By Charles Biderman
The Federal Reserve has now admitted that five years ago, just days before the start of the financial meltdown, Mr. Bernanke and others at the Fed did not have a clue as to the impending financial disaster. Now contrast that with the results of an astonishing poll by a Chartered Financial Analyst Institute publication that 59% of investors now believe that because of what’s happened during the last five years: central banks and governments will be there to bail out troubled creditors.
In other words, because of what’s happened in the last five year, 59% of investors now believe that the Federal Reserve will save their butts in terms of their investments if anything goes wrong.
Add to that insanity the fact that Investor’s Intelligence has reported that the percentage of bearish newsletter writers is now near its lowest point since it was started 50 years ago in 1963. Which means that most everyone now believes in the market’s version of the tooth fairy — that the Federal Reserve is omnipotent.
Remember, five years ago the premise behind all the money printing was that it would be a temporary bridge to get over the difficulties created by banks owning more bad paper then their total capital worth. So instead of allowing the big banks to go broke, they were bailed out.
If we bailed the big banks out, we also have bailed out everyone else. The only reason unemployment is down is that more people have gone on disability or gotten student loans then have gotten jobs. After tax income, net of inflation, has barely been growing over the past five years and is likely to decline this year. But so what? The Central Banks will save our butts regardless of reality.
The Obama administration has embraced a weird kind of economic religion that has no basis in reality. It believes deficits do not matter since the markets now appear to be willing to let central banks determine interest rates, and therefore bond prices. Since the Obama Administration also believes that government spending can be effective at getting stuff done, it plans to keep growing government. Obama has admitted that spending will keep growing in areas such as medicare, social security and government pensions. Of course no one mentions that entitlement spending will cost over $1 trillion this year and that employment taxes that are supposed to pay for this year’s entitlements as well as entitlements in future years, will be less then $600 billion, even after a big tax hike.
In other words, besides a $700 billion deficit on current government activities, there is a more then $400 billion deficit on entitlements this year that will keep growing to infinity and beyond. But no one cares.
All bull markets end when new share sales from companies and insiders swamp corporate buybacks. That is close to happening, but has not yet happened. Therefore, for now the emperor is still clothed. However, at some point soon, I expect new offerings to swamp corporate buying after which the market will crash regardless of whatever the Federal Reserve tries.
Historically reality has always won out. The only problem is staying financially solvent to be able to profit from the coming plunge in prices. That is why I started Biderman’s Market Picks.
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