Ed Note: With Europe in economic trouble and the USA struggling and Debt soaked (even though its Leader declared wednesday that "raising the debt ceiling, which has been done over a hundred times, does not increase our debt"), one has to wonder what drove the S&P 500 to hit an All-Time High this week.
Currently, buyers have to be found for Trillions in US Government Bonds over and above the 85 BILLION per month that the Federal Reserve continues to buy - after it essentially admitted Tuesday that the economy is too weak for it to reduce its pace of creating money out of thin air.
In spite of the troubled conditions US Stock Indexes continue to behave as if a Financial Boom had been, and would continue to be driving them higher. A scenario like this has happened before. Or at least so say newspapers back in the late 1920's.
Martin Armstrong of Armstrong Economics explains what is driving them higher, and its not what Political leaders or the newspapers are telling you.
Martin's answer below begins with a question that you can read HERE
It’s a Matter of Confidence
"Money has NO CHOICE but to go to stocks. Pensions will go bust and stocks are becoming the ALTERNATIVE to government debt."
Prior to Great Depression in a PRIVATE WAVE, rising interest rates were seen as BULLISH because it meant people were still borrowing and bidding up rates. Rates crash in recessions because there is no bid.
The central banks have manipulated rates very low and capital has no choice but to shift. As confidence in government declines, rates will rise and people see alternative investments in the private sector exactly as we saw going into 1929. There is no relationship that is ever fixed BECAUSE there are other factors people may not be looking at.
Your statement there is a “high degree of confidence in the authorities to “manage” the situation without an accident” reflects this directional change. This is why gold declined. The Goldbugs only see their point of view. The MAJORITY disagree with them and ask the average person on the street do they think government will collapse or the dollar and they will look at you like you are a nut-job. We are not at the point of a collapse in general confidence yet. That comes after 2015.
Your statement “European bond market yields reflect complete confidence in the EU and ECB” does not reflect confidence but manipulation as is the case with rates in the USA. Governments are artificially setting them low to save money, but when the confidence shifts, rates will explode as the Fed was testing the marketplace.
The Pension Crisis is all about this confusion. They have been bond buyers. They earn nothing and the central banks are creating the next default – pensions. They do not have “confidence” but have no choice as do banks with requirements to buy government bonds for reserves.
Your statement: “The US stock market is exactly positively correlated to the belief that the Fed has things under control (see Wednesday’s reaction). Logically, loss in that confidence would obliterate stocks. Yet you suggest we are on the verge of a massive collapse in confidence in government and its agencies and that stocks will double. How do I reconcile?” Your assumption is incorrect. Stocks are not rising because of “confidence” in the Fed, the central banks have themselves been buying stocks lacking confidence in public debt. Money has NO CHOICE but to go to stocks. Pensions will go bust and stocks are becoming the ALTERNATIVE to government debt.
Even during the Great Depression, corporate bonds were in higher demand than government. Read the newspaper of 1929 and you will see the complete opposite interpretation of the same fundamentals from today.
About Armstrong Economics
Armstrong Economics mission is provide a public service for the average person to comprehend the global economy and for professionals to access the most sophisticated international analysis possible (the computer to the right is what is used for analysis)
We provide an integrated understandable global model approach that is free of personal bias, bravado, or other nonsense to enable you to see the inherent inner-workings of the world economy to grasp how everything is truly integrated to a single enterprise driven by international capital flows. Forecasting the World economy and markets becomes possible only when approached on a stoic unemotional basis from a international perspective. Trying to forecast a single market is dangerous for everything is interconnected on a global scale. Personal opinion has no place in forecasting. It was personal opinion that argued for centuries the world was flat and that the earth was the center of the universe with everything revolving around it. Galileo spent life in prison for daring to disagree with such opinions.