Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Surging Commodity Prices Could Crush the Stock Market Recovery

Stock-Markets / Stocks Bear Market Aug 04, 2009 - 11:12 AM GMT

By: MoneyWeek

Stock-Markets

Best Financial Markets Analysis ArticleStock markets around the world had another rip-roaring day yesterday.

The S&P 500 traded above 1,000 for the first time since November. The FTSE 100 hit its highest point since October.


Everyone cheered the return of banking profits and banking bonuses, as money flooded out of “safe haven” assets and into riskier plays such as commodities and emerging markets.

We’ve seen this before. And it didn’t have a happy ending last time...

Why we are so bearish about the recovery rally

Why are we so bearish about the current rally? It’s a question that was put to me in an email yesterday and it’s a good one. So let me explain.

The global economy was always going to rebound at some point. This recession has already been massive, although it may not feel like that to anyone who has managed to hold on to their job. In the US, it’s easily been the worst since the Great Depression. But even the Depression wasn’t a bottomless pit – you had recovery and relapse all the way through that.

However, we haven’t fixed any of the problems that led to the financial pile-up in the first place. Our route out of trouble has been exactly the same as it’s always been. Pour more cheap money on the problem and reward the banks for failure. Quantitative easing, or money printing, or whatever you want to call it, is just a turbo-charged version of the “Greenspan put”.

Let’s remind ourselves of why this collapse happened in the first place. It’s really not complicated, though many would have you think it is. Banks were allowed to operate with impunity in a consequence-free environment. On the one hand, they weren’t effectively regulated. That would be fine, but for one thing. There was an implicit promise that they couldn’t fail either. Alan Greenspan had already amply demonstrated throughout his time as head of the Federal Reserve that he would do anything in his power to bail out Wall Street.

It’s exactly like being taken to a casino, given a never-ending supply of chips, and being told that you can keep the profits and the house will take care of the losses. The result was that banks took the biggest bets they could, and with the aid of the credit ratings agencies, made a lot of money by selling their clients high-risk products masquerading as low-risk ones.

None of that has changed. Bank reform is becoming bogged down in the mud of reports and committees on both sides of the Atlantic and meanwhile, the champagne is flowing and the guaranteed bonuses (an oxymoron if ever there was one) are back.

So what, you might say. That’s the way the system works. Banks pay plenty of taxes, and we all benefit from the trickle-down effect, everyone from celebrity chefs to Polish nannies.

The current system doesn't work

That’d be fine – if it did work. Our problem is that it doesn’t work. All cheap money does is blow up fresh bubbles, which then explode and cause terrible damage. The tech bubble was bad, and the property bubble was far, far worse. Remember, at one point last year people were genuinely afraid that cash-points would stop paying out and we’d have riots in the streets. If we don’t deal with this – and it looks like we’re not going to – then it’ll happen again.

Only this time, our economies are even more fragile than they were then.

If banks are too important to be allowed to fail, then we have to split out the function that makes them too important to fail – the retail banking function, basically – and regulate it to within an inch of its life, like the utility companies.

And this isn’t just about the banks. If central banks are going to persist with the notion that they can somehow control the economy, then they’re going to have to start paying attention to asset bubbles too, rather than washing their hands of all responsibility for them as the Greenspan Fed did.

But it’s unlikely that any of this will happen now. As the ‘recovery’ continues, any impetus for reform will vanish. And politicians will be too scared of withdrawing support from the financial sector in case it upsets the apple cart and ruins their chances of getting voted back in. So we’ll stick with the current system until it blows up in our faces again.

Rising commodity prices are bad news for the economy

Already we’re seeing a “recovery” bubble building. I said yesterday that the current markets felt uncomfortably like early 2007, when everything was rising and no one could find any reason for it to stop. In today’s Financial Times, John Authers compares it to a different time period – last summer. “The rally in risky assets is painfully reminiscent of the behaviour that preceded last year’s crash. Then, as now, commodities, emerging market equities and high-yielding currencies validated and supported each other higher.”

Meanwhile, the dollar has been taking a kicking as investors abandon “safe haven” assets. In fact, the greenback has “now given up half of its gains since it hit bottom last July, just as the bubble of commodities and emerging markets was about to burst. Then, as now, the advance of relatively risky assets has been uniform, and undiscriminating.”

Whatever the reason behind rising commodity prices – cheap money, “stimulus” packages, or demand from China and India – they are bad news for a fragile global economy. Higher raw materials prices hit profits and raise costs for consumers just as they need the money most. But they also put pressure on central banks to raise interest rates to combat inflation. With cheap money the main thing keeping the global economy afloat right now, any hint of tightening could bring the rally to a very rapid end indeed.

By John Stepek for Money Morning , the free daily investment email from MoneyWeek magazine .

© 2009 Copyright Money Week - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Money Week Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

TraderJoe
05 Aug 09, 14:57
Moneyweek wrong on stocks

I used to subscribe, but you were / are wrong on stock market trends


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules