A) Bernanke and crew have no choice but to keep propping up equities, because there's no consumer spending to keep it going right now....
B) The "big money" continues to sit on the sidelines with a "wait and see" approach and much to the dismay of Bernanke, the banks continue to be stingy and cautious with loans and monetary streams into the lagging real estate market.
C) Unless the government (aka Obama and Congress) can come out with a plan that gives everyone a clear picture of the way ahead....we have no choice but to continue QE.
In summary, if Bernanke abandons QE before the government establishes some sense of stability and the economy begins to hire again and replace QE with consumer spending, we'll see an even worse crash than if we'd have done nothing.
Corporate earnings (as a % of GDP) are higher than they were in 2006 and much higher than the average, which gives indication that without an increase in wages/labor/consumer spending, we're in for a large sugar rush crash.
Eventually, these companies cannot sustain earnings if people have no money to buy iphones and autos and home furnishings and clothing, etc.
I hate to say it, but if Bernanke quits now, it's gonna get bad.
All roads lead to the national debate on budgets, entitlements and socialism vs. fiscal sanity.
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I agree with you. That being said I don't know what may be the trigger or tipping point but I think there is a good chance that the market will collapse, almost is a certainty really ... just a matter of when.
While we have recently seen various fundamentally driven predictions for the S&P going back to its 1994 level of ~400 (most recently from Albert Edwards and Russell Napier), few charts predict a comparable major retracement in the key equity index. And while it is not quite a variant of the Kondratieff Wave chart familiar to most, this chart courtesy of Sean Corrigan shows the historical 33 year peak to trough frequency of the S&P, emphasizing the cyclical periodicity observed in market cycles. The chart predicts the next 33 year low to occur some time in late 2015, taking the S&P to the proverbial 400 level. As Corrigan observes: "A third, post-94 Bubble-era decline of -50% would unwind all of that move and half the log rise of the Great Bull Market (something the '49-'68 move did) and return to both the mid-1960's highs and Fib retrace the whole post - WWII move. Doing this by late 2015 would preserve the 33 year span."
The latest decline in employment and other economic data suggests the U.S. economy is about to, "relapse back into economic stagnation or recession..." according to Societe Generale's Albert Edwards.
Edwards explains that without more quantitative easing, his ice age theme, in which equity prices decline, and bond prices climb, is back on.
From Albert Edwards:
The Ice Age theme is now well known. In a world of very low inflation and near deflation, equities de-rate both absolutely and relative to government bonds, which also re-rate in absolute terms. After the obscene extremes of equity valuations seen during the 2000 bubble, we have entered a long valuation bear market which should end in extreme levels of cheapness consistent with an S&P around 400. The unavoidable deep recession associated with this level (not forgetting the inevitable China bust) will drag an already 'expensive' bond market to even higher extremes. One of the key themes of our longer-term analysis is that at the end of one of these lengthy 15-year phases for the financial markets (shown below), investors believe that the current investment phase will continue indefinitely. That was not the case in 2009 and is not the case now. There is still far too much hope to call a bottom.
There is, however, opportunity for equity investors at the end of this long, dark tunnel they are about to go through, according to Edwards.
Investors should note how the 2001 and 2008 recessions brought about savage Ice Age de-ratings of US valuations followed by only a partial 50% recovery of the previous valuation losses during the cyclical upswing. If we are about to set out another leg in the Ice Age de-rating, the next icy 'steppe' in valuations could take us closer to 7x - i.e. what we would typically expect to see at the end of a secular valuation bear market. By then investors would have lost all hope as we sink into deep recession and bond yields plunge below 2%. That will be the buying signal for equities and time to offload our remaining holdings of government bonds back to the Central Banks.
Note the "steppe" Edwards speaks of. There was on sharp down leg in 2001, another in 2008, and now we're preparing for a third, according to Edwards.
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It's VERY simple. All roads lead to Congress and our illustrious grand politician (aka the President).
The economy will not get better and will continue to tumble (in terms of REAL metrics like jobs, consumer spending, confidence, etc).
Do not focus on the equity markets/indexes. Bernanke may not have announced continued QE, but rest assured that in an election year, he's not going to allow the President to suffer the additional burden of the markets tanking too.
Conversely, we are TOTALLY primed to see a massive bull run. There's massive amounts of cash available and waiting. The major indexes are so heavily weighted on comapanies like Apple and Microsoft that have piles of cash JUST waiting.
So there's a legit case that could be made for boom or bust.
But again, it ALL hinges on the long term debt crisis solution. More and more analysist and TV personalities are starting to see or at least admit this.
Mark my words, IF we come out of the debt crisis negotiations with a SOLID, LONG TERM plan that curbs spending and doesn't increase taxes, you'll see the markets go crazy next year....jobs will eventually come back, etc.
IF we see a solution that doesn't curb entitlement spending or address the LONG TERM problem, you'll see SP and Moody's downgrade us (for the first time ever) and you'll see the dollar plummet and the economy as a whole will either enter into a Japanese decade of stagflation, or we'll simply crumble and burn.
Someone said it best that the next great crash is coming....because the NEXT time this happens, what is Bernanke gonna do? Quadruple the debt again? We can't. We burned that get out of jail free card. We're setting ourselves up for a MAJOR catastrophe if we don't solve the debt issue.