Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold, Silver and Copper - The 3 Metallic Amigos and Their Messages - 5th Dec 20
TESCO Christmas Decorations Festive Shop 2020 - How to Beat the Coronavirus Economic Depression - 5th Dec 20
Premium Bonds Good, Bad or Ugly Investment? Here's What Return (Prize Wins) to Expect - 5th Dec 20
How to accomplish a technical analysis with the Forex - 5th Dec 20
What is life insurance and what are the benefits of having it? - 5th Dec 20
Pre-COVID US Economy Wasn’t All That Great Either - 4th Dec 20
Bitcoin Breath Taking Surge - Crypto Trading Event - 4th Dec 20
Platinum Begins A New Rally – Gold & Silver Will Follow - 4th Dec 20
Don't Let the Silver (and Gold) Bull Shake You Off! - 4th Dec 20
Stronger Risk Appetite Sends Gold below $1,800 - 4th Dec 20
A new “miracle compound” is set to take over the biotech market - 4th Dec 20
Eiro-group Review –The power of trading education - 4th Dec 20
Early Investors set to win big as FDA fast-tracks this ancient medicine - 3rd Dec 20
New PC System Switch On, Where's Windows 10 Licence Key? Overclockers UK OEM Review (5) - 3rd Dec 20
Poundland Budget Christmas Decorations Shopping 2020 to Beat the Corona Economic Depression - 3rd Dec 20
What is the right type of insurance for you, and how do you find it? - 3rd Dec 20
What Are the 3 Stocks That Will Benefit from Covid-19? - 3rd Dec 20
Gold & the USDX: Correlations - 2nd Dec 20
How An Ancient Medicine Is Taking On The $16 Trillion Pharmaceutical Industry - 2nd Dec 20
Amazon Black Friday vs Prime Day vs Cyber Monday, Which are Real or Fake Sales - 1st Dec 20
The No.1 Biotech Stock for 2021 - 1st Dec 20
Stocks Bears Last Chance Before Market Rally To SPX 4200 In 2021 - 1st Dec 20
Globalists Poised for a “Great Reset” – Any Role for Gold? - 1st Dec 20
How to Get FREE REAL Christmas Tree 2020! Easy DIY Money Saving - 1st Dec 20
The Truth About “6G” - 30th Nov 20
Ancient Aztec Secret Could Lead To A $6.9 Billion Biotech Breakthrough - 30th Nov 20
AMD Ryzen Zen 3 NO UK MSRP Stock - 5600x, 5800x, 5900x 5950x Selling at DOUBLE FAKE MSRP Prices - 29th Nov 20
Stock Market Short-term Decision Time - 29th Nov 20
Look at These 2 Big Warning Signs for the U.S. Economy - 29th Nov 20
Dow Stock Market Short-term and Long-term Trend Analysis - 28th Nov 20
How To Spot The End Of An Excess Market Trend Phase – Part II - 28th Nov 20
The Gold Stocks Correction is Maturing - 28th Nov 20
Biden and Yellen Pushed Gold Price Down to $1,800 - 28th Nov 20
Sheffield Christmas Lights 2020 - Peace Gardens vs 2019 and 2018 - 28th Nov 20

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Is the Economic Stimulus Recovery Party Over?

Economics / Great Depression II Dec 21, 2009 - 11:43 AM GMT

By: Q1_Publishing


Best Financial Markets Analysis ArticleIs the Fed’s free money, economic “reflation” party coming to an end?

There are a lot of well-publicized signs it may be.

Inflation is starting to tick up. The Labor Department reported this week its inflation measures rose at annual rates of 1.8% (CPI) and 2.4% (PPI).

On the unemployment front, “good” news is just around the corner too. The Census Bureau has to finish up its search for 1.4 million temporary workers in the next few months. Also unemployment benefits will start expiring soon for many folks. Which means people will leave the work force or take whatever jobs they can get, both of which reduce the official unemployment rate. (Side note: The impact of these two events should be noticeable shortly after Congress’s jobs program is enacted – pure “coincidence,” your editor is sure)

On top of that, the hottest reflation trades are showing their first significant weakness in a long time. For example, real assets like oil and gold are 10% below their recent highs, China stocks have failed to set new highs, bank stocks appear to have hit a wall, etc.

