A Bifurcated Market

The Federal Reserve believes that the printing of money will result in a return to a "normal" economy.  Their view is that printing money will stimulate the economy.  Using Bernanke's own words; "Lower mortgage rates will make housing more affordable and allow more homeowners to refinance.  Lower corporate bond rates will encourage investment.  And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.  Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."  Out of this jobs are created and all is back to "normal".

Well let's delve into this for a moment.  Lower mortgage rates have not happened.  In fact the mortgage rates are following the 10-year treasuries higher.  The 10-year treasury has recently broke down and the yield has increased and this has fed into mortgage rates that have increased from 4.2% in October to 5.0%.  This rate increase has quelled any form of a recovery in housing and some people are even calling for a second leg down in housing.  As housing normally leads the economic recovery this is a bad omen and certainly is not what Bernanke expected to happen or what he is saying is happening.

Job creation has not happened.  While the unemployment rate has recently fallen to 9.0% from just under 10.0% it is more a factor of people falling off the government unemployment list rather than people actually finding jobs.  If you include discouraged and part-time workers then the rate jumps to 16.1%.  Certainly not a number that shows success.

So where is all the "success" that Bernanke and company are telegraphing?  It all boils down to one leg of the stool and that is the stock market.  The stock market is on a one way tear and is showing no signs of turning back.  So long as the Federal Reserve continues to print money that new money has to go somewhere and right now it is being piled into the stock market.

So who benefits from this stock appreciation?  The main beneficiaries are the wealthy and the investment bankers.  Most of America does not own a stock.  Housing is their main asset.  As housing prices are down they are feeling the pain.  Furthermore I am not sure why an executive has to hire people because his stock price has gone up but according to Bernanke this is what will happen.  Certainly among a small sector of the economy there is a massive benefit to the money printing.  Those involved in the stock market and investment banking are making a lot of money.  However if you refer to the Austrian economist Mises you will see that inflation always benefits a few lucky individuals at the expense of the bulk of the population.

Right now food and gas prices are spiralling higher squeezing the average Joe.  Out of work and with no sign of a recovery in housing the cost of this money printing is higher prices and a loss of value in the one asset that would get him to retirement.  Meanwhile the investment bankers are paying out massive bonuses and buying bigger houses.  Sales at Tiffany's and Nordstrom's are growing while Walmart sales slow.  This bifurcation of the market cannot continue forever but it looks like it will continue as long as Bernanke prints money and he has stated that there is much work to still be done and by that I am sure he is referring to tree cutting and money printing. 

There are other repercussions that seem to escape our fearless leaders.  High food prices are causing social unrest in Tunisia, Algeria, Jordan, Yemen and now Egypt.  Countries trying to fight inflation are raising interest rates.  Recently Brazil, India, South Korea, Thailand, Malaysia, Poland, Peru and more have all raised interest rates.  So this bifurcation is not just limited to the United States but, just like the housing boom, the United States is exporting these problems to the rest of the world.

How will this all end?  Well as a follower of this blog you will know that I believe it will all end badly.  Once the printing stops, and it will, the stock market bubble will collapse and will create another wave of unemployment and another drop in the price of housing and this time there will be no money printing available to the Federal Reserve to "save" us.  The pain will be enormous but hopefully this time around the market will be left to clean the slate so that we can rebuild on a solid foundation.