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Thursday, September 16, 2021

COOKING & BOOKING: October Instincts

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COOKING & BOOKING: October Instincts

The Executive Director of JPMorgan Chase admitted that the stock market’s “biggest nightmare periods have tended to be October.  You go back to obviously the crash in 1929, but the 1987 crash, and in 1989... was in October. You tend to have these October moments.” 

 

Financially most are feeling pretty good as brokerage accounts never looked healthier and home prices are over-the-top.  Over the past year, the S&P 500 has closed at new, all-time highs over 50 times and in so doing has created the illusion that the market only rises.    

This results in taking more chances when investing.

A White House which believes that global warming, systemic racism and COVID are our greatest threats, does not possess the foresight and wisdom to comprehend what is economically occurring.   

The K-shaped economy and booming stock market underscore that Main Street and Wall Street are at a major disconnect. Many dismiss the growing rate of inflation, the unprecedented intervention by the Federal Reserve’s nonstop money-printing and increased debt believing that the dollar today is worth the same as it was last year. 

It’s not. 

The duality of low interest rates and those stimulus payouts have devalued the dollar.  Thanks to inflation and time, savings in fixed investments like CDs, bank accounts and money markets lose purchasing power.  With yields registering next to nothing, where are investors expected to put their money?

As a result, savers seek more risk in order to obtain better returns leading to a stock market that is cooking and overvalued. Increasing stock prices coupled with a mushrooming federal debt is a brick road paved over with inflation.   As the Fed continues easy-money policies, the market will continue higher as the infusion of cheap dollars rules the day.  

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Most bankers, brokers, and politicians understand that these bouts with inflation are what economists call: “The Money Illusion.” It is when one’s wealth is measured in how many dollars they possess, rather than its purchasing power.   

Among investors, the Money Illusion breeds risk taking and heightened speculation.  It’s like watching a skilled magician work his stagecraft.  It looks and appears amazing and impossible, but it is not at all what it seems. 

Low interest rates did, in fact, rescue the market.  The Fed slashed short-term interest rates to near zero at the onset of the COVID-19 debacle and bought large purchases of Treasury and mortgage bonds making dollars discounted.  In so doing, The Fed propped up not only the bond markets, but stocks, too.

Many are in denial about what is truly happening throughout our financial system.  To paraphrase writer Upton Sinclair, it’s difficult to get someone to look when their getting paid depends on not looking.

The laws of economics cannot be repealed, no matter what one’s wishful thinking may be.

Adding to the illusion is that 40% of all U.S. currency in circulation has been printed since March 2020.  Few comprehend the effects of so many trillions in our financial system.  The Case-Shiller Index which measures home prices has risen 18.6% for the year, up from a record 16.8% the month before.  The index is the proverbial rat in the financial mine that brings with it a healthy dose of inflation.  

Financial storm clouds are forming as the economy experiences labor shortages, supply chain disruptions, rising prices, and increasing inflation.  With too many dollars chasing too few assets, the good times won’t last forever. 

One out of every four companies are on life support because of low interest rates.  With rates near zero, and with inflation rising, The Fed cannot afford to keep them low forever. 

Bankruptcies are on the horizon. 

The federal debt continues to grow as trillions crowd the government’s balance sheet with the debt literally growing by the second.  Inflation does to a degree keep the debt somewhat manageable.  However, as inflation rises, Social Security, and other assorted fixed incomes like pensions will see their buying power shrink even further. 

Eventually, a significant tax increase will hit all Americans hard and below the belt – regardless of income. 

Rising stock prices are great, but when easy money begins to create social, political, and economic turmoil, something is seriously amiss.  A White House which believes that global warming, systemic racism and COVID are our greatest threats, does not possess the foresight and wisdom to comprehend what is economically occurring.   

The laws of economics cannot be repealed, no matter what one’s wishful thinking may be.

As October looms, consider this a heads-up.  

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Last modified on Thursday, September 16, 2021
Greg Maresca | Remnant Columnist

Maresca writes from Northumberland County, Pennsylvania.