A Signal from the Stock Market


"QE about to get a second chance at reviving the moribund U.S. economy."

The stock market has been weak of late, so it seems reasonable to question whether its rise from March 2009 is really forecasting better economic activity. Could it be that something else caused the market to climb from that low and send a false signal about the potential for economic activity? The following chart shows there is indeed another factor at work.

Correlation of Fed Monetizing to S&P500 1/2/09 - 6/11/10

There is a clear relationship between the rise in the S&P500 Index from its March 2009 low and the Federal Reserve's purchase of U.S. government debt instruments, which it calls "quantitative easing" (QE). Another term for it is money 'printing.' The Fed is simply turning U.S. government debt into more dollar currency, which obviously debases the dollar. It also explains the correlation in the chart.

Note how the S&P Index started climbing with the commencement of QE, then it dropped early this year when the Fed announced QE would end.

The stock market soon rallied thereafter, probably because few believed the Fed would really take away the 'punchbowl.' But it did, and the S&P has been in a downtrend since.

Now that the Fed has stopped printing, the S&P 500 Index not only stopped rising but began falling to reflect the true state of underlying economic conditions. Consequently, I expect there will be new calls in Congress for another stimulus package, but more immediately, it seems likely that the Fed will recommence purchasing U.S. government paper. QE, I expect, is about to get a second chance at reviving the moribund U.S. economy.

Policymakers continue to ignore the fundamental problem plaguing the U.S. economy—there is simply too much debt. The only outcome we can expect from more QE is a debased dollar.

Gold is rising against all world currencies, and its ascent will only be hastened if the Fed restarts QE.

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