Good News is not Always Good

Once again the cheerleaders on Wall Street were out in full force pointing out all the advances in price today. The thought suddenly struck me that most people view all this chatter as positive and that prices going up is "always" a good thing. One would think that in all cases a bull market is the best cure for all evils and that a bear market hurts all and sundry. This in not always the case.

Today the best rally came from grain commodities. As a group they were up over 3%. Let's think about this for a minute. Up 3% means that prices at the grocery store will continue to rise as the feedstocks seep into the prices of everything from our cereal to the price we pay for beef and poultry. At a time when the consumer is already strapped this will hurt economic growth.

Now let's turn to the price of houses. Certainly in general an upward move in the price of housing is good for an economy. What of our current economic environment. Falling house prices mean that the inventory of houses will clear quicker as more and more people are able to afford what they previously could not. Eventually the low prices will clear out the overhead allowing prices to appreciate once again and benefiting the economy. As long as prices are propped up artificially this cannot happen and this can mean long periods of slow or no growth.

The rally in stocks can suck in the innocent looking for a quick reward. Earning next to nothing in their savings accounts the Federal Reserve is begging people to risk their hard earned savings on risky investments one of which is a punt on the stock market. As prices spiral higher it gets harder and harder for the public to sit on the sidelines. As time has proven over and over again, just as soon as the public jumps in the wind leaves the sails of the market. It appears that this is another setup waiting for the public to take the bait.

I would prefer to see a market that is based on rational investment at a reasonable price than the current market that is filled with speculation. This to me means that a bear market is a benefit rather than a curse. Obviously I am aware that this would mean that the public will be stung for another loss; but until the economy is on a solid footing it would be preferrable for the public to continue with their austerity measures as this will help in righting the economy far more quickly than investing in another speculative market.

My view (which is based on where we are in the current economic cycle) is that prices should be let to fall to a point where we can clear the dead wood out of the barn and make way for the new season. As long as we tinker with the normal functions of a free market we will continue to drag this economic turmoil out for an extended period. Therefore I for one do not applaud the current market rally but see it as another vain attempt to prop up a weak market that is in desperate need of being washed clean. One thing I do know is that the old axiom of the commodity market: "High prices end high prices." I have no doubt that at some point the high prices in stocks, commodities and real estate will undermine the "recovery" and we will once again find ourselves in another bear market.