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The Cost Of Dow 11,000

6 December 2010 7 Comments

Stocks are performing fairly well, still very much higher from the bottoms hit in early 2009.  This of course has not come without a cost.  What is that cost?

Well, here’s a hint.  Gold is at $1400.  Silver is at $29.  Oil is above $80.  Food prices are at higher levels than they were previously.

There has definitely been a cost to orchestra this stock market rally which is exactly what the Federal Reserve has done.  The cost has been a weakened currency and lower purchasing power.  The Fed has bet that by boosting asset prices including stocks, Americans will feel wealthier and go spend money and boost the economy.

Even if this is happening – and it is to an extent – it will not improve the actual economy, but Americans are becoming increasingly broke.  A strategy that continues to make Americans increasingly more broke is not a strategy that results in any foundational recovery or increase in future prosperity.  Quite the opposite.

So if that is true, then why do it?  Well, it seems that the current leadership has a vested interest in keeping the status quo going as long as possible.  Maybe to hang on to power or to their current place in society?  I don’t know why exactly.  All I know is that the leaders want the game to continue no matter who is hurt in the process.

There is only one thing you need to know: The average American is getting decimated by this so-called recovery.

The only way to salvage some of your wealth or assets might be to vacate the system that the Fed is so set on propping up.  It might mean pulling money out of the traditional investments and assets and out of the manipulated financial system.  Or, it might just mean you stop further allocation of additional funds into these areas, and instead put your hard earned money into hard assets that can’t be debased by politicians.



  • Tom said:

    I don't really understand the argument really. If you think that Fed policy is causing inflation in the prices of commodities why don't you just invest in those? Commodities companies make up a large percentage of most indexes even.

  • 20smoney said:

    Tom, I do invest in commodities and commodities based companies.

    My point is that the cost of making americans feel wealthy via higher stock prices is a loss of purchasing power.

    The dow can hit 50k, but if bread costs $20, how much better off are the average americans?

  • TaJ said:

    The problem with investing in a manipulated market is that you no longer know what the true prices of things are.

    I don't think we can even say that there will necessarily be inflation… or deflation… or stagflation… though there could be any or all of these things. We don't know! Every number that's out there is manipulated to some degree.

    Central bank money printing is adding more "energy" to the global financial system, making it unstable. Instability is not a good environment for any investment, unless you're real quick on your feet.

    I wanted to make an analogy to global warming but I'm not sure everyone here believes that's a real thing, so… 🙂

  • Tom said:

    I think the idea that there is some "true" price of things is illusory. The price is whatever the market can bear, and the Feds action have an effect on those prices. I don't think that it's fair to say that the government is setting prices. They are definitely influencing them but only inline with what the stated mission of The Fed is, to maintain price stability. We may think it's great that suddenly houses cost 40% less than they once did but in the long term I would argue that it's not a good thing for small investors. Why? because why make such a large investment (your life's earnings for most people) when it can be cut almost in half overnight. Now if you do allow this to happen the end result will be that all the property will end up in the hands of fewer and fewer people (the super rich) because they will be the ones who can afford to ride out such price fluctuations. One the one hand you don't want to form asset bubbles by propping up house prices but on the other you don't want to have no price stability because then the super rich end up owning everything. You can see this happened in in equities during the financial crisis. The super rich lost a lot less than middle class investors simply because they could afford to ride it out.

  • 20smoney said:

    Tom, you're making an argument that price inflation is better for the little guy than the big guy. Sorry, but you've got it completely wrong.

    The rich can afford higher prices, the little guy cannot. I usually refer to consumer product inflation, but you brought up housing and that is a good example as well. You're leaving out renters in the discussion. Because housing prices are inflated, rental rates are inflated and the little guy is getting slaughtered.

    Inflation benefits the rich and destroys the middle & lower class. The Fed is in the game to protect the rich.

    The idea that they are accomplishing price stability is a joke. Price stability like oil shooting to $150, nasdaq to 5000 in late 90s, or 1 bedroom condos preconstruction to $800k? Yeah, that's stable alright.

  • Tom said:

    I think you're making a strawman out of my argument. Average house prices are down 25%, http://investmenttools.com/median_and_average_sal… . Of course there's going to be some bubble behavior. Rising commodity prices would happen even when an organic recovery comes.
    http://blogs.wsj.com/wealth/2010/04/30/top-1-incr… :

    "Meanwhile, share of national wealth held by the bottom 90% fell to 25% from 27%.

    The reason is that the wealthy benefited disproportionately from the rebound in financial markets. Their wealth generally is mostly in stocks and businesses, the values of which have surged since the depths of the crisis.

    Real estate, which accounts for the bulk of household wealth for the nonrich, hasn’t recovered. From 2007 through the end of 2009, owner-occupied homes fell 26% in value, while other real estate also fell 26%. Yet stocks fell only 24%, while other financial securities shed 14%.

    The rich, in other words, suffered a smaller percentage decline than did the bottom 90%."

    This is the cost of having no price stability. House price growth should not be a straight line but 25% and dropping is going to destroy the middle classes wealth more than anyone super riches wealth.

    Also, I think you may be misguided by believing that because the rich ending up benefiting from a course of action that it is hurting the middle class. The rich are able to quickly adapt and almost always end up benefiting from any circumstance. That's the benefit of being rich. The rest of us are stuck selling our labor to make a living.

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