Wednesday, October 14, 2009

DOW 10,000!!!

Recession cancelled!!!

Not quite...

The fundamentals necessary for recovery are still lacking. Unemployment is increasing with no growth in GDP. So what's propping up the DOW?


One would think that fear would tank the markets rather than create a ~1,000 point rally, right? It's not fear in the equities market, but rather fear of inflation.

Gold prices are probably the best forward looking predictor of inflation we have. Government data (CPI) won't come out for at least a year after inflation starts hitting while gold prices are driven by the market and reported by the exchanges in real-time.

Look at the same chart as above compared to GLD (a gold ETF tracking just under 1/10 spot price)...

The fact that GLD and the DJIA are correlated during this "rally" shows it's no stock rally at all but rather a flight from USD based securities and reserves into equities. What's worse, than a misreported rally, is that because the fundamentals are lacking, the market is poised for another fear induced sell-off. Investors will think "oh no, not this AGAIN!" at the first sign of bad news and we could quickly enter another sell-off cycle.

Also, consider that the Fed has kept rates between 0% and 0.25% for almost a year now. If we do start to see inflation the Fed may raise rates to kept it in check creating a new wave of bankruptcies as credit is constricted and interest payments increase--this could also crash the DJIA.

[No, I'm not telling anyone to buy gold or GLD! This is not that kind of blog.]

I'm hopeful the economy can recover but we have a long way to go. What's disappointing about the recent upbeat economic news (which I believe is more political than economical) is that we haven't addressed the underlying issues of this recession.

Historically, recessions can be a good time to re-tool, re-educate, and re-direct capital towards new business opportunities and growth. Recessions have a way of purging old business models that have failed and encourage new successful ones to take their place. I don't see any of this happening and all of Washington's promises on job creation (green jobs) have failed.

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