There are a lot of reasons to be bearish against the stock market right now.  Unemployment is still near 10% (according to government statistics), banks are holding back when it comes to lending, and there is an overall anti-risk and anti-investment mentality right now in the business world, especially because of excessive government.

There is one reason for the stock market to go up.  That reason is the Federal Reserve creating new money out of thin air.  So to answer the question in the title of this post, yes, the stock market is up because of QE2, along with QE1 before it.

I have argued before that an increase in the overall stock market is due to monetary inflation.  While the stock market does not necessarily track the money supply in the short term or even the intermediate term, there is a strong correlation in the long term.  If the Fed kept a completely stable money supply where it did not increase it or decrease it at all over a long period of time, then the stock market would trade in a relatively narrow range.  If there is no new money to bid up prices, then the prices won’t be bid up.

For those who understand Austrian economics, or for that matter Chicago school economics, you are aware that the overall price level changes because of changes in the money supply.  If there were no changes in the money supply, prices, in general, would not go up in a free market.  In fact, in a free market, prices would actually fall due to the increases in production and technology.  If you accept this fact for consumer prices, then it should not be much of a stretch to apply the same thinking to asset prices.  So while certain stocks may go up or down in price, the overall stock market would stay relatively flat if there were no changes in the money supply over a long period of time.

This is why you should not use the stock market as a predictor of the overall economy.  The stock market has been going up big time for the last couple of years.  But this is following the initial bailouts and a doubling of the monetary base.  Now we have QE2 (more money creation) that is supposed to last 8 months (until June).

This is why I have been hesitant to recommend large short positions.  I certainly think there could be some severe pullbacks in the stock market and a small short position might turn out to be a good speculation right now if you get in and out rather quickly.  But overall, it is hard to fight the Fed on this one.  The monetary base continues to go up and this new money is going to go somewhere.  Things like gold, oil, silver, and food are going up, but you can add the stock market to that too.

This is why we should not judge the Japanese economy too harshly based on its stock market.  It has been down or flat for the last two decades, but you can partially chalk that up to the fact that its growth in the money supply has been much tamer than elsewhere.

There are no guarantees that the U.S. stock market will keep going up, but if the Fed keeps creating new money out of thin air, it is hard to bet against it.

Standard & Poor’s cut its outlook on U.S. government debt.  It is keeping its AAA rating for now, but the rating is going from stable to negative.  The stock market reacted to this news with a sharp decline.

Next thing you know, there will be a report that politicians sometimes act in a corrupt way and people will be shocked by the news.  If you detected some sarcasm, it is because this news is not news at all.  The only thing newsworthy about it is that some in the establishment are starting to at least acknowledge that there may be a problem (and yes, S&P is part of the establishment).

If S&P were really honest, the U.S. would have lost its AAA status many years ago.  There is no possible way that the current debt will be paid off, unless it is done through massive inflation (which is, in a sense, a default of its own).

I suppose that it’s a good thing that more people are realizing that there is a major problem that has been created by DC.  The current course is unsustainable and something is going to change.  A lot of people are going to be unhappy, whether it is people having more taken from them by the government or people losing out on their free lunches.

The politicians in DC will continue to run up the debt until one of two things happen.  Either the law of economics will eventually force them to cut because the Fed can’t create any more new money without risking hyperinflation, or Americans will put an end to it.  For Americans to put an end to the reckless spending, we will need to see more than a few tea party people elected to Congress.

If Americans really desperately wanted lower spending right now, then it would happen.  The problem is that the opposition to big government is not strong enough right now.  Even if it is an even split, guess which way the politicians will come down.  Americans need to stop worrying about voting the “right” people into office.  Instead, they need to educate themselves and help educate others.  Americans need to stop depending on government and expressly withdraw their consent.  If half of Americans turned into minarchists and/or anarcho-capitalists overnight, then the federal government would just about dissolve in a short period of time just based on public opinion.  This would hold true for any country.

Last week, I received a comment about gold/ commodities being an accurate gauge of inflation.  The beginning of the comment was as follows:

“I’m a novice on this, so forgive me if I’m off-base, but your statement that created money goes into hotspots (and the idea of bubbles) seems to conflict with my understanding of commodities.  I thought that commodities were an accurate gauge of inflation, so gold (and oil) going up, would indicate a devalued dollar, not an artificially created ‘bubble’ in oil (or gold).”

Let me attempt to clear this up.  While gold has a certain correlation with inflation, it is not a direct correlation in the short-term.  If you want an investment as a “hedge” against something, then you want it to react strongly.  For example, TIPS (bonds that adjust for price inflation) are not a good hedge against inflation.  Even if you put half of your portfolio into TIPS and price inflation started raging, then only that one half of your portfolio would stay even with price inflation.  The other half would be vulnerable.  If you want to find a good hedge against severe price inflation, then you need to find something that will go up at a faster rate than the rate of price inflation (in the short-term).

