This Market’s Bound to Bust

Sporting events are overrated.  Think of the latest Mayweather vs Pacquiao fight.  What a dud that turned out to be…twelve rounds of pat-a-cake.  We’ve seen harder hits watching the squirrels go at it along the back fence.

For any real action these days, you must turn elsewhere than professional sports.  Some prefer reality television for kicks and titters.  Others like to keep up with the gossip on Facebook.  Here at the Economic Prism we have other hankerings.

For the greatest show on earth, we set our sights to the stock market with eager anticipation.  We don’t know what will happen next.  But we do know something big – like a massive meltdown – is coming.

On Tuesday, for instance, the stock market took a nose dive.  The S&P 500 lost a full percent.  From what we gather, good news for the economy was perceived as bad news for stocks.

New home sales data exceeded forecasts.  Orders for capital equipment rose in the U.S. for a second month.  In addition, regional manufacturing was reported to have exceeded estimates.

Stocks Power On

These data points all suggest the economy is improving.  Thus, if the economy is improving, the Fed will be compelled to take the financial system off of life support.  They’ll finally begin to raise rates off the zero bound – flat liner – level for the first time in over six years.

What will happen when the Fed raises rates?  No one quite knows for certain.  But Wall Street thinks it’ll be bad for stocks.  The increase in borrowing costs will bring a decrease in speculation, goes the thinking.

Maybe so.  But, at the same time, raising the federal funds rate to a quarter percent is still at an extreme low rate of interest.  It will still be highly accommodative.  Shouldn’t this continue to propel stocks onward and upward?

Time will tell.  By Wednesday, just a day later, Wall Street had moved on from Tuesday’s concerns.  The S&P 500 rebounded 0.92 percent…nearly making back what it lost the day before.

There was no obvious reason for the recovery that we could tell.  However, nothing makes much sense about this market.

The simple fact is, stocks are beyond expensive.  They should be going down…not up.  In fact, those who are buying at this point in the bull market cycle will likely have to wait a decade – or more – to get their money back.  Still, stocks power on…what to make of it…

This Market’s Bound to Bust

In short, we are living in a strange place in a strange land.  The general attitude is that stocks will continue to move higher no matter what.  There’s also a strong belief that the Fed knows exactly what they are doing.  That they’ll somehow levitate stock prices regardless of what happens to the real economy.

To back up this notion is the experience of the last six years.  The Fed has held its fat foot firmly on the accelerator and record stock prices have occurred.  Stocks have practically gone straight up.

The relationship seems to be well established and well supported.  What’s more, blindly believing in the Fed and buying the dips has been extremely profitable.  Yet it has also become extremely dangerous.

At the moment, no one seems to care that the stock market is as overvalued as it was prior to the massive busts of 1929, 2000, and 2007.  No one believes a 50 percent loss will happen again.  The reality, though, is that a halving of the stock market is practically guaranteed…and you should plan accordingly.

Call us a doomer.  Call us a gloomer.  Call us whatever you must.  But be forewarned, if you haven’t already, this market’s bound to bust.


MN Gordon
for Economic Prism

Return from This Market’s Bound to Bust to Economic Prism

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