tell the voting public the truth.

Should we invest in Gold and Canadian and Australian currency now?

follow the moving capital?

With debt mountains growing in Europe and the US it seems precarious to place any capital in bonds or the volatile stock markets. 


I am a subscriber to Martin Armstrong’s theory of capital movement and cyclical asset bubble creation. By increasing interest rates it makes sense that capital will inflow into any country to take advantage of the return over and above risk-free rates. With global banking, money moves easily from one side of the world to the other. Why would increasing rates slow your “fake” investment economy down? It may slow down your real economy based on goods but then the West has had a decreasing share in this type of trade for decades and Services (especially financial services) have taken over our previous industrial economy.

Importantly, capital moves to where it can achieve the highest return for the least risk. If you think about money flowing around the world moving in the path of least resistance it makes sense that it would choose to move closer to areas of easy growth over time. Look at Japan, lower the rates and money will flow out of your economy and come to higher returns in the US, or other parts of Asia thus prolonging your stagflation. Japan is far more of an export led economy that the US or the UK, if lowering rates didn’t work for them why would it work for the service industry centric western economy?

As the velocity of this cash movement increases to this area of higher rates, asset bubbles are created and this in turn changes the risk reward profile of the investment and the “smart money” realises that the risk is too high. Again, the capital starts to ooze out of investments first slowly and then with an increasing rate to find the next easy slice of lower risk investment. The typically slow moving retail investors who are slow to enter the engorged market and equally slow to leave are the losers in this great tide. Getting in to the game too late and staying much longer than the architects of the asset bubble. It’s well known that these cycles of investment exist but unfortunately the investment secrecy serves to enrich the few at the expense of the many who can’t invest enough time to back test this as they’re probably too busy doing something useful for our economy like creating and distributing food. Banks and global asset managers take advantage of this and facilitate amazing levels of conceited and self interested activities in order to enable the wealthy to continue their status in society performing the most socially derisory task – making money from money. 

So what’s the recommendation? Move your money to the Australian or Canadian dollar for a 15-18 month time frame and you should avoid the currency destruction that’s about to occur in US and the UK. Just doing this should give you a healthy return.

In a longer time frame attempt to invest in physical gold rather than gold ETFs or stocks as the likelihood is that there isn’t as much gold as people think there is and when the chips fall down it’s the physical gold holders who are actually going to get their hands on the stuff rather than the paper holders. Martin Armstrong believes that gold has a long way to go due to the forced destruction of the western currencies to deflate their debt away.

So in short, Australian and Canadian currency will continue to appreciate due to their governments increasing interest rates and gold will continue to go upwards because of the weak currency stance of the US and the UK. Lets see if I’m right in Dec 2012. If you read this then post a comment and let me know.

Deterioration of politics due to voter apathy and media self interest

The irony of the latest internal notes released from Ed Balls by the Daily Telegraph is that they speak more about retaining power and personal grievances than actually helping the people of Britain. Policy statements are only mentioned with a view to gain power, or to convince the public of their desire to “do good”. Committees are set up to look at policies with a view to winning the election. Politicians have overridden the desire to serve their community by the need to win at all costs. They will say anything; do anything, and side with anyone to win. This is as much to do with the media and people’s changing attitudes as it is to do with politicians almost psychopathic winning agendas.

The media’s “conversations” with the public have seriously undermined our ability to focus on difficult long term objectives. We can no longer allow plans to span many election years as people want to see results now not in 5, 10 or 15 years. We see this expectation rise from our entertainment screens, we can no longer wait to watch serialised programming; and we must see the winner of talent competitions after immediate phone ins. The Chinese government has a march on modern democracy because of this need for immediate gratification. They have envisioned plans for the long term, and although they are not always fair or representative to everyone, they realise that they give everyone a better future in the long run. You can argue that democratic policies are never fair to everyone after the debate is over someone almost always loses. But crucially, the Chinese don’t waste time ensuring they are “Richard & Judy” friendly instead of actually solving the problem i.e. the nation’s energy crisis! I think Brown finds the “spin” and “media pandering” pointless as well but unfortunately when the media provide such a disfigured sense of what it is to be successful (looks and vapid one-liners at PMQs) he could never compete. It’s absolutely crazy that we would need to change our political leaders because the media have become “bored” with the current Government. If this thinking continues we will constantly have strife and failures in an effort to make news. How sad for the millions that will die or be impoverished because we want to be excited by what we watch on TV. I think Blair knew the power of media, and hated it. He used it for his own advantage as long as he could but understood the real requirement to execute change plans quickly before the media was “bored” and needed to move on (not for the people but for their own self interests). In his autobiography he notes that he was much better at being prime minister in his last term but ironically that was when the press forced him out over Iraq and “Presidential leadership”.

It is naïve to expect every working class family to aspire to better things in only one generation. It takes time and energy to understand, conceive and execute change within even one family. Even then, there is bell curve of distribution between those who listen and understand quickly and those that will never agree to change. Niche ideas take decades to become populist even when there is immediate gratification, for instance, cars, cell phones and electrified homes. Selling an agenda to the public based on values which may benefit them in the future, whilst knowing that the salesmen might not execute, or worse still not even be in power after they have won the debate almost seems like a waste of energy. Most human beings don’t seem to form their views of policy based on intellectual debate, they base them on how they will be affected in the short term. Politicians play on this innate short term view. This is why they can kick the hard decisions down the road e.g. pension reform (we definitely don’t have enough money to pay for promised pensions); decay in family and community ties; increased immigration due to lack of work ethic amongst indigenous people; our aging population and consequent health costs; and the European integration problem.

So whose fault is it? It’s ours, collectively as a democracy. Unfortunately, we give in to our base desires for instant rewards. The media and the politicians give us exactly what we want – conflict to titillate us; style over substance; arguments which attribute only blame with no valuable conclusion; and a failure to identify the themes which affect us all in the longer term. Scientifically, endorphins are released in our brains and we have satiated a small need whilst sacrificing our longer term aspirations and requirements. We reward our media (with increased sales) and our politicians for not solving problems but for looking good or communicating in a light, funny manner. They are a reflection of what we want.

Sadly, if this continues I can see this ending badly with the continued decline of the West’s influence in the real problems affecting the world or a war which aligns people’s values and concentrates them on the greater good thus enabling a new generation of leaders to get on with solving our problems rather than fixing their hair.