Wednesday, September 20th, 2017 MST

Uncertainty in the markets

Fred Hickey, whose stock market and gold predictions I’ve written about before, sees the stock market on precarious ground.  He reminds investors that the Fed kicked off this bull market in stocks and bonds eight years ago with a forecast that massive money creation would “lift asset prices and generate a wealth effect,” which then would jump start an economic recovery.

He further reminds subscribers (monthly, one-year $140) that the plan was supposed cause the economy to reach “escape velocity” and sustain itself.  Despite that being an old Keynesian theory that many times had been discredited, it was still implemented.

After an economic recovery, the Fed would then sell the assets it purchased, and all would be well. Fiat money, money created “out of thin air,” had saved the day. Things didn’t quite work out that way.

Economic growth over the last eight years has not bettered 3% on an annualized basis, hardly reaching escape velocity.  Still, the Fed has talked about selling some of the $3.5 trillion in assets that it purchased.

If the Fed sells, that will drain money from the system, which, if creating money is supposed to stimulate the economy, will depress the economy.  Various FOMC members have said that the economy is strong enough to absorb the selling; others disagree.

The stock market is running on freshly created money.  If the Fed sells, pulling money from the system, investors will run for the hills.  Still, it is not a given that the Fed will sell.  Some analysts speculate that another round of QE is coming.

The economy is not on solid ground.  New jobs are mostly  in the lower-paying leisure and hospitality industries, and many are part-time.  Jobs in the higher-paying, full-time goods producing industries (manufacturing, construction, mining and energy) are two million fewer than in November 2007.  No job increases in the wealth-producing industries, but more jobs in the wealth-consuming industries.

The stock market does not like uncertainty.  Will the Fed sell, or will it not sell?  If this uncertainty causes stocks to start down, gold and silver will move up.  If stocks fall in a big way, the metals will go up in a big way

Leave a Comment

You must be logged in to post a comment.