Why True Prosperity Doesn’t Come from a Printing Press

Ooooh…

Bad, bad day yesterday. Municipal bonds took a big hit. California is going broke. The Dow finished down 178 points. Gold up $30.

Did you pay attention to our “Crash Alert” flag, dear reader? Hope so. This market is dangerous. Because it is built on a lie – that EZ money from the Fed’s printing press will cause stocks to rise, interest rates to go down, and the economy to revive.

It ain’t gonna happen.

Never in history has it worked that way. Ben Bernanke maintains that what he is doing is merely an extension of normal monetary policy. It’s not. It’s a daredevil maneuver in which the Fed funds about 100% of the US government’s borrowing needs over the next 8 months.

Will it do any good? It could cause a speculative boom in the stock market. Or a speculative bubble in commodities…or emerging markets…or anything else.

But real, genuine, honest-to-God prosperity? By just printing up money?

Nope. Not possible. It’s not that easy.

The risk is that investors may connect the dots. Let’s see… Stocks haven’t made them any money in 10 years. Yields are still down around 2% – so they can’t expect any decent returns from that quarter. And stocks are still expensive – with P/Es close to 20.

So, what can investors expect? Will P/Es go up? We can’t think of any reason why they should. Will stock prices rise? Again, they can do what they want…but we can’t think of any good reason for them to go up.

On the other hand, we can think of several good reasons for them to go down. The best one is this: that’s what markets do. They go from peak to valley…and back to peak. This one was at a record peak in 2000 and then another record peak in 2007…and still no valley. Stocks never got to be as cheap as you would expect at a major bottom. So, unless something has changed…that valley still lies ahead.

And wouldn’t it be just like Mr. Market to bring it on now? Investors are creeping cautiously back into the stock market. They took huge losses in ’07-’09. Their houses are down 30%…and still sinking. Many have lost their jobs. They have retirement ahead of them. And they haven’t saved enough money. So, they’re hoping to make some money now.

Meanwhile, the feds are hoping that this big $600 billion inflow of new money lifts stock prices. This is supposed to make people feel richer. Then they act richer…and then, like magic, they ARE richer.

But if the feds want stocks to go up, they should buy stocks, not bonds. When they buy bonds the money goes into the banking system. Does it end up long the US stock market? Or does it end up betting on gold or cotton or Indian stocks?

No one knows. But there is no guarantee that the feds’ gamble will raise stock prices. On the other hand, wouldn’t it be a cruel and obnoxious thing for Mr. Market to hit them all now with a major bear market?

Yes it would. Will he do it? We don’t know. But it’s a risk. Stay out of stocks. Buy gold on dips. Be happy.

Bill Bonner
for The Daily Reckoning