Why Stocks Are Rising Even As The Economy Slumps

Stocks are approaching all-time highs. At the same wages and salaries, after taxes and inflation, are declining year over year. How can stocks keep going up without the economy leading the way or even following behind? Simple. It is a case of supply and demand in the stock market.

Ever since July 2011 when QE 2 ended, companies have been using some of the record amounts of cash on their balance sheets to reduce the total number of shares outstanding by about $1 billion each and every day. Why? All that cash was earning virtually nothing because of low interest rates. By the way, that $1 billion of corporate buying is net of all share sales, whether by companies, insiders or investors.

Then there’s the fact that this year, the Fed for the first time since the end of QE2, has resumed directly adding $4 billion each and every trading day into the bond and stock markets.

Therefore, we have more money chasing fewer shares. That is the only reason stocks are going up. So what if the economy is on its ass? What difference does that make in a drugged stock market? Isn’t it obvious that stock prices most likely will keep going up as long as the narcotic of free money keeps the investing public all doped up?

But the real problem with a drugged market is what will happen when the drugs are either withdrawn or no longer work. Can you imagine what this stock market will look like on cold turkey?

It will be ugly. Disaster almost always occurs at some point when governments create money to pay their bills. Very few governments in the past have been able to avoid collapse after having entered the quicksand of currency debasement. And the more we keep debasing our currency, the worse the ultimate consequences.

Yes, Warren Buffet on CNBC Monday pretty much said that this deficit problem is no big deal. After all, the U.S. overcame massive government deficits that paid for the Civil War as well as the two world wars. Therefore, says Buffet, the US government will overcome this mess. To me, that smacks of arrogance, not facts. There were specific reasons why the U.S. was able to pay off those three post-war deficits that are not true today.

Enormous wealth was created after the Civil War as a result of the opening of the West, the takeover of Indian lands for free land to settlers and the construction of the railroads that crisscrossed the nation. The years immediately after World War I also saw enormous growth. The auto industry, the telephone and the electrification of cities created enormous wealth. After World War II, there was the build out of the interstate highway system, TV and the beginning of the wireless culture.

Today truly is different for at least three reasons:

One, we are not fighting a war that threatens our survival. So we have not been borrowing from the future this time to prevent our demise. No this time we are borrowing from the future to pay our current bills, with no growth in sight.

Two, the $90+ trillion present value of all the future entitlements the U.S. government has already promised is greater then the $65 trillion present value of all U.S. assets.

Three, there is nothing I see on the horizon the equivalent of free land, railroads, electricity, the interstate highway system or the internet to take us out of the quicksand.

Below you may find the video.