Stocks Will Rise Forever, Until They Don’t

“Risk off” is an easy call for the first four days of this week. I’m beginning to think there is something wrong with me. I keep shorting stocks and junk bonds in my Model Portfolio year after year and I keep losing money. Isn’t that the definition of insanity?

The reason why stocks will rise forever (until they come crashing down) is very obvious. Investors have learned that whenever stocks start to tank, the Fed will pump new amounts of money into the economy thus fueling ever rising equity prices, no matter how unreasonable they become. Last week on my radio show, David Rosenberg said his work shows that there is only a 7% correlation between the stock market and the real economy. That compares to a 30% to 70% connection between the real economy and stock prices in the past. But there is a 95% correlation between Fed-credit-creating policy and the stock market! This is insanity on a macro scale like we have never seen before. I keep shorting stocks and junk bonds believing that sooner or later the laws of economics will prevail.

But I believe it was that the economics devil himself who is the orchestrator of this insanity who said something like “Markets can remain unreasonable longer than you can remain solvent.” I guess Keynes knew that because more than any other mere mortal he was the main orchestrator of this global monetary mess. I keep shorting stocks and junk bonds believing that gravity still exists.

Given that both Alasdair Macleod and Michael Oliver are convinced we are heading into a bear market for the dollar and a rise in commodity prices across the board, I thought it would be good to show you my Inflation/Deflation Watch Chart.  It has in fact broken out to new highs, closing as of January 16 at 163.84.  This is a non-weighted index that tracks the prices of gold, silver, copper, oil and the Rogers Raw Materials index as well as equity that attempts to measure prices across the entire global spectrum. So included in this index are the S&P 500, the Philadelphia Housing Index, Indian Stocks, Chinese stocks, auto stocks, and the 20-to-30 year U.S. Treasury prices. While my IDW is not proof that we have entered a new bull market for commodities and a period of massive hyperinflation, it is of concern to your editor. As such I will likely be updating it more frequently for you in the near future.

About Jay Taylor