The Finance Insider blog

Search This Blog

Blog Archive

The Finance Insider

Thursday, March 7, 2013

Look at the Dow Jones Industrial Average. The benchmark stock index has already hit an all-time high. Does this not indicate that a recovery is underway? Can so many people be wrong? Well, we fear that this bull rally in the US stock markets is dangerous. The economy still fares poor on several vital indicators. Household income and confidence has been dipping to an all-time low. The case with employment, wages and salaries and housing is not encouraging either. At the same time, energy continues to remain expensive.

In essence, the US is in a deleveraging cycle after a 40-year boom fuelled by excessive debt. Its economy is going through a correction. As such, the stock rally is not supported by organic economic growth. The US Fed Chairman has been injecting huge doses of money recklessly into the financial system. This has caused stock prices to go up. Mr Bernanke has been hoping that the 'wealth effect' caused by the rise in stock prices would trigger consumer spending. And this in turn would prop up the economy.

That's nothing but wishful thinking. By artificially inflating asset prices, the US central bank has created an illusion of stability. We believe this is extremely dangerous. Any major external shock outside the control of the central bank could bring the markets crashing.

No comments:

Post a Comment