When the Markets Wise Up

The Dow went up 10 points yesterday. Gold went down $10.

Noise. Forget about it.

But wait…maybe this noise is whispering to us. “Watch out!” it seems to say.

Surveys show investor sentiment more bullish than it has been at any time since ’06/’07 – that is, since the peak of the bubble years.

And now the Fed has just entered the market with the biggest wad of cash investors have every seen. The Fed’s pockets bulge with $600 billion. It says it will spend $105 billion next month alone. The Fed is all bid. No ask. And everyone knows it.

How come the stock market isn’t soaring? How come it didn’t soar yesterday? And how come gold fell yesterday?

Is all this buying power already priced in?

True, the Fed is buying bonds, not stocks. But where does the money go? Into the hands of the bondholders. What do they do with it? Why don’t they buy stocks…as the underbid, underpriced, underappreciated risk asset?

What’s going on?

We don’t know. But we raised our “Crash Alert” flag yesterday. Anything could happen. And “anything” is usually not good.

But hold on…how could the market crash when the Fed is pumping in so much money?

Again, anything could happen…markets are sometimes smart and sometimes dumb. In times of trouble, the market’s IQ tends to go up. It gets smarter…it begins doubting what it hears…and what it sees. It looks further ahead.

If it looked ahead now, what would it see? It would probably see a speculative surge…followed by a sell-off. Looking at the big, long-term picture, it might see that there is little reason for much price appreciation in US stocks over the next 5, 10, 15 years. How are companies going to make more money? The economy is de-leveraging.

If prices don’t go up, investors have to look to yield for their money. The current yield is only about 2.5%. Not enough. In order to get the yield up to a more respectable 3.5%, stock prices would have to fall – by about 40%.

The stock market will probably come to terms with that logic sooner or later. Maybe it will skip the speculative run-up in prices all together. Maybe it will just sell off, to bring stocks down to a point where yields make them attractive again.

Stay tuned…

Bill Bonner
for The Daily Reckoning