Following up on our most recent post discussing Peter Schiff’s views on inflation and rising asset prices, we bring you some market analysis from the financial gurus at Zero Hedge and Trim Tabs:
From Trim Tabs:
At the time we released our report, many people thought it was crazy to suggest that the Fed or the government would manipulate the stock market.Â Yet Ben Bernanke, Alan Greenspan, and Brian Sack have all but admitted publicly this year that the Fed attempts to prop up stock prices.
The market cap of all U.S. stocks increased $2 trillion in 2010.Â All of the gain and then some, $2.4 trillion, occurred since the end of August after QE2 was announced. Once again, most of the money to push the market cap higher does not seem to have come from the traditional players that provided money in the past.
If the money to boost stock prices by almost $9 trillion from the March 2009 lows did not come from the traditional players, it had to have come from somewhere else.Â We believe that place is the Fed.Â By funneling trillions of dollars in cash to the primary dealers in exchange for debt, the Fed has given Wall Street lots of firepower to ramp up the prices of risk assets, including equities.
But what will happen when the Fed stops buying assets?Â If QE2 works and the wealth effect of higher asset prices creates a sustainable economic recovery, we think the Fed will stop its QE activities.Â The Fed is legally mandated to manage the economy, not the stock market, and we think the Fed will sacrifice the stock market to its legal mandate.Â If that happens, stock prices are likely to plunge to well below fair value.
A more likely outcome is that stock prices will be higher by the time QE2 ends, but economic growth will not be sustainable without massive government support. Then even more QE will be needed, and stock prices could keep rising for a while.Â In our opinion, however, no amount of QE will be able to keep the current stock market bubble from bursting eventually.
Zero Hedge weighs in:
Ergo our call earlier that Bernanke has at best +/- 150 days to assuage the market’s fear that QE2 is ending (not to mention that we have a huge economic recovery, right Jan Hatzius? We don’t need no stinking QE…). Therefore the best Bernanke can hope for is to buy some additional time.
None of it is real, folks.
Can stock markets go up forever? We suppose so. If The Fed introduces QE3, QE4, QEx, then sure, asset prices can rise indefinitely. But that doesn’t mean things are getting better.
Either way, we’re in trouble.
At some point, however, something is going to break, and the whole thing – stocks and bonds (and therefore the US dollar) will come crashing down.
It’s only a matter of time.