Wednesday, March 6, 2013



Today saw the Dow reach a new all time high of 14254, exceeding 2007 levels. At the same time  the FTSE saw 5 year highs. The mainstream media slavishly and mindlessly report this   euphoric situation, linking it to the economic recovery, particularly in the US, and of course the financial genius of Ben Bernanke and the FED.. 

They fail to mention a few troubling little details about the US economy now, compared with then in 2007:

  • GDP Growth: Then +2.5% without QE; Now +1.6% with 1 Trillion QE
  • Americans Unemployed (in Labor Force): Then 6.7 million; Now 13.2 million
  • Labor Force Participation Rate:Then 65.8%; Now 63.6%
  • Americans On Food Stamps: Then 26.9 million; Now 47.69 million
  • Size of Fed's Balance Sheet: Then $0.89 trillion; Now $3.01 trillion
  • US Debt as a Percentage of GDP:Then ~58%; Now over 100.0%
  • US Deficit (LTM): Then $97 billion; Now $975.6 billion
  • Total US Debt Oustanding: Then $9.01 trillion; Now $16.43 trillion
Adjusted for inflation over the last 5 years the new "high" is still well below the 2007 level in purchasing power terms.

These figures do not take into account the stagnation in the real estate market, where shadow inventory will weigh on the market for years to come, despite the gross misrepresentations in this regard from the NAR (National Assoc of Realtors).

Also ignored is the student loan market, which  now exceeds USD 1 Trillion, and default rates are soaring, as hapless students with worthless degrees are unable to find work. The good news for politicians is up to now students were excluded from the unemployment statistics.
If one considers that USD 1 Trillion of new cash pumped into the economy generated only a 1,6% growth, or USD 250 Billion of GDP increase, then QE seems  an ineffective tool to create a meaningful recovery.

In reality the rise in the Dow has nothing to do with economic fundamentals. It is purely down to the QE and ZIRP driven "Bernanke High". Excess liquidity from QE finds its way into the stock and bond markets, driving prices up and yields down. Zero interest rates drive prudent investors like lemmings into taking unwanted risks to get some/any return on capital.

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