Last week the major market averages traded in a narrow range, with the S&P 500 trading between 1246 and 1234, as they appear to be taking a small pause in the rally. I think there is a good change that they will breakthrough this range before the end of this week and start another move higher and if they don’t do it this week they almost certainly will next week.
Everyone knows that the market moves up at the end of the year and everyone is bullish right now.
I worry though that after one more big move up that the market will make some sort of peak in the first few weeks of January and then start a sharp correction. If it happens things will play out much like they did at the end of the last year and beginning of this year. If you recall the market went sideways in the Fall of 2009 and then finally broke out at the end of the year only to pullback back sharply into February. But right at that top everyone was bullish in the sentiment surveys just like they are now.
What also is very similar is that if you recall way back in November of 2009 the fist cracks in sovereign debt problems hit the market when the nation of Dubai received a giant bailout. There was talk that the debt problems extended to Greece and other European nations, but those worries were totally ignored in the United States until they could no longer be denied.
Now Ireland just got a bailout and there is talk that Portugal and Spain will get smashed with debt problems within the first six months of 2011. Those worries are being totally ignored right now. So if when we do get a correction next year don’t be surprised if it doesn’t coincide with bad news from those countries hitting the market.
The most bullish of people say that the market is going up because the Federal Reserve is printing money and therefore nothing can make it fall again. CNBC’s Steve Liesman has praised Ben Bernanke as being a “genius” for engaging in quantitative easing.
But quantitative easing IS NOT working and is actually now starting to cause some serious problems in the financial markets – which of course are being ignored at the moment.
In the past 15 years every time the Federal Reserve has lowered interest rates it has kept them low for too long and as a result created several man-made disasters. In the late 1990’s they helped to create the Internet bubble when they lowered rates and kept them too long for too long in order to bailout the Long Term Capital Management hedge fund and then they printed money out of thin air to increase the money supply at the end of 1999 in order to ward of the phantom Y2k computer bug.
Then in the mid-1990’s as a result of the fallout from that bubble they lowered rates and kept them too low for too long and created the man made real estate bubble.
Now as a result of the fallout from that bubble the Federal Reserve bailed out banks all over the world while the Federal government has brought us trillion dollar deficits. They have transferred the debts from international bankers on to the balance sheets of governments all over the world and so we now have the European debt crisis unfolding in front of our eyes and next year we will have bond problems in the United States – which are going to be a man-made disaster created by Bernanke’s quantitative money printing scheme.
Back this past summer Bernanke argued that the economy was weakening and that quantitative easing would help the economy by lowering interest rates. He said that the Fed would simply buy US treasury bonds and that would make the value of those bonds go up and interest rates would fall as a result. All of this would provide a nice boost to real estate prices next year and help stimulate bank lending.
Well since Bernanke has printed money and bought these bonds interest rates have done the opposite – they have gone up and not down – as you can see from this chart below.
In fact the interest rate on the 5-year, 10-year, and 30-year bond has almost gone up a full percentage point. You may not remember, but Bernanke and his supporters (yes there are a few people inside the Federal Reserve telling him he was making another mistake) were saying in the summer that they were going to force interest rates down almost a full percentage point.
Bernanke DOES NOT have control over the bond market or the financial markets. The idea that he can just print money or change interest rate policy and make everything go in the direction he wants is a myth.
In fact many suspect that his own money printing policies are blowing up in his face and are making interest rates go in the opposite direction than he intended.