By Porter Stansberry In The Daily Crux: | 24 August 2009
Lots of folks are scratching their heads, wondering why the stock market seems to want to go straight up. Can it last much longer? No, we haven't seen inflationary pressures leak into most commodities or consumer goods yet. But that's normal. Big monetary inflations, like the one going on right now, always hit the banks first. Look at the chart below of the Financial Sector ETF (XLF):
As long as the banks and the brokers are making money, the stock market will keep going up. And as long as the government keeps printing trillions of dollars each year, while holding short-term interest rates at nearly 0%, financial stocks are going to keep going up, too. I call what's happening the "run up".
At the beginning of a big inflation, it feels good to everyone. Everything starts going up— stocks, real estate, agriculture, metals, etc. People begin to believe the government's inflation was the correct answer to all of our problems. They say: Just print more money— that way nothing bad has to happen.
Of course, the good times don't last. The purchasing power of the currency eventually collapses. But at the beginning… everything soars. I think we're in that period. There's a huge wave of money surging into the market, and it's blowing past all of the regular limits.
More evidence of my "run up" theory: Sales of previously owned homes jumped 7.2% in July. That's the fourth month in a row sales increased. And July's number was the biggest increase since they started keeping track of these statistics in 1999. The last time sales rose four consecutive months was July of 2004— smack dab in the middle of the real estate boom.
What accounts for this good news? Why should home sales be soaring when home prices are plummeting and mortgage defaults are rising? There's only one explanation— the "run up". And as if on cue, the financial pundits are already claiming the government's inflationary policies are what saved us. Wrote Paul Krugman last week: "We appear to have averted the worst: utter catastrophe no longer seems likely. And Big Government, run by people who understand its virtues, is the reason why."
Sure, if you're willing to ignore every single historical example of big government's runaway deficit spending and the impending bankruptcy of our entire country, then catastrophe no longer seems likely. But if you know anything about economic history and the compounding nature of interest, then you know catastrophe is now assured. The "run-up" will feel great. And the big government folks will claim they've saved the day. But just watch what happens to the value of our currency over the next two to three years.
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