Posted on 01/16/2014 6:28:02 PM PST by 2ndDivisionVet
The stock market has been mixed lately as a result of the Federal Reserve Bank’s (Fed) announcement that it will reduce its bond buying activities, which started December. Because tapering or reducing the purchase of government debt at very low interest rates is not good for stocks, and will cause the market to decline overtime, the Fed sugar coated its announcement of an exit from the bond market to ease market concerns.
It gave market investors an organized plan of exiting the bond market over the next 12 months, and sugar coated the exit by saying if the unemployment rates start rising again and financial markets get wobbly, the Fed will re-enter the credit markets and initiate another round of government bond purchases to keep interest rate low. The sugar coating extended to the Fed emphasizing in its announcement that it is committed to keeping interest rates close to zero per cent for the foreseeable future. Investors thought this was good news. Primary, among the reasons they thought this was good news is that cheap money will be hanging around for at least the next 2 to 3 months, maybe a little longer.
The stock market over these last few months rose primarily due to the availability of cheap money. Cheap money results when the Federal Reserve Bank which is the nation’s central banker keeps interest rates artificially low. Artificially low interest rates allows borrowers to borrow money at very low interest rates. Borrowers are able to finance the purchases of automobiles, appliances, and other home related goods and services at very low interest rates, thus causing businesses associated with black-National-unemployment-news those products to expand sales. Among industries seeing their profit margins improve handsomely are the auto manufactures and the home improvement stores such as Home Depot and Lowe’s.
While many other industries benefit from low interest rates, there is an industry non-investors have little knowledge of that benefits richly and contributes greatly to stock price increases. Stock market investors who qualify are allowed to borrow money to purchase stock. Almost anyone who has an account with a brokerage or investment firm can open what is called a margin account. With this margin account, based on the amount of assets, meaning cash and securities in the account, investors are able to borrow money to purchase stock.
These investors can be investment groups, both large and small or a single investor. Obviously, this is a real advantage, for as the stock market rises, you can purchase more and more stocks, making even more and more money, on borrowed money. Due to low interest rates, it is logical to assume, investors took advantage of this option, thus creating more stock purchases, thus driving the stock market higher.
However, in the last two months we have seen, due to the Federal Reserve Bank’s (Fed) qualitative easing program (QE), improvements in the labor markets. In October, due to easy money (cheap money), the national economy created 204,000 jobs and in November, it created an additional 203,000 jobs. The national unemployment rate dropped to 7.0% in November from 7.3% in October. ( http://thyblackman.com/2013/06/24/a-7-national-unemployment-rate-is-not-good-for-blacks/ ). The national economy needs to create on a daily or continuous basis 250,000 to 300,000 jobs monthly to get back to being considered healthy. Nevertheless, market investors see a trend beginning to develop. They see the Fed’s cheap money program working!
This concerns investors. They know the Fed has one eye on the inflation rate as it floods the market with dollars and another eye on the exit door if the inflation rate begins to rise. Generating too many dollars can cause inflation. Therefore the Fed wants to close the money pipeline. It then wants to make a well organized exit from the bond market before inflation becomes a problem, hence the 12 month exit plan. Investors smelled this exit coming when they saw the unemployment results. However, the Fed in saying it will not raise rates while it exits the bond market allayed investors immediate concerns.
But investors know unless something replaces the bond buying activities of the Fed like a national job creation plan, unemployment will begin to rise. This was in part evidenced by the creation of only 74,000 jobs in December. If low job creation numbers continue, the low unemployment rates, such as the national rate which fell to 6.7% in December becomes a red herring. You see, the QE program is not a long-term job creation plan and this is what the public needs to focus on, rather than the unemployment rate. As the easy money(cheap money) dries up, its influence should recede along with its withdrawal. How soon we see the reduction in influence, such as no more low interest rated borrowing, is really the big unknown! The country has become accustomed to easy (cheap) money.
But, the price of easy money if it gets out of control is inflation. And the remedy for inflation is higher interest rates. Nevertheless, the QE program benefited those who were well or properly positioned to take advantage of cheap money like consumers who needed to finance the purchase of a new car, new appliances, home improvements, refinance home mortgages, stock speculators, real estate speculators who have been buying abandon properties in large blocks and corporations who were able to refinance their operations at very low interest rates. Easy money is not a long-term means to create jobs. When you focus on long-term job creation, the most meaningful ways of achieving this goal is not through easy money, but calculative strategies such as:
1) businesses on a wide basis expanding spending,
2) the federal government finding a way to increase revenues directly to the consumers on a long-term basis,
or
3) the federal government increasing spending on long term projects, such as repairing the infrastructure, thus the need for deficit spending due to the federal government being broke.
What is a harbinger of tough times ahead is that businesses have not shown any inclination to increase spending. As a matter of fact ,they have done just the opposite. In this low interest rate environment, they have chosen to shore up their balance sheets through refinancing debt. They have used the low interest rates to finance increased stock prices through stock buy-back programs.
Meanwhile, the federal government is stymied by ideologues who refuse to pass any meaningful infrastructure spending legislation. It remains to be seen if the Davis Deficit Neutral Job Creation program ( http://www.jobcreationnow.com ) which creates a path to long term consumer spending which is the solution, can rise out of obscurity and get mainstream media attention in the coming months. If the Fed stays committed to ending its program of cheap money, this will inevitably lead to low monthly job creation numbers. Low monthly job creation numbers means tough times ahead for everyone, as the unemployment rate will invariably rise again. And so it goes…
Our current “Obama boom” is financed with 40% created money.
Imagine how it looks when that is taken away...
But as long as the markets continue to swallow it, the govt will make sure the entitlement army re-elects more Democrats.
Simply put, they’ve run out of other people’s money.
It’s tough to be poor, BUT it’s tougher if you’re also stupid..
Ha?
$800 billion was already allocated to this in the first stimulus plan five years ago. They had trouble finding "shovel ready" projects to spend the money on. If the money went where it was intended, we don't need a lot of infrastructure, because we have already finished the low hanging fruit on that list.
The "Deficit neutral" plan is nowhere near a neutral plan. The social security money is not sitting there waiting to be spent, it is coming in from working aged people. Handing retired people lump sum payments will cause the government to go out and borrow money to fund that. And retired people are not that great of consumers either. They have all the stuff they need, and they mostly need money for health care. Giving seniors a lot of money will not create a boost in anything except casino gambling.
Obama can’t afford to run out of other people money until after the 2014 election.
This whole article is crap. To start with, the unemployment rate is artificially low due to the way this administration is cooking numbers and lowering the number of Americans who are supposedly looking for work.
92 million Americans are not working, and the vast majority of those 92 million are collecting some sort of check from the government.
The stock market has been artificially held up by the 800 billion a Month the government has been pumping into it, which inevitably has been ending up in the pockets of his Wall Street and Banker buddies.
No matter what they do the bottom is going to fall, and it is going to fall hard. Americans are unaware and even if they knew, they are totally unprepared for the collapse that is coming.
I am not even convinced that winning the Senate and keeping the House will help the inevitable collapse. Hell, if we take the Senate and keep the House, those pulling the strings behind Obama may just hurry the collapse along in an attempt to blame them for causing it.
Either way, I believe the collapse will happen within the next 2 years. It could be so bad that the resulting chaos will make the 1930s look like the 1980s.
Just my opinion, but you asked.
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