Thursday, February 3, 2011

Market Musings: A Virtuous Cycle

On the surface it seems like a great idea.  The Federal Reserve jump starts the economy through asset purchases, and all is ok because inflation is under control.  The stock market goes up and the official inflation numbers remain tame although everything we touch and need to function and subsist day to day goes up in price.  What a great thing.  What a great country we live in.  And most importantly, why didn't we think of this before?

I actually heard some analyst waxing poetically on Bloomberg the other day that current monetary policy has our economy right in a "virtuous cycle".  It doesn't get any better than this.  The yield curve is perfect, inflation is tame, and the stock market is rising.  What could be better?  Well for one the employment picture, and two the housing market are two of the main reasons why the Fed embarked on QE2.  And neither of these are going to recover anytime soon.  Having the Dow hit 36000 in 2012 was not on the agenda, but what the heck, it is not a bad byproduct of this hastily conceived strategy to revive the economy. 

When I hear others gloat that things can't get any better than this, I have to sit up and take notice.  Yes, the market has already discounted the employment situation and the housing mess as these will take years to come back.  But to think that printing money and going into more debt to solve a debt problem can be done without consequences is ludicrous.  If this policy was so good, why didn't our financial leaders do this before?  

After all, what is better than a virtuous cycle?  And haven't we heard this before with 1) tech and productivity in 2000 (i.e., stocks deserve these valuations because we are so much more productive) and  2) with housing in 2005 (i.e., housing prices always go up)?

Lastly, David Rosenberg has some big picture thoughts in his latest piece, and it is well worth the 5 minute read.  You can sign up for free at this link.   

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