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December 23, 2009 – Comments (6)

The stock market is absolutely fascinating right now.

Three amazing facts:

1) Dollar strengthens and gold deflates as inflation fears grow.

2) Consumer wages rise 0.4% in November, about equal to inflation.

3) Spending rose 0.5% in November - obviously pushing consumers into MORE debt.

These three facts should have decimated the 50% move the stock market saw since March, but it continues to move higher.

Unequivocally, the easy money from the FED is making this happen.  How long can it last?  I'd say anywhere from another six months to two years.

Give Keynes credit for writing "The market can stay irrational longer than you can stay solvent."

6 Comments – Post Your Own

#1) On December 23, 2009 at 9:46 AM, russiangambit (29.27) wrote:

It is not precisely irrational. What we are experiencing is inflation in the financial assets. Printed money went into the financial assets.

Average consumer doesn't have access to that money. So, on the consumer level we have deflation while in financial assets we have inflation.

That is why average people are mad. They don't understand how it happened but they can see the difference. Very rich already recovered from the crisis because they have access to the financial markets, while middle class is only more squeezed.

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#2) On December 23, 2009 at 9:57 AM, neskolf (29.70) wrote:

I'd also take those wage and spending numbers with a grain of salt.  A couple of weeks a go we see an 'adjustment' to unemployment figures (oops, they weren't quite as good as we thought), and yesterday we see a 'revision' of the GDP (oh, it was just a tad lower).  I'd be willing to wager that, about a month from now, the wage and spending figures get adjusted downward.

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#3) On December 23, 2009 at 10:29 AM, outoffocus (22.85) wrote:

1) Dollar strengthens and gold deflates as inflation fears grow

Am I the only one who picked up on the paradox of this statement?

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#4) On December 23, 2009 at 10:29 AM, Harold71 (22.92) wrote:

The market can stay irrational longer than you can stay solvent

 

Same exact thought came to my mind yesterday.  It's amusing how markets cannot see what is coming down the track in the long run.  And that is exactly what causes a crash -- a sudden realization of reality.  

Anyone that still believes in efficient markets....well, they're probably the same people that own 30 year gov't bonds.  

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#5) On December 23, 2009 at 10:38 AM, leohaas (32.74) wrote:

1) You are reading way too much into these numbers. Numbers for a single month should always be taken with a grain of salt. Focus on quarterly numbers, or better yet annual numbers.

2) According to the numbers, wages went up about the same percentage as spending, so there is no disconnect here. No increased debt, either. Debt is probably decreasing because of all the foreclosures and bankruptcies!

3) Your 'as' statement could be stolen from the mainstream media: it suggests a correlation between the part before the 'as' and the part after the 'as' where there might not be one. My take: dollar strengthening and gold deflation are temporary, inflation fear will continue to grow.

You are right on one statement (the one about easy money). This, combined with the stimulus and bailouts has prevented a new Great Depression. These measures are responsible for the recovery we are in right now. And indeed, it will not last. That is by design: the measures are all intended to be temporary.

The big fear for the economy must not be about the how long this can last, but more about the ability to turn off the money spigot fast enough. Once the economy improves a little bit more, the foreclosures and bankruptcies abate, and banks increase their lending again, we will face significant inflation. That is because most of the money in our fractional reserve banking economy is created by commercial banks.

russian: you are wrong when you say that the rich have recovered. Just look at the numbers: the stock market is still way down since the top, and so are housing and most other asset classes. Gold is one of the few the exceptions...

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#6) On December 23, 2009 at 10:38 AM, russiangambit (29.27) wrote:

> Anyone that still believes in efficient markets....well, they're probably the same people that own 30 year gov't bonds.  

Duh, it is still in all finance books. Of course, that theory goes with a list of about 2 pages of prerequisites/ assumptions, which pretty much guarnatees that it can never work in reality. You know, like the things you can only observe in the vacuum or zero gravity.

Of course, the people you see on TV never mention that. 

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