How the Stock Market Doubled

Things keep on moving forward as they must.  Some things seem obvious and predictable…like Greek insolvency.  Others, like the escalating potential for an attack on Iran, are just coming into focus.  Still, what we see, and what we know, is just the half of it…

Also lurking out there are what Donald Rumsfeld once called “unknown unknowns.”  These are the things we do not know we don’t know.  We’d give you an example of one, if we could.  But we can’t.  Because then, by definition, it would not be an unknown unknown.

Nonetheless, once something passes from the unknown to the known it must be discerned, processed, and acted upon.  Confounding things is all the noise out there…which can distract and confuse even the most focused and clear thinking individuals.  Where the stock market’s concerned, what’s the lowly working stiff saving for retirement to do?

One option to consider is doing nothing.  Doing nothing, however, is a decision to do something.

Putting money in a savings account is taking a position in the banking system.  Stuffing physical cash in the mattress is shorting inflation.  Buying treasuries is a vote of confidence in credit markets, and a vote the government will meet its obligations.

A Reliable Way to Build True Wealth

You see, no matter what you do, you are doing something.  So, if you must do something, what should it be?

One place to start is to follow Warren Buffett’s two rules for investing.  Rule No. 1: Never lose money.  Rule No. 2: Never forget Rule No. 1.

Of course, this is easier said than done.  Everyone, including Buffett, loses some money in the stock market.  The point is stocks should be an investment; not a vehicle for gambling.

Hence, according to Buffett, investments should be made in good companies at fair prices.  By doing so, the investor is better able to hold stocks across wide market valleys.  Likewise, overtime they’ll be richly rewarded.

“Lethargy bordering on sloth remains the cornerstone of our investment style,” said Buffett in his 1990 letter to shareholders of Berkshire Hathaway.  Certainly, this is not an exciting or gratifying way to invest in the short term.  But over a career horizon it’s a reliable way to build true investment wealth.

Unfortunately, in times like now, you must factor in Federal Reserve gas huffing…

How the Stock Market Doubled

Quite frankly, we don’t like it on bit.  But the Fed’s loose monetary policy has turned the entire stock market into a gambling house.  Now, on top of trying to find good companies at fair prices, an investor must factor in Fed gas.

Stock Market’s Three-Year Rally Has Fed to Thank, reads a headline from CNBC.

Despite a sluggish economy the stock market’s more than doubled over the last three years.  Here’s how…

“In the nearly three-year run, the S&P 500 reached its cyclical high of 1,370 in May 2011.  That was just before the Fed’s “QE2,” or its second quantitative easing program came to an end at the end of June.  The Fed purchased $600 billion Treasury securities under that program in an effort to drive rates lower and send investors into riskier assets — like stocks.

“From May through early October, the stock market moved lower as the debt ceiling debate raged in Washington, and the economy and Europe worried markets.

“The S&P bottomed in early October at 1,074, just as the Fed embarked on yet another program, ‘operation twist.’  The ‘twist’ involves Fed purchases of longer duration Treasurys, using the proceeds from sales of shorter term securities.

“The S&P 500 since then has gained more than 22 percent.”

In other words, the stock market double is based on a fraud.  Like the housing bubble and tech bubbles before, these things always go on much longer than expected…and they never end well.  In the meantime, it should be quite a spectacle.

Sincerely,

MN Gordon
for Economic Prism

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