Wednesday, May 28, 2014

Monthly Economic Outlook, Part 1

There hasn't been a whole lot to report in economics for the last two months.  Mostly just a stagnant malaise in the economy, and a steady climb (bull market) in the markets that does not reflect the true underlying economic conditions. There has been, in the past few weeks, a slight increase in the price of copper, which means manufacturing is making something of a comeback.  It will need to get above $3.33 per pound, though, to reflect a healthy manufacturing base.

I noticed a slight change in the bond market the past couple of days, and it may be that some of the more conservative investors are moving their money out of the stock market into long term (10 years) Treasury Bonds. 

This would be in keeping with the thoughts I heard from a couple of analysts that we are in pretty far along in a Bull Market.  Now, if common people begin to think the stock market is a place they can make money, we may soon see what is known as stupid money flowing into it.  This is money that is put into stocks in a way that is completely disconnected from any reality of what those stocks are worth. (The very definition of a market bubble.) They unwittingly play a game called the "greater fool rule" where as long as there is someone who will pay more for the stock tomorrow or next week, the stocks will continue to rise.

At this point, all of the traditional investors will leave stocks for bonds or money market accounts, and people with a (sometimes unconscious) survivalist mentality will begin to buy into silver, platinum, gold and palladium.  Of course, most of these people (at least in the US and Europe) will buy their metals on paper, since that is more convenient. A side effect of this is that more metal might be traded than actually exists in the world, so prices might climb fairly steeply.  

Around this time last year, I expected the market to go into the major bubble building phase in the last half of this year.  But at the time, I didn't know the government statisticians were playing around with the methods they use to generate their numbers.  That is why I didn't see the stagnant malaise we were in during the last few months of 2013. Of course, that screwed up my timetable pretty dramatically, but the underlying ideas are still sound. I am still trying to judge when the market will go into bubble overdrive, and then burst.  Of course, no one knows this for certain.  Anyone who can reliably predict when the bubble will burst would soon be rich.

But I can guess when it will get dangerously unstable.  Currently, I would look for the S&P to pass 2200 and for the bubble to continue to build past the end of the year. But I have to repeat that this is just a guess.  The only thing certain is that there will be a bubble, and it will burst.  Safe bets are that it will be a stock bubble (some analysts say we are already in one), and that just as it bursts gold and silver will rise (but I don't know if it will rise by 30%, or 130%). 

For your reading pleasure:
Anyone who is thinking clearly knows the economic system fostered by central banks is totally and completely out of control.

Repetitive rounds of QE, competitive currency debasement, interest rates at zero, and sponsorship of the internet bubble followed by the housing bubble, followed by the current stock market bubble is proof enough.

So, what I am about to report is really nothing but common sense, except for the fact that it comes from an unusual place, where one does not normally hear such discussions.

J├╝rgen Stark, former vice president of the Bundesbank, and also former chief economist of the ECB (unofficial title) says "The System is Out of Control". Via translation from Libre Mercado:
[read what Stark says at the link]