By MoneyMorning.com.au
We feel like we’ve been here before.
This morning, Bloomberg News reports:
“Stocks surged, sending the Standard & Poor’s 500 Index to the highest level in five months, and commodities rose for a third day amid speculation China may act to spur growth.”
Part of the reason was due to “good” news from U.S. aluminium producer, Alcoa [NYSE: AA]. According to Bloomberg, “Sales rose 6 percent to $5.99 billion, topping the $5.7 billion estimate in a Bloomberg survey.”
The company still made a loss. But that didn’t stop the shares piling on 4.5% during the day’s trade.
So, the future looks bright for stocks. Which must mean the U.S. economy and the Fed is in good shape too… or does it?
Because Bloomberg also reports:
“Federal Reserve Bank of San Francisco President John Williams said he sees a ‘strong’ case for more Fed purchases of mortgage bonds given his expectation that inflation will fall below 1.5 percent this year.”
So which is it? The economy is picking up… or it’s not… or it is, but not enough?
The answer is, we have seen this before.
It’s recovery by stimulus… which isn’t really a recovery at all.
It’s like the PM saying Australia has a healthy car industry, while at the same time announcing the government is giving Ford Australia $34 million of taxpayer money… on top of a $103 million bailout from Ford Australia’s U.S. parent company.
And Holden gets a hand out too. $100 million of taxpayer money… that’ll teach you not to buy a Ford or Holden… because you’re paying for one anyway! And those who did buy Ford or Holden are paying for an already expensive car twice.
But we’ll have more on the madness of subsidies another day…
What we’re going through now is a repeat of the “Seeds of Recovery” mantra. The market last fell for this trick in 2009 and 2010.
Investors thought they saw things improving but forgot it was the delayed impact of central bank and government stimulus. So they bought stocks, believing the good times were back.
Only they weren’t. Soon enough the stimulus wore off and investors were back to square one.
So it seems the Fed’s John Williams knows what will happen next if the Fed doesn’t print more money to buy more assets. He knows the economy will head south and mainstream investors will lose all faith in the Fed.
But at the moment, the Fed and U.S. Treasury money-go-round goes on…
Today the Financial Times reports:
“The US Federal Reserve sent $76.9bn in profits to the Treasury last year, according to the central bank’s preliminary results, showing how the Fed’s unconventional monetary policy has turned it in to the most profitable bank in history.”
The FT goes on – oblivious to the obvious:
“As part of its efforts to support the economy, the Fed has bought billions of dollars in Treasury securities to drive down long-term interest rates. The Fed earns interest of more than 1 per cent on many of those securities while it pays only 25 basis points to banks on their reserves. The difference allows it to record large profits which it remits to the Treasury.”
Profit for the Fed means profits for the U.S. Treasury, right? Wrong! It’s a funny-money merry-go-round. Think about who pays the Fed 1% interest. That’s right, the U.S. Treasury.
And because the Fed pays out 0.25% to banks for cash held on deposit, it can only give 0.75% (less expenses) back to the U.S. Treasury. Which means the Treasury makes a loss on the deal. Keep doing that over and over and it’s the surest way to Loserville.
But this is the muddle-headed world we live in. Where profits are losses… and a healthy industry is only healthy because it gets millions in taxpayer support.
For now the market loves any so-called good news it can get. If that means stocks going up due to an aluminium producer losing money… China providing more stimulus… and the U.S. Federal Reserve printing more money, then so be it.
But as we’ve seen before, this isn’t a recipe for a long-term rally.
Our message today is the same as before Christmas: Keep your safe money safe, and only punt with money you can afford to lose. Because this is still one heck of a risky market.
Cheers.
Kris
Publisher’s note: The brand new Slipstream Trader stock market video update recorded live this morning is now on YouTube. To watch it, click this stock market update video link. Murray says he’s in “observation mode” right now. Why? He told us earlier: “US markets are in short and intermediate uptrend but long term downtrend. They are quickly approaching large overhead resistance around 1300 in the S+P 500…
“How the market behaves near there is important.” Says Murray. “If it gets rejected once again and we see some weakness I can become aggressively bearish again. If it busts up through 1330ish then I will have to reassess my strong bearish stance. The ASX 200 is also flirting with the key 4200 level again. If it can hold above there we may see a short term spike higher. Another rejection from 4200 and a close below the 10 day moving average will increase my bearish conviction…” To listen to Murray explain all this in greater detail, click on the following link to watch his brand new stock market video update.
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From the Archives…
A Story of Sell-Offs & Super Spikes by a Stock Market Trader
2012-01-07 – Murray Dawes
Why BHP Will Be the First Victim of China’s Economic Collapse
2012-01-06 – Kris Sayce
The Sun Starts to Set on China’s Economy
2012-01-05 – Kris Sayce
New Year’s Eve 2029: Will the Australian Stock Market Lose a Decade of Growth?
2012-01-03 – Kris Sayce
How to Buy Gold and Silver
2011-12-11 – Dr Alex Cowie
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