The rapid rise in US equities and what it means to us

I’ve been in the mortgage technology business for a long time. We work with bankers and because our software has to help them make sense of their surroundings, I’ve learned a great deal about the economic indicators that point to risk and reward in the U.S. market. This is the environment that bankers live in and they take it very seriously, gleaning information for every possible indicator of economic health to help them manage risk in their enterprises.

Most Americans are not like that. Not even close. While many have heard of national unemployment numbers, average housing prices, home starts and some of the other indicators the government uses to determine our economic health, most Americans rely on just a few key indicators.

(1) Do we have jobs? If Americans don’t have jobs, you’ll find it very difficult to convince them that the economy is not doing poorly.

(2) What’s the status of our 401(k)? For those Americans that still have money in a retirement account, knowing how that has changed since the last time they looked will be a key indicator for them. But, since most retirement accounts are invested in stock funds, the key economic indicator for most Americans is:

(3) Where is the Dow? And that’s a problem.

Dan Norcini had an excellent post on this not long ago where he talked about how much fun he’s having watching analysts try to explain this market.

“It is always fun listening to some of these analysts scratch around for reasons to explain this stock market strength especially when some of these same people will point to the poor labor markets and broken housing market as reasons for concern. Some go as far as expressing great hesitation over further strength given the sharp rise in crude oil and related energy prices. They sluff that off however and will point to the global growth factor as reasons for the rally in the US equity markets with that overiding everything else.”

In truth, the Fed has its printing presses running day and night, pumping billions more into the economy in the sure knowledge that once it gets into the hands of the banks, it will find its way swiftly into the stock marketing, bumping up the Dow even more and convincing Americans that the economy is alright, despite all evidence to the contrary. This ties right back to our discussion of the Fed’s balance sheet in my last post.

This is artificial. The analysts can’t explain it because they are not trained to identify market manipulation. We’re not creating wealth in America anymore. We’re printing it. And that’s not sustainable.

The more US dollars we print, the less the rest of the world will want them. It might have been alright when Japan was the biggest purchaser of US Treasuries, but who will take them off our hands after we buy them all back to provide the liquidity required for Japan to recover from the recent calamity?

I don’t see any good outcome from the administration’s current monetary policy. But when things change, it will be like switching off a light.