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Minyan Mailbag: Lying Eyes?

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There is a limit despite what bureaucrats believe.

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Professor Succo,

"Lying eyes?" The TICK is almost never going below -400 and the ten day average of the NYSE breadth has been almost continuously positive for months. Highly, highly unusual for the way we know markets behave.

Best,
Minyan Ron


MR

Yes.

I made the big leap yesterday saying governments (no price sensitivity) were buying index futures in the U.S. This is the only answer I see for the odd behavior. Stocks not in an index are severely lagging.

I am not necessarily saying the Federal Reserve of the U.S. is buying stocks. More likely, it is the central banks of other countries recycling dollars from trade "throwing" them into U.S. stock indexes.

It seems not to bother those invested in risky assets that central banks are printing money and buying things like stocks. In fact they welcome it as nominally at least they are making money as stock prices rise.

But I warn everyone that this has vast implications that do not bode well for the future, perhaps the near future.

What does it say when central banks become the elephant in the room and own risky assets? First, it interrupts the normal market mechanism of pricing risk. Investors are not putting their hard earned money in the right places by discerning proper investments; governments are making credit easy for even the worst companies. Productivity will fall over time. Debt will continue to rise from this easy credit and will eventually crowd the economy out. We are already starting to see this and a new development has passed most by: the net interest component of the trade deficit is now turning negative for the U.S. We are paying out more income than we are receiving on our investments. In addition, net disposable income, crankily not rising as we export that income to production oversees, is at an alarming level to debt service.

Central banks continue to force credit down the throats of an already indebted system as a solution to continued economic expansion. The cumulative effects continue to get worse. Central banks are now delving into buying everything from mortgages to stocks. Can they own everything? I think not. There is a limit despite what bureaucrats believe.

-Succo
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