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FreeMarkets (96.02)

Bernanke Creating the Hoover Damn - DOW 100,000?

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December 18, 2009 – Comments (5)

The next three months are going to be absolutely fascinating on the stock market.  The dollar's advance may continue as the velocity of money continues to grind to a halt.  Banks aren't lending because they are either storing the money in their vaults to get their reserve ratios up to regulation OR their buying treasury's to make an easy 3.5% on the taxpayers backs.

Bernanke doesn't have too many options yet, and the dollar is strengthening because less are in circulation. So he'll keep interest rates at zero and possibly rec'd Congress add another stimulus plan in early 2010. 

Picture a damn full of money, with the taxpayers below.  Not enough is flowing out, so to increase money to us, Bernanks lowers the interest rates.  But instead of more money flowing out, he's only getting a trickle more  - not enough to get the velocity of money moving at the rate he thinks is appropriate.  With interest rates at zero, he knows the only way he can get money out of the damn is to print so much it just flows over the top. His goal is to stop printing and reduce the amount of money once the economy starts moving again, but he has two HUGE problems.  One, inflation may get out of control before jobs are created.  Or two, the damn can burst as banks realize the party is over on treasury's and begin buying more stocks.  This will then drive up prices of the market, but not based on fundamentals.  Then the traders will pocket the profits and only a select few Americans/foreigners will make lots of money.  This could pretty much create the biggest bubble we've ever seen.

IMO, don't even think about shorting this market.  It might not be worth 1 oz of gold in ten years, but an oz of gold might be worth $100,000.  DOW 100,000, here we come.

5 Comments – Post Your Own

#1) On December 18, 2009 at 6:23 AM, TMFBabo (100.00) wrote:

Dam, not damn.

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#2) On December 18, 2009 at 9:50 AM, FreeMarkets (96.02) wrote:

I meant it as a metaphor.  Like "Oh damn, we're screwed!"

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#3) On December 18, 2009 at 10:04 AM, FreeMortal (29.41) wrote:

Lol, great headline.  It got my attention.  They should pay you for this.

Excellent analysis.  With hundreds of billions of TARP money being paid back, the money exits the system along with multiplier-based financial structure that goes with it.  So we have trillions of M2/M3 exiting the system at this point.  Does anyone know how much money this really is and how it affects the M2/M3 money supply?  What are the new reserve requirements and how do they affect the money supply?

Your second point on inflation is just as important.  The TARP money that remains in the banks is not being lent and multiplying as intended, creating the potential for quite a bit of inflation down the road if the money starts flowing somehwere close to normal.

I had thought that the banks were using QE to make money via the carry trade. With the implicit government guarantee minimizing any downside, why would the banks buy treasuries rather than stocks? At what point will the banks realize that the treasury party is over?

If the damn breaks, will that mean a bout of currency inflation, followed by a deflationary crash?  How long would it take to play itself out?  How would this affect gold?

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#4) On December 18, 2009 at 11:10 AM, PeteysTired (< 20) wrote:

As Lyod Chrismas said in Dumb and Dumber

"We got not food, we got no jobs and our pet's heads are falling off!"

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#5) On December 18, 2009 at 11:11 AM, TMFBabo (100.00) wrote:

I wondered that after I posted of course.

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