Bulls, Bears and Elephants

Investors and institutions are cheering the decision to keep the “stimulus” going via the Fed’s program of quantitative easing, the printing of money. The S&P and the NYSE have reached yesterday levels not previously possible. This is a problem.

There are basically three markets that economists use to gauge stability in our fiscal and financial health: the job market, which unemployment has been at over 7% since mid-2008, the housing market, which has been in a six-year slump, and the stock market, which is no longer the place for a shy, small potatoes person to save his nest eggs.

Essentially, from my viewpoint as a banker and mortgage guy, housing drives the American economy. Many industries rely on a successful housing market: construction, home improvement; retail industries like carpet, appliance, furniture, auto; utilities like oil, gas, electric; and capital improvements like roads, bridges, schools. Even the building of malls and shopping centers rely on housing because if houses become vacant, soon the commercial center has no business and will close.

A good job market, dependent on housing to help create and retain jobs, should be no worse than 5.5% to be productive and booming. This happened best during the Reagan years when the economy had been a nightmare under President Carter. Even in the 1984 election cycle, when unemployment was down to 7.3%, there was confidence that the market would continue to improve. And it did. For years.

The stock market is the most volatile of these markets, and really the least important. Why? Well, people will save money with disposable income, income not needed to get by day-to-day. But people do not have disposable income if they are struggling with their rent or mortgage, and don’t have enough funds to get the necessities. Even 401-k investments are being cut because saving for retirement is not a priority for younger people. Paying down the student loan is far more important.

And, while it seems the Fed is helping the economy by its QE Programs, instead, the money is becoming worth less than before. Mortgage rates are rising, which makes it more difficult to purchase a home, which starts the cycle again: housing, jobs, stock. And the dreaded “I” word lurks nearby. Inflation is the elephant in the room that nobody wants to mention.

Eventually, in order to fight inflation, the Fed will be forced to raise rates. Or what will happen is that the dollar will lose any remaining value because there is too much money in the economy. And like it or not, all other currencies look to the strength of the American dollar for value comparison.

If the dollar falters, hyper-inflation will be the result. All countries will suffer and “free-trade” agreements or not, it will be every country for itself. Then, financial chaos will be rampant in the world markets.

All because investors were happy that the Fed announced that it would continue to print money.