Tuesday, December 1, 2009

Exactly Why IS The Stock Market Rallying?

To he honest answer is that I don't know!   But, I can think of several possibilites.  In fact, NO ONE can know with any degree of certainty.  The fact is that markets of all sorts do what they want and when they want.   The reasons are only clear in hindsight.  What I CAN do is review the potential reasons and make an educated guess.

One possibility is that the economy is indeed recovering.  That's less ridiculous than it might seem at first. Given the level of stimulus, coupled with the high level of growth in the money supply, the economy typically would respond with an initial recovery.  The unfortunate side effect of all the economic juicing is that eventually, prices start to rise at an accelerated rate.  A good analogy would be a drug addict.  At first the drug gives one a "high" but is followed by the inevitable withdrawal symptoms. The drug addict then builds a tolerance and needs MORE of the drug.  Subsequently, the crashes become more painful.

Another reason for this rally may be inflation expectations.  In Zimbabwe, which is just starting to recover from one of the most severe bouts of hyperinflation I've ever heard of, their stock market shot up exponentially.  Zimbabwe's inflation rate was so high that it reduced the value of ITS dollar to 6 QUADRILLIONTHS of its value in 2003!  However, in the U.S., in the late 1960's through 1982, a period of high inflation, stocks fell by an astonishing 90% from peak to trough, if the cumulative inflation was taken into account.  That loss was virtually identical to that experienced during the Great Depression.

A third possibility is that we are in a temporary rally within a longer-term overall downtrend.  This is a very common occurrence, especially after the severity of the accelerating panic that engulfed the market between the emergency takeover of Bear, Stearns in 2008 and the March lows of 2009.  The market behaves like a pendulum.  It frequently overshoots in one direction only to be followed by a sudden sharp about-face.

Finally, the idea that the market is manipulated by agents or proxies of the government is gaining acceptance. It has also been, to some extent, even admitted to, but only very recently.  Until we get an audit of the Federal Reserve, we won't know with any certainty as to what extent this may or may not have occurred.  It's clear the Federal Reserve DOES manipulate some markets such as interest rates and, therefore, the price of bonds.

They also manipulate the U.S. Dollar.  But we don't know how far that manipulation extends, nor its overall effect on the stock market.  If this indeed is true, it will ultimately fail because it can only work temporarily.  We can be certain that whatever power the Federal Reseerve exerts, it must be limited.  Otherwise, the market would have never crashed in the first place!

So, here's "Marko's Take" on all this!  My own personal belief is that we are indeed in a temporary rally that will ultimately prove to be of limited duration and NOT make new highs for a long time.  And it may be somewhat overdone with help from our friends and their proxies at the Federal Reserve.  Even if  I AM correct, I don't have any firm conviction as to how long it will last, nor how high it will ultimately go.

I'm always delighted by your comments, pro or con. If you like what you've seen, it would thrill me to have you email this piece, or any other of my pieces, to a friend or two.

Marko's Take

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