This is where gold comes in.  Just like real estate, gold will have a strong correlation with inflation over long periods of time.  But over shorter time frames, there is not necessarily a strong correlation.  Gold was a terrible investment from 1981 until 2001 and yet there was positive price inflation in every year, although it was relatively low when you compare it to the 1970’s.

When you look at the 1970’s and you even account that it was during a time when it became legal again for Americans to own gold, you can see that the price of gold went up far in excess of the inflation rate.  If you had put all of your money into gold when it became legal and you held it until 1980 before it crashed, you would have made a profit in real terms.  Adjusted for inflation, you still would have been way ahead.

This is why gold is such a good inflation hedge.  Gold tends to rise and rise dramatically during times of uncertainty and times of high inflation.  It is also a canary in the coal mine when it comes to future price inflation.  When people are worried that the Fed will create a lot of new money out of thin air in the near future, they turn to gold to protect their savings.  In times of high inflation (and we do have high monetary inflation right now), gold will do especially well.  If you have just a quarter of your investments in gold, then it can make up the difference for your other investments that aren’t keeping up with inflation.

As for bubbles, I don’t think gold is currently in a bubble.  There is no mania yet.  The only mania I see is trying to get people to sell their scrap gold for cash.  In a mania, you would see people trying to come up with cash to buy gold.  While I do think that gold can be a “hotspot” for newly created money, it does not mean that the price of gold is about to come crashing down.  There are logical reasons why gold is going up significantly right now.  People are afraid of the future and afraid of fiat currencies (particularly the U.S. dollar).

In conclusion, during times of unusually high inflation, you should expect gold to go up at a rate that is even greater than the inflation rate.

I had the enjoyment last night of seeing the movie Atlas Shrugged.  It was the first part of three.  I had heard a mix of reviews of the movie, so I didn’t have my hopes real high.

I read the book almost 11 years ago and have not read it from start to finish since then.  Like many people, it was a highly influential book for me.  I don’t think the book is very realistic.  It paints a world of black and white.  It seems that most of the businessmen are either good or evil and there isn’t much in between.  The reality of the world we live in is that there are smart and productive businessmen who aren’t necessarily strong advocates of liberty.  Also, while businessmen and entrepreneurs are vital to our economy, we should not forget that the middle class is just as important and the middle class are often better advocates of liberty.

Overall, I enjoyed the movie.  It is hard to do the book justice, but considering the time and money limits of the film, I thought it was reasonably well done.  The actress who played Dagny Taggart was just how I imagined she would be when reading the book.

Unlike the book, the movie takes place in the year 2016.  They mention headlines such as the Dow Jones being below 4,000.  Railroad use for travel and shipping is popular once again.  Other than the time period, the movie seemed to stay close to the script of the book.  It is hard to say, but for someone seeing the movie without having read the book, it seems that there is less of a mystery, although you still don’t know where all of the productive people are disappearing to.

For anyone who has not read the book or seen the movie, I really would recommend reading the book first if that is possible for you.  I am not a big fan of Ayn Rand’s writing style, but the story itself is incredible once you get into it.  Of course, people who are not sympathetic to liberty will not enjoy it, unless it happens to convert them.  The book is over 1,000 pages long and it is not an easy read, but it is certainly worth it if you can find the time.

I am not sure whether Ayn Rand would have been happy with the movie or not.  Regardless, it does draw attention to the book and that is a good thing.  I am not an Objectivist and I have my disagreements with Ayn Rand and her followers.  But she is an important part of the libertarian movement and Atlas Shrugged is one of the best libertarian books ever written.  If you have already read the book, watch the movie when you have an opportunity.  I hope you enjoy it as much as I did.

Yesterday, I severely criticized Obama and his ridiculous “plan” to “cut” the future deficits.  Today, it is time to pick on the Republicans, so let’s have a brief discussion about Paul Ryan, a congressman from Wisconsin.

Paul Ryan has a so-called roadmap.  But just like with Obama’s plan, it doesn’t actually cut the size of government.  All it does is reduce the rate at which government is increasing.  It takes the already proposed budgets and reduces them, but the government will continue to get bigger.

If Paul Ryan wants to reduce spending, don’t give me a 10 year plan (just as Obama gave a 12 year plan).  Instead, reduce government spending right now.  The current budget does nothing to reduce government spending.  It increases spending.  Let’s stop with these future plans and do it now.

I have one other suggestion for Paul Ryan.  Instead of giving us your roadmap, how about you start repealing all of the hideous things that you helped pass while Bush was president.  Paul Ryan supported TARP (the bailouts), he supported the Medicare prescription drug plan (socialized medicine), and he supported “No Child Left Behind” (the centralization of government education).  These are just a few of the big things that he did to support big government.

