Thursday, April 3, 2014

The Welfare Recipient Mentality Of The Stock Market

     Those who have been labeling the stock market as a casino, especially in recent years, have never been more correct. Traders and investors alike place bets on the roulette wheel that is the Federal Reserve, and all other data is made null and void. The economy produces bad news and good news, and both are treated with the same indifference by those in the market, who only respond to what flows forth from the mouths of fools at the Fed, like Pavlov's dogs. This dependence by the market on the Federal Reserve has eliminated the need or desire for any stimuli other than words of encouragement from the Fed, and declines in the market are now based solely on an absence of those words.
     The exclusion of real economic data from the movement of stocks has caused a credibility void in the market in the minds of the general public. There are two things that have driven the market to new highs recently, even though the economy is obviously slowing from even the pathetic pace it has demonstrated over the last five years. Both drivers of the market are related to actions by the Federal Reserve. The first is their bond-buying, called quantitative easing, which essentially has pumped three trillion dollars into the market over the last four years. The second driver of the market is the historically low interest rates implemented by the Fed, which has allowed companies to borrow money at very low interest rates and buy back their own stock, thus driving up valuations of their company's shares.
     Of course, the historically low interest rates were suppose to incentivize banks to loan money to fund real estate purchasers. It has not quite worked out that way, that is why many of the homes being sold have been cash deals by investors looking to rent or resell properties. The low interest rates have bludgeoned savers by making it unnecessary for banks to pay more than one percent interest on deposit accounts like savings and CDs. The banks have taken advantage of the Fed's zero to quarter percent interest rate they have charged them for the last six years to borrow money, and have used that cheap money to buy bonds which pay them close to three percent or more.
     The Welfare recipient mentality of the stock market is illustrative of the predictable outcome of meddling in private markets by government bureaucrats, who have never spent a single day working in those markets. Unfortunately this is a world wide problem, central banks have positioned themselves as tin gods over private markets. But eventually even tin gods must bow to the much more powerful god of economic reality, then God help the average person who pays the ultimate price for big government hubris.

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