Recently, I questioned whether the bounce in the markets reflected genuine recovery or was just a sucker’s rally. Lots of other people have the same question, including Andy Kessler in today’s Wall Street Journal.
On March 18, the Federal Reserve announced it would purchase up to $300 billion of long-term bonds as well as $750 billion of mortgage-backed securities. Of all the Fed’s moves, this “quantitative easing” gets money into the economy the fastest — basically by cranking the handle of the printing press and flooding the market with dollars (in reality, with additional bank credit). Since these dollars are not going into home building, coal-fired electric plants or auto factories, they end up in the stock market.
A rising market means that banks are able to raise much-needed equity from private money funds instead of from the feds. And last Thursday, accompanying this flood of new money, came the reassuring results of the bank stress tests.
The next day Morgan Stanley raised $4 billion by selling stock at $24 in an oversubscribed deal. Wells Fargo also raised $8.6 billion that day by selling stock at $22 a share, up from $8 two months ago. And Bank of America registered 1.25 billion shares to sell this week. Citi is next. It’s almost as if someone engineered a stock-market rally to entice private investors to fund the banks rather than taxpayers.
Can you see why I believe this is a sucker’s rally?
As Kessler and others are pointing out, this is not a rally driven by productivity. Profits are still in the tank, the last Treasury auction was a flop, the dollar is suspicious, the stimulus is a pork-laden hoax, states are bust and we have a demagogic president who learned everything he knows about economics from ACORN.
What could go wrong?