If Paul Ryan is serious, he should repudiate all of these horrible votes from his past.  But he won’t, because he is a politician and he isn’t serious about cutting government.  He is a fraud.

Don’t believe any of these Republicans in DC.  The only person who is at all serious about cutting government is Ron Paul.  His son, Rand Paul, comes in a distant second.  There might be a few other tea party people in the House who are half-decent.  After that, the Republican politicians are a bunch of frauds.

Again, the national debt will continue to grow no matter which party is in power.  It will take a severe fiscal crisis to stop the spending.  It will be done the hard way.

Obama gave a speech today laying out his plan to cut $4 trillion from the deficit.  First, let’s distinguish between the debt and the deficit.  The debt is the total amount that the federal government owes.  It is currently over $14 trillion.  This is not getting cut.  The deficit is the yearly amount that is added to the total debt.  This year it is projected to be over $1.5 trillion.

When Obama says he plans to reduce the deficit, this means that he plans to reduce the rate at which the national debt is increasing.  But it will still be increasing.  Imagine if you have $50,000 in credit card debt and you keep adding another $5,000 to this debt each year.  Then you say, “I have a plan to reduce my deficit by $2,500.  I will cut my deficit in half.”  The problem is, you will still be adding $2,500 a year to the credit card debt that already exists.  You will be doing nothing to pay it down and you will keep spending beyond your means.  What kind of a plan is this?

This so-called $4 trillion is over 12 years (long after Obama will be out of office).  That is just over $300 million a year when deficits are projected to be over $1 trillion per year.  Seriously, this has to be some kind of a joke.  So Obama’s plan consists of continuing to add over $700 million to the national debt every single year and we are supposed to cheer this?

It gets even worse when you look at the details that we have so far.  Of the $4 trillion in so-called cuts (which they really aren’t), one trillion is coming from tax increases.  This alone is a farce because higher tax rates don’t necessarily mean the government will collect more money.  Another one trillion will supposedly come from lower interest payments on the national debt.  I didn’t know that Obama had the ability to predict lower interest rates in the future.  He should really get into trading futures if he is that brilliant.

The remaining 2 trillion will be from reductions in spending.  This really means reductions in what is projected for the future.  No real spending cuts will actually take place.  Even part of this consists of $480 billion that will be “saved” from Medicare and Medicaid.  But I thought that was already part of Obama’s healthcare plan.  If saving money from Medicare is that easy without affecting healthcare, why don’t they do it now?  You’re telling me that the government was just going to throw away $480 billion that wasn’t really helping anyone important with healthcare expenses?

This guy is a real joke.  He must think that the American people are really stupid.  Let’s see if he is right. I hope the majority of people see right through this garbage.  This just tells you how out of control the politicians are in Washington DC.  The national debt will only stop growing when the Fed refuses to buy any more government debt or the people stop electing these clowns.

Tomorrow I will discuss the phony plan laid out by Paul Ryan.

While still trying to get through this phony show on the budget, Congress and the president will soon be arguing about the national debt.  Obama says that he regrets his vote against raising the national debt limit while he was a senator.  Of course he does, because it makes him look like a hypocrite.  He voted against it while Bush was president, but now he is president, so things change.

You can view the national debt in several places.  You can try here or here.  They will vary a little bit as they are estimates.  The current debt ceiling is just under $14.3 trillion.  It is projected that it will be hit sometime in May.

If the government doesn’t raise the debt limit before the ceiling is reached, then maybe we really will have a government shutdown.  It would be even better if we saw some kind of a default, although that is not likely.  In fact, it is unlikely that Congress will fail to raise the debt ceiling.  Despite the bickering between the two major parties, they really are in cahoots with each other.  The Republicans will pretend like they want cuts.  Obama and some of the Democrats will say that children and elderly people will be starving in the streets.  The two sides will come to an agreement, just in time to save the world.

The two parties even count votes.  If there is a Republican who was elected on a tea party platform, he may be permitted to vote against raising the debt limit.  If the vote is too close, the establishment may require that he vote in favor of it.  If that happens, he will say that this is just a start and that they won because of the “cuts” in government spending that were achieved.

For any politician who really wants a balanced budget, then they should simply vote against raising the debt limit.  It really is that simple.  We hear that it is just not possible, but that’s not true.  It’s just not politically possible for most of these people (Ron Paul is usually the lone exception).

If the government brought all troops home, ended the Department of Education, ended all farm subsidies, ended all foreign aid, ended the Department of Energy, ended the FDA, and ended all corporate welfare, then the budget would close to balanced.  This is just a beginning and we haven’t even touched Medicare and Social Security yet.  But, of course, this is impossible in the eyes of the typical politician and even many Americans.  This is why it continues.

