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The Real Reason Why The Stock Market Is Soaring?

January 28th, 2013

stock price surgeMichael Snyder: You can thank the reckless money printing that the Federal Reserve has been doing for the incredible bull market that we have seen in recent months.  When the Federal Reserve does more “quantitative easing”, it is the financial markets that benefit the most.  The Dow and the S&P 500 have both hit levels not seen since 2007 this month, and many analysts are projecting that 2013 will be a banner year for stocks.  But is a rising stock market really a sign that the overall economy is rapidly improving as many are suggesting?  Of course not.  Just because the Federal Reserve has inflated another false stock market bubble with a bunch of funny money does not mean that the U.S. economy is in great shape.  In fact, the truth is that things just keep getting worse for average Americans.  The percentage of working age Americans with a job has fallen from 60.6% to 58.6% while Barack Obama has been president, 40 percent of all American workers are making $20,000 a year or less, median household income has declined for four years in a row, and poverty in the United States is absolutely exploding.  So quantitative easing has definitely not made things better for the middle class.  But all of the money printing that the Fed has been doing has worked out wonderfully for Wall Street.  Profits are soaring at Goldman Sachs and luxury estates in the Hamptons are selling briskly.  Unfortunately, this is how things work in America these days.  Our “leaders” seem far more concerned with the welfare of Wall Street than they do about the welfare of the American people.  When things get rocky, their first priority always seems to be to do whatever it takes to pump up the financial markets.

When QE3 was announced, it was heralded as the grand solution to all of our economic problems.  But the truth is that those running things knew exactly what it would do.  Quantitative easing always pumps up the financial markets, and that overwhelmingly benefits those that are wealthy.  In fact, a while back a CNBC article discussed a very interesting study from the Bank of England which showed a clear correlation between quantitative easing and rising stock prices…

It said that the Bank of England’s policies of quantitative easing – similar to the Fed’s – had benefited mainly the wealthy.


Specifically, it said that its QE program had boosted the value of stocks and bonds by 26 percent, or about $970 billion. It said that about 40 percent of those gains went to the richest 5 percent of British households.

Many said the BOE’s easing added to social anger and unrest. Dhaval Joshi, of BCA Research wrote that  “QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it.”

So should we be surprised that stocks are now the highest that they have been in more than 5 years?

Of course not.

And who benefits from this?

The wealthy do.  In fact, 82 percent of all individually held stocks are owned by the wealthiest 5 percent of all Americans.

Unfortunately, all of this reckless money printing has a very negative impact on all the rest of us.  When the Fed floods the financial system with money, that causes inflation.  That means that the cost of living has gone up even though your paycheck may not have.

If you go to the supermarket frequently, you know exactly what I am talking about.  The new “sale prices” are what the old “regular prices” used to be.  They keep shrinking many of the package sizes in order to try to hide the inflation, but I don’t think many people are fooled.  Our food dollars are not stretching nearly as far as they used to, and we can blame the Federal Reserve for that.

For much more on rising prices in America, please see this article: “Somebody Should Start The ‘Stuff Costs Too Much’ Party“.

Sadly, this is what the Federal Reserve does.  The system was designed to create inflation.  Before the Federal Reserve came into existence, the United States never had an ongoing problem with inflation.  But since the Fed was created, the United States has endured constant inflation.  In fact, we have come to accept it as “normal”.  Just check out the amazing chart in the video posted below

The chart in that video kind of reminds me of a chart that I shared in a previous article

Hyperinflation Weimar Republic

Not that I expect the United States to enter a period of hyperinflation in the near future.

Actually, despite all of the reckless money printing that the Fed has been doing, I expect that at some point we are going to see another wave of panic hit the financial markets like we saw back in 2008.  The false stock market bubble will burst, major banks will fail and the financial system will implode.  It could unfold something like this…

1 – A derivatives panic hits the “too big to fail” banks.

2 – Financial markets all over the globe crash.

3 – The credit markets freeze up.

4 – Economic activity in the United States starts to grind to a halt.

5 – Unemployment rises above 20 percent and mortgage defaults soar to unprecedented levels.

6 – Tax revenues fall dramatically and austerity measures are implemented by the federal government, state governments and local governments.

7 – The rest of the globe rapidly loses confidence in the U.S. financial system and begins to dump U.S. debt and U.S. dollars.

