September 16, 2012
Weekly Market Outlook
By Keith Schneider
As expected, Equity Markets rallied around the world as it responded to the Fed's decision to aggressively pump money. Caught between a choice of a double dip recession or possible hyper-inflation, Bernanke chose inflation and turned up the monetary spigots big time.
In one of the better orchestrated moves, the Fed chairman and ECB head Draghi have managed to move the markets almost 15% from June lows. Bernanke has also doubled the Dow industrials since the financial meltdown, stabilized the financial system that was on the verge of a complete meltdown, and helped engineer a significant economic rebound.
However, the recovery is stalling and gold is set to move to all-time highs. Western civilization, currently run on the principles of Keynesian economics seems to have hit its limitations. We are now approaching what one could call Cargo Cult status.
For those not familiar with the term "Cargo Cult" please allow me a moment's digression to explain. The most widely known Cargo Cults started in the South Pacific after WWII, specifically in Fiji and Papua New Guinea. After WWII ended, Indigenous (some were cannibals) people were fooled into believing that by performing certain rituals, the "wealth" that was dropped from skies during WWII to supply troops would re-appear. The wealth from the skies never came back, but the ritual has persisted for years.
It seems that bankers all around the Globe are performing a similar ritual, dropping money while global economies wait for a return to prosperity. Clearly, dropping more money into the system has its limitations and even Keynes would have concerns at this point. Cracks are apparent in how effective the new easing will be as US treasury rates actually rose this week, but high yield corporate bonds and junk debt declined, where players are seeking some level of return.
Since late July, we have been highlighting topping action in US Long Bonds and they have dropped about 10%. Bankers and Politicians are caught between the choices of excessive inflation versus fiscal responsibility that would likely bring on another recession or worse. There is no good playbook.
Watch the tape, play the trends and ignore the rest. This is a clear example of how rational thought can get in the way of successful trading. Currently, the US equity markets are frothy short-term, which we cover in this week's video, as well as various credit markets.
And be sure to subscribe to our YouTube channel here and get all of our free videos as soon as they’re released!
Have a great weekend!
Every week you'll gain actionable insight with:
