I am bearish on the stock market for the short and intermediate term. The Federal Reserve has been way too loose with its monetary policy for the last 2 decades. There shouldn’t be a Federal Reserve (“Fed”) because the market should determine interest rates as well as the money that we use. But if we are going to have a Fed, they can at least not be reckless. Alan Greenspan, who used to be a follower of Ayn Rand and praised a gold-backed currency, has been one of the biggest inflaters (counterfeiters) ever.
The Fed is now in a predicament. It can have a tight monetary stance/higher interest rates, which will cause a tough recession. This is what it should do. It would be painful for a couple of years, but then we could get rid of the bad investment and go forward with prosperity. The other choice is to have a loose monetary policy/lower interest rates. This may hold off a recession or make a recession milder than it otherwise would have been. But this would result in higher inflation and lay the groundwork for a more severe recession/depression in the future.
Chances are, the Fed will inflate. Helicopter Ben Bernanke will live up to his name. If lowering interest rates doesn’t provide enough money to the market, then he will have to drop money out of helicopters as he once suggested.
When Bernanke made the point that the Fed can always inject money into the system, he was correct. He simply said that if low interest rates don’t work, they can theoretically threaten to drop money from helicopters (inflate) and it will do the job. He wasn’t really saying he would do it, only that it is possible. That is essentially what the economic “stimulus” package it doing. It is creating money out of thin air to inject into the market.
The Fed will probably not disappoint (the politicians, that is) and will continue to inflate. Therefore, I would bet on more inflation in the future, but a recession in the near term is still likely. If you are going to own stocks, then you can put a small portion in defense stocks. With Ron Paul having little chance to become the next president, you can probably count on the next president to continue with more war. We can’t be sure which way Obama would go, but even he is not likely to completely withdraw troops from Iraq. Defense is probably the safest bet with stocks.