Sunday, June 12, 2011

Economy and Stock Market.

Is stock market an indicator of the economy or is it a rear view mirror?
There is no clear answer to that. I would think that in an ideal world, where Governments and central Banks do not continually try to influence the stock markets, where manipulation is within a certain limit, stock markets can be regarded as an indicator of the economic health of the country. But not so in today’s situation.
Today the biggest creditor nation of the world is trying to hold on to the proverbial straw to stay afloat. The situation has come to such that the US Government is actively monetizing its debt, although it is illegal in its constitution. They do it in a not so subtle manner. 1st one arm of the Government sells the Tbonds to the primary dealers and then another arm of the same Government buys them back. The primary dealers who are the powerful banks and the .01% of the population who virtually control the Government, make money in the process.  By the end of June 2011, Fed will hold 16% of the US debt vs. 12% for the Chinese.
The two trillion dollars injected in the system since 2008, have done nothing to kick start the US economy except re-flating the US Stock market and jacking up the price of the commodity. Only the top 10% of the US population own any stocks. (Congratulation to you for being in that top 10%, otherwise you would not have read this blog). The bottom 90% are squeezed dry every day. They are paying more for their food and gas and their purchasing power has gone down as wages have not gone up, dollar has gone down and  today the use of food stamps are at the record high and increasing. Where is the growth they talk about?
Between the top 10%, there is another sub division. The top 0.05% and then the next 9.95%. The objective of the uber top is to take the last drop of money from the rest and leave them in semi slavery. May be that’s what capitalism is all about. That’s how human history was for all these years before western civilization invented democracy about few hundred years back where lofty ideals like equality and fairness were talked about and cherished.
If stock market were to follow the economy , S&P 500 would have been below 500 level. There is huge disconnect between the real economy and the stock market. The classic example is the Oil prices. We know that consumers cannot afford $100 a barrel oil and such high price leads to demand destruction, as consumers, those bottom 90%, live pay check to pay check, have to adjust their spending pattern and cut down on other expenses just to get by. That leads to slower growth. But the manipulators don’t really care. The oil price today is not a factor of demand and supply but of speculation. There is not enough storage in the world to hold all the oil in the oil contracts.
Today the stock market is all smoke and mirror. Very soon that smoke and mirror will crush and it will catch down the real economy.
In the mean time, S&P 500, which is having a sell off of some kind, will now rebound before the option expiration. I think the March 2011 lows will be broken in a dramatic gap down in the morning of Monday or Tuesday to take out all the bull stop loss points. Then there will be sharp turn / reversal to finish the Triple Witching week at 1300 plus level. Just when bulls get some hope, I expect the market to back test the lows again. That is the nature of the beast. It will back test the lows before a bottom is in. if you believe my theory about the top 0.05%, who manipulate and control the market, they will inflict the maximum pain on the rest 9.95%. I also expect a sustained rally in summer because everyone is expecting a crash.
But as I said before, at some point, the smoke and mirror come crashing down and in this case the stock market will catch down with the real economy. I am betting that September 2011 will be that time when the end game starts.