Economic Review

1/19/2010

Looking back over the first decade of the new millennium and what you had was a US Equity market largely subsidized by the monetary authorities

The Doc couldn’t just jump into the next decade without taking a look back to a troubling, long term event that seemed to have taken place and unfortunately still exists today. The turn of events began back in the year 2000 with the pricking of the exuberant Stock bubble with a high Fed Funds target rate in the 6% area. However the demise of Stocks and the unfortunate event of 9/11 disrupted the economy significantly, which caused the Fed to quickly lower rates below 2%....the start of the Stock and real estate subsidizing process.

The Fed target level remained below 3% and well into the negative real interest rate zone over the next years (until late in 2005) despite the exuberant activity in the US real estate and Stock markets. Finally, as the imbalances in the economy were so great with housing prices nearly out of control and Stocks reaching new historic highs, it was time to prick the bubble again. This time Stocks could only sustain about a 5% Fed Funds target rate before spiraling down, at which point the air came out of real estate as well, and the subsidizing process started again, this time with rates set near zero, where we are today.

We are now entering the second month of 2010 and interest rates remain at near zero levels and well in the negative real rate zone again. What’s a small investor to do? CD and T-Bill investments used to provide an OK, conservative return for risk averse and older investors. However over much of the last decade these investors were almost sucked into Stocks as they are now or otherwise suffer no returns at all.

So why are Stocks making unbelievable gains since their recent bottom? Economic activity?...I think not. There’s almost nowhere else to put your money and it’s been that way for a long, long time. So the question to leave you all with is…if short term rates were/are kept a normal levels (e.g. some premium to inflation), what would be the state of the US Stock market? Dow Jones 10,600….I don’t think so. Not even close.

Stephan Kudyba (MBA, PhD) THE MARKET DOCTOR

Daily Analysis | About

Market Doctor Disclaimer

All information contained herein is for informational purposes only and does not constitute an offer to sell nor the solicitation of an offer to buy any security. “The Market Doctor” or anyone affiliated with the production of the investment market information is not responsible for any activities conducted by viewers. This material is informational only and does not recommend investment activities for corresponding viewers.