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Obama, money pumps, equity market rallies

Posted by Adrian on December 9, 2008

In basic stock market terminology there are two types of markets a bear market and bull market. In basic capitalism and economic structure there is two types of broad based markets, the wider economy and the capital markets. The stock markets are essentially the business dealings (trade) of the broader market or economy. It is simple in that sense. The complexity or trick is to try and connect the two, in an attempt at predicting future events, cycles and so on (to make money).

We are currently in a bear market. In September 2008 the stock market had one of the biggest sell off’s in history with most indices coming highs and falling close to 50% in the red. Then the volatility kicked in, ever since the US government pumped the money, gave out stimulus cheques, bailed out incompetent banks and basically threw money at everything they could think of; policy makers do not really understand economics in the real world, nor do they (or are capable of) differentiating between markets. To them, or what is fed to them by bigger market players, is the assumption that equity markets or stock market reflects the direct pulse of the economy, or barometer of economic and social well being. This of course is a detachment from the reality of the what the world economy represents, which is not stock market rallies. So, stimulus cheques, bailouts and money printing is the precursor to activate sock market confidence. Mix that with extremely oversold markets and you have sporadic rallies. So economic stimulus, bailouts are not designed for the average person in the street trying to survive, but for the market players to make money. That is all. So the surmise that rallies could peter out towards the end of 2008, should be revised to say that the rallies could be persistent, but volatility will still trump the rallies.

Money making on sucker rallies is courtesy of the institutional players. With the world economy becoming a disaster zone, a massive sell off is on the cards; maybe at some point in March 2009, or after March 2009.

US President Barack Obama has been advised by an old school (Keynesian) economic team to spend as much as the government has on infrastructure, roads, bridges etc, on top of that there will be a shoring up of the car industry. I suspect the US government will bail out the car industry in earnest. But the business model that will come out of a government bailout will shrink dramatically, sack a lot workers, then proceed to make small cars. Profit will be negligible and it will become a zombie business.

The US will eventually go broke, no doubt about that. I have been bullish on the US dollar, but the US dollar will crash hard at some point in 2009.

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