Irrational exuberance anyone?
I believe it was John Kenneth Galbraith, a committed Keynesian who
famously said the financial memory is "notoriously short."
How ironic then that Fed Chairman Ben Bernanke, a fellow Keynesian
and Alan Greenspan protege, is doing everything possible to inflate yet
another stock market bubble.
I must agree with financial adviser Richard Lehmann when he says five
years from now we will all look back and say, "What were those people
thinking?"
This brings us to the reality gap, that yawning chasm between the real economy and current asset valuations.
With the U.S. economy expected to grow at 1.8% this year and real
incomes slumping 3.6%, the biggest monthly drop in 20 years, how else
can you describe the difference between what's happening on Main Street
and what's happening on Wall Street?
The stock market appears to be ignoring Main Street's pain and
concentrating exclusively on the Fed money machine. It correctly assumes
the country is now being run by the Fed and Ben Bernanke.
The only problem is his policy of more, cheaper money has no history
of ever working. If it did, Argentina would lead the world in terms of
productivity and growth.
Perhaps higher stock and housing prices in the wake of slumping wages
and declining consumer confidence make sense on Wall Street and in
Washington D.C., however, they don't make much sense to me.
I am afraid the powers that be are just setting Joe Sixpack up for
another fall. Nothing like being the last soldier at the Little Big
Horn.
According to Jim O'Neill, chairman of Goldman Sachs Asset Management,
U.S. economic growth would have to accelerate to "ridiculously strong
levels" to justify a substantive advance from here for the S&P.
What chance is there of this happening when the just re-elected
visionary-in-chief has tasked the federal regulatory bureaucracy to
review each of its decisions in light of renewed concern over global
warming?
Foolish me to think that Al Gore's sellout to Al Jazeera put paid to
that myth. Such is the strength of true believers that they soldier
blindly on even after their prophet cuts the ground out from under their
feet.
I am sure Obama and his minions will use this fig leaf to stall or
defeat real job creation engines like the Keystone Pipeline, hydraulic
fracking and additional refining capacity to aid our energy boom. All
this will deprive Main Street, the real economy, with much needed jobs
and affordable energy.
A
s an investor, if you're not going to lose more money on this next
Fed-inspired bubble, you should understand who they're really working
for. According to Lehmann, "while the Fed continues to pay lip service
to reducing unemployment (Main Street), its real efforts are going into
keeping interest rates artificially low and trying to stimulate
inflation."
First, this helps government by enabling it to borrow and spend more
money. Next it helps Wall Street by driving money into riskier assets.
The one group it doesn't help is Main Street.
The inflation and incumbent economic dislocation that will result are
anathema to investors. Therefore, be very careful about joining this
dance. When the music stops, there may not be a chair to sit down in.
• Smith is president of Peregrine Private Capital Corp.
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