Thursday, June 14, 2012

The Stock Market's Rigged

Here's Mr. Biderman making several important points.

  • The stock market is rigged as the Fed tries to increase consumer confidence through the "wealth effect".
  • Nothing has changed since 2008, they are merely kicking the can down the road.
  • The economy is barely growing above inflation, if at all.
  • We are spending $1.3 Trillion in order to grow income $250 Billion, which is not sustainable.
  • We will see both inflation & deflation. 
Click here to watch video.

Two very importance points here that I've pointed out before.

  1. The market is an illusion and you should not trust the current valuations as the markets are completely manipulated and have no meaning. You may ask, "who cares, as long as the market is moving up"?  The reason is because the markets will eventually move back to their intrinsic value once the Fed runs out of the ability to juice it with more QE, loses all credibility, or both.
  2. We will see inflation and deflation simultaneously. Inflation in foodstuffs and fuel, the things we need to get by day to day. And deflation in the things that we define our wealth by: stocks bonds and real estate.
 Biderman's description of requiring $1.3 Trillion to create $250 Billion in higher wages is the very definition of a negative multiplier. The Keynesians like Paul Krugman along with the current administration have been operating on the assumption that more deficit spending was needed because it supposedly had a positive multiplier. They thought each dollar of additional spending would create $1.60 in economic activity. They have clearly been wrong and as a result we have spent $5 Trillion in new debt and are no really better off than we were at the beginning of this administration. The graph below clearly illustrates the difference between their assumptions and actual economic reality.

This explains why Christina Romer, Obama's economist, thought the stimulus she crafted for President Obama would keep unemployment below 8% when in reality it has never been below 8%.

This weekend, Greeks will go back to the polls for a new election to once again try to form a government. ...And the results may not be very good for markets. Several FX trading companies are warning clients against holding positions in the Euro over the weekend. The ten year Treasury just hit a record new low yield on high demand for safe assets (bond prices and yields move in opposite directions). And today, G20 announce they stand ready to act to stabilize markets if needed. This pushed stocks up today but its not good news.

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