Sunday, August 24, 2014
The belief that the stock market will go up forever is a bubble psychology that goes back to the South Sea Bubble, which fooled even Sir Isaac Newton. Since 2009, and especially since President Obama's reelection in 2012, the stock market has been going at a tear. The tear will continue. The editorial page of the New York Times proves it. The Times wrote this yesterday:
On one side is a small yet vocal minority of Fed officials who want to head off inflation by raising rates sooner rather than later. On the other is a majority that thinks a near-term rate hike would stifle growth and, with it, any chance of restoring health to the labor market. That group includes Janet Yellen, the Fed’s chairwoman, and most members of the Fed’s policy committee…The economic evidence indisputably favors Ms. Yellen, who has indicated that rate increases should not begin until sometime next year, at the earliest. It will take until then to be able to say with confidence whether recent improvements in growth and hiring are sustainable.
The reason that the Times's editorial is important is that the nation's hierarchy of decision making with respect to interest rate policy is as follows:
Investment banker cronies--> Ochs Sulzberger family-->The New York Times--> public opinion among Democrats --> President Obama's opinon --> Janet Yellen's opinion --> Federal Open Market Committee decision
If a Republican were in office, the Wall Street Journal would play the equivalent role.
Rates will be lower, or will increase less, than stock market participants expect because the Democrats have a commitment to boosting the stock market. The Times goes on to make the curious claim that keeping interest rates low will improve real wages; that real wages have declined while interest rates have been kept at historically low levels for the past 43 years does not deter them. Recall the old saying about insanity.
Seeking Alpha says that George Soros is currently hedging the S&P 500. I'm sure that there is a logical or statistical basis for his tactic because all evidence says that the stock market is high now. The support of the Fed will continue to keep the market at high levels into next year, though. I'm not buying the S&P short ETF, SH, just yet. However, I have about 1% of my portfolio in the VIXX index and an interest rate short index, both of which have declined and are near all-time lows. The VIXX index measures market volatility, and it goes up when the stock market goes down. It is at all-times low, which is an indicator that the stock market will go down.
From a policy standpoint the New York Sun's Seth Lipsky continues to offer a still, small voice of financial sanity among the Sodom and Gomorrah of the American media. Sadly, Paul Krugman will have to turn into a pillar of salt before any change in America's addiction to print-and-spend economics ends.
For now, I'm buying a little more Chicago Bridge and Iron (CBI). It's gone up a few percent since Buffett bought a second set of shares; according to Seeking Alpha several other hedge funds are piling in. The sharp decline due to rumors about improper accounting and the firm's president's illness seems to have offered Buffett and other hedge funds a buying opportunity; including pension fund holdings, Berkshire may own 25%.