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Bull Fever: Is the Good News on Wall Street Really Bad News?

By Robert Stacy McCain on 7.30.09 @ 3:29PM

Sitting here watching CNBC's Erin Burnett raving about today's Wall Street surge -- DJIA up by more than 150 points as of 3 p.m. -- my natural pessimism looks for the cloud behind the silver lining.

Having spent the past few days wading through financial news, I'm now seeing this:

Stocks up;
Dollar down;
Oil, gold, other commodities up;
Bonds still slightly jittery.

A few months ago, when I asked a private-sector economist what he thought of the policy now being pursued by the Fed, Treasury and Congress, he answered: "They're trying to re-inflate the bubble."

That stock prices could go up as a result -- the deficit-funded flood of currency being partially diverted into securities -- is certainly a possible consequence of this inflationary policy.

Well, good news for those who bought low (in March) and are now in a position to sell high. But does this mean that the market "bottom" is behind us and recovery awaits around the proverbial corner? I'm not persuaded. Today's rally is chiefly being attributed to good news from China, an independent variable. If I were playing the market, I'd be watching bonds very closely. The bond market is the canary in this fiscal coal mine.

The happy bulls need not let a stubborn bear spoil their happiness. Heck, even bond-watcher Rick Santelli was a bit more optimistic today. But focus on the objective fact: Everything looks like good news when Erin Burnett is reporting it.

View all comments (5) | Leave a comment

Tim| 7.30.09 @ 3:42PM

Bonds are the bull in this coal mine.

JP| 7.30.09 @ 5:02PM

The good news is that the Housing Sector is recovering. Low interest rates, government subsidies are giving this sector a big assist. However, I do think that with so many foreclosed properties out there, many people with beaucoup cash are picking up great deals at the auction houses.

What should worry everyone is the Fed involvement in the recent stock market gyrations. It appears the $2 trillion of newly printed money that the Fed has pushed onto its ledgers has had a big hand in the recent market recoveries and sell-offs. Since early July both stocks and commodities have recovered from thier June Swoon. Is Bernecke just reinflating the Bush Housing Bubble?

Since energy and food are no longer part of the CPI, the Fed and Treasury are really missing a big part of the inflation picture. Just this week, Bernecke says he has the tools to forestall another speculation bubble. Will he be willing to increase interest rates to soak up all of that loose cash that is making its way into the world' markets? Will this new market surge translate into a real recovery, or into a job-less recovery?

Every expert (both conservative and liberal) have opined that The Beltway is where our economy is now centered and not Wall St. Does this mean that this could very well be a jobless recovery? From all indications from Congress, the cost of employing people is about to sky-rocket. Better to move as much of the businesses overseas before the real hurt is applied.

Finally, just a month ago many of the CEOs who met in Sun Valley Idaho said that the Dow was still about 20% over-valued, and warned that until that is correted there will be no sustained recovery. Does that still hold true? Are speculators just flushed with so much cheap money that they are reinflating a damaged balloon, or is there that much value out there? I wouldn't go out and but that new Chevy Volt just yet.

Sean| 7.30.09 @ 5:18PM

Some economists predicted the market would temporarily go up awhile ago due to all the dollars being printed. I wonder if there is a graph with the stock market versus the dollar value versus the money supply.