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Economic Review

11/17/2009

Has anything really changed over the past couple of months? (Higher Stocks, Higher Unemployment, Zero Interest Rates, Weak US$, Expanding Deficits, Shaky Real Estate markets)

The theme for the world of high finance in the US has been the reflation trade which has been the pulse for months now.  The bad news is….there really hasn’t been any change in the ridiculous scenario.  Unemployment in the US has continued to rise and will undoubtedly increase over the next months, yet US Equities continue to be on a tear.  This is despite the fact that Ben Bernanke mentioned in his latest address to Congress that any near term economic rebound would not be robust and that extremely accommodative interest rate policy (e.g. near zero rates) would probably prevail for the foreseeable future. The re-flation trade that takes its roots in a weak US currency has been further exemplified by the extreme bull moves in commodity markets, more specifically in Gold and Silver, however appreciations in these markets make perfect fundamental sense.

The question that needs to be raised yet again is that despite the bleak long term economic/financial imbalances (e.g. US debt) that prevail, how long can stocks continue to rise?  One may look to the Japanese situation in which the once great island economy tried to print currency in order to increase inflation during their decade long recessionary, deflation ridden economy.  The result has been an explosion in their national debt, weak spurts of growth, but no noticeable, sustained increase in Equity prices (still about 70% from the peak achieved over 20 years ago).  The US situation mirrors a number of these scenarios except for the deflationary situation, where prices are actually rising in the US for consumer goods (not real estate however).  Believe it or not, but its almost as if another bubble is evolving…can you believe that?

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