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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Will the Fed Continue to Inflate the Stock Market By Printing Money?

Stock-Markets / Liquidity Bubble Nov 15, 2007 - 12:17 PM GMT

By: Greg_Silberman

Stock-Markets

The 100 Dollar Bill drop - In spite of money drops and liquidity injections we continue to see a volatile scary stock market. Will the Fed ultimately lose control and the stock market deflate or will the money presses continue to levitate the stocks at the expense of the Dollar?

The market got its ¼ point rate cut on Wednesday the 31 st of October and has been slaughtered ever since. Gee, thanks a lot Mr Bernanke!


The markets message is clear – Market to Fed: Send more money! More rate cuts please.

We've been telling subscribers for a while that this market is resting on quicksand. This is a market which requires constant support, hugs and kisses from the Fed in order to remain elevated. So a ¼ point didn't do the trick this time. No problem! You can bet the Fed will be back in December bearing further gifts – maybe sooner.

In fact, we've been so sure the the official policy is “support the markets and to hell with the Dollar” that we've been advocating buying non-resource stocks as well as our regular Gold and Oil stocks. The thinking being that the stock market is headed higher on a Super Inflationary Wave ( forecast of u. s. inflation rate )

Lucky for us we've got some hard thinking subscribers who pointed out that our views are somewhat inconsistent.

For years we've been saying that nothing will prevent this Gold Bull market from expressing itself fully. No amount of government intervention or derivative games will prevent Gold from going to 4-digits and beyond. Ofcourse we still stick to that.

But now subscribers are telling us (and rightly so) that we've done a flip-flop by saying that the Fed will be able to constantly elevate the stock market by reducing interest rates.

So which one is it?

Can the Fed manipulate the stock market and keep it rising forever or will market forces eventually prevail as in the case of the Gold?

Truth is, its not much of a question. If growth in earnings is real then stocks should naturally outperform Gold. There should be no need to artificially support the market by printing obscene amounts of money. However, today we have a situation where growth is being engineered through the printing press. How do we know this?

Text Box:  Illustration 1: Stock Market falling against Gold but rising in Nominal terms (below)

Gold / Real money has been outperforming the Dow since 2000 and it now looks as if it is about to enter the next phase (target of 10 ounces : 1 Dow). The bottom of the chart shows the S&P500 in Dollar / nominal terms. Fact is, even though the S&P is higher today then in 2003, in real terms (as measured by Gold) it is quite a bit lower. We're about to learn the hard way that PROSPERITY CAN NEVER BE PRINTED. If it could, Zimbabwe would be the worlds super power.

So whilst we will continue to get scary days like we've seen over the last 2 weeks, we feel that the Fed through its unlimited printing press will continue to keep the Stock market Bear at bay but will sacrifice the Dollar and keep Gold well bid.

More commentary and stock picks follow for subscribers…

By Greg Silberman CFA, CA(SA)
Profession: Portfolio Manager and Research Analyst
Company: Ritterband Investment Management LLC
e-Mail: greg@goldandoilstocks.com
Website: blog.goldandoilstocks.com

I am an investor and newsletter writer specializing in Junior Mining and Energy Stocks and small caps listed in the US, Canada and Australia.

Please visit my website for a free trial to my newsletter http://blog.goldandoilstocks.com

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.  

Greg Silberman Archive

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