“I don't believe that, but you are a fool if you do not take the Fed at their word. The lynchpin for the Fed is that rising equity prices will create a virtuous circle of economic activity. Mr. Bernanke himself has cited the positive effects his activities have had on the stock market.
Many traders are more than distressed by this policy...they're apoplectic. "QE2 is the exercise of fiat printing to raise asset prices in order to 'trick' the 'moneyed class' into doing the things that create economic activity," one exasperated trader wrote to me recently. "Problem is, it only rewards speculators and the very wealthy...the inflation confiscates wealth from everyone else because base necessities (commodities) go up and wages remain stagnant." - Bob Pisani, CNBC Reporter, 16 Feb 2011
So is the market rigged? The short answer is, “sort of”. Under Quantitative Easing (QE2), the Fed is buying Treasury Bonds that the Government is issuing to cover the National Debt; but, the Federal Reserve has no real money to do this, so they simply print more money. They are buying the bonds on the secondary market from the Banks. This puts more money in circulation as the banks make a profit on the sale and have more money on their books.
The stock market benefits in two ways: (1) Directly, because the banks can invest it themselves (2) Indirectly, because the Fed purchases are artificially keeping Bond yields low, so investors are flocking to the stock market.
There is an unintended consequence though; some investors are betting on inflation and buying commodities. So commodities, (cotton, oil, copper, silver etc) are going up. Will this lead to disastrous inflation before the Fed can undo QE2? I don’t know. All we can do now is ride the wave in stocks.
I do expect a bad end to this. The 1966 Bear Market lasted 16-years and the 1929 Bear Market lasted 25-years.
A guess...this bear market will last 20-years. In other words, it will be 2020 before we make significant new highs in the Dow and S&P.
Our NTMS analysis still says “HOLD”.
