Not Too Late to Ride The Bubble

Many readers of this free site have written to ask if it’s too late to join the stock market rally. I don’t think so. We’ve come a long way since the end of summer, but there’s a lot going for the market that I expect to carry it for a while.

I track a sturdy list of long-term risks that are real and will one day matter. Our job is to know the time frame in which they’ll matter, and it’s not now. From today’s Kelly Letter, consider the following thoughts if you’re deciding whether to risk capital in the stock market.

Know that we’re participating in another unsustainable bubble, all but acknowledged by Fed Chief Bernanke on 60 Minutes a week ago. The first two years of stimulus created an economy that’s been anemically expanding for 17 months, but producing an employment-to-population ratio that stands at a cyclical low and worse than the cyclical low of the expansion that preceded it. We’ve never seen that before.

The unemployment rate has fluctuated above 9 percent for 19 months. That the labor market is awful is not news, and is the reason we’re already seeing more stimulative measures so soon after the prior ones. With 15 million Americans unemployed and another 11 million underemployed, no wonder average hourly earnings are on the decline and food stamps are on the rise. An all-time high of 43 million citizens now depend on the government for food.

What’s more, recent stimulative measures pack more psychological benefit than real benefit. Federal Reserve actions, including QE2, have boosted bank reserves by about $1T in the past two years. Almost all of that sits as excess reserves at Fed banks earning 0.1 percent interest. The Fed lent money to the banks and the banks deposited the funds back with the Fed. Some stimulus.

The excess reserves can’t help the economy unless they become loans and deposits. Loans are issued with formulas based on bank capital, which keeps falling due to loan write-offs resulting from the still-rising rates of delinquency and default stemming from the catatonic labor market. The latter also damages the credit worthiness of potential borrowers who see their debt ratios stuck at or near all-time highs. That’s now in further jeopardy as the rate on a 30-year home mortgage is approaching 5 percent, putting more downward pressure on home prices, the main source of household wealth in America.

While the economic stimulus from Fed operations is so far nonexistent, some unfortunate side effects are already taking shape. For example, commodity loans are cheap and driving the speculative frenzy we’re seeing in that market. Food and fuel shortages and price spikes are already making headlines, and you’ve probably noticed bigger numbers recently at the gas pump.

All of that shows why Bernanke considers the economy to remain non-self-sustaining, despite the monetary stimulus that’s come its way. The latest round of stimulus, at least what’s being billed as stimulus, is the tax package working its way through Congress. However, it also looks to pack a minimal punch.

For starters, how stimulative can it be to keep things the same? That’s the basic question. While we may have avoided another round of lost jobs and prevented a quick second dip into recession, we didn’t gain much. As it’s been for a while, the new getting better is just not getting worse. There’s something to be said for that, no doubt, but not a lot. That’s why I think the tax package will have a minimal impact — and only for two years. The economic boost of the tax package will probably be looked back upon with as much reverence as the rebate stimuli unsuccessfully tried by presidents Ford, Bush, and Obama.

Meanwhile, nothing has been truly fixed. Is it ever? Sovereign issues linger both at home and abroad. State legislatures will find when they reconvene next month that they still face aggregated deficits of some $280B, with emergency funds already spent. The 11,000 jobs lost at the state and local levels last month were not the end of the “shared pain” we’ve heard so much about. Questions about what to cut and whose taxes to raise have not gone away. They’ve been postponed.

In other words, the day of reckoning continues to get pushed out. How long that can go on is anybody’s guess. I, like many others, have thought it imminent at several points in the past two decades. A debt-based society doesn’t give up the ghost easily, however, especially when some proceeds from the debt peddlers find their way into political pockets. With the level of financial ignorance remaining elevated among the citizenry, this financial game can last a long time.

Now, there is a chance that the latest postponement will be long enough so that the organic economy, which is to say the real non-goosed one that exists when you use money you earned to buy a real good or service from somebody else, picks up steam. In that case, a new bull market could take hold. We don’t have evidence of that yet, however. The evidence we have still says bubble, but bubbles are profitable, too, as long as we get off before they pop.

This entry was posted in Stock Market Forecasts. Bookmark the permalink. Both comments and trackbacks are currently closed.


  1. Posted January 1, 2011 at 8:13 am | Permalink

    If you have extra money on your account, I would really suggest that you put it in the stock market. Not just because of its monetary interest but your economical awareness and interest increase.

  2. Gregory Iwan
    Posted December 18, 2010 at 12:03 pm | Permalink

    The banks (God love ’em) are convinced they have to show real INCOME, or they are sure they will have a terrible time attracting further capital. Without further capital, guess what? They won’t (they say, don’t dare) lend. There is a mountain of hidden capital out there, but without a decent rate of return, it doesn’t move. And moving money is all that makes any economy go. The lower the velocity of money, the lower helicopter Ben feels the price of money must be. I begin to wonder if the opposite might not be partially true.

  • The Kelly Letter logo

    Included with Your Subscription:

Bestselling Financial Author