The Federal Reserve’s balance sheet continues to go higher, although at a slower pace than in March and April.  For the last recorded week, it went up by $65 billion.  This is a considerable improvement from my point of view, but it is still going up a lot, and major damage has already been done.

Meanwhile, as the Fed’s balance sheet approaches $7 trillion, stocks are booming again. After a devastating March, stocks have roared back.  The Dow is above 24,000.  The S&P 500 is nearing 3,000.  The Nasdaq is over 9,000.  It wouldn’t take that much for the Nasdaq to reach its all-time high again.

In other words, stock investors have just shrugged off 30 million newly unemployed Americans. They have shrugged off trillions of dollars in new debt.  They have shrugged off the fact that governors and mayors can shut down businesses with the acceptance of a large portion of the population.

Stock investors love monetary inflation from the Fed, and they are getting plenty of it.  I believe that is the main explanation for the partial recovery in stocks.

Here’s one of the problems with that.  The Fed could expand its balance sheet to $20 trillion, but if major companies can’t make a profit, then how can investors justify elevated stock prices?

If we get massive price inflation, then business expenses will go up.  So even though the products being sold might fetch a higher price, it doesn’t mean profits will go up.  It doesn’t mean there will be any profit at all.

What happens to this market when the bankruptcies start?  Can the federal government really bail out every single business?

Even if the large majority of bankruptcies happen with small businesses, the impacts will be widely felt.  Even with that, we know that some large publicly traded companies are going to suffer terribly. There are going to be some bankruptcies.  There will be a select few companies that may actually do better in terms of profitability. Amazon, Walmart, and grocery stores may find they do better, but even here there is no guarantee.

When the lockdowns finally end – assuming they will – not all of these people will be going back to work.  Some will find they don’t have jobs to go back to.  They may enjoy their higher pay from the federal government for a while, but it’s not going to last forever.  Meanwhile, the taxpayers (and holders of U.S. dollars) pay the bills.  It is one giant waste of resources that could have been used for investment and productivity.

I find it hard to believe that this stock rally will last.  There is just no justification for it except Federal Reserve inflation.

At some point, the Fed will have to further slow down or stop its inflation.  It seems like it can just continue forever, just like the national debt, but there are limits.  If the Fed doesn’t back off eventually, then maybe we will see high price inflation.  Either way, the Fed is misallocating resources on a grand scale, and it is making most everyone poorer in the long run.

I think we are still in a major bubble in stocks.  There is going to be massive pain everywhere, and that includes stock investors.  Stocks aren’t just completely immune to the rest of the economy.

If you have doubts, just remember these two key points.

Number one, even the Fed has limits, and it will eventually have to drastically reduce its rate of inflation.

Number two, the Fed’s money creation doesn’t bring back profitability to companies that are on the brink of bankruptcy.  Even with direct bailouts, there are limits as to what can be done.

The other day, I had CNBC on the television without any volume.  I walked by once, and the caption for the segment was “Cities in Crisis”.  I walked by later, and it said, “College Crisis”.  These captions actually cheered me up.  There may be some good things that come out of this.

I am not against all college, but I am against the wastefulness of it.  I am against the politically correct garbage that is taught in most colleges.  I am against the federal government’s backing of student loans.  I am against the Fed’s artificially low interest rates that make these loans even more enticing.

I think we will be seeing a segment called “Stocks in Crisis”.  Maybe they already had that back in March, but we will see it again.  I fully expect stocks to drop below their March lows.  I expect they will go far lower than that.

If I am wrong, then this means the Fed will have gone to even more massive monetary inflation. I don’t think we’ll get hyperinflation, but I can’t be certain about that any longer.  It is amazing what has been done in the last two months.  I don’t know if stock investors would like hyperinflation, but we would have far bigger problems at that point than what is happening with stock prices.  At that point, we will be worrying about whether trucks deliver food to the grocery stores.