Tuesday, January 18, 2011

Investing In The Stock Market—Any AMERICAN Stock Market—Is A Sucker’s Bet

Here at The Hourly G, we find the stock market tedious and depressing because of a single, simple truism: American equities are unhinged from reality, due to the Federal Reserve’s machinations.

“These are the voyages
of the starship . . . Manipulate.”
The Fed is supposed to have the twin goals of stable prices and maximum employment—but ever since the Global Financial Crisis of 2008, Benny & The Fed Fools have apparently ditched the second mantra, and replaced “maximum employment” with “maximum equities prices”, in the perverse belief that high equities prices are a sign of “economic health”.

So since equities are being gamed, why bother commenting on them?

Yves Smith at naked capitalism came out today with a nice sum-up of exactly this feeling we here at THG have:
We seem to be in a toxic replay of what I called the Tinkerbell market in 2007 and 2008: if the officialdom can get enough people to applaud, the economy will live. They weren’t too successful back then, but the crisis has appeared to have upped the game of the Powers That Be in talking up the price of financial instruments. And having the Fed at ready to provide boatloads of liquidity should anything go awry appears to have put much of the world in “don’t fight the Fed” mode.
Market action is looking a tad manic, yet the dot-com mania proved that unwarranted optimism can persist far longer than cooler heads deem possible. Hedge fund leverage, for instance, is allegedly back to pre-crisis highs. And various market commentators are pointing to worrisome echoes of dot-com type preferences, where stocks amenable to fantasy, or what Bill Fleckenstein calls “imagination” are preferable to ones with clearly better prospects. 
This is the upshot of what she wrote; interested parties can find the rest here.

The Tinkerbell Market sums it up nicely: Clap as hard as you can, and it’ll live. 

Still, that means that the equities markets are really already dead.


  1. GL - are you trying to set a new record for most tweets and blog postings on a daily basis? quality, not quantity.

  2. Contrary to anonymous @9:40 AM I think your amount of content and quality is just about right. Spacing would be my only suggestion. 4 straight hours followed by 12 or more hours of nothing makes for a disjointed experience. I'd suggest timing releases every 2 hours starting around 8 AM EST to keep people coming back all day. Just my 2bits.

  3. you nailed it there GL. As an individual investor, I know its a rigged market and adjust. But it still makes me mad it is this way. Banks are also handling your pension funds with your future to benefit themselves. We need a hero, all we have is Obama.

  4. These articles don't explain in layman's terms how the US stock markets are artificially inflated. How exactly does 'the fed providing excess liquidity to the markets through QE1/QE2' cause price distortion? So how is the fed's money printing bringing out overinflated stock prices?

    Would you care to elaborate porfavor ?
    - HC
    Brooklyn, NY

  5. Anon, I think it works like this. If interest rates are at zero, the only way for investors to chase yield is in equities and commodities, and mutual fund managers are desperate for yield.

    Further, if the fed is lending the big banks huge coin at zero percent, they know the money has to go somewhere, there's only two potential places. What, lend to small businesses. Are you batshit insane too?

    After what we've witnessed over the last few years, I wouldn't be surprised if even further, the fed has a verbal understanding with the big banks that X percent of the money they lend them has to go into the us stock market.

  6. Here is a link to a chart that shows the rise in the S&P 500 as related to the Fed's monetization efforts. Clearly there is a relationship.



  7. Dear batshit, besides trigger happy fund managers & TBTF institutions recycling TARP/QE/& Stimulus money into the stock market, is there anything deeper that can be explained about stock price manipulations?

    JMA - I was linked to that chart today from ED Steer Gold Report & it does look frightening.

    and how about gold mining stocks? They seem to be performing quite impressively, are they also considered overpriced for the same reasons?

    Brooklyn, NY

  8. Anon,

    Sorry, that's about the limit of my understanding of the matter, and my knowledge of gold mining stocks is nil.

  9. does there need to be any more explanation for rising stock prices than artificially low interest rates. It has always been that way. Chasing yield, or margin buying, etc.
    American stock index volume is declining, main street is getting out of bonds, many individual stocks are going up on low volume or sideways on increased volume or good news/breakouts are met with selling. these are all signs that the "smart money" is selling. The indexes can go up, but that don't mean the stock market is strong. A bear market starts long before the indexes start to decline....



Knock yourself out!

The cult of stability is a culture of death.