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The Leavenworth Times - Leavenworth, KS
  • Dollars and sense: Wall Street no reflection of Main Street

  • I was going to write about disability and long-term care insurance but, I decided take a break from Bob and Mary to touch on recent action by the Fed.
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  • I was going to write about disability and long-term care insurance but, I decided take a break from Bob and Mary to touch on recent action by the Fed.
    Last week Ben Bernanke announced that the Fed would launch the next round of quantitative easement or QE III. This is to be continuous or ongoing QE. You may recall that I wrote about this a few months back. Two previous versions of quantitative easement injected about $2.7 trillion into the economy. The markets get an immediate bounce as well as commodity prices.
    For example, while QE II was in full swing, Brent oil crude jumped from $87/barrel in November 2010 to $120/barrel by June 2011. Higher oil prices tend to be a drag on the economy so, the overall impact on economy and the unemployment rate was minimal.
    Wall Street loves quantitative easement but in the long run, it has a negative impact on Main Street. Mind you that this is also an election year. The Achilles heel for the current administration is the poor performance of the economy and lack of jobs. QE III will give a temporary bounce to the markets and the appearance of a stronger economy.
    Back on Main Street we will just be paying more for groceries and gas. The effects of quantitative easement on top of the conditions brought on by the drought affecting corn and cattle are likely to cause food prices to rise to uncomfortable levels by next spring.
    In addition to increasing our national debt and devaluing our currency, there is something more that concerns me. It is the creation of another bubble. Anytime the federal government intervenes into a market in a big way, natural market forces of supply and demand get shoved to the sideline.
    When they reassert themselves into the market, it typically happens with a jolt. It happened in the dot.com or tech bubble in 2000 and again in the housing market when Fed lowered the standards for home loans that they would underwrite. When market forces reasserted themselves, both the tech and housing bubbles popped.
    Why? Because they were artificial. The tech bubble was created by irrational exuberance and the threat of Y2K and the housing bubble was created by government policy; not by natural forces of supply and demand. Quantitative easement does the same for the stock markets.
    Blogger Dennis Slothower stated last Friday, "The stock market is no longer any kind of reflection of the real economy (because the real economy is mediocre at best) and may not reflect economic conditions again . . . at least for a very long time. Fed QE has made this happen. In the simplest of terms, when you have more and more dollars …all chasing the same assets over and over, the price of those assets will go higher. It's called supply and demand. This huge Fed liquidity induction over the last several years and now guaranteed to infinity (as I stated above, there is no dollar limit on QE III) has found its way straight into the easiest of assets to acquire and liquidate commodities and equities…In this last decade the U.S. has experienced two especially painful financial bubbles created from Fed/government easy monetary policy (the tech bubble in 2000 and the housing bubble in 2008). Both eventually burst, crushing many investors. The newest financial bubble via easy money is the Equity/Commodity bubble – and we are in it right now!"
    Page 2 of 2 - Sooner or later, market forces will reassert themselves with a jolt. The more the markets are out of synch with the economy, the bigger the jolt. And if it happened today, that jolt would be down. That temporary bounce in your 401k will be gone in a flash. Smart investors will make money. The vast majority will get crushed.
    When is this likely to happen? No one knows. In the near term, there will be money to be made in the markets. One commentator called this a "bull market in fear." Wall Street will make money and Main Street will get crushed but it's not the fault of Wall Street. It's another federally stimulated bubble.
    The next article will discuss long-term care insurance. Previous articles are posted on my web page at http://theretirementexperts.us/.
    If you would like to comment or make any suggestions, contact me at larrymartin@theretirementexperts.us or call at 651-4321.
    Larry Martin is a registered investment advisor offering advisory services through Main Street Advisor, LLC (MSA). The opinions expressed in these articles may not represent those of MSA. 1407 Main Street, Hays, KS 67601. The Consultants Financial Services, LLC and MSA are not affiliated.

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