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.