Many investors have been taken by surprise by the sudden strength in the broad US stockmarkets, especially given the severe structural problems of the US economy. The breakout to new highs by the Dow Jones Industrials was predicted in a Marketwatch article on 13th April, based on volume studies. The S&P500 index has not as yet broken out to new highs, but is close to doing so and is expected to shortly. What are the reasons for this sudden strength and to what extent is it an illusion?
The US economy now has severe and intractable structural problems arising from massive and universal indebtedness which ranges across the spectrum from extremely high levels of personal indebtedness and then through high corporate debt levels and then on up to the State and Federal level. A highly geared life based on maxing out credit opportunities has become the norm across all strata of US society, but naturally such a way of life is not without risk. For all players, from the ordinary guy on the street trying to pay his huge mortgage and keep up with his credit card payments, right up to the Fed and the government, the specter of a liquidity gridlock and a deflationary implosion is understandably the thing to be feared more than anything, even eventual hyperinflation, and the thing that needs to be kept at bay. Who was responsible for this mess? - principally the government and the Fed, but essentially everybody - including every corporation and private individual who has run a highly geared operation or lifestyle based on credit. The essential point to grasp here is that there is now no way back, no way to return to a life of financial propriety. The flood gates were opened long ago and structural indebtedness has reached such extreme levels that any attempts to rein it in and bring it under control would quickly result in a liquidity gridlock and an inflationary implosion. A monster has been created with an insatiable appetite, and the Fed now has no choice but to keep feeding it. This is the reason for the latest wave of liquidity which is driving down the dollar and contributing to the rise in the stockmarket, but there is another factor driving up the stockmarket which we will now look at.
Some of you may recall how before the Asian Tsunami struck, the sea receded as if there was a very low Spring tide, and those folk on the beach who did not understand what that meant walked further out looking for shells or maybe sunken vessels and were doomed as the Tsunami then came rushing in. This makes a fitting metaphor for the ocean of cash - of dollars - that has been accumulated by countries such as China as a result of prolonged and massive trade imbalances with the US. With the dollar dropping ever lower this ocean of cash, that was until recently held back like the waters before the Tsunami, is now rushing forward like a tidal wave to literally buy up America lock, stock and barrel, via its capital markets, and it's all perfectly legitimate - it's a free market, right? - or so they say. This is globalization in action, folks, so be smart and be sure to send little Johnny to Mandarin classes. The world IS NOT getting poorer, at least not in the financial sense, it's getting richer, a lot richer, driven by the powerhouse economies of Asia, principally China and soon India, where people are ambitious and want to work to make a better life for themselves and their families, and are not burdened with an entitlement mentality. For many American workers the age of driving 2 hours to get to an office to spend the day making cups of coffee and paper aircraft and ordering stuff on the internet (as the writer used to do before he was mad enough to become self employed) are numbered - the new oriental bosses are going to take a dim view of that kind of thing. Instead, American workers will be arriving at 6 am to begin the day with Tai Chi and chanting the company anthem, followed by watercress soup for breakfast.
Ironically, this economic takeover of the United States by far-eastern interests may be what saves the country from itself. But what about the effect on the prices of commodities, specifically Precious Metals and Oil, of this global growth and rebalancing?
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