Two cheers for the stock market
The stock market had a massive rally yesterday, with the Dow Jones Industrial Average up over 200 points and the S&P 500 up better than 22 points. (The Nasdaq, while still up big, was a relative laggard in percentage terms.)
But before we start wildly cheering, we need to keep in mind the key impetus for this rally, namely the Fed’s announcement yesterday that they are going to buy hundreds of billions of dollars of Treasury securities (mostly longer-dated notes and bonds) over the course of the year in a “Quantitative Easing program” which has recently become known as QEII.
It is true, as Larry Kudlow points out in his note for National Review, that talk from the White House about being open to extending the Bush tax cuts for all tax brackets added fuel to the skyrocketing stock market. However, before that announcement, the stock market was already up more than half of the amount it ended up on the day. Furthermore, the day before, the stock market was down substantially – the Dow down about 100 points – and then it rallied to close up slightly on the day following the news of QEII.
It’s QEII because there has already been a big push by the fed in this direction with their buying treasuries. Bernanke and his accomplices in the Obama Administration claim that this action has substantially helped the economy. But that’s far from obvious; many people believe this action is “pushing on a string", that it will accomplish nothing for the economy, or at least nothing good, and that it poses substantial long-term risk.
In particular, if interest rates are forced down but there is no demand for capital by business, the money will and is flowing into other assets, whether stocks or commodities, or perhaps even a little bit of real estate. The other aspect of QEII is that by essentially printing money, the Fed is lowering the value of the dollar.
Indeed, the US Dollar was down about 1.5 cents against the Australian Dollar, British Pound, and Swiss Franc yesterday, and down about a penny against the Euro. For those of you who don’t follow these markets regularly, that is an enormous downward move in the dollar, on average down about a% against these currencies.
This means that while the stock market was up a little less than 2%, the actual purchasing power of a dollar in worldwide terms was down 1%, so the true value of the market’s increase is much less than it looks. And most people don’t have all their net worth in the stock market. So between the great day in the market and the terrible day in the dollar, which are directly related, the average American is probably poorer today than yesterday because of the Fed.
The reason the stock market tends to go up with a weaker dollar is that exporters become cheaper to foreigners, allowing them to buy more or allowing the US manufacturers to raise their prices in dollar terms. The same thing happens in dollar-denominated commodities, such as silver, gold, and oil…and almost every other commodity…all of which had massive gains on Thursday. Gold was up more than $50, or about 3.7%. Silver was up a stunning 7% and oil was up about 2.5%. Natural gas was also up as were copper, wheat and soybeans.
In other words, the Fed’s dollar-destroying actions are making it more expensive to build a house, heat a house, and feed your family.
So before you cheer the big rally in the stock market, I urge you to pay attention to what the man behind the curtain is doing to your net worth. He’s waving the happy picture of lots of up arrows in your stock report, hoping you focus on that while with his other hand he’s destroying your savings and raising your cost of living.
I believe Ben Bernanke will go down in history as one of the most destructive economic forces this country has seen. Unfortunately, he’s killing us with extremely dangerous monetary policy at the same time that the Obama Administration has killed us with the most wasteful fiscal policies in our nation’s history.
If America comes through this unscathed, which I doubt, it will only happen because of the entrepreneurial spirit of Americans and only in an environment of reduced taxes and regulation, none of which will be easy while this econo-moron of a president and Ben “Sancho Panza” Bernanke remain in office.
For some very interesting – and not particularly uplifting – comments, see these insightful remarks by former OMB director David Stockman:
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