Despite last week’s confusing employment data, the increasing threat of another decline in home values, political uncertainty in Egypt and the broader Middle East, and sharp pullbacks in some emerging markets such as Brazil, US stock markets continued to rise. It sometimes seems that Wall Street exists in a bubble that is well-insulated from the rough and tumble of the outside world. But, in what may be a harbinger that America’s era of prosperity is winding down, the hallowed New York Stock Exchange, long the epicenter of American economic might, is expected to be bought by Germany’s Deutsche Boerse. When the king is so unceremoniously uncrowned, it can’t be long before investors notice how shabbily dressed he really is.
In view of this evidence of increased unemployment and continued erosion in the housing sector, it is hard to see any likely recovery in consumer demand in the short term. Without such a rise, it is hard to justify any short-term run up in consumer sentiment and stock prices. But both have done just that. From my perspective, this represents a major financial disconnect.
Serving under former Fed Chairman Greenspan, Ben Bernanke helped to engineer the largest asset boom in history. The natural result was the credit crunch of 2008, from which we now are still trying to recover. However, Bernanke has been unwilling to accept continued recession. Clearly, he is determined to stimulate the economy, not by encouraging consumer demand, but by inflation.
The stimulus packages and quantitative easing programs have created a massive injection of liquidity. Furthermore, the Fed’s manipulation of interest rates has pushed investors into riskier assets, such as equities and commodities, and out of relatively secure investments, such as bank deposits and bonds. This abundance of cheap money is creating an artificial asset boom, and it is the main reason why equity prices have risen.