Wall St. Winning - Main St. Losing

government spending crashWall Street is continuing to see successes from a stimulus rich economy at this point as markets have remained green all throughout the week. However, despite the big returns we've seen the past several months in equity markets, Main Street consumers continue to suffer. When looking closer at the facts, it makes more sense why.

For the past two decades, our economy has thrived on economic "bubbles", which as we have seen, can temporarily create very strong growth. However, just as every "bubble" does, we usually end up seeing a burst (as we have with the Internet and tech bubble). You would think that we would have learned from our prior bubble mistakes about the consequences that can come from such mindless spending. However, this is not the case.

The government clearly took the bubble route when they decided to set record amounts of government spending, printing and stimulus. It is one thing to stimulate money going into consumer's pockets, but $3 billion for Cash for Clunkers, $24 billion for first home buyer's credit, $787 billion in American Recovery and Reinvestment Act, and $700 billion in TARP. With all the spending, we were able to rack up debt in the amount of 10% of our GDP, just in 2009! Not only that, but we are also BORROWING at more than six times the amount we borrowed last year. Fortunately, for the US Treasury, foreign nations still have found value in investing in the dollar. However, due to increasing large currency printing and spending, the dollar continues to get trampled on when compared to other major currencies. At this rate, you can expect foreign economies to quickly stop buying our debt.

What is really devastating in all of this, is the lack of money that is getting into consumer's hands. Sure, Goldman Sachs and other Wall Street banks are making a killing, borrowing the Fed's money at 0% and investing them in riskier assets. However, bank loans shrank at an annual rate of $931.3 billion in the 2nd quarter of this year. And listen to this scary fact: prior to the fall of Lehman Brothers, it took the Fed almost 14 years to double the monetary base (currency and reserves in the banks). After the recent Lehman fall, it has only taken the Fed 196 days to do the same (45 times the amount!)

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When our government chose to take this route of recovery, it was the "quick-fix" band-aide choice that we've seen in times past. The only problem is (as we've seen), is that it eventually comes back to haunt us. In my opinion, it is for this reason we continue to see a climbing stock market, despite continuing weakening economic data. With this amount of government intervention, holding a strong short position at this point is just plain stupid.

Thus, I look to other means until these decisions catch up to us. Indeed, despite deflationary indicators, concerns are raised about the dollar. As a result, we have seen huge gains in commodities. Gold, oil, and agriculture are reaching new record highs as investors hedge up on the falling dollar. Even though, we have already seen huge gains from these sectors, we could continue to see them rise into the new year. I do still feel that eventually, the dollar will rebound strong, but at a 0% borrowing rate, a dollar recovery is difficult.

Our economy still remains on very thin ice. Just because the market continues to perform well, this does not mean our economy is driving that. As I always say, a market crash does not come when everyone is expecting it. At this point, I always am on my guard. Happy Trading.


  1. Anonymous Says:

    The market seems like the only place left to park your money other than commodities which most people have no idea how to buy in to. It's not just the stimulus making the markets go up, It's all the greedy lemmings as well. Eventually, the stimulus will stop , companies won't be able to cost cut anymore and the real pain starts. We will see the market correct to normal levels. We are going to end up just like Japan did.
    Yes, the feds are printing, but the money has no velocity, it's never making it out of the banks, their off book assets are depreciating so fast they have to build up a reserve or be insolvent. Once credit starts getting out to main street then you can say we are in a new bull market. For now this has to be a bear market euphoria rally, look at japans Nikkie as it cascaded down with deflation, bear rallies all the way down. Maybe they are printing like crazy, but everything is deflating faster. People are confused inflation/deflation. Both gold and equities going up, how is that possible...the feds are fighting a tough battle, re-inflate what they have no control over. Read this if you are confused.


    Its certainly true main street is getting the short end of the stick.