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Tuesday, June 20, 2017

Markets Be A Climbin' Into the Air Based on Air

Today as of this writing, the Dow is at 21,524 

Honestly 8 years ago when it was 8,539 on June 19, 2009, we'd never imagine it would get this high 

Of course we never imagined all the tricks and schemes of the central banks of the world, foremost the Fed to prop it up so dramatically to enrich all those who caused the 2008 crash

Think about that number for a moment...  In 8 years, it has risen 12,965 points
On election night 2016 before the cowardly, greedy investors had a mini-panic attack and dumped stock, the Dow was at just about 18,000

So it has gone up 3,524 or thereabouts in 6 months..

Now where did this new found wealth come from?   Certainly nothing tangible or you know, Real..

Guess that's why the vast majority of Americans' economic lives are not much better than when the lil' brown monkey became President
As stated a moment ago, the reason the market is so high and keeps rising is because central banks have intervened in the market in an unprecedented fashion for over 8 years. 

They have transformed stock markets into signaling devices that are intended to boost the perception of increasing wealth, whether earnings and productivity are actually increasing or not.

Remember in this world we live in, perception is reality.
The idea was/is to generate a "wealth effect" and calm people so they don't take their money out of the banks in droves or even worse, try to save

This perception of a growing economy encourages people to borrow and spend more as they feel their wealth is increasing. This will (so goes the assumption) overcome the stagnation of wages and spending, and spark a gloriously self-reinforcing consumer credit-spending binge.

In other words, a self-fulfilling prophecy so everything gets back to a central bank controlled 'normal' where the 'haves' continue to have in abundance and the 'have nots' believe the con that one day they will have too

This is how governments and banks have dealt with recessions for decades
This is considerably different from a stock market which accurately reflects where the economy is at the moment based on a open market of decentralized buyers and sellers, which reflects statistical data and sentiment regarding the real-world economy of sales, profits and productivity.

In other words, a thermometer that keeps accurate temperature reading

Traditionally speaking, the stock market is a discounting mechanism

What that means is the market absorbs data about the present and projects that into the future. If growth appears to be slowing, the market discounts future earnings and stock valuations decline accordingly.
If growth appears to be picking up, the market increases its expectations of earnings and valuations expand accordingly.

But even though global growth is visibly slowing, stock markets keep going up.

Why?

There are several dynamics in play. One is that human players now account for no more than about 10% of market activity; the rest is robots and ETF (exchange traded funds) buying and selling.

Yes,, only 10% of investing is done by living, breathing creatures
Another is that central banks have been major buyers of ETFs and stocks, and this is unprecedented. 

For instance, the Swiss Central Bank is now a major shareholder of Apple and Amazon, and the Bank of Japan owns a significant chunk of Japanese ETFs.

Central banks once bought assets such as bonds and futures as a temporary plunge protection team tactic to stop a downturn from accelerating into a rout or crash. 

Now they are buying trillions of dollars in bonds and stocks during so-called "good times" to keep the market lofting higher even as growth slows.
This permanent intervention via buying stocks has distorted what the market can tell us so rather than communicate a sense of how the real economy is doing, the market now reflects the will of central banks to keep the market lofting ever higher on the back of central bank purchases and liquidity.

This has created a disconnect between the market and the real economy, a gulf that widens daily.

Can it continue? 

Unfortunately yes, as long as central banks keep buying stocks and increasing liquidity.
Good luck getting this truth from mainstream TV and print financial news

But there is a cost to this manipulation: there is little information left in the market other than the enthusiasm of central banks to push valuations higher and suppress volatility.

This lack of reality-based information and the homogenizing of sentiment leaves traders and owners alike with a false sense of confidence, and sets up a Titanic Mindset

Something like "Hey, we can maintain full speed through this dangerous ice field in a flat-calm sea because this ship is unsinkable: the "experts" told me so.  We'll just crash through those little bergs..No worries, mate.."
Pretty much everyone today who follows stocks knows what happened on October 24, 1929 then continued on the 29th...

Trust us.. Very few to none expected it on October 23rd much less on June 20th of that year

We like Trump a lot but if he honestly thinks he is the reason the market is climbing for no real-world rhyme and reason and this is going to continue unbridled, he will find himself sadly mistaken

The moral of this little tale:  Don't get complacent..