These continual votes on raising the debt ceiling are a joke.  It really isn’t a debt ceiling if it keeps getting raised.  The true debt limit is the limit imposed by the U.S. dollar.  The Fed will keep buying debt until it faces the threat of massive inflation or hyperinflation.  At that point, we will hope that the Fed quits buying government debt in order to save the dollar.  Then it won’t matter what the debt limit is.  Congress will not be able to deficit spend any longer.  They will be forced to cut back and it will be much more painful then.

I received a question recently regarding investments beyond a 401k.  I think this advice might be helpful to others, so I will respond with a post.  The question was as follows:

The price of crude oil passed $113 per barrel today.  It has been climbing steadily for the last few months.  If you are looking for a good mutual fund with energy stocks, there is an energy fund by Fidelity with the symbol FSESX.  I have no opinion in trying to time it.  You really should have bought this fund a couple of years ago, but if you think oil is going higher still, then this may be a good mutual fund to own.  If you want to own it, just buy it and don’t try to time the market.  If you fear a pull back in the short-term, then dollar cost average your way into it, but don’t wait.

The price of oil had already been climbing, but it really started to take off when the protests in the Middle East and Africa began.  When Libya started to erupt, then the price really took off and has continued.  It is easy to blame the situation in Libya for our current oil price, but it really misses the big picture.

The Fed’s program of QE2 (money creation) is the elephant in the living room that many don’t want to talk about.  The Federal Reserve has almost tripled the monetary base since 2008.  Although most of this new money has gone into excess reserves with the banks, the new money is still having an effect on prices.  We are starting to see that now.

When new money is created, it is not evenly distributed throughout the economy all at once.  It can go to certain hot spots.  It causes bubble (and later busts).  Right now, it seems to be going into oil, precious metals, and other commodities.  It is also going into stocks to a certain degree.

When something happens in Libya or there are reports of things happening in other oil producing countries, the hot money starts bidding up the price of oil.  It is almost as if the market is looking for a reason to bid up certain prices.

So although the supply and demand (and the perceived supply and demand in the future) of oil affect its price, the supply and demand for money also affect its price.  The supply of money is going up.  Expect prices to go up.  Oil and precious metals are going higher right now.  Food prices will probably not be too far behind.  Be prepared for higher prices.

The adjusted monetary base is on fire.  You can view it here:
http://research.stlouisfed.org/publications/usfd/page3.pdf

Sometimes it is important to take a step back and get some context.  The longer term chart is here:
http://research.stlouisfed.org/fred2/series/BASE

The money supply has approximately tripled in the last 2 and a half years.  Nothing like this has ever happened in modern day America.  It really is unprecedented.  Oftentimes, I think libertarians get carried away with their predictions of doom and gloom.  People that believe strongly in the free market do not give enough credit to the free market’s ability to overcome government obstacles.  But this explosion in the money supply really is something to worry about.

Quantitative easing is the new term that refers to money creation.  QE1 happened after the fall of 2008.  We are now in QE2 mode which is supposed to continue until June.  You will hear some say that the economy is bad because banks aren’t lending.  What these people don’t realize is that the lack of bank lending is what is keeping this economy from completely falling apart.  If the banks were lending out all of this new money being created, we would be facing the possibility of hyperinflation.

I am not sure if the Federal Reserve has any idea as to what it is doing.  This crazy money creation is causing great damage that we will see in the future.  It is misallocating resources on a grand scale.  It is preventing previous malinvestment from correcting.  It is setting the stage for what could be the Greatest Depression, even worse than what we saw in the 1930’s.  I hope I am wrong and that the Fed slowly starts to pull this new money out of the system.  I hope we go through a recession like we did in the early 1980’s.  Bernanke and the Fed are playing with fire right now.

Expect for price inflation to slowly pick up throughout the year.  I don’t expect QE3 any time soon, but you never can tell with the morons that are running the Fed.  If you haven’t already done so, prepare yourself for price inflation like we saw in the 1970’s or worse.  Buy essentials that you need.  Buy extra and don’t wait.  You obviously can’t buy extra gasoline and most food now, but there is a lot you can stock up on.

For your investments, you should have at least 25% of your portfolio in investments that do well during times of high inflation.  This is the minimum.  You should invest in things like gold and gold related investments, silver and silver related investments, oil stocks, oil mutual funds, oil ETFs, other commodities, etc.  You should prepare for interest rates to go much higher, but I wouldn’t necessarily speculate on it right now.

I have a lot of faith in the free market, but the Fed and the government are doing too much damage right now for us not to feel some major pain in the near future.  Prepare yourself and don’t wait.