The FED is out of control
From Russell - Dow Theory (reprint)
June 5, 2001 – There it was, right on the front page, right hand column, investors are becoming increasingly bullish about the stock market. In fact, the public is beginning to pile back into equity mutual funds.
Here we are with values near their highest level in history, and the public is turning increasingly bullish. What's the incentive? The incentive is that if you buy stocks here they should go higher. There's no incentive from dividends. The basic drive behind stocks now is liquidity. The Fed, flooding the nation with liquidity, is "floating" the market higher. With any luck, the panic-stricken Fed will bring back "the bubble."
Question: Russell, why do you say that the Fed is bringing back the "bubble?" What bubble?
Answer: The S&P is now selling at above 27 times earnings while providing a dividend yield of 1.2%. These valuations, taken at any other times in stock market history, would be considered "bubble values." Previous bull markets tended to top out at around 20 times record earnings with dividend yield at around 3%. This market is now priced higher than the peak values of any previous bull market peak in history.
Yesterday Greenspan expressed the opinion that there were no significant signs of inflation. The implication here is that he has room to drop rates even further.
Gold seems to agree. And bonds seem to agree. The yield on the 10 year T-note is now 5.31% while the yield on the inflation adjusted 10 year T-note (TIPS) is 3.25%. The differential in the yields is 2.06, down from 2.21 only a few weeks ago.
Furthermore, despite what you may hear, the 30-year T-bond (which is the most sensitive to inflation) appears to have bottomed (Sept. futures) at around 98.13 to 98.15. Over the last three days the Sept. futures have rallied above their previous peak of 100.05. As I write this, the "long bond" (30-year bond) is up 12 ticks to 100.30 on the Sept. futures. The bond market does not appear to be worried about inflation.
The fact of the situation is this – the Fed is going to continuing "printing money" until gold and the bonds tell them to stop. This has just NOT happened yet. Evidently, the outside forces of deflation are so strong that they have, so far, nullified the Fed's inflationary activities.
What the Fed is doing is extremely dangerous, it's a policy of desperation. In the end, it will backfire on the Fed and the nation. The Fed is intent on holding back the forces of recession, holding back the bear. The longer the forces of correction are thwarted, the greater the danger. The Fed is an institution that is running wild -- totally out of control.
The surging liquidity is literally forcing stocks higher. When you buy stocks here you're not buying income, you're not buying value – what you are buying is DIRECTION. That's always dangerous, but there's no sense in kidding ourselves, that's what's happening. |
