The Fed saves the day again

As I mentioned in the previous post, the Fed was most likely going to step in to save the charts. That is exactly what happened. The DOW was down 70 points on the day and rallied to close only down 1 point. Amazing. A late day buy program kicked-in to save not one major trendline but two! A break down of both of these trendlines would have been very bearish.

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I am an all out bear on this economy. The DOW can shoot to 20,000, and I will still doubt this economy. There is a disconnect on Wall St. and Main St. please understand this. The Fed is trying to paint this rosy picture for the "Average Joe." It may work in the near-term but the long-term effect will be worse than it should have been.

I am against Government intervention with the market. Free markets have their down times, yes, but recessions are needed to flush out the weak companies and make way for stronger and emerging companies. That is true capitalism. Bailing out large firms is not the solution. They should fail. And when they fail there will be extreme pain initially, but the economy will recover on its own eventually. Recessions are like wildfires, forests need wildfires to flourish. Prior to the 1960s, the government extinguished wildfires fearing that it would burn down an entire forest. But it was later discovered that wildfires were essential to a plant's life cycle. Fires would burn causing pine cones to dry and drop to the forest floor so that a new tree could grow.

The same principles found in nature can be applied to the economy. The Fed policy and the country's appetite to spend spells big trouble for the American people; I assure you. If the dollar continues to lose its value, we will all be paying more for everything. It doesn't matter if you're below the poverty line or a multi-millionaire; your wealth is being eroded away.

I fear inflation more than anything else. At least in deflation, asset prices fall but your purchasing power goes up; offsetting any losses you may incur in the stock market. Inflation, however, can spike stock prices initially but eventually they will become too expensive to buy. (Food will become expensive, people will have to sell stock to use the money to live off of, because their living wages will not be sufficient to support them.)

According to investors, the Great Depression failed in comparison to the recession of the 1970s. Why? Because even though asset prices saw a steeper decline during the Great Depression, people were able to buy more with their money because of deflation. But during the 1970s asset prices fell while everything else was rising in price because of inflation!

Can you draw parallels with the past? Imagine an economy with no jobs, falling asset prices, rising standards of living, and inflation. Majority of the people in this economy would not have a job the few that do would be working for wages that could only buy them a loaf of bread. A grim economy indeed.

By no means am I saying inflation is a problem now, but it will be if the Fed and the government continue to print more money and spend more of what it doesn't have.