Bull Killed by Overlooked Problems

The US stock market has staged one of its most powerful rallies in history that followed the March o9, 2009 market low. It soared another 5% during the first quarter of this year – its best first quarter in a dozen years. You cannot bury your head in the sand and ignore what’s happening. We cannot fail to acknowledge the cheap money from the government bailout and not a well-rounded economy recovery as the most likely drivers behind the torrid run-up in the US share prices.

I have received quite a significant response over the last two months arguing this bull market is too good to be true. My guess is that the stock market a year from now will be a lot lower that it is now. I suspect that when we are able to look back on the recent ‘bull-market’ in a larger or longer context, it will show up as a large bear market bounce, fueled by a huge government stimulus and ultra-low interest rates that make keeping cash in US Treasuries or money market funds very unpalatable.

The market crash that ended a year ago was triggered by excessive debt, financial manipulation, deceit and lack of true moral hazard. We are now have even more debt, unabated financial manipulation, collaborative deceit between the Fed and Wall Street, and confidence bordering on certainty that if the too-big-to-fail guys fail again, the government will not dare to not bail them out again.

Given that the ‘recession’ did not clean up the problems that caused it, I don’t see any way that we can avoid another drop, deeper and harder, to correct the problems that were not allowed to correct on the previous iteration. I don’t know when the next collapse will begin, but now we have a target-rich environment that fertilizes the land.

But be warned, soothsayers can be accurate or be believed, but not both.

As former US Vice President Dick Cheney famously said, ‘deficits don’t matter’… and that is perfectly true – up until now as most developed economies are now running deficits, it is increasingly to look like the debt will have to be monetized, which in due course can only lead to inflation.