16 July 2010

Endless Gold

The stock market slide is entirely to be expected as I have been saying for ages. Inflationary measures cannot produce a surge upwards, they move like a balloon then burst. This one though did not exactly burst it did what I said a while ago, it slid back down.

The market is highly technical now, this seems to be the source of valuations. 10,000 is acting like a gravity well from above and a boost from below. Keeping dollar at extremely low interest rates, effectively removing interest rates as a monetary tool by saying this is for an extended period, and thus allowing vast sums of dollar to be borrowed and pushed into stocks, is not even an inflationary measure.

It is too direct too close to the source, it was really a rescue measure, to give some respite to asset values while a real recovery hopefully took hold. The problem is, the economy is too hooked on debt and there need to be major efforts to restructure the US economy, which haven't really happened.

What has happened have been huge spending commitments. I approve of health care, to put it mildly, but what is the point of a measure which cannot be paid for at present tax rates.

Yes, it can be funded by relying on the dollar's status as the world reserve currency and as a flight to safety instrument. All these allow it to hold some kind of value despite these interest rates. Fed funds rates are effectively a way to add value to dolar, and they have removed this value adding mechanism.

Either they can shore up the sliding floods of cash away from equities or find a new way of providing cheap funds or deal with the probably accurate equity valuations and foucs on restoring the economy.

The problem with relying on borrowing is this removes cash which could go to, yes equities. Another problem is the cheap dollar cash went to the wrong kind of companies, those which were low because they should be low and thus could be pushed up (in a way the rescue measures have worked because of the technical nature of the market).

What is needed is something solid to build on the pleasant fact it is at or above 10,000 now instead of some place a lot lower. The cheap dollars worked, but let's keep it going.

When Obama got serious about infrastructure and science and engineering (the stimulus) great companies like EME and JEC got a boost. That was a good way to go. The stock market is like that phrase from computer science garbage in, garbage out, but conversely, give it gold (or at least something halfway decent to compute on) and it will give you endless gold.

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