"There is no means of avoiding the final collapse of a boom brought by credit expansion" - Ludwig Von Mises
In my post from just two days ago, I indicated that the Fed would soon start buying Federal Treasuries, which is tantamount to "printing money". It appears that soon just got here, as the Fed announced today that they are going to start buying Federal Treasuries in order to drive interest rates down across the entire credit market.
In the long-term of course, this won't do anything to derail the deflationary economic collapse, however, in the short-term this is very significant and indicates that the Fed is now "All in" in its bid to stop deflation. Essentially what the Fed is trying to do is to induce the capital markets to take on more risk by making the "risk free" yield (i.e. U.S. Treasuries) relatively low and unattractive. Of course, the stock market took off on this news and rightly so, as stocks should be one of the primary beneficiaries of this historic policy (as far as I can ascertain, the U.S. Government has never monetized its debt on a significant basis). Therefore, I think the stock market could have a significant multi-month rally back to the 200 day moving average which is an important demarcation line that stymied all of the rally attempts during the last bear market (2000-2003). We have yet to have a rally back to the 200 DMA in this bear market, so we are long overdue. In percentage points from here, based on the S&P 500 (currently 800) and depending on the trajectory of the rally, I would hazard a range between 900-1000 (~12-25%) is possible sometime between now and the summer. Bearing in mind that the market is already up 20% off of last week's lows (!), so a pullback is due any time now. As always, take all stock market predictions with a grain of salt...
As I mentioned however, in the grander scheme of things, this monetization policy will not alter the deteriorating economic fundamentals. Think of it as similar to pouring gasoline on a dying fire - yes there is a great, seemingly impressive burst of flame, but then almost as quickly as it started, the fire burns down, as there is no underlying "fuel" to keep it burning. Similarly here, stocks will rally and become more expensive, and then everyone will realize that there are no underlying fundamentals (aka. profits) to support the higher valuations. Households will still be massively in debt (and falling further behind every day), and there will be no long-term driver for economic growth. As I wrote recently, the (latest) stimulus package is a joke relative to the size of the overall economy and the magnitude of this crisis. Last year's stimulus package didn't do anything, and yet they apparently think we are stupid enough to believe that this time will be different. It's starting to feel a lot like Ground Hog Day around here...
Event Risk
There is one major risk to the near-term rally scenario, and that is event risk. The specific event I have in mind is a looming global currency crisis that will most likely begin in Eastern Europe and then spread worldwide from there. I don't think it's a question of if there is a crisis, only when. And while short-term the market typically trades off of technical supply/demand factors (moving averages, overbought/oversold indicators etc.). Should we see some sort of "black swan" (unpredicted, though far from unpredictable) currency event, then whatever "up trend" (if any) is in place, will surely be curtailed. Suffice to say a truncated rally at this juncture would be EXTREMELY bearish to this economy and the markets, as the Fed has now played its last card. This is it, as I said at the beginning, we are ALL IN now, and if the casino (market) calls the Fed's bluff, it will be panic time...
Fortunately, and contrary to Bernanke's wishes, I see this Fed program to buy Treasuries as a good thing for those who prefer to ride out this crisis in "risk free" assets. After all, basically what the Fed is doing is to put a floor underneath Treasury prices which even further reduces risk for those who want to hide out in Treasuries and leave the short-term stock market speculation to the gamblers...Imagine an asset class (Treasury bonds) that won't go down, because the Government is the buyer of last resort and yet has upside potential in the event of an "adverse event" and ensuing safe haven buying. Sounds like a great idea to me...
What of Gold?
Despite today's historic decision to monetize the debt, on top of the $7+ trillion the Government has thrown at this economic fiasco to date, gold still is lower today ($940) than it was in January 2008 (albeit not by much). Suffice to say if gold can't decisively break $1000 and stay above $1000 on this (supposedly hyperinflationary) news, then it has a long way to fall...
Position your assets accordingly...
