Tony Sun: Founder of KhronoStock.com
One of the obvious reasons why stocks are on a defnitive path of further decline and making much lower lows is that the stock market can be used effectively as a tool to control hyperinflation at least on a temporary basis.
Simply put, by creating fears in the stock market, investors almost always park their money in US treasuries. We have seen this happening back in late 2008 post Lehman collapse when the yield on 90-day T-bills went to 0%. By scaring people out of the stock market, an artificial boost is created for US treasuries. Such boost can help to keep treasury yield very low on a tempoary basis. However, the current situation with the treasuries needs much more than a temporary help.
At some point, the Federal Reserve will be overstretched in terms of keep buying the debt from the Treasury. Thus, a sustained buying of the treasury needs to come from sources other than the Federal Reserve, the Chinese government and other nations. It needs to come from the retail and institutional people. Thus, perhaps a sustained decline in the stock market would help such effort.
The point here is that the Federal Reserve will try everything possible to prevent hyperinflation. Whether or not they can succeed, their effort will likely result in further declines in the stock market. Thus, be aware.
Hyperinflation will lift stocks higher as it has been doing right now via the downward spiral of the USD. Hyperinflation, does, however destroy wealth. If USD collapse, stocks will rise to unimagiable levels, but their value will be under a worthless or near worthless currency.
That being said, I do think we are near a reflection point in the stock market. This rally has been driven by hope, not economic data. I believe a geopolitical event or financial scare will tip this market over and create demand for the USD and treasury. This will consequently lead to a sell off in the market.
Crazy Jim, I agree with the first half of your post about inflation and the markets however I’m not too sure about the second half. I think there is huge government intervention (interference) going on behind the scenes and they are going to do whatever then can to keep the market moving up. Although I would love to see a sell off and retracement I just don’t think it’s going to happen. Think about it for a minute. If they allow this market to fail or take a big hit then whats left? All the bad news is good and all the not so bad news is great! The stock market is the only thing thats distracting people from whats really going on. If they allow the markets to sell off they will be talking depression again and they aren’t going to let that happen. It’s going to be a slow bleed, hyperinflation, unemployment, government social programs.
Hi Guys,
Hyperinflation will NOT lift stocks for two main reasons.
1. Interest will be so high that you can pretty much double digit returns on CDs and money market/cash. There is absolutely no incentive to buy stocks.
2. High interest rate and inflation will destroy corporate earnings will destroy valuation of stocks.
3. Like I said, the Fed has to force people and do everything to get people and institutions to buy treasuries. Thus, it is in their interest to force the stock market lower and that is exactly what they did since Lehman collapse last year.
I know this logic is counter intuitive, but I think it is correct.
Botswana had inflation of 10,000% last year, needed to print billion dollar notes and had
a disaster econo. . . . but it was the only stock markets to rise in 2008 while the world
plunged 50=75% !!!
Once the public sees that defaltion and credit losses persist (and they are as seen by
the credit losses reported today, twice the rate of official unemployment for c.cards)
the same greed that drove em into stocks will send them out and into gold or silver
or whatever the new bubble of choice will be.
Isolated third world country case is irrelevant. US experiencing hyperinflation will show different consequences.
I still believe that gold and silver prices will be capped. All the Federal Reserve has to do is to gather banks and sell gold and silver like last year.