Mad#1
Hedge funds report that the June second quarter the best in 20 years as the Dow Jones Industrial Average increased 37% to 8800 before settling at around 8300 last week. The low, on March 5, 2009, was 6440 and indeed it is curious that we have seen such a bounce given recent unemployment records and our ongoing stalled economy. What gives? I think the stock pickers are the beloved banks, who have received billions in bail-out cash to free up lending, which has not happened. Rather, these institutions have bought equities and hence the Dow's improvement. If we look at Citicorp's balance sheet, for instance, cash and cash-equivalents which includes liquid stocks, has increased from $200 billion to $618 billion from December 31, 2008 to March 31, 2009. Bank of America: $42 billion to $197 billion over the same three month period. This suggests two things: A) banks gambling with our tax dollars - outrageous. Outrageous! and B) a recovery, indicated by the stock market, illusory. In fact, remarkably, we may be in another equities bubble since pricing not supported by strong underlying company performance: the S&P 500 PE ratio is trending up following March 31: S&P 500 PE ratio rose to 132 (the reason is the denominator E or earnings in the PE ratio enemic while prices is rising. For my calculations the 919.14 closing price of the S&P 500 on
This suggests that rather than inflation, which our politicos secretly desire as it improves - artificially - property values and reduces foreign debt, we may still fear deflation which, once started, spirals downwards out of control. See exhibit A, Japan. The Republicans and we all have much to fear by breaking the bank with rampent borrowing but the alternative worse. In short, something has to give. We all know what it is, too: military spending. Iraq has cost us dearly and we will soon otherwise have no choice but to reel in the Pentagon. Can we do so before before our social fabric stretched to tear?
