How Long Will Stock Prices Remain Disconnected From Reality?:The Coming Credit Bubble

Monday, March 26, 2012
By Paul Martin

by MIKE WHITNEY
CounterPunch.org
MARCH 23-25, 2012

Last week, the experts were sure that, “The recovery is finally here”. This week, not so much.

The optimists pointed to manufacturing, retail sales and employment as signs of a strengthening economy, but what they were really jazzed about were the moves in the bond market where yields on 10-year Treasuries inched higher for 9 days straight. Market-watchers saw that as proof that investors were ditching their risk-free assets (bonds) and moving back into stocks. (which is a sign of confidence) As it turns out, the Pollyannas were too quick to judge.

As of Friday morning, all the major indices were down finishing a 5-day rout that pushed the Dow to within spitting-range of 13,000. News of a slowdown in China, a recession in the eurozone, and deepening deflation in Japan have all weighed heavily on stocks and, once again, raised the prospect of another round of easing by the Fed.

The economy is nowhere near a “self sustaining” recovery. Surging stock prices are not a sign of a stronger economy, but poor monetary policy. In the last 3 years, the Fed has pumped $2.3 trillion in liquidity into the financial system. As a result, stocks have skyrocketed (The Dow Jones and S&P 500 have doubled in that same time period) while the real economy has remained flat on its back. The correlation is obvious.

The real economy is in the tank because households and consumers are still repairing from the housing bust and financial crisis which wiped out much of their home equity and retirement savings. Working people will remain
constrained in their spending until they’re able to whittle their debtload down to a more manageable level. That could take years.

So, it’s not surprising that retail investors have shrugged off the “recovery” hype and avoided the stock market altogether. According to the ICI, Mom and Pop are not just sitting on the sidelines, they’re actually withdrawing their money from equities and sticking into FDIC-insured bank accounts. Here’s a blurb from The Big Picture which explains:

The Rest…HERE

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