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Source link: http://archive.mises.org/9937/obamas-stock-market-mini-bubble/

Obama’s Stock Market Mini-Bubble

May 12, 2009 by

Since the end of February when the S&P 500 closed at 735.09, the index has been pushing strongly ahead, closing on Friday, May 8, at 929.23 — an increase of 26.4%. We suggest that the key driving force behind this strong bounce is a massive increase in liquidity. What is it all about, and how do changes in liquidity drive the stock market? FULL ARTICLE

{ 17 comments }

GGG May 12, 2009 at 8:36 am

Gold should have stayed above $1000 a long time were it not for the Plunge Protection Team working round the clock to the keep the prices down. Can gold cross $1000 again? I hope so, but I would not underestimate what the vile bankers can do either to distort the markets.

http://www.gata.org/node/7401

Kakugo May 12, 2009 at 8:50 am

Funny thing, just yesterday we had the official datas on industrial production for the first quarter and it was far worse than anybody expected. Industry is taking one blow after another and, as Austrians clearly showed a hundred times, everything the government has done so far to “boost production” has failed miserably. How did the stock market reacted? It went up and today is going even stronger! Fuel prices litterally soared yesterday and I begin to fear I’ll win a bet I made in January when I said they’ll be back to last year extremes by July even if crude won’t reach last August prices.
I am also beginning to fear that another prediction I made jokingly will come true, namely that governments will inflate their way out of the “crisis”, preparing the ground for an hyperinflationary depression in 2010 or 2011 at latest.
I am no economist but I’ve seen enough bad economics and politics in my life to smell a very bad situation coming.

GJC May 12, 2009 at 8:54 am

Great article for stock market bears and gold bulls. It’s comforting to see that liquidity increased just as much if not more during the Depression yet it did not stop the market from falling.

Here’s to owning physical gold and SKF!

Jeremiah May 12, 2009 at 8:55 am

Just to piggyback, Kakugo, high/hyper inflation means high interest rates. Americans should position their assets for inflation and their debts for high interest rates. If you have debt, this is the year to find a fixed rate, eh?

Eric Parks May 12, 2009 at 9:09 am

The nature of the beast. If this is a secular bear market, then we can expect counter-trend bull markets to occur from time to time. The S&P can go much higher and still be within a downtrend line.

I’m reminded of the Nikkei index and the multiple times it rallied, only to fall to greater depths.Each time, the calls went out that the bottom was in. This is the process which catches the most flies in the web, I’m afraid.

I’m not rooting one way or the other, mind you. I’m just making a point. It’s amazing the unidirectional opinion that most hold with regards to the markets, and how the politicians try to please those opinions rather than allow the markets to work. Such thinking applies to stocks and house prices only, I guess. Most people like to see prices decline in other areas.

Michael A. Clem May 12, 2009 at 11:07 am

I’m having trouble wrapping my head around this “demand for cash” and “demand for the services of money”. People don’t just ask for money and get it (except for banks asking the Fed). Are you saying that an increased demand for cash leads people to convert assets like savings and investments into cash so they can buy more consumer goods? Is a loan also an increased demand for cash (borrowing money to buy consumer goods)? is money in a savings account not “holding cash”, since it’s in the bank and not in your pocket?

fundamentalist May 12, 2009 at 11:25 am

In the near term it appears that people will stick with government securities and gold, but eventually people will tire of the low returns. There is an enormous amount of cash tied up in US notes and bonds due to previous monetary pumping by the Feds, all earning very low interest. A small portion of it breaking off and going into stocks could send the S&P soaring.

Greg Lilley May 12, 2009 at 11:51 am

Another great article by Frank Shostak, but I didn’t understand how liquidity is being calculated. Did anyone else?

- Greg

Mashuri May 12, 2009 at 1:12 pm

Well the treasury yield is already showing signs of breaking upwards, despite Fed purchasing. The bond vigilantes simply won’t tolerate these low yields with inflation expectations on the rise. I think the Fed would have to become the super-majority buyer of all treasuries, including 30 year bonds, to keep rates where they want them to be — and I wouldn’t put it past Bernanke/Geitner to do just that. Also, if other banks stay above our rate, we can pass some of that inflation off through a dollar carry trade like Japan did for so many years.

Zach Bush May 12, 2009 at 3:30 pm

Jeremiah,

I believe in the proper Austrian sense hyperinflation refers to a flight from the currency, not high inflation. Please feel free to correct me if I am wrong, but this is how it has always been defined when I have read any works by Hayek or Mises.

If this definition is correct then hyperinflation has already begun. The Chinese have recently announced their intention to establish the Yuan as world reserve currency and they are already getting backers.

On a humorous note I think that the model Gisele actually began the hyperinflation a few years ago when she demanded that US modeling firms pay her in Euro and not USD.

greg May 12, 2009 at 3:42 pm

I see no correlation between liquidity and the S & P other than when the market goes into a big downturn, the Fed’s response is to increase liquidity as all of your charts show. It is not an indication of market movements, it is a response.