On the surface, it’s not looking good for the fed-fueled, reflation trade. Remember, the market is looking for signs the Fed will keep rates low to fuel the current rally to new highs – bad news is good news.

But if you look past the most closely watched indicators, it’s much easier to see when the Fed will hike rates and put an end to the party. It’s probably farther away than most believe. Here’s why.

Keeping One Step Ahead of the Fed

The entire relation trade has depended on the Fed. The low rates have allowed traders to borrow money for free and buy anything that’s going up. The low rates have also encouraged savers to look for better returns outside the lowly yields of money markets, bonds, and CDs.
That’s why the current rally depends on the Fed keeping rates low and all eyes are on the economic indicators the Fed is watching.

Everyone is trying to get a jump on when the Fed will raise rates and dissecting every bit of economic data very closely. But there’s a much easier (and accurate) way to do that.

You just have to look at the current economic situation from the Fed’s perspective.

You know, think like your enemy, to beat your enemy.

Inside the “Man of the Year”

Right now the Fed believes it is fighting another Great Depression. To them that means an all out war against deflation.

Just listen to Bernanke’s past comments on the Great Depression. It doesn’t take long to see he truly believes deflation was the cause of the Great Depression.

This excerpt from Bernanke’s speech at the National Press Club in 2002 explains it all, Deflation Making Sure It Doesn’t Happen Here:

The Congress has given the Fed the responsibility of preserving price stability (among other objectives), which most definitely implies avoiding deflation as well as inflation. I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States and, moreover, that the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief.

Clearly, they’re at war with deflation. “Whatever means necessary” is a powerful statement.

The thing is though, the big headline makers like unemployment, CPI, and gold prices, don’t matter much to the Fed. There’s something much bigger they’ve got their eyes on.

A Pattern Makes Perfect

That’s why we have to look at what the Fed is watching to see if the economy truly is recovering.

That is credit.

You see, the end of every recession has been marked by a rebound in the rate of consumer credit expansion.

The chart below shows the rate of consumer credit expansion since the 1940s:

It doesn’t take long to spot a pattern.

Each recession coincided with a rapid decline in the rate of consumer credit expansion.

Each recovery coincided with a rapid increase the rate of consumer credit expansion.

There’s no reason to expect the current recession to be any different.

This is what the Fed is watching closely as the true signal the recession is over. And so it is when credit expands, they’ll start to raise rates.

That hasn’t happened yet and it’s not likely to happen anytime soon.

The Forest and the Trees

Once again, there’s going to be a lot of debate over the coming months on a lot of subjects.

The market will likely continue to focus on unemployment, consumer and producer prices, and other bits of econo-data.

Meanwhile, they’ll continue to give little attention to the rate of consumer credit expansion – a.k.a. what actually matters. It’s the classic Wall Street habit of failing to see the forest through the trees.

But hey, that’s opportunity for us and why we’ll stick to our original strategy at the Prosperity Dispatch,  and take the most recent round of volatility in stride.

Basically, the Fed is going to keep the free money, reflation party going for the foreseeable future. They won’t be moving an inch until they see credit demand rebound, which could be many months away.

Until then, they can be as “creative” as possible and prevent deflation with “whatever means necessary” with few immediate consequences.
There will, however, be consequences…eventually.

That’s why we continue to buy on the dips, forget about the short-term volatility, and bet the Fed will keep the party going for longer than most everyone expects. All the while keeping in the back of our minds the true causes of the Great Depression and why this rebound, whether it lasts another week, six months, or two or three years, will go down as a giant bear market rally.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Disclosure: Author currently holds a long position in Silvercorp Metals (SVM), physical silver, and no position in any of the other companies mentioned.

Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.

© 2009 Copyright Q1 Publishing - 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.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

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

6 Critical Money Making Rules