In this cycle, the stock market will not die a natural death. In an organic market which is what professionals and amateurs alike believe we have, a bear market begins when supply finally exceeds demand after prices have been elevated by investors bidding prices up due to a strong belief in positive influences.
Today’s stock market has been created by a political agenda and is not the result of enthusiasm and excitement on the part of the public. As supply begins to overtake demand, stock prices are artificially supported. In order for the market to drop, the political agenda will have to be exposed or the support network must unravel more than it already has. What are the pillars that support the market? How can changes within and between these pillars cause the stock market to fall?
Federal Reserve: The primary role of the Federal Reserve System is that of elevating asset prices. There is no evidence that the resolve to accomplish that goal has weakened. As Quantitative easing ends, new tools for supporting the market are being rolled out. In the case of a serious decline, our Federal Reserve will announce that they are buying stocks outright to “save the world.” In the history of the world, there has never been a government initiative that has been a benefit to an economy.
Foreign Central Banks: Foreign central banks buy stocks without apologies. Many have loaded up on the riskiest stocks in the history of stock market trading. Anytime the central bank favorites are under pressure, expect foreign central banks to support the prices of what they already own. How long will foreign central banks cooperate with a U.S. political agenda? They will continue until or if citizens in foreign counties discover how much they are being fleeced and force changes. Discontent around the globe is growing but so far there is no focus on the actual causes of difficulties. Failure of foreign central banks to cooperate in elevating asset prices would burden our Federal Reserve with a serious handicap.
Friends of the Federal Reserve: These are high frequency trading firms, individuals and institutions which get advance information and are guaranteed a profit. These are the parties who squeeze short positions, slow down volume when that is needed, create artificial demand in the derivative markets and keep prices moving higher. This group is allowed to break just about any law, if the end result is higher stock prices. Causing a decline is not politically doable. These are not patriots. They will cut and run when and if the profit guarantee disappears. As it is, stock market volume consists almost entirely of very short term trading. If mountains of long term holdings started hitting the market, I am not sure the friends could handle it. They also depend on ordinary traders continuing to use traditional technical analysis dogma for decision making. That is about like offering a neck to a predator but folks can’t break the habit.
Corporate Buybacks: This may be the first pillar to break. Corporate insiders are not fools. The fastest way to get paid the most money in the shortest period of time is to run up the price of the company’s stock for any or no reason at all. Corporations will take advantage of the government’s gift as long as they possibly can. Producing and innovating is much slower in generating personal profits. They also know that after loading up their companies with treasury stock with borrowed money, any drop in the stock’s price will be catastrophic. This may be the first pillar to opt out.
Retail Brokerage Firms: Every order received is shared with the high frequency trading firms. Retail brokers benefit every time a customer gets stopped out.
Stupidity: The biggest asset the manipulators have is the stupidity of the American public. This is treated as a constant. That may be a mistake. It only takes 3% of the public thinking to generate a change in a political agenda. Thinking is starting to increase ever so slowly.
Chances are still better that the economy will be completely destroyed before asset prices completely change direction. What is important to know is that this is not an organic market. Government intervention in the stock market began during the Reagan administration in a small way and has continued to each year since. Today all of the world’s resources are focused on keeping asset prices moving higher. A very small percent of the world’s population has an overwhelmingly large part of the world’s political power.
The Swamp My Puppy Dog and I is another timely Curbside Jimmy song. 