Market Rally Will Boost Economy Until Debt Crisis Arrives

No.: 
51

A massive amount of quantitative easing (money supply inflation) is underway in the U.S. and around the world. The Bank of England, for example, has committed 75 billion pounds ($111 billion U.S.) to purchase government bonds and corporate paper. This worldwide printing of money lends support to the contention of Lawrence Summers, director of the White’s House’s National Economic Council, that economic trends will improve in the next few months. It also supports the call of some market analysts for a bullish bias to equity markets, at least for awhile. Wall Street does NOT deserve a bullish environment but it is busy creating one with the cooperation of the Fed and U.S. Treasury.

Part of the speculative rationale for the bullish view is that workers are in a weak position to bargain in support of their interests. In Spain, for example, workers are more than willing to take pay cuts to keep their jobs. Situations like this make it possible for corporations to cut costs at worker expense. Thus, the stock market could continue upward as speculators bet cost cutting measures will produce higher corporate profitability ahead.

Remember, the turnaround in equity pricing trends in March was led by hedge funds. Thus, it is not surprising to see a good deal of recent effort late in the trading day to push the closing prices of the indexes upward. Don’t be surprised if the Dow reaches 10,000 within a year, with other indexes making corresponding moves.

On March 23, 2009, the Wall Street Journal carried an article by George Soros ("One Way to Stop Bear Raids") that reinforces the argument that hedge funds operating cooperatively with influential mega-capitalists and opinion makers can drive markets up or down with little regard for the underlying fundamentals. Hence, while economic fundamentals may continue to decline for the time being, equity prices may continue to rise in the face of hostile data. Consider carefully a fragment from the recent Soros article.

"Up until the crash of 2008, the prevailing view — called the efficient market hypothesis — was that the prices of financial instruments accurately reflect all the available information (i.e., the underlying reality). But this is not true. ...[W]e must understand financial markets through a new paradigm which recognizes that they always provide a biased view of the future, and that the distortion of prices in financial markets may affect the underlying reality that those prices are supposed to reflect" (George Soros, March 23, 2009).

If Soros is correct, the market was not only biased during the expansionary phase of the various asset bubbles but continues in a reactionary state of bias now. Even as the former market bias pumped up the economy, the negative bias that developed as a result of market chaos is driving the economy lower than it would go without the bias. This bias in public opinion is subject to exploitation through trend following systems. The fact that so much trading nowadays reflects computer based trend extrapolation means that the sell-off this year in many stocks went further than economic fundamentals justified, just like the bounce-back may end up being driven higher than justified (i.e., the Soros disequilibria theory). The combination of regulatory changes and the reversal of hedge fund positions can exert the effect of repairing the economy, perhaps just enough to pull the late-to-the-party public back into the markets as market pricing exceeds equilibrium and hedge funds dump assets.

No one should assume that the upward trend in equity prices means that everything is going to be all right. To the contrary, the increasing sovereign debt of the United States is undermining the prospect for continuing economic sovereignty. Within the next few years we should expect a massive panic in financial markets as our nation’s credit worthiness is called into question. The panic will be managed (but not quelled) by the shuttering of financial markets by executive edict. The temporary closing of markets will produce an environment of fear sufficient to allow U.S. economic sovereignty to be bartered away for an extensive set of fixes to our economic system and the financial architecture of the world.

In sum, markets can be shattered intentionally or through unexpected circumstances (that are then gamed by the best positioned elites). Crisis disequilibria environments contribute to the ability of super-elites to change monetary policy, market regulations and financial architecture, thus achieving ends unreachable outside crisis contexts. Furthermore, the rapid pace of change in crisis environments leaves members of Congress and the general public disoriented, exhausted and vulnerable to the objectives of those who push global democratic plutocracy.

While this may be an attractive environment for trend following market players, an increasing number of Americans want to find alternative places for investing money. Eventually, we may get that opportunity on a national level if resistance to Wall Street continues to build. Wall Street wants an extended rally off recent market lows so as to undercut the opposition it now faces.