There’s no blaming Helicopter Ben for yesterday’s outbreak of irrational exuberance, but if not him, who? For perspective, recall the prediction made here in late May – that it would be a do-nothing summer for the stock market, with the Dow Industrials fluctuating meaninglessly between 10600 and 11200 until after Labor Day.  If you look at the chart below you’ll see that that’s pretty close to what has happened so far:

We should keep this chart in mind as share prices continue to whip violently around in the weeks ahead. While these almost daily conniptions may contribute to the impression that “something” is happening on Wall Street, the opposite is true: stocks are simply marking time, unable to establish a significant trend.

How do I reconcile this fact with my prediction here the other day that a stock-market collapse lies just ahead? I don’t.  There are a dozen great reasons why stocks should be trading at less than half of today’s prices, and we need to be prepared for this no matter what happens from one day to the next. But at the same time, we need to acknowledge that stocks are unlikely to plummet as long as there are hundreds of trillions of dollars of funny money in play in the global financial economy. That is the game these days, not trade in actual goods and services, and the dollar amounts involved dwarf the “real” economy to which stocks supposedly are tethered.

Shell-Game $Trillions

We know that the dollar sums that fuel the world’s smoke-and-mirrors economy aggregate into the hundreds of trillions of dollars because, according to the Bank for International Settlements, leveraged financial instruments alone currently amount to more than $300 trillion, or more than five time global GDP. Since it only takes a paltry few billion dollars worth of buying power to send U.S. shares sharply higher on a given day, we shouldn’t be surprised when an occasional, slight shift of shell-game money toward stocks makes shares go bonkers.

While it behooves those of us who remain skeptical to step out of the way when the herd comes thundering in, we needn’t feel guilty for inferring that nothing healthy or in any way positive has occurred. Someday, something is bound to occur that causes all of the world’s funny money to vanish in mere hours. Until it happens, though, it would seem that stocks have little choice but to continue hovering on a permanently high plateau.

***

Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2006, Rick Ackerman. All Rights Reserved. www.rickackerman.com 

-- Posted Tuesday, 25 July 2006 | Digg This Article