The current bottom of around 700 on the S & P was more about the media and naked short selling of the market. Primarily focused at the financials.

The media today has a major impact on the short term movements of the market. Just look at the “Swine Flu” pandemic. The media jumped all over this and in just one weekend, had the entire market convinced that this was the big one. Markets fell and shorts piled on while a few drug stocks soared. And in a week it was over!

This is why the 700 mark on the S & P was an artificial low and the actual trading bottom is more in the 840 range. And the market today is more of a trading market as it seems to being staying within a tight range. But at sometime it is going to break out.

On gold, anyone that has read my postings knows that I am not a big gold fan although I do trade the GLD between $80 and $100. Unless some major country goes to the gold standard, I don’t see much chance of gold going north of $1100. The major factor keeping a lid on gold is the chance that some central bank in the world will dump some of their reserves. The other problem with gold is any gain is taxed at a high collectible rate.

Finally, if you are going to invest, you should not take advice from anyone that has a strong position one side or the other. This author has stong ties to gold and other metals. On the other hand, you should not take my advice either. Research and form your own opinion that you can live with.

Anonymous May 12, 2009 at 7:09 pm

The gold market is systematically manipulated by governments and banks, but that doesn’t mean that gold will not eventually go higher. In fact, gold must go much higher. Government intervention can only work temporarily. Market fundamentals will eventually prevail.

Coincidentally, there is a very good article about gold market intervention currently posted on Kitco. James Turk does a great job of explaining how and why governments suppress gold prices. Check it out:

http://www.kitco.com/ind/Turk/turk_may042009.html

B. Ranson May 13, 2009 at 10:59 am

I agree, with reservations, with Greg.

I am not going to guess where the market is headed or where the bottom is.

Mountains of bad debt, propped up with low interest loans, remain. The Fed is expanding the monetary base rapidly in an effort to keep rates down and save borrowers from bankruptcy. At some point, price inflation will become obvious to all, possibly in a rise in the price of gold.

When this occurs, the Fed will be forced to chose between the collapse of the dollar and allowing the terrible accumulation of bad debt to be liquidated. The first option will send the price of gold up. The second could cause it to fall.

Government manipulation is not likely to succeed at keeping the price of gold down in the long term. John Paul Koning’s recent essays on the failure of Bretton Woods are illustrative. Governments and central banks have only a limited amount of gold to sell. However, only the fear of collapse prevents them from printing unlimited amounts of fiat money.

Troy May 14, 2009 at 9:41 am

Greg and B.

I am pretty sure Frank would not disagree that the increased liquidity is a response. BTW…The Fed purportedly does not respond to the market, but instead to the economy and particularly inflation/deflation.

The main point that you missed is that the artificial monetary effect on markets is leading to an increasingly short lived “boom” in the market. I think Frank’s point is that this will be temporary and shorter than historic time periods leading to a “bust”. This bust and the next to come is made worse by the hangover that occurs when “liquidity” is created by the Fed. Yes, sentiment may have had something to do with the current run, but an increased supply of money will move markets and likely has as Frank has argued.

In other words, we have treated our hangover with more alcohol. It is making us feel better right now, but the hangover will eventually come back stronger. As some point we will have to take some pain, likely in the form of a weaker dollar / inflation. It is probably a good idea to prepare for this possibility, gold is one egg in the old hangover remedy that may ease the pain. In the mean time, I need a beer.

Nima May 15, 2009 at 2:29 am

How do you measure liquidity?

Green shoots BS May 15, 2009 at 8:46 am

…on Monday we said:
—–
EURUSD rally back to March levels (1.36) is being attributed to returning risk appetites, beginning of a recovery… others see it rather as a different kind of risk aversion, a flight to goods from currencies tottering from too much QE, monetary inflation… Each scenario has different implications for the duration of the rally.
If the “green shoots” hypothesis is true, we should see stable prices,
recovering industrial production and improving employment figures. If the
“flight to real” theory holds, we should see upside surprises in consumer
prices and further dollar weakness.
——-
*US and EU core prices were up more than expected, us jobless claims were worse…US Industrial production revised is also worse…

Conclusion:
We can definitely forget about “green shoots”, V-shaped recovery…

Jeff Harding May 18, 2009 at 6:00 pm

I also have a question about how Shostak measures liquidity. Can anyone answer this question which has now been posted 3X? Reserve Bank Credit and the M1 Multiplier show that the credit expansion hasn’t really hit the economy yet. If the credit expansion were driving the market, what is the measure of liquidity that he is measuring? I have tremendous respect for Shostak being that he is an economist for a real world outfit. But he never responds to his posts. And now he is giving what is, in essence, investment advice that I would like to follow, but … Can anyone shed any light on this?

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