The problems that began with the popping of the real estate bubble in 2006 quickly spread to the stock market. If you added the private debt and consumer spending bubbles you had the mess that was the financial crisis of 2008.

Our current economic problems have roots in the past. We have seen government debt rising rapidly, since the early 1980’s that debt has risen from 1 trillion dollars to 17 trillion dollars. Middle class incomes have grown very slowly over the last 30 years. The middle class had been a factor in the economy with its growing purchasing power, but that has all changed since 1980.

change in after-tax income since 1979

 

Real productivity is the key to economic prosperity. Think of the time when railroads were built from coast to coast, trade jumped exponentially. Think of the invention of cars and airplanes and the impact on the world. We have seen a decline in productivity since the early 1970’s despite the advent of the computer and the cell phone.

non-farm productivity 1947-2012

Bureau of Labor Statistics

While productivity has been down we have seen a tremendous uptick in federal deficits since 1980. But, there wasn’t a lot of concern about the deficits since the Gross Domestic Product was up 260% from 1980 – 2000. We did, however, run into a bubble in the stock market in 2000. The markets were up about 1000% which greatly exceeded the growth in the GDP, hence the bubble.

People moved out of the stock market and into real estate and the banks and Fannie Mae made it easier and easier for people to own homes. So, by 2006 the real estate markets had peaked and the bubble broke, bringing down the revived stock market and destroying financial institutions and creating general havoc. The public had huge access to credit through home equity lines of credit and consumer spending was soaring when the bubble hit.

With the threat of a serious depression on the horizon the Federal Reserve stepped in with what is called Quantitative Easing. The easing began in November of 2008, about the time that the stock market began to warm up again. The Fed has printed roughly 4 trillion dollars since the beginning of quantitative easing. The idea was to bring interest rates down and the Fed did this by actually controlling the markets. They basically took over the Treasury market with its massive purchases and drove rates way down. 

photo by Jeff Turner

The strategy was to help out the real estate markets. A large percentage of the economy is driven by the real estate markets and something needed to be done to take real estate off of life support. By lowering rates they would be encouraging homeowners to refinance and getting investors to buy down the large number of foreclosed homes on the market.  The Fed also wanted to support the stock market. When investors were shut out of the Treasury market by the Fed they turned to the stock market and liked what they saw. Corporations also liked what they saw and started issuing corporate debt at very low rates. By foregoing stock issuance they created a shortage of stock and with the demand for stocks increasing……..

s @ p 500

Is it possible that we have another bubble to deal with?

Sure looks like it! However, if the Fed continues to feed money into the system the markets will continue to move higher. The trend is your friend and never fight the Fed. How long will this go on? A couple of months or a couple of years?

The Fed knows that what they are doing is unproven and dangerous. The risks of inflation and higher interest rates are almost a certainty. So why? They are scared and they have no other options. They didn’t let the markets take care of themselves they took control of the the markets……….

This is the Fed’s Stock Market!

It is essential that every investor exercise active management of his portfolio. You cannot rely on your financial adviser!

The financial community rarely gives you sell recommendations, perhaps 5% of the time. Does that mean that 95% of all stocks are worth buying? Can you trust that kind of record?

 Active Management means Be Your Own Broker and Go Beyond Brokers will help you get there. 

 

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