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Economic Review |
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8/30/2010 Yet another attempt at Bubbles Our last updates consistently favored a second dip approaching in the economy and the latest economic data are consistently supporting this scenario. Housing data is dismal, job destruction continues and individuals are withdrawing money from their retirement accounts at a record. We also warned of an impending support/creation of bubbles to help save the fledging US economy from slipping further into the red and these could take the form of a Stock or Bond bubble. Well, to refresh the situation on bubbles, US equities tried to rekindle growth through artificial means as the major Indexes rallied hard into the end of July, but do to the lack of individual investor participation, the bubble rally turned quickly into losses. On the Fixed Income side, the bubble we tipped you off on reared its ugly head with a drop in 10 Year Yields of some 60 basis points. However, as we warned, this bubble would produce little results to spur growth as mortgage rates have grinded a bit lower but did not follow the action in Treasuries. Given last weeks Fed reaction to the weakening of economic activity in the US, it appears that perhaps yet another shot at building bubbles to spur growth is in order. At the Wyoming conference last week comments such as the central bank “will do all that it can” to ensure a continuation of the economic recovery and that more securities purchases may be warranted if growth slows were uttered. Can stocks produce enough price appreciation to spur growth? The answer is….who cares, because this is not a sound economic policy to spur growth. Reality is that without the individual investor it will be difficult and the market will be susceptible to more flash crashes if speculators need to liquidate positions all at the same time. On the interest rate side, if mortgage rates can drop to 4%, perhaps a short term bump can be experienced but with job destruction continuing this is all smoke and mirrors. Current short term artificial fixes are increasingly disturbing as more structural policies need to be pursued in order to move forward on a sustainable growth path.
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| Stephan Kudyba (MBA, PhD) THE MARKET DOCTOR |
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