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One More Melt-up Before the Crash?

By: Rick Ackerman, Rick's Picks

-- Posted Tuesday, 29 May 2012 | | Disqus

[We recently featured a guest commentary from Gary Leibowitz, a frequent contributor to the Rickís Picks forum. In the essay below, he explains why, despite Europeís financial troubles and signs of a global economic slowdown, a perfect storm of positive factors is likely to produce a final hurrah for stocks. Donít hold onto them for too long, though, says Gary, because 2013 is going to bring disaster for most investors. RA]

Whatever happened to all that money Helicopter Ben printed? Surprisingly not very much. Between late 2008 and the end of 2011, the Fed injected almost $2 trillion in the financial system. Most of it, however, is parked in banks as reserves. At the same time, the Fed announced it would pay interest on those reserves. They paid $2 billion in 2009 alone. Since the Fed created an incentive for banks to hold that cash, 88 percent of it was still being held as of December 31. There goes the theory that we could inflate our way out of this mess! In fact, the Fed has done exactly the opposite, creating a system that pumps banks full of interest-free money while keeping that money from circulating. How ingenious! M2 velocity, which measures the frequency with which a unit of money is used, then re-used, to buy goods and services, has been contracting since 1999. In fact, it is near an all-time low. At least, it was up until a few months ago. The recent announcement of a huge borrowing frenzy last month could be an anomaly, or a breakout of all that zero-velocity cash. But up until recently, the money has not been lent, or spent.

It seems that high commodity prices may have been caused by the huge monetary spike. Not that the money actually fed into the system as inflation; rather, it was the fear and anticipation of inflation that pushed prices higher. Under the circumstances, it can be reasonably inferred that all of those conspiracy theories that had the Fed working with some diabolical group to pull the strings, holding inflation at bay, were incorrect. In fact, the actions of the Fed, along with widespread, errant assumptions about the inflationary effects of monetization, may have helped to create more inflation than easing alone might have produced. And now, with monetary velocity flatlining and the economies of China and Europe slowing dramatically, we have a convergence of factors that could bring about a nasty bear market in certain investables, especially commodities and energy. This makes perfect sense, although it seems not to have occurred to the many economists who are more bullish on the economy than theyíve been in years Ė and worried about an outbreak of inflation. To the contrary, if this mechanism is working in the way Iíve described, we could have a nice bout of deflation. It would come at first in the form of a contraction in food and energy prices. Under the circumstances, the spectacular run of earnings for companies in these sectors might come to a screeching halt.

ĎDeath Threatsí from Inflationists

An argument I had years ago on a financial blog caused so much contention that I got death threats. I made the simple observation that, no matter how much money the Fed produces, if lenders refuse to lend or borrowers to borrow, deflation was possible. They told me this was impossible and that I didnít understand the definition of inflation or how the Fed works. Well, in hindsight I might not have. However, it seemed a stretch then, and still does, to believe that the Fed could simultaneously pump the banks full of liquidity while creating incentives to ensure that the excess money would not cause inflation.

How this relates to the markets going forward is the subject of an interesting debate. If the U.S. consumer is actually starting to spend and borrow like in the good old days, as demand for energy wanes we could have a perfect stock market environment. Imagine the unwinding of all those bets on commodities as prices fall and spending increases. It might sound like an oxymoron, but in the real world both are possible. Granted, prices will eventually catch up to demand. But that gap could persist for many months of perfect stock-picking weather. Gold, in the meantime, should trail until unmistakable signs of a heated economy emerge.

New Stocks Will Lead

Before I declare the war on debt over, I should note that all it does is delay the inevitable. Unfortunately, private debt canít be forgiven like public debt. If the lender is the Federal Reserve, debts are easily forgiven or fudged. But for private lenders, once they realize they will never get paid the game is over. Will governments continue to bail out the failing parties? Will austerity measures continue even as governments try to keep sovereign borrowers from sinking into bankruptcy?

In the meantime, for the remainder of 2011, I expect stocks to rotate leadership and soar once again. The perfect investment will actually create a perfect storm for next year in which real inflation will create havoc on politicians trying to bail out the world when debt payments become too steep. The Pollyanna investment world of 2012 meets the Catch-22 impossible-to-salvage 2013? A real possibility. That means a wild ride is about to unfold. In conclusion, I would like to acknowledge a debt of gratitude to Richard Mills, author of this article. Some of my arguments came from this article, but the conclusions above are mine.


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 indication of future results, so let the buyer beware. There is a substantial risk of loss in futures and option trading, and even experts can, and sometimes do, lose their proverbial shirts. 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 subscribersí initials will be used unless express written permission has been granted to the contrary. All Contents © 2011, Rick Ackerman. All Rights

-- Posted Tuesday, 29 May 2012 | Digg This Article | Source:

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