I write about derivatives a lot, because they are one of the greatest threats that the global financial system is facing.  In fact, right now a derivatives scandal is threatening to take down the oldest bank in the world

Banca Monte dei Paschi di Siena, the world’s oldest bank, was making loans when Michelangelo and Leonardo da Vinci were young men and before Columbus sailed to the New World. The bank survived the Italian War, which saw Siena’s surrender to Spain in 1555, the Napoleonic campaign, the Second World War and assorted bouts of plague and poverty.

But MPS may not survive the twin threats of a gruesomely expensive takeover gone bad and a derivatives scandal that may result in legal action against the bank’s former executives. After five centuries of independence, MPS may have to be nationalized as its losses soar and its value sinks.

So when you hear the word “derivatives” in the news, pay close attention.  The bankers have turned our financial system into a giant casino, and at some point the entire house of cards is going to come crashing down.

In response to the coming financial crisis, I believe that our “leaders” will eventually resort to money printing unlike anything we have ever seen before in a desperate attempt to resuscitate the system.  When that happens, I believe that we will see the kind of rampant inflation that so many people have been warning about.

So what do you think about all of this?

Do you believe that Federal Reserve money printing is the real reason why the stock market is soaring?

Please feel free to post a comment with your thoughts below…

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Michael-SnyderWritten By Michael Snyder

Michael has an undergraduate degree in Commerce from the University of Virginia and a law degree from the University of Florida law school.   He also has an LLM from the University of Florida law school. Michael has worked for some of the largest law firms in Washington D.C., but now is mostly focused on trying to make a difference in the world.


NYSE:AGQ, NYSE:FAZ, NYSE:GLD, NYSE:SLV, NYSE:TBT, NYSE:TZA


 

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  1. Jim
    February 4th, 2013 at 14:47 | #1

    I think you have summed up the situation quite well. This recovery from 2008 has lasted longer than many of us (of similar mind) have thought it would. The naysayers like Pirate will be in for a rude surprise within the next 12 months. The party is just about over. 2008 was last call at the hurricane party.

    Wild money binges always lead to depressions. Prior to the Fed, we went thru them in a few years and burned them out. Now with the Fed, we must suffer thru at least 20 years of trouble because they prolong the agony with artificial “stimulus” that artificially screws with the natural corrections. No economist of international standing predicted the 2008 crisis. Many cycle pros did, howver.

    Bottom line…..high powered economists from schools such as Yale, Haaarvard, Columbia… don’t know sh…..

  2. Chris
    January 29th, 2013 at 21:44 | #2

    Mr. Snyder, I apologize for the trolls. Your logic is spot-on, and I applaud your effort to educate Americans. Try as they might, by pointing out previous predictions that may not yet have come to pass, they cannot refute your underlying premise that inflation of the monetary base disproportionately benefits the upper class, harms the middle and lower classes via increased prices, and at current debt levels, will eventually result in the crash of all crashes.

    “Michael T. Snyder is a fundamentalist Christian crank” is a juvenile ad hominem attack, which doesn’t deserve a response, let alone page space under a fine article. Ending a post with “lol” further exemplifies a lack of intelligence. Again, my apologies.

    Oh, Dallas! Where to begin educating you. Let’s start with your first sentence, shall we? The assertion “In every economy there are cycles,” while ridiculous, can be forgiven, so take heart. It’s unlikely that you are as old, or older than the Federal Reserve, which was formed in 1913, so you like most everyone, have no frame of reference for what a stable currency, backed by gold, means to an economy.

    The “cycles” to which you uneloquently refer, are the direct result of money-supply manipulation, and the ensuing price inflation and economic bubbles (think housing circa 2000-2006) that form as that funny-money chases stocks, houses, a limited supply of goods, and is otherwise malinvested in “Bridges to Nowhere” and the like. All courtesy of that dollar-destroying institution, the Federal Reserve. Let the reader never forget that it is because of rampant paper-money printing that the government is able to prop up the welfare state and finance all the wars of aggression. You want to bring the troops home? End The Fed. You want to help the young family put food on the table and pay less for health insurance? End The Fed!!!

    Next up, “How do you expect economies to grow without expanding money supply?” The question is bogus on its face, nevertheless I apologize profusely if somebody has actually put this insane idea into your head, and you aren’t just trying to confuse our dear readers with “drivel and sensationalism.” What you mean to ask is “How can living standards rise with a stable, non-expanding money supply?” See, the question should always be asked in terms of increased living standards, which is all anyone (other than the Federal Reserve) really wants. Who gives a rat’s posterior if GDP is rising and the parrots chatter “the economy is growing, the economy is growing,” when you don’t have a job and a gallon of gas costs $5, $10, or $20? This is the lie the establishment uses to trick average Americans into thinking that things are on the rebound, when the truth is 180 degrees opposite.

    Economies grow because of savings and investment, which lead to increased production. Savings (and surely NOT debt!) allow for consumption of the increased production. It is a logical fallacy, bordering on intentional deceit, to assert that an economy grows because of an increase in the money supply. Of course you can point to rising money supply and a rising GDP and say, “AHA! Look! Rising GDP! The economy is growing!” but you would also have to point to the outright lie that is the Consumer Price Index, and assert that prices are not also rising — i.e. the dollar’s purchasing power is decreasing. You couldn’t possibly do that with a straight face, because everyone knows that prices are currently rising, and fast. In this expanding-money-supply scenario we now find ourselves, the net result is increased wealth for the few that are closest to the money printing — the parasitic class (banksters, public employees and their unions,) and DECREASED living standards (via higher prices) for everyone else. No bueno!

    A stable gold-backed money supply equates to dollars that maintain value, and even appreciate in purchasing power. This wonderful scenario encourages people to hold onto their gold-backed dollars via savings, then make wise investments, which finally result in production of things that people actually want, like iPads, and not Bridges to Nowhere (see malinvestment, above.)

    I invite you, Dallas, and you, gentle reader, to peruse the writings of the great Murray Rothbard, available FOR FREE at mises.org. In particular, the book “What Has Government Done to Our Money?” is likely to permenently change your life for the better.

  3. Pirate
    January 29th, 2013 at 11:40 | #3

    Michael T. Snyder is a fundamentalist Christian crank who has started numerous blogs as a testament to his raging insane belief that the world is about to end. He started with The Economic Collapse Blog in 2007, with constant articles stating how the world is going to hell every single day since the meltdown started in 2007. It seems as though Snyder blames the government for every ill in the world, because without it everything would be great.
    Like most doom-sayers, it doesn’t seem to faze Snyder one bit that every one of his past predictions of economic collapse were dead wrong. He simply refuses to even address or acknowledge that he has been wrong thousands of times, especially if you count each numbered item of his massive lists. He seems to have explosive diarrhea of the mind that no amount of logic can slow or stop. lol

  4. Dallas Johnston
    January 29th, 2013 at 06:16 | #4

    In every economy there are cycles. Your comparison of the US to post-war Germany is intellectually insincere: Germany was subject to greater than $800 billion (inflation adjusted) in reparations during a time when they had a literally decimated economy–many historians believe this is what gave rise to Nazi Germany. Contrary to your opinion, the US has not experienced runaway real-term inflation since implementing QE.

    US corporations were at historically low valuations (are still relatively low), are experiencing decent earnings growth and are considered a somewhat safer bet in the global economy, as equities go. The reason for the rise in the S&P is clearly due to people having grown tired of negative yields in fixed income asset classes, to finally release sidelined funds for investment in a market opportunity they do not wish to see slip by. This has come about as everyone concluded the world is not coming to an end.

    It appears you have an infatuation with the notion that derivatives markets will implode, bringing down the entire banking system, as it did with MBS/CDOs, etc.; however, you fail to recognize that the fed has been taking these very assets off the banks’ balance sheets and quietly tucking them away within their un-audited books, which is what QE is really about. Is this correct? Will it backfire? It is yet to be known, but conjecture from non-economists such as yourself is worthless. What we do know is banks are healthier and the economy is picking up, bolstered by long overdue growth out of Asia as they liberalize trade/monetary policies, etc.

    Additionally, your recipe for collapse is flawed even in chronology. A simple look back to only a few years ago would inform this notion.

    Not all derivatives are equal–and most all of them have been designed for hedging purposes. In fact, stock options are a form of derivative: do you think options wield the power to crash markets? Derivatives regulation has come a long way since Lehman. Does this mean there are no ticking time-bombs? Absolutely not. Again, these things happen in cycles, and have done so since the first markets in Holland.

    Additionally, the Bloomberg video you linked to with the hockey-stick growth trajectory of the CPI conveniently skirts consideration of the fact that more money in the system will produce higher costs. How do you expect economies to grow without expanding money supply?

    Is the system rigged for the rich to get richer? I would most definitely say so. That being said, there are ways you can benefit from this knowledge. If you really believe the world is coming to financial ruin, then I challenge you to put your money where your mouth is, short the S&P, buy GLD shares, and keep the blogosphere updated as to the performance of that portfolio. Otherwise, your inputs equate to drivel and sensationalism solely for the purpose of ad revenue. Too bad the vast majority of your readership learned investment strategy from “Mad Money,” otherwise even that revenue would be negligible.

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