New bull market Part II

Following on from this blogger’s previous post, a similar position has been put forward by a fellow blogger/moderator, SuitablyIronicMoniker, but from a US market perspective and the interaction of the ongoing QE2 program enacted by the Federal Reserve.

Things are good at the moment. Unemployment is low, commodity prices are high, the stock market is rising…

But all is not quite what it seems.

The US stock market is doing well. Very well. Remarkably well. So well, that there is almost no variability as it relentlessly climbs in a near straight line;

The normal pattern for a bourse, at least for the last four centuries, is a jagged line. Ups and downs, dips and troughs are the norm, not the exception. There is an analogy in human physiology. The normal heart beat is varied and irregular. As the heart gets sicker, in heart failure, the variability is lost. This greatly increases the chances of sudden death occurring.

The stock market is experiencing the same thing. The problem is that the normal conditions have been replaced by a set of highly abnormal ones.

The New York Fed is the cause of this chain of events. Through their “third mandate” – keeping stock values high, they have been pumping billions into the system every single day;

Some of this money goes to increasing the prices of commodities, some to keeping stocks green. Some to the FX markets. But none of it is healthy or sustainable.

The Australian stock market is nothing more than a sub-branch of the Dow Jones. For all of the daily rhubarb about stocks going up or down for various reasons, our market essentially mirrors the US;

The underlying situation in the USA is dire, there is no other way of putting it. Unemployment is at historically high levels. Municipal, State and Federal debt is so high that simple payments are no longer able to be made in many jurisdictions. There are over 44 million americans on food stamps.

The crash of 2008 was partially averted, but the underlying problems remain, and are now bigger than ever.

Hold on to your hat in 2011…

People like to put reasons behind what is usually noise (e.g the nightly news summary of what happened on the ASX that day), and this desire extends to both house prices and the stock market.

The conventional thinking is a fundamentally sound economy, high commodity prices reflecting underlying and strong demand for growth and increased planned investment (at higher IRR) by private business are the drivers of equity market valuations.

But again, I point to credit flows driving speculation, this time coming from government owned printing presses, not the banksters.

In the US case, its the $US660 billion Federal Reserve QE program. In the Australian case, its the $US586 billion or 4 trillion Yuan Chinese stimulus program and the well-directed if somewhat mis-managed Australian Federal Government Economic Stimulus Plan (sorry for the capitals).

Other’s have talked about their effect, and what may or may not occur at the cessation of the various plans, but I contend that if Australia has to rely upon Chinese stimulus to boost its mining companies, whilst the industrials stagnate with minimal earnings growth, we may be in for a repeat of the nearly 10 year long secular bear market that the US experienced in the last decade and the Japanese in the previous 20 years.

In other words, a trader’s market.