We are coming upon interesting times... hmm, I find myself saying that a lot the last 2+ years. Well, let's say we are continuing in interesting times. For so many decades a rising stock market (or other asset values) signaled (per market dogma) the markets sniffing out good tidings before the rest of us could recognize it.

But is it correct to use the most dangerous words known to any investor - it's different this time. Could rising asset values portend nothing other than a leadership class intent on playing a shell game, trying to show us how all is well again due to their paper printing prosperity? [May 19, 2009: Paper Printing Prosperity Defined] I think so. Which is why we can have deflationary aspects in our real economy while inflationary aspects in the Wall Street economy. And if you are not inflating your assets in the Wall Street economy, you are losing purchasing power by the hour - so they've got us by the short hairs again. We must buy risk assets just to keep treading water (or obviously move your dollars into gold or foreign currencies). We can also turn to Marc Faber who says very simply (I paraphrase) - the worst the economy is, the more they will print.

To highlight the treading water effect, via the Big Picture some great data today; start studying up on the terms real v nominal if you are new to the blog or the finance world.

We can put into perspective the asset inflation we are seeing in many different asset classes that has been achieved in part due to a depreciating US$ by analyzing the returns in the S&P 500 and DJIA for 2009 in terms of gold (real money as opposed to fiat). This highlights again the nominal gains we are seeing in stocks this year as opposed to real gains.

In gold terms, the S&P 500 is down .7% in 2009, a far cry from the 16.9% nominal gain, as the S&P 500 buys 1.017 ounces of gold vs 1.024 on Dec 31st 2008. The DJIA in gold terms is lower by 5.7% in 2009 vs the nominal rise of 10.7% as the DJIA buys 9.37 ounces of gold today vs 9.94 on Dec 31st 2008.

What awaits us ahead? Certainly the conundrum of rising asset values while the real economy suffers has arrived... hence, unlike in the old days when assets inflating foretold the markets signaling to us good days are ahead, instead the movement up means little more than a leadership regime gone wild with a fiat currency.

I saw this excellent post on Gregor.us and asked the author if we could bring it over since it touches on these points. I think he says what I think much more eloquently, although long time readers will recognize all the tagmarks we've been raising the red flags about. But the important point to speculators is, unlike every other time in history when assets (i.e. stocks, commodities) inflating refute bearish points; this could be the time when assets inflated could actually support the bearish view. Talk about contrarian!

Brought over in its entirety:

The Alignment of Asset Reflation and a Collapsed Economy

If all the highly informed people who’ve been waging a war the past six months against rising stock prices would just step back for a moment, they would perhaps understand better that their macro views are supported, not negated, by asset reflation. For it’s this asset reflation that hints at the singular and doomed strategy of our monetary policy, and its overlay on our collapsed economy. Just so that I’m clear: there is no macroeconomic recovery occurring in the United States. What’s unfolding currently is snap-back from last year’s crash, which led us to the bottom of a spider-hole. The positive bits of macro data, dribbling out here and there, are really just about getting us back to zero. A kind of steady-state, expected to carry on for some time to come. And that’s a best-case scenario.

You can think of the US economy as a kind of defunct amusement park, over which the FED has poured trillions of dollars of syrupy goo. The caramel candy is there for tasting, but it doesn’t turn the machines back on. The ferris wheel is silent. Since WW2, Washington has always been able to call upon Housing and Autos as the two areas to stimulate, to pull the country out of recessions. Of course, we just did that in super-sized fashion 6-7 years ago, to extract ourselves from the last recession. So, it’s kind of sad to see policy makers trying this again. Failed thinkers promote failed playbooks.


Our society’s hierarchy rests in part upon the following assumption: that the intellectual capacity of the chairman of the Federal Reserve, with his PhD and his white papers, is superior to that of a mortgage broker from Orange County, California. I think we need an adjustment to this type of assumption. Because the spread I see opening up everywhere in the US economy is what I call the Prestige-Performance gap, whereby the assertions of our elite no longer comport with observable reality. If the chairman of the Federal Reserve will not allow that the greatest credit bubble ever has now burst, or that it ever existed, then this partially explains why he would think stuffing the banking system with fresh capital would revive the economy.

Asset reflation therefore, in equities and especially in gold, should be seen not as exuberance but merely as part of the same chaos in pricing unleashed by The Federal Reserve, starting earlier this decade. As so clearly outlined in the recent data on employment, credit demand, consumer spending, and our (in)ability to save there is little to no prospect for a sustained economic recovery for one simple reason: Americans are now trapped by their debt.

For those who recognize a rising stock market as evidence of disarray, what we should anticipate now is the recognition phase where the wider public finally comes to understand the nature of our inflationary depression. My marker has been 100 dollar oil and 15% unemployment in California. That should finally get the message across. But other combinations will do: 1300 dollar gold, 1300 on the SPX, and more problems with Commercial Real Estate will also suffice. Like the prestige-performance gap, the divergence between the economy and asset prices apparently has to become even more grotesque before people